After decades as the lender of choice for the small-time used-car lot on the corner, Westlake Financial Services is moving into big-time auto dealerships.

Over the past year, the subprime auto lender has pursued more major dealerships and financed thousands more loans as a result. That’s helped dealerships move more cars as they see more buyers with bad credit – and helped the Mid-Wilshire based firm continue a torrid growth streak.

Through the first five months of this year, Westlake said that it had issued $210 million in loans for cars purchased at so-called franchise dealerships – those affiliated with Ford, Toyota and other major auto brands. That’s more than double the volume of such loans issued in the same period last year. Most loans are for used cars, though the number of loans on new vehicles has grown, too.

Ian Anderson, Westlake’s president, said expanding into the franchise market gives the company the ability to write more loans on better cars.

“It’s an untapped market for us,” he said. “The returns are better and people default less.”

Westlake specializes in loans to customers with bad credit. Such subprime loans sometimes carry interest rates of 20 percent or more. That’s steep, but dealerships say that Westlake helps them offer loans to customers other lenders won’t touch, resulting in sales that otherwise wouldn’t happen.

Customers at Nissan of Van Nuys, which started working with Westlake a few months ago, bought 16 cars with Westlake loans last month and 23 in May. Some buyers couldn’t provide pay stubs or had such bad credit that no other lender would finance them, said Sam Patel, the dealership’s finance director.

“I would say 80 to 90 percent of those deals would not have happened if we didn’t have Westlake,” he said.

Independent roots

Since it was founded in 1988, Westlake’s business has been focused on independent dealers, largely because fewer lenders play in that market. Westlake was founded by Don Hankey, No. 26 on the Business Journal’s list of Wealthiest Angelenos with an estimated net worth of $2.3 billion. He said that before he started the company, other lenders would make customers with bad credit sign over furniture and appliances as collateral.

Lenders like that don’t exist anymore, but car buyers today still have fewer financing options at independent dealerships than at franchises.

In 2012, more than 80 percent of Westlake’s loans were made through independent dealers. But while independent dealers accounted for most of Westlake’s business, franchise dealerships account for more auto sales nationally.

To get into more franchise dealerships, Westlake hired sales representatives to establish relationships with dealerships. More significantly, the company started working with Dealertrack Technologies Inc. of Lake Success, N.Y., which makes car-finance software that’s widely used by franchise dealers.

Using Dealertrack, a dealer can submit information – car make and model, customer income, down payment – to multiple lenders and then see the options. Until last year, Westlake wasn’t in Dealertrack’s system. That means if a dealer wanted to run a deal by Westlake, it would have had to go through Westlake’s website and resubmit all that customer information.

That’s a hassle that most dealers likely wouldn’t go through, said Robert Riedl, chief investment officer at Irvine auto lender Consumer Portfolio Services Inc., which works mostly with franchise dealers.

“If you require the dealers to use your own website, that would be much more difficult,” he said.

Dealertrack charges lenders a fee for every application sent through its system, but the fees are small enough that it’s more than worth it for the additional deals Westlake gets.

Paul Kerwin, Westlake’s chief financial officer, said it’s a volume play. Dealertrack brings more dealerships and more dealerships mean more loans, even if most dealerships only do a handful of Westlake loans each month.

“We can sign a huge number of dealers and function profitably only getting one or two or three deals from them a month,” he said.

But in expanding its business with franchise dealerships, Westlake faces much more competition from other lenders. That means loans through franchise dealerships might carry lower rates, but Anderson said there’s still plenty of upside.

“There’s a lot more competition in the franchise space, so you need to be aggressive from a pricing standpoint,” Anderson said. “But there’s also less risk.”

Better cars

When making a loan, Westlake looks not only at a customer’s ability to pay, but also at the value of the vehicle. That’s important if a customer can’t pay and Westlake has to repossess the car, as a newer car with lower mileage is an easier resale.

And franchise dealerships tend to sell newer, better cars, so loans to franchise customers are seen as less risky, Anderson said.

“If you take two used Toyota Camrys, the one on the Toyota franchise lot tends to run better than the one on the independent lot,” he said. “You’ll rarely see a franchise dealer with a car that breaks down within the first six months.”

Loans through franchise dealers have also helped Westlake make up for a dip in its independent dealer business.

Santa Monica vehicle information website Edmunds.com reported this spring that used-car sales through independent dealerships are down nationwide, while sales through franchise dealerships are up.

For Westlake, that’s meant a 6 percent decline in the volume of loans through independent dealerships. But lending through franchise dealers has more than doubled, making up the difference and then some.

In all, Westlake issued loans of $621 million through May, up 16 percent over the same period last year.

With all those franchise deals, Westlake executives expect the company’s revenue this year to grow nearly 5 percent beyond last year’s total of $548 million, continuing a decadelong growth spurt. Westlake’s revenue was just $61 million in 2003.

Good timing

The growth of Westlake’s franchise business has come at a time when dealerships say they’re seeing more business from customers with bad credit – exactly the kind of customers Westlake specializes in.

Dealers say many potential buyers have steady work and feel they can afford a car, but their credit was damaged by the recession. For some of those customers, Westlake is the only lender available.

For instance, most lenders require customers to provide a pay stub, but Westlake will accept a letter from an employer.

That might only be a problem for a handful of prospective customers, but dealerships are eager to move cars and meet monthly sales goals, so every sale helps, said Mike Do, finance director at Alhambra Nissan.

“We consider Westlake when we can’t get a customer financed through a conventional lender,” Do said. “Instead of not making a deal, they certainly do help us out.”

Selling a car to a customer with bad credit can benefit dealerships in other ways, too, said Patel at Nissan of Van Nuys.

By working with Westlake, Patel said he can finance customers who have been turned down elsewhere. That can help foster customer loyalty and bring buyers back for another car or for repairs.

“Everybody who has bad credit knows they have bad credit,” he said. “So when they get a car, they’re going to talk to friends and family and say, ‘I went to Nissan of Van Nuys and they financed me.’”