Subprime auto lenders say that if their business will have to radically reform itself if it is ever to regain credibility with the financial community.

Such reform might even include, besides tighter credit standards and better management, more conservative bookkeeping for the gain-on-sale accounting that once made the industry's earnings look so seductive on Wall Street.

"We in the industry need to be quite candid," said Adrian Katz, vice chairman of AutoBond Acceptance Corp., Austin, Tex.

"If you on the outside looking in at our business, you think we stink."

Mr. Katz and others industry leaders were in Chicago last week at a conference sponsored by Executive Enterprises to figure out how to pick up the pieces of their business, whose fall from grace some compare to the savings and loan debacle of the 1980s.

Of 21 subprime auto lenders with $50 million of assets or more, 15 are in serious trouble, according to a recent report by Prudential Securities. Mr. Katz said it is high time for companies to ask themselves basic questions.

"Every company claims to have good underwriting guidelines, and that it is the exceptions made that are killing them," he said. "But we see loans for up to 200% of collateral. You cannot run a business that way."

Such practices have frightened away investors and lenders. At the conference, only three investors showed up-all from insurance companies with the stomach for risk. Mutual fund, pension fund, and other large institutional investors were nowhere to be found.

Only one bank representative was in attendance: Chevy Chase (Md.) Bank. It is perhaps the only bank or thrift in the country willing to acknowledges that it is aggressively building its business in subprime auto lending.

"We see outstanding opportunities in this area," said David Ledwell, national accounts group manager at Chevy Chase. The Washington-area thrift is owned by B.F. Saul Real Estate Investment Trust and willing to take bigger risks than other companies.

To restore credibility to subprime auto lending, companies must be more realistic in how they account for securitizations, emphasized George C. Evans, chief executive of Search Financial Services Inc.

Securitization is the primary way these companies fund their operations.

They sell assets and book the profits right away-before the loans are collected. Mr. Evans told the audience this practice is "the cocaine addiction of our industry."

The danger in such accounting, he observed, is that it allows companies to report high earnings without actually generating any cash.

But if loan losses are higher than expected, or loan originations lower, it does not take much for a company to fall into serious financial problems.

But John Speaks of Moody's Investors Service said he thinks such adjustments will be hard for the industry to make.

The difference between recording gain on sale and another route "is the difference between the tortoise and the hare," he said. "Everybody knows the tortoise wins in the end, but quarter by quarter it looks as if other companies are making money and you are not."

Nevertheless, subprime auto lenders acknowledge the need to change. In high disfavor on Wall Street, companies will have to raise money any way and anywhere they can, said AutoBond's Mr. Katz.

"You've got to be creative and flexible-you have to be sincere," said Mr. Katz. "You have to be a sophisticated beggar."

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