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Small Business Pulls Drivers, Lenders Out of Bad Relationships

LEAP AUTO LOANS

CEO: Tim Condon.

Revenue: Undisclosed.

No. of local employees: 20.

Headquarters: Sorrento Valley.

Year founded: 2009.

What makes the company innovative: Leap provides restructured car loans to borrowers facing repossession or bankruptcy. The service benefits lenders by buying cars at higher prices than if they were auctioned, and offers payments that borrowers can afford.

A new leasing program created by a San Diego business aims to create a win-win for lenders of defaulted car loans and the borrowers facing repossession of their cars.

For the most part, borrowers who got well behind in their monthly car payments could expect the repo man or gal to come around when they least expected it to take back the collateral. After that, the lender would auction off the vehicle, collect what they could but almost always end up taking a loss on the failed agreement.

On the other side, the defaulting borrowers were out of wheels, but had to find alternative transportation, most likely at a much higher cost.

There’s got to be a better way, said Tim Condon, president and chief executive officer at Leap Auto Loans, which launched in 2009.

A longtime veteran car finance executive who worked with higher risk borrowers in the past, Condon and his team developed the concept of buying the vehicle of the distressed borrower from the lender, and leasing it back at an amended payment price that borrowers could afford.

That’s not to say everyone who defaults on their car loan, triggering repossession, can qualify for Leap’s services. Borrowers must have verifiable income, even if it may not be the same as it was when the car was purchased, Condon said.

Because of the Great Recession, many borrowers have a reduced ability to make car payments, and got into a hole because of circumstances beyond their control, such as a losing their job, or facing a serious medical problem, Condon said.

Although banks have set up loan modification programs for defaulting mortgage borrowers, there hasn’t been much accommodation by lenders when it comes to auto loans.

A Road Less Traveled

For the most part, banks won’t negotiate with defaulting car loan borrowers, and are locked into a process that prevents them from reducing the principal on auto loans. In addition, after a borrower misses a series of payments, they are usually facing thousands of dollars in debt along with late fees and penalties, Condon said.

“Finance companies have more room to work with customers and they might cut the interest rate a little bit, but if those rates are already low, that probably won’t change the payment that much,” he said.

Banks that take back the cars subsequently put them on the auction block and incur a loss — the difference in what is owed and what the selling price is.

Yet using Leap’s arrangement, that loss is reduced, Condon said.

“Banks will still take some type of haircut but it’s better than going to auction with it,” he said.

In an actual example, Leap provided a customer who defaulted on her car loan with a new loan in which the payments were cut from 54 to 48 months; and the payment was increased slightly to $385. The restructured debt saved the borrower $2,040 in aggregate payments.

Knowing the Customer

Condon launched the business in 2009, a few years after he arranged the sale of another auto lending business, ACC Consumer Finance. He worked at ACC, which made subprime car loans, after serving seven years at HSBC Auto Finance as its chief financial officer.

“We have a lot of experience working with customers who are facing some type of financial distress, and we felt we became pretty good at working with these customers,” Condon said.

The business obtained an undisclosed amount of venture capital financing from Austin Ventures in Texas, but made it the primary owner of Leap. The business is not related in any way to Leap Wireless International Inc., a San Diego provider of nationwide, flat-rate cell phone services. The name comes from the workout program operated at HSBC called Loan Extension and Adjustment Program.

While loan restructuring or workouts are fairly common when it comes to mortgages and commercial business loans, it took a while before banks accepted Leap, and contracted with it, Condon said.

Over the 18 months, Leap’s loan portfolio has grown to nearly $10 million, and most recently was increasing by about $1 million a month, Condon said.

Larry Hartwig, chief executive at California Community Bank in Escondido, said although he was unaware of Leap and its lease-back program, it’s similar to hard money lending in that it is based solely on the value of the collateral, and the major risk is knowing what kind of deal makes sense, and what to pass on.

“Obviously, it’s a bit like real estate — you have to buy right … and make sure the valuation of the collateral is right,” Hartwig said.

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