1. Buy Here, Pay Here – Is It Right For Your Dealership? BHPH: Inside The Numbers Presented to: F&I Showroom Industry Summit September 26, 2011 Las Vegas, Nevada Presented by: Ken Shilson, CPA Founder and President, National Alliance of Buy Here, Pay Here Dealers (NABD) President, Subprime Analytics Booth # 231

2. 4 Reasons 1.Good Margins 2.R.O.I. 3.Growing Customer Base 4.Independence

3. 4 Reasons Why Now 1.Secondary Finance collapse 2.Subprime mortgage collapse 3.New technology 4.Survival

4. 4 Questions to Ask 1.Access to Capital? 2.Logistics? 3.Appetite? 4.Personnel?

5. 3-Step Method to Success 1.Process 2.Training 3.Execution

6. 5 Vital Departments of Buy Here Pay Here 1.Inventory 2.Recon 3.Marketing / Sales 4.Collections 5.Financial / Accounting

7. Benefits and Pitfalls BENEFITS Margins R.O.I. Customer Base Independence New Technology High Price of Entry PITFALLS Capital Fast growth Too Bold Spending Headaches High Price Entry Customers

8. Recent Changes in the Subprime Financing Market Make BHPH a Very Attractive Profit Center!

9. Open Automotive Loans by Risk Segment Source: / Experian SubprimeAnalytics

10. Quarterly Used Vehicle Financing by Credit Tier Source: / Experian SubprimeAnalytics

11. ImportantBHPHTrends!

12. BHPH Financial Trends 2008 – 2010: Gross Profit Comparison Source: Shilson, Goldberg, Cheung & Associates, LLP Sales 100% 100%100% Cost of Vehicle Sales(59)%(59)%(60)% Subtotal41%41%40% Financing Income15%16%18% Bad Debts(18)%(20)%(21)% Gross Profit38%37%37% 201020092008 Expressed as a percentage of sales.

13. BHPH Financial Trends 2008 – 2010: Cost of Sales - Detail Source: Shilson, Goldberg, Cheung & Associates, LLP 201020092008 Cost of Vehicle Sales48.13%49.03%51.03% Reconditioning Costs7.17%6.68%4.12% Other3.21%2.85%4.52% Total Cost of Vehicle Sales58.51%58.56%59.67% Expressed as a percentage of sales.

14. BHPH Financial Trends 2003 – 2010: Costs / Expenses Source: Shilson, Goldberg, Cheung & Associates, LLP Expressed as a percentage of sales.

15. BHPH Operating Practices 2005 – 2010: Average “Cash in Deal” Source: NABD / NCM $4,480 $4,696 $4,865 $4,850 $4,645 $4,563 $4,200 $4,300 $4,400 $4,500 $4,600 $4,700 $4,800 $4,900 $5,000 200520062007200820092010

16. BHPH Operating Practices 2006 – 2010: Average Total ACV Per Vehicle Sold (Including Recon) Source: NABD / NCM $4,949 $5,111 $5,284 $5,534 $5,458 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 20062007200820092010

17. BHPH Financial Trends 2004 – 2010: Bad Debts Source: Shilson, Goldberg, Cheung & Associates, LLP Expressed as a percentage of sales. 17% 19% 20% 19% 21% 20% 18%

18. BHPH Profitability Percentages NABD BHPH 2010 AveragesBenchmarks Gross Profit / Vehicle Sales*38% Operating Expenses / Vehicle Sales20% Operating Income / Vehicle Sales18% Interest Expense / Vehicle Sales3% Net profit / Vehicle Sales15% *Gross profit includes finance income, net of bad debts. Source: Shilson, Goldberg, Cheung & Associates, LLP

19. Three Key Elements of BHPH Deals: 1.The Customer! 2.The Vehicle! 3.The Deal Structure!

20. Industry Loss Statistics Provided by Subprime Analytics Computerized Portfolio Analysis www.subanalytics.com SubprimeAnalytics

21. Loss statistics were determined by Subprime Analytics, who performed electronic portfolio analysis of approximately 900,000 subprime loans aggregating approximately $8.0 billion to identify loss rates and patterns. Notes to These Statistics SubprimeAnalytics

22. Average Gross Loss$ 7,0727,0496,887 (Before recoveries) Average Net Loss$ 4,5265,0905,157 (After recoveries) Average Default Rate 30.39 % 30.11 % 28.43 % (Percentage of Loans Written Off) Our Findings… Loss Rates 2010 SubprimeAnalytics (Continued) 20092008 Source: Subprime Analytics

23. Average Gross Dollar Loss Rate (% of Principal) 39.18 % 37.51 % 35.54 % Worst - 00.0% Average Net Loss Rate (% of Principal) 26.52 % 26.06 % 24.76 % Worst - 00.0% Average Recovery (% of Principal Charged-Off) 35.50 % 29.80 % 28.00 % (Excl. Repo Expenses) 20092010 Our Findings… Loss Rates SubprimeAnalytics (Continued) 2008 Source: Subprime Analytics

24. 201020092008 Highest Cumulative Default Month After Origination25 th Month21th Month19 th Month Highest Frequency Of Default4 th Month4th Month4 th Month Highest Loss MonthFebruaryFebruaryFebruary Our Findings… Loss Frequency SubprimeAnalytics Source: Subprime Analytics

25. Avoid Paying Taxes On Money You Never Receive!!! Tax on “Phantom Income”

26. MSSP Independent Used Car Dealer Audit Guide Overview “The use of Related Finance Companies (RFC’s) is a common practice in the Used Car Industry. Such companies serve many valid business purposes and were utilized before any tax advantages were developed.”

27. Ten Fatal BHPH Mistakes You Must Avoid To Be Successful! Based upon analysis of over $8 billion in BHPH loans by: Subprime Analytics

28. Mistake 1: Not determining that your installment contracts and documents are compliant with all the applicable laws and regulations. (Making legal and regulatory mistakes can bring you down!) SubprimeAnalytics

29. Mistake 2: Improper deal structure: not properly matching the customer, the vehicle, and the deal structure when granting credit. (Selling a customer the vehicle they want instead of the one they can afford!) SubprimeAnalytics

30. Mistake 3: Not running a credit bureau report prior when granting credit. (Initially saving a few dollars ends up costing you millions!) SubprimeAnalytics

31. Unscored45.3% 400 – 54532.3% 545 – 600 29.5% 600 – 64523.0% 645 + 16.8% Losses Based on Credit Bureau Scores… Default Rate Average Loan Default Rate 28.4%! SubprimeAnalytics Source: Subprime Analytics *Opportunity, or mistake??

32. Mistake 4: Emphasizing sales growth over good underwriting. (Growing too fast can be fatal!) SubprimeAnalytics

33. Mistake 5: Not independently (separate from the sales function) verifying stipulations or customer applicant information. (There is an inherent conflict of interests between sales and good underwriting practices!) SubprimeAnalytics

34. Customer Age… Years Default Rate Over-65 Population Expected To Double By 2030! 16 – 2530.4% 25 - 3029.8% 30 - 5525.2% Over 5517.3% SubprimeAnalytics

35. Analysis of customer info is needed to effectively manage portfolio risk! Verification of income, debt and expenses is critical to good underwriting. Using technology is the only efficient way to gather and analyze customer information. The more you learn about your customers, the more you will earn! Our Conclusions… Take the CASH approach to underwriting! SubprimeAnalytics

36. Verify Customer… What Do Good Underwriters Do? C apacity A bility to Pay S tability H istory SubprimeAnalytics

37. Mistake 6: Not learning from your losses! (Making trial and error mistakes can cost you millions!) SubprimeAnalytics

38. Learn From Your Losses! Analyzing Your Portfolio Helps You Avoid Trial and Error Mistakes…. SubprimeAnalytics

39. Mistake 7: Modifying or extending the term of the loan in order to meet the customer’s payment requirements. (In BHPH, time is your enemy!) SubprimeAnalytics

40. Mistake 8: Letting a large down payment (like a tax refund) make the deal instead of making the deal better! (Confusing down payment with repayment!) SubprimeAnalytics

41. Mistake 9: Not properly managing portfolio risk by adapting to changes in economic conditions. (Dealer education, reading and networking are your best defenses here!) SubprimeAnalytics

42. Mistake 10: Not monitoring or using credit scoring or deal stipulations to make underwriting decisions more consistently. (Frequent changes in underwriting policies and practices can be very costly! SubprimeAnalytics

43. Finding The Capital You Need! a.Lines of credit b.Sales of contracts c.Point of sale funding d.Equity e.Need for portfolio metrics, static pool and loss liquidation! Financing Sources:

44. Developing an Action Plan! a.Develop your business model and project capital requirements b.Identify key personnel needed c.Location – separation from franchise operations? d.Systems / processes needed e.Identify capital sources f.Other

48. Questions… At this time you are welcome to ask questions on anything covered in this presentation… Booth # 231 Kenneth B. Shilson, CPA Subprime Analytics 2180 North Loop W., Ste. 270 Houston, TX 77018 (832) 767-4759