In a significant move for a major lender, GE Commercial Distribution Finance (CDF) has shelved a previously announced higher interest rate on RV dealers’ curtailment payments that are more than 30 days past due. A default rate of 8% per annum was to have been phased in starting today (July 1).
“We are pleased to report that CDF has decided to eliminate this higher default rate and will implement the standard ‘default rate’ as defined in your current inventory finance agreements,” the company said in a letter received today by dealers utilizing GE Capital for floorplan financing. “This new program also eliminates the 12 month due-in-full payoff requirement as an additional means of helping dealers preserve cash during this difficult economic period.”
Today’s announcement also included a modest new curtailment program schedule effective for invoices purchased by CDF on or after July 1. The new curtailments range from a payment of 1% of the original invoice amount due monthly beginning on day 180 and step up as the unit gets older, escalating to a payment of 3% of the original invoice amount due monthly for units aged at least 450 days. None of the revised curtailment payments under the new schedule will be assessed interest.
Pete K. Lannon, managing director and president of GE Capital’s Motorsports and RV Group, said the previously announced hike in overdue curtailment rates was misperceived by dealers and it therefore detracted from the company’s desire to refocus its clients on “the importance of making curtailment payments going forward.”
“It was just a means of raising that (curtailments) on the attention scale of something that needs to be addressed,” Lannon said in a wide-ranging June 30 interview with RVBusiness. “Some of the misperception of what happened in the industry is that people were taking it and then saying that we were now charging it on the entire invoice amount, which is wrong. Further statements we read said that we were going to apply it to the entire account balance, which was also wrong.
“The whole theory around making the curtailment payment itself was being lost in the ‘theorization’ that was being bandied about about the 8% rate,” he added. “So, instead of raising attention on the importance of making the curtailment payments, all the attention was being focused on a rate – which people were erroneously assuming was going to be applied much broader than it was … As we listened to questions from the dealers and as we listened to comments in various media that were being raised on behalf of dealers, we realized that the main part of our message was being lost.”
As Lannon noted, the use of curtailments – small incremental payments intended to reduce the ceiling of the unpaid loan as aged inventory declines in value – have always been present in the RV industry. At times when consumers were flush with disposable income, however, they were oftentimes overlooked.
“They were frequently waived, and not enforced,” Lannon noted. “That’s because the product was turning very rapidly, so dealers were in fact able to sell it for more than they invested in the product. When the retail marketplace slowed down – as it started to do dramatically in late ’07, and certainly we saw that through all of 2008 – the dealers’ aged inventory grew to such an extent that they were no longer able to sell product because it had aged into the next model year and beyond.
“So those sales that were actually consummated were made at a much lower price point,” he continued, “and dealers were not able to generate enough on the sale in order to pay off the unit. Or, if they stuck to their guns, they wound up foregoing sales that could have helped the dealers generate positive cash flow.”
All this, Lannon emphasized, underscored the need to regain focus on curtailments as a means of managing risk. “After a certain point, if the unit remains unsold, we want to see some progress made towards paying down the principal balance in line with what looks to be the declining value of the unit,” he explained. “We want to make sure that the dealer is investing in the unit so that when they can make a retail sale they are not ‘upside down,’ meaning coming up short on the amount they have to pay off versus what they could actually sell it to a retail customer for.
“When you have a discussion with a dealer, face-to-face, or a manufacturer, they all agree that, as a product ages out, they are faced with this dilemma,” Lannon added. “They understand that principal reductions are a healthy mechanism to help reduce the amount that’s invested in a unit.”
Curtailments on invoices purchased prior to July 1 will revert to previously agreed-upon plans “unless they’ve been modified – and in many cases, they have,” as the company worked with dealers in the soft market. “We’ve had to modify (some dealer’s agreements) because of their current circumstance,” he said. “They were so far deep into missed curtailments that they could not effectively catch up. So we’ve had to make some individual arrangements with them. It’s one of the areas we’ve been working on the hardest with our dealers since February and March.”