While banks continue to be enticed by the promise of robust profits in the subprime auto lending market, speakers at a Florida lending conference warned of pitfalls in the business - or, as one put it, "sharks in the water."

The admonitions came at the Consumer Bankers Association's Automobile Finance Conference and Trade Show, which was held last week at the Marriott's Orlando World Center.

Talk about used car financing, particularly at the lower, or subprime, end of the credit spectrum, dominated the first day's sessions, just as leasing did at last year's gathering in Nashville.

"Leasing is still the buzzword in our industry, but 'used cars' is the hot term for the '90s," said Richard T. Schliesmann, executive vice president in Wells Fargo Bank's auto finance division.

Fueling the demand for used cars is consumer discomfort with the spiraling cost of new cars - the "sticker shock" phenomenon - combined with a flood of late-model used cars coming off leasing programs.

Consultant Art Spinella said his marketing surveys showed consumer interest in purchasing used vehicles has risen steadily over the last 12 years as demand for new cars declined.

Having a two-year-old or three-year-old car "doesn't bother people anymore," said Mr. Spinella, vice president and general manager of CNW Marketing/Research in Bandon, Ore.

The question for banks is how deeply to get involved in the business of financing used cars. With overall consumer credit quality slipping, the real growth in that market has come in the subprime category - credits rated B or lower - rather than with the A credits banks traditionally favor.

Many banks have dipped their toes into the subprime markets by underwriting some B paper. But only two - Cleveland-based KeyCorp and, just two weeks ago, Southern National Corp. of Winston-Salem, N.C. - went so far as to acquire an established subprime lender.

"How you approach this business can either enhance your profitability or potentially ruin it," said Patrick S. Doran, chairman of the CBA's Automobile Finance Committee and senior vice president at PNC Bank Corp., Pittsburgh.

Posing a question on the minds of many of the more than 700 bankers assembled at the conference, Mr. Doran asked, "Is this a business that an A lender can really understand and manage?"

John C. Speaks, vice president and senior analyst with Moody's Investors Service, said pitfalls of the subprime market - the "sharks in the water" - include greater incidence of fraud and sky-high repossessions. "This isn't exactly what you're used to," Mr. Speaks warned the bankers.

The recent financial problems of independent companies such as Norfolk, Va.-based TFC Enterprises and Search Capital Group, of Dallas, have underlined the risk inherent in the subprime business.

Worries about the soundness of TFC's bonds roiled the subprime auto loan securitization market earlier this year. At least one big insurer, Cigna Corp., said it will no longer purchase securitized subprime auto paper.

While no actual bond defaults have yet occurred, Mr. Speaks said he expected to see such problems within the next year or two.

Given all the perils of the business, a lot of bankers at the conference were eager to learn from the experience of KeyCorp, which entered the subprime market last year through the purchase of AutoFinance Group Inc.

In a well-attended presentation, AutoFinance Group CEO A.E. "Al" Steinhaus said KeyCorp made the acquisition work by operating the subprime lender as a subsidiary.

"It's a different animal that needs to be managed differently," Mr. Steinhaus said.

Mr. Steinhaus also pointed out that placing the subprime loans in a separate legal entity prevents regulators from requiring a bank to boost capital to hedge against the increased risk.

"We can do what we want to with this business," Mr. Steinhaus said.

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