Forbes India 15th Anniversary Special

Billionaire Don Hankey: An underdog's lender or a loan shark?

Don Hankey has become a billionaire charging sky-high interest on subprime car loans. Now he's moving into the sharing economy by partnering with Uber. Sounds sexy, but for Hankey it's just another attempt, like renting out his mansion, to earn an ironclad 30 percent return

Published: Jan 7, 2016 06:09:26 AM IST
Updated: Dec 28, 2015 06:21:23 PM IST
Billionaire Don Hankey: An underdog's lender or a loan shark?
Image: Ethan Pines for Forbes

Thirty seconds into meet- ing Don Hankey, he’s already crunching num- bers. We’re hunched over the computer in his corner office in a quiet part of Los Angeles inspecting a massive spreadsheet.

“Let’s say this guy’s putting $3,000 down on a $15,000 loan and his FICO score is 610,” says Hankey, who arrived at the office at 5.45 am, the norm for decades. “We’d approve him at 19.09 percent.”

He rejiggers the formula, adding and subtracting past financial sins and hypothetical repossessions on the fictional person’s credit report like a mad scientist mixing beakers. “If we change it to a $2,000 down payment, it’s 23.99 percent.” Hankey, immaculate in a starched white shirt and blue tie, then heads into the lobby and pauses in front of a 60-inch flat screen displaying a live feed of the emails that are sent whenever his Westlake Financial Services approves a new loan. The inbox is overflowing. On a typical day Westlake finances 750 cars. It currently has 336,000 outstanding loans, each originating from one of the 23,000 dealerships it works with (everyone from CarMax to small mom- and-pop used car lots).

The average American has a FICO score of 695. But most of Hankey’s borrowers aren’t average—they are financial under-achievers with credit scores below 600. Many have bankruptcies, past repossessions or limited credit histories—things that make them unattractive to traditional lenders. That’s where Hankey steps in. While Westlake offers loans as low as 1.65 percent, it specialises in financing credit-challenged car buyers—at an eye-popping rate of 19 percent, more than double the average for used car loans.

It’s a risky and controversial business, but bankrolling these borrowers pays well: They typically shell out $344 per month over 49 months, or $16,860 on a $12,000 loan. That translates to an extra $3,920 in interest over the life of the loan when compared to the 3.67 percent rate a borrower with good credit gets when buying a new car, according to Experian. Sure, each month the company has to write off about $17 million in unpaid loans, but it still banks a profit of around $20 million. In 2014 Westlake netted $230 million on $600 million in revenues.

This kind of lending has a reputation for sharp elbows. Hankey repossesses around 250 cars every day, and his debt collectors have been known to spoof their caller ID so it appears that they are calling from the local pizzeria. But in many ways he is providing a critical service for this country’s poor. Outside of a few coastal cities like New York and San Francisco that have widespread public transport, owning a car in America is not a luxury—it’s a necessity. Try commuting to a job in Texas or buying groceries in Minneapolis without one. And, assuming you make the monthly payments, financing a used car is one of the quickest ways to improve your credit score.

Westlake Financial is by far the largest part of the seven-company, $1.3 billion (revenues) Hankey Group, which runs mostly auto-related businesses. Hankey, who owns 57.5 percent of Westlake (he brought in outside investors in 2011), is also in car insurance, rental cars and real estate, and has a tech firm. But subprime auto financing has been the main driver of growth—and it’s also the major reason the 72-year-old Hankey, who himself is chauffeured around in a brand-new black Maybach, is richer than ever, with a $2.7 billion fortune.

One of Hankey’s latest bets is on Uber. He joined forces with the ride-share leviathan in September 2014 as its only outside financing partner. Spanish bank Santander had been working with Uber, offering a lease-to-own programme, but that relationship ended earlier this year. Would-be Uber drivers who are looking to purchase a car can get pre-qualified online in a matter of minutes. Westlake’s software determines an interest rate, sales price and down payment, and then the driver inks the deal at a local, Uber-approved dealership in one of 18 states, including California, Florida and Texas. The Uber app automatically deducts the car payment from the driver’s weekly earnings.

It’s a clever way to get around two of the lender’s biggest headaches: Determining ability to pay and collecting payments. Westlake knows Uber drivers have a source of income and that the payment will always be routed to its coffers, reducing risk and uncertainty. But so far a greater portion of its Uber drivers are behind on their payments compared to its typical subprime borrowers, apparently not earning enough to cover the costs. Uber, flush with cash after raising more than $8 billion on the private market, is getting in on the game itself, launching a programme in July to lease—rather than sell—cars to its drivers for three years. Drivers also have the option to pay $250 to escape the lease scot-free, as long as they give two weeks’ notice. Westlake, which has lent to 1,000 Uber drivers, says it is still signing up more of them and is not too concerned, either about delinquencies or Uber muscling in on the business. Makes sense given that Uber-related loans represent just 0.3 percent of Westlake’s loan portfolio.

Billionaire Don Hankey: An underdog's lender or a loan shark?
Hankey rents out his Malibu house, once owned by Olivia Newton-John, for $12,500 a day

But why would drivers agree to Westlake’s often onerous terms? Because they have little choice: Darrell, one of the Uber drivers who has purchased a car using Westlake, says that no one else was willing to finance him, but Hankey’s firm let him trade in a 1996 Nissan Quest on which he owed $1,400 for a brand-new 2015 Toyota Corolla. “My credit was in the worst condition,” he says. “Westlake Financial saw everything, and they still gave me a chance.”

Hankey got his first chance from his dad, who ran a dealership in Los Angeles called Midway Ford and a National Rental Car franchise. As a teen he worked at Midway as a lot boy, washing and polishing cars. The next summer Hankey started selling cars and became the dealership’s top seller by August. But he was always more into numbers than wheels. When he was 16, his father sat him down to explain that his weekly poker game with friends was a waste of time and money. The young entrepreneur responded by furnishing a carefully recorded ledger showing his winnings exceeded his losses over the previous year.

His father died of cancer after his first semester of college. He stayed the course, graduating with a degree in finance from USC in 1965. He then enrolled in the school’s MBA programme but quit halfway through, heading up to Vancouver to check out a logging outfit that his mom wanted to invest in. After a few months he came back to Los Angeles and got a job as a clerk at investment bank Jefferies before becoming a trader at brokerage firm Mitchum, Jones & Templeton.

In 1972 he and his family borrowed $250,000 from Ford Motor Credit, the automaker’s financial services arm, to buy out the partners in Midway Ford. The dealership had once been very profitable but had been floundering since Hankey’s father died 11 years earlier. Hankey took a leave of absence from Mitchum with plans of righting the ship, hiring a good general manager and returning to his trading job.

“I came in at the finance end, and I didn’t know how to run the store,” says Hankey. “It was more than I bargained for.” He never went back to his old job and instead spent years fighting to turn a profit. He eventually stumbled into subprime lending. Tired of turning away credit-challenged customers, he began extending credit to help finance deals. Other dealers couldn’t believe he was willing to risk his own money on loans to sketchy borrowers. “I was ridiculed for a few years, but, lo and behold, it turned into a pretty good business plan.”

Almost too good: His showroom became cluttered with people argu- ing with his finance department over what they owed. Worried that it might start to hurt sales, Hankey moved the lending business to its own location up the road, and it eventually became a separate company. He soon expanded his subprime financing programme to other dealers, using profits to move into new states.

By 1990 he had about 1,200 borrowers in California. He realised that to continue growing at a steady pace without taking on partners, he would need to shoot for 30 percent returns. It’s been the rule ever since. As chairman Hankey insists on a 30 percent pretax return on equity and 20 percent revenue growth.

The numbers fanatic has used that 30 percent mantra to guide him in and out of businesses. Today Hankey, who claims he’s averaged a 34 percent annual return on equity since 1980, owns a Toyota dealership, rental car businesses and a million square feet of southern California retail and office space. His Knight Insurance Group sells policies to dealerships and rental car companies. His Hankey Investment Co offers bridge and construction loans to commercial developers and has recently begun developing its own properties, including two towers across the street from the Staples Center.

“Don’s key job is capital allocator,” says W Scott Dobbins, head of Hankey’s real estate company. “He sees where risk return is best amongst the companies and tries to balance that. And obviously he’s been very successful.”

Within 10 years Westlake hopes to apply its subprime prowess to everything from RVs and boats to furniture lending. “Guys that need a lawn mower that have 580 FICOs where no one else will finance—why couldn’t we do that?” asks Ian Anderson, Westlake’s president.

Hankey has even found a way to make a return on his beach house in Malibu, 3 miles from his main residence, a 12,500-square-foot complex called Xanadu with five terraces, a theatre, a gym, two separate guest quarters and 165 feet of beach access. It’s regularly rented out at $12,500 a day for filming commercials, TV shows and movies, including Entourage, CSI: Miami and Charlie’s Angels.

Then there is Nowcom, which not only handles Hankey Group’s IT services but also created a success- ful software suite for car dealerships called Dealer Center. Hankey leases the software for up to $65 a month to 13,000 dealers, who use it to manage inventory, run credit reports and send loan applications to Westlake and 1,500 other lenders. Crucially in the subprime market, Dealer Center looks beyond the obvious factors like an applicant’s income and FICO score to analyse more complex indicators of someone’s ability to repay a loan. It considers everything from the length of time an applicant has lived at his or her current residence to more intri- cate information about their place of employment. For example, Westlake’s algorithms factor in which Las Vegas casinos’ dealers tend to earn more. They know that, everything else being equal, a dealer at the Wynn will earn more in tips than a dealer at, say, Ex- calibur—and be a stronger applicant.

It’s a great time to be in the auto financing business. The number of new loans being pumped out each year is up roughly 80 percent since 2009, pushing outstanding car debt over the $1 trillion mark for the first time in US history. Subprime lending has been one of the biggest drivers, with loans to borrowers with below-prime credit totalling $356 billion—up some 35 percent from 2009.

Despite the obvious similarities to the housing industry before its col- lapse, few experts think it’s a bubble, yet. “We have unleashed a lot of the pent-up demand we accrued during the recession,” says Cristian deRitis, a senior director with Moody’s Analytics. “If we continue to loosen underwriting standards, there will be greater cause for concern and potential for a bubble, but right now it seems to be more of a return to equilibrium than overexpansion.”

Still, the industry, including Westlake, gets a pretty bad rap—and for good reason. Westlake’s 400 debt collectors, operating next door to Hankey’s main offices, may start making calls as soon as someone is just one day late on their payment. Westlake will often initiate repossession proceedings after a customer is delinquent for just 45 days. Lines are occasionally crossed. The Consumer Financial Protection Bureau—a federal watchdog tasked with overseeing the financial sector—ordered Westlake in October to pay $48 million in fines, balance reductions and cash restitution for deceptive collection tactics and other violations over a four-year period. Among its misdeeds: Employees falsified their caller IDs so it looked like the calls were coming from local pizzerias, flower shops or even a member of the borrower’s family.

Westlake insists that the most egregious examples were rare occurrences that largely happened years ago—and that those employees were terminated immediately. Other actions, like using the phrases Westlake Repossession (which the CFPB says made it seem like repo was imminent, even when it wasn’t), were in fact approved by the company’s compliance department at the time. “[The Bureau is] looking at a standard almost retroactively, saying, ‘Well, in 2010 you should have been doing this.’ When in fact nobody knew that the auto industry was going to be subject to that standard in 2010,” says Westlake’s chief compliance officer, Robert Engilman.

Hankey has implemented stronger punishments, including docking bonus pay, for mistakes debt collectors make—such as forgetting to identify themselves as Westlake employees. It has devised a remediation plan, approved by the bureau, that includes recording 100 percent of their calls to monitor for regulatory compliance.

Despite the fine and the rock- bottom ratings on review sites like Yelp and Consumer Affairs, Hankey is convinced he is providing a good service. Without subprime lenders like Westlake willing to take on the risk of offering loans at rates high enough to make a profit, it’s unlikely that the poorest credit-challenged customers would be able to buy cars at all. “I think we help a large number of people get financing for the car that they need to make it to work,” says Hankey. “The alternative is to wait several years and pay cash for the car, or take the bus.”

According to Westlake, a high-interest car loan actually helps people rebuild credit. “If you make all your payments on time, your credit score will improve dramatically,” says Westlake President Anderson. “In the future if you need another car loan, your rate can be much lower, and we give you $300 toward the down payment.”

A recent Equifax study found that people with credit scores below 550 who took on subprime auto loans were four times more likely to see their scores jump to 640 within three years. Not that Westlake always benefits: Perhaps bruised by rough treatment and the high interest rates, not many of Hankey’s customers seem eager to do business with him again. Of its 336,000 borrowers, only 7 percent are return customers, but that’s more than triple the number who came back two years ago. Convincing customers or the public that Hankey’s formula—charging high rates to hit ambitious profit goals—actually makes people better off is a tough sell.

“My grandma says, ‘Oh God, Ian, that’s horrendous. You’re a loan shark!’” recalls Anderson. “I say, ‘Grandma, really, we’re just trying to make a return.’”

(This story appears in the 08 January, 2016 issue of Forbes India. To visit our Archives, click here.)