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Bank of America Renews Line of Credit with Buy-Here-Pay-Here Dealer

Adam Rust's picture

Posted February 8, 2012

Even as reports continue to show that getting a mortgage loan at Bank of America is difficult for many people, SEC filings show that the Charlotte bank has no problem extending financing to firms that do offer high-cost loans.

A recent example is the loan arranged by Bank of America for America's Car Mart last October. Bank of America

(in partnership with three other banks) gave America's Car-Mart (ticker: CRMT) a new line of credit for $105 million. The extension represented an increase from arrangements made in January and May of 2011.

America's Car Mart is a buy-here-pay-here car dealerships with more than 100 locations throughout the Southeastern United States. The business model at BHPH is simple: we finance anyone.

As the name implies, car buyers return to the dealership where they purchased their car to make their future car payments. Payments are made frequently. Many people make bi-weekly payments. Thus, the BHPH is a vertically-integrated car company.

However, in a Buy-Here-Pay-Here, selling and financing cars is the sizzle. The steak of these firms are collections. According to CRMT's most recent annual report:

"Collecting customer accounts is perhaps the single most important aspect of operating an Integrated Auto Sales and Finance used car business and is a focal point for dealership level and corporate office personnel on a daily basis...Substantially all associate incentive compensation is tied directly or indirectly to collection results.  Over the last five fiscal years, the Company’s annual credit losses as a percentage of sales have ranged from a low of 20.2% in fiscal 2010 to a high of 29.1% in fiscal 2007 (average of 22.7%)." 

Operating a BHPH is a high-risk business. Over the last 12 years, credit losses as a share of sales at America's Car Mart have never dropped below 17 percent. The losses were as high as 29 percent in 2008. Although that sounds high, it is actually a bit below industry norms.

Is it fair to say that B of A is financing a business that makes high-cost loans? Since they finance anyone, interest rates on a two-year loan average about 14 percent (at CRMT) but can often come in higher than 20 percent. Given that they are financing anyone, while many of the corporate franchise dealerships are not, BHPH dealerships have leverage to mark up the sticker price on their cars, too. The average sales price at CRMT in 2011 was about $9,300, with an average down payment of about six or seven hundred dollars and a profit (pre-tax) on resale of more than $1,300. Again, CRMT is offering far more value than some of their competitors. Financial statements released in an S-1 by one of their competitors reported an average markup of 76 percent.

I suspect that their business soars in the first three months of the year, when many lower-income households receive their tax refunds.