Search Financial Services Inc. is abandoning the subprime auto lending business and will focus on direct consumer lending, the company said Tuesday.
Executives said the firm had run out of money to buy contracts from auto dealers that make loans to people with bad credit, and that one of its lenders, Fleet Financial Group, was unwilling to extend more credit for auto loans.
For the past three years Dallas-based Search has been headed by former executives of Associates Corp., who hoped their expertise from decades of work in the consumer finance business could turn Search around.
George C. Evans, 62, Search's chairman, president, and chief executive, has a history of turning around troubled finance companies. He came out of retirement in 1994 to do the same for Search. He acknowledged needing money after years of court battles with Texas state police; an officer had killed his son in a botched drug sting.
But Search, which filed for bankruptcy in August 1995 and emerged from it a year later, was unable to make a profit.
The company was unable to collect enough loans to pay its debts to the satisfaction of its bankers. Efforts to raise funding through Lehman Brothers and Greenwich Capital didn't pan out, so Fleet pulled the plug on its $75 million line of credit.
The exit of Search shows how difficult it is for a subprime auto lender to recover after a financial crisis. Not a single auto lender that had collapsed has recovered.
Other big specialty finance companies that had entered this line of business have also announced plans to cut back. Last week Money Store said it would stop making subprime auto loans.
James F. Leary, vice chairman at Search, said participants in the industry "must be more realistic" about the terms they offer auto dealers.
"People have paid too much to dealers, so much that there's no room to absorb the losses that come with this kind of financing," he said.
The company said its loan with Hibernia Corp. to fund its consumer finance business remains in effect. That loan is reported to be for $25 million.
Search said eliminating its subprime auto lending unit would save $3.2 million a year and cost 55 people their jobs immediately.