During the recent awards season for films, Guillermo del Toro’s “The Shape of Water” garnered accolades and made headlines. The shape of the water treatment financing industry is much less glamorous than a Hollywood movie, but as 2018 gets into full swing, it is important for dealers to know how the headlines on the economy and financing markets may shape their options going forward.
Consumers Are Borrowing
In December 2017, the Consumer Finance Protection Bureau (CFPB) released its biennial report on trends in the credit card market. The report showed that Americans are borrowing at levels near those of the years prior to the Great Recession. In mid 2008, credit line levels reached $4.4 trillion; the new report shows mid-2017 levels nearly back to the 2008 level, reaching $4 trillion. Additionally, the Federal Reserve reported that actual revolving debt balance levels reached $1.023 trillion in November 2017, up from the previous peak of $1.021 trillion in April 2008. In the decade since the collapse of the housing market and the ensuing recession, Americans have once again embraced the use of credit to meet their financial and lifestyle needs.
Many also are feeling positive about the economy. According to the Conference Board in its Consumer Confidence Survey, consumer confidence hit an all-time high of 128.6 in November 2017, followed by a strong 122.1 level in December. Confidence numbers have been boosted by low unemployment levels, the stock market rally and recent government fiscal and tax policy reforms.
However, a number of reports also show that consumers have mixed feelings on the recently passed Republican tax reform bill, which could impact consumer confidence going forward. A recent Bankrate.com poll showed that 70% of people think the work of elected leaders will have either no impact or a negative impact on their personal finances.
So, is all this confidence and borrowing a good or bad thing for the water treatment industry? The shape of this answer is a question mark. It depends on the perspective from both sides—dealers and lenders—and what the industry has learned from the Great Recession a decade ago.
Before the Bust
For water treatment dealers who were selling in the pre-2008-recession years, many recall with nostalgia the access to easy credit in 2006 and 2007 that boosted sales. House values were rising with seemingly no end in sight and lenders of all types were clamoring for business. For dealers, this meant they had a variety of program options at competitive dealer fees and customer rates, and loose credit standards meant just about anyone could get approved.
The effects of the housing downturn and resulting economic distress were immediately felt in the water treatment industry. Rising delinquencies and foreclosures led lenders to tighten up lending guidelines, cut programs and, for some, eventually exit the industry altogether. Water treatment dealers were left with few financing options; for many, sales drops followed.
The water treatment lending market today is echoing that of the pre-recession boom. Lenders are battling for business, and water treatment dealers once again have access to a variety of competitive financing offers with more relaxed credit standards. This is great for today’s sales, and for some companies, that is all that matters. They view this boom as a wave to be ridden to shore.
If the past has taught the industry anything, it is that a correction will happen; a rising interest rate environment combined with record consumer debt levels means it likely will be sooner rather than later. When a downturn occurs, tightening of credit standards, elimination of programs and less access to credit are the likely results.
There also is uncertainty over the future direction of the CFPB. At press time, the legal battle surrounding the leadership of the federal consumer finance regulatory agency was unsettled. The CFPB had previously included deferred interest programs in its areas for future scrutiny. The agency felt that consumers were being negatively affected by these plans and added them to their agenda for future review, but the leadership decision may impact the agenda going forward. Any changes to or restrictions on deferred interest plans would have a significant impact on the water treatment industry.
Even in the face of some regulatory uncertainty, the water treatment financing market is in good shape. But if a market correction is a matter of “when” and not “if,” what should water treatment dealers be aware of?
First, it is important to have relationships with at least two or three lenders. As much as most lenders would like to be exclusive with every dealer, it is in the best interest of water treatment dealers to have at least a couple of partnerships. During the prior recession, some dealers who had only one lender relationship suddenly found themselves holding a number of unfunded contracts or found themselves with no programs as lenders exited the market. Each lender has a different level of risk tolerance, different funding sources and delinquency exposure. Having at least a couple of lender relationships helps reduce the risk of being caught without financing altogether.
Second, it is important to remember that lender relationships are partnerships. If water treatment dealers view lenders as disposable or see them as adversaries, the market will not be healthy. Lenders rely on dealers providing them with accurate information and accurately representing program terms to customers. Failure to do so can increase lender losses, which can directly impact future credit access. Dealers can help their lender partners make the best loan decisions by accurately disclosing all income on loan applications, submitting joint credit applications when possible and notifying the lenders of any information that may be relevant to making a sound credit decision.
Third, dealers have a responsibility to their customers to ensure they understand the terms of any financing programs offered. This means making sure sales representatives are fully trained on the programs. Training should ensure that explanations of financing do not gloss over critical information such as payments or interest that will increase after a set timeframe or the accrual of interest during a deferred payment period. These factors could significantly impact a customer’s ability to repay the loan in the event of an economic downturn, and customers have the right to know these important terms upfront to make an informed decision about financing. Today’s buyer has easy access to multiple online review and complaint sites as well as the Better Business Bureau and CFPB complaint site; dealers risk unwanted negative publicity and regulatory scrutiny by not accurately representing financing programs and terms.
The Shape of the Future
Today, the water treatment financing industry is strong. Lenders are feeling confident and the programs and credit approvals offered reflect that confidence. Water treatment dealers are reaping the benefits of multiple competitive offers leading to strong sales results. However, there is an undercurrent flowing through the market that needs to be known. Loose credit standards combined with record consumer borrowing levels echo the run-up to the Great Recession a decade ago. It is in the best interest of dealers and lenders to reflect on the past and ensure their actions today do not impact the long-term shape of the industry.