After spending 20-plus years working her way up the corporate ladder at Maryland National Bank, Karen Trostle decided she could start her own marine loan origination company.
When the birth of a son motivated her to reduce travel, the Maryland native tapped her dealer contacts and formed Sterling Acceptance Corp. in 1987. She co-owns the company with her husband, Dave, and when they aren’t getting boat loans financed (and sometimes even when they are), they are typically found aboard their 50-foot sportfishing boat, cruising the Chesapeake Bay and beyond.
This winter, the pair decided to take the boat to Florida and live aboard while attending boat shows and meeting with clients. The business now has five loan production offices around the country, including its Annapolis, Md., headquarters.
Trostle is a past president (2008 to 2011) of the National Marine Lenders Association. She has been on the organization’s board since 2005. She boasts 40-plus years of marine direct, indirect and floorplan banking experience. Down to earth and quick to laugh, her passion for boating and finance come across easily in conversation.
One increasingly prevalent post-recession trend, she says, is for buyers of boats over $250,000 to pay cash — she guesses that 60 percent of these buyers are using wire transfer instead of borrowing. We asked her about other trends and where she thinks the marine lending market is heading.
Q: Can you tell me how you got started and what led you to form your own company?
A: I started at Maryland National Bank at a branch in Annapolis right out of school. I started as a clerk typist working in the floorplanning area, which included cars, boats and motorcycles, and I worked my way up. I became a manager in the area and was transferred to the consumer banking division in College Park and Rockville.
Soon I was with child and doing some traveling for the bank. I was transferred to the boat loan department in Annapolis, where we did credit and sales and floorplanning for marine. I wound up being a vice president of the sales operation.
I was traveling a bunch because we had 12 loan production offices around the country. And I just thought, you know, I really can’t do this with a small child, but then thought, I bet I could do this myself, knowing that I had a lot of dealer contacts. I started my own service company, Sterling Acceptance Corp., in 1987, so I’ve been in business going on 29 years now.
We have offices around the country. We’re a service company, so we develop relationships with banks and we act as their marketing arm. We attend boat shows and do our own advertising, and we actually collect financial information and present it to a lender for loan approval. Once they render their decision, we handle the back end for them by doing all the paperwork, doing the Coast Guard registration, doing the title work and securing their lien. We’re paid a fee for doing that.
We’ve been doing that for 28 years, and we’ve got offices in California, Florida, Virginia Beach and now in Newport, R.I., and at our home base in Annapolis. I grew up in the lending area and was really trained by the market rather than being trained in college. I’ve grown to love it.
It’s part of our lifestyle. We own a boat and we spend most weekends aboard. So we’re in the middle of the market in both personal and business.
Q: What kind of boat do you have?
A: We have a 50-foot Post, which is a sportfishing boat. We don’t do a whole lot of fishing, but we cruise on the Chesapeake Bay. This year is the first time we’ve brought the boat to Florida to spend the winter down here and attend the Miami show and the West Palm show. We’re staying aboard the boat, again mixing business with pleasure.
It’s a first for us, so we’re excited about it. We just love being on the water, and it’s relaxing for us, so we can be energized to work also. We meet a lot of our clients on the water, too. We know where they keep their boats and try to hang out with them. They welcome us on their boats and want to show us around. That’s fun.
Q: What exactly do service companies provide for the marketplace? Did the economic downturn shift that role?
A: I’m not sure the 2008 downturn … really affected the job of the service company.
There are different types [of service companies]. There are different relationships with lenders; there’s a dealer-direct relationship with the lender, where the dealer has a finance and insurance department and works directly with a lender. There are companies that are indirect service companies that represent a number of dealers and process loans for them, but the dealer works directly with the bank as far as the reserves are concerned.
Then there are loan origination companies, and I would put us in that category. We’re a separate entity from the dealer and a separate entity from the lender, but we’re the originator. We work with lenders, and our salespeople propose programs that attract clients through sales objectives with dealers to get their business and then we work directly with the lenders. We’re more independent than the dealer might be with the direct relationship.
The objective for all parties — dealers, service companies, indirect service providers — is to get the loan approved at a good rate and a good profit for the company. What we find in the dealers that deal direct with the bank is that they may have direct relationships with five different banks. But there are other lenders out there that just deal with service companies.
So when some dealers are unable to get a loan approved or get the rate for the consumer, they come to a company like ours because we have other sources. We operate on a national level, so we have banks outside their region.
One of the best things we do as a service company is we warrant to the lenders that all the information we give them is true and exact. We also warrant their liens will be perfected, and we warrant that all information is notarized to ensure people are who they say they are. In doing that, we give a comfort level to a lender.
One thing that’s important to our industry is the National Marine Lenders Association. Its lender members are service companies, banks and indirect processing groups. We talk in our conferences and workshops and marketing about best practices for the industry.
One of the things that has really impassioned me over my tenure at Sterling is being part of the association. I’m immediate past president now and served as president during those lean years between 2008 and 2011.
One thing the group does is collect data in a survey report to see how the industry is performing in terms of delinquency, charge-offs and volumes. The information is really good for new lenders trying to decide whether to get into the boat loan market. It allows lenders to compare themselves to the industry standards.
Q: I know the NMLA changed its name a year or two ago to be more inclusive of all parts of the marine lending industry, and not banks specifically.
A: As an association we want to make sure we touch those industry partners that are lending for boats so we can share best practices. It’s a unique, specialized industry, for sure. It’s important for us to encourage membership in our association and keep on top of changes in the Coast Guard, changes certainly in the Consumer Financial Protection Bureau and its impact on lending in the marine field. Our members include documentation companies, attorneys, insurance companies, repossession and recovery agencies and surveyors.
Q: Can you talk about the data you’re collecting and how the industry compares in terms of charge-offs and volume and some of those other data points you were discussing?
A: The association does an annual survey of its members and uses a third party to collect the data. Each individual provider of information gets put into a data bank, and it’s all averaged out so there isn’t one lender’s information that’s known.
It’s conducted around March, and we ask lender members to provide information about delinquencies, loan volumes and turnover rates, which would be the average life of a loan. They provide the terms they offer, we ask about variable waits and the indices used. We even ask about characteristics of a loan, which would be annual income, average age, average number in the household, so we get demographic data.
By early fall we present a report. It’s really detailed, and we’ve been doing it a long time, so we have about 10 years of trending data. So you can really see trends when you look at it. Certainly a dramatic one is the 2008-to-now with delinquency and charge-offs. When you look at it right now, the boat industry does better than auto in delinquency and charge-offs, so marine is a valued addition to most portfolios.
This report does show trend lines for volume, and you can see when rates are increasing or declining, you can see changes in volume and refinance, and changes in the portfolio as time goes by. It helps new member lenders get information about our past.
Q: It seems like the data would be compelling in drawing new lenders to the marine industry.
A: Absolutely. If you aren’t a member and you don’t participate, you can purchase them, I think for $395. If someone wanted to get into the industry but doesn’t know where to go, they could buy it.
Q: You touched on the changing regulations and the Consumer Financial Protection Bureau. Anything new on that front? I remember hearing lots about it for a while soon after Dodd-Frank, and then not as much recently. Is that still top of mind for lenders?
A: Yes. The CFPB is the result of the Dodd-Frank [Wall Street reform and consumer protection] bill, and it’s an agency that oversees lending for mainly larger banks, and its actual provisions have not all been written yet. They started out concentrating on the mortgage industry and have gotten into the credit card industry, and also automobile.
The marine loan side is a small segment of the total market, so we are looking at provisions as they come down because it’s a consumer loan just like an automobile, so their regulations might be similar. There have been changes that have affected our procedures. One big change that occurred initially was that the Dodd-Frank bill changed the definition of what real property is in a vessel and made them the same. That means if you’re living aboard a boat, right now because of the new definition, the provisions of the mortgage industry would apply to you or anyone else living on a boat. What that means is the seller of the loan would have to be certified; they would have to go through training and classes and their license would need to be renewed every couple of years.
It also kicks in the good-faith estimate, like when you buy a house, they give you that ahead of time. All the provisions that mortgage companies have to comply with, we as service companies, banks or anyone involved in the boat loan would have to abide by the same provisions, which makes it hard and expensive.
As a result, lenders have decided that we’re not doing liveaboard loans anymore. Because of that bill, and the need to abide by new regulations, lenders are not lending to that segment. It’s not a huge part of the market, but unfortunately we cannot lend to them anymore.
Terminology in truth in lending, and in whether you’re a joint borrower or single borrower, have made banks have this huge dependence on a legal department because all the forms had to be looked at and had to include specific new verbiage. So it’s impacting us, and I don’t believe it’s going to calm down.
We don’t know exactly what the future holds, but everyone is trying to think about what could happen and doing their best to make sure they abide by all regulations as they come. We may not be hearing about it, but trust me, it’s being thought about at the major banks every day.
Q: What about the current boat lending climate and where you think it’s heading?
A: I don’t think 2016 is going to change a whole lot from 2015. From the recession what’s changed in our lending field is we’re tracking with what the boat sales are. Average loans have been lower because people are buying smaller boats.
We do see more and more banks getting into marine lending. That is growing as we see boat sales continuing to trend ever so slightly up. Interest rates — we just saw a quarter-of-a-point rise at the end of the year, and that rate was already plugged into banks’ rates going into the fall because they knew that was coming and rates haven’t really gone up since.
There are predictions they could go up half a point or three-quarters of a point this year, which will transfer into the loan rate, but they’re still great rates. I can remember back in 1988, which was a boom year for us, interest rates were 12 percent and people were waiting in line to get them.
I think that even if the rates go up a half or three-quarters of a point, I don’t think it will affect people buying a boat or the habits of the boater. It’s been talked about so much in the news that it’s already being settled in everyone’s psyche, and they expect it. But I don’t think it’ll be swift or immediate. I think it will trend a quarter of a point here and a quarter of a point there.
Q: What about the health of consumers? Has it been long enough for some of the unfavorable credit fallout to go away? Do you think there will be at least a small population of people who, say, had a short sale in 2009 but have otherwise maintained good credit and financial health who will come back to the market as they can qualify for more favorable loans?
A: I believe so. Right now, if a short-sale history is in the credit report, most lenders will not do the loan. But after seven years — that’s the statute of limitations — they will disappear from their credit history. So as time goes by, assuming they have good credit since, their credit scores will go up and it is likely they will be able to borrow again.
You know there are subprime, tier 2 and tier 3 loans available today from some banks. If you have shown you’ve recovered and you’re stable, you’ve got money in the bank and your credit has been good since then, you can get a loan.
Q: So do you think from 2016 maybe through 2018, those who had a slip in credit reports and can achieve more favorable terms might return to the market?
A: I believe that is true. But on the other hand, I’m not so sure we’re losing them from buying a boat because they can’t get financing. There might be a bump when the people can borrow, but I think there are enough subprime lenders out there that I don’t think that’s what’s stopping them from buying, that they had a short sale in 2008.
I think they can get financing. It’s just that the rates won’t be as attractive because of the credit score. I don’t think we’re going to see a big bump because I think now they can still get funding. And the first step for that group may be to buy another house.
Q: I still hear some dealers saying they can’t make sales because they can’t get them financed. I think many of them recognize that maybe some of those customers who were getting approved probably shouldn’t have been, but the sting of losing those middle-class buyers who pulled equity out of their homes for a boat is still there, even this many years later. Do you think dealers and consumers have gotten used to the new normal for lending?
A: Getting back to the annual survey, you can see if you look at the down payment — and that’s a big consideration when you’re buying a boat — a lot of lenders have reduced the amount the buyer has to put down. You can get a 10 percent-down loan, you can get a zero percent-down loan under $100,000.
I hear people say the same things — that they could sell more boats if they could get more financing — but I don’t think that’s as big an issue as it used to be. I wouldn’t say lenders have loosened up, but there are more liberal lending criteria out there that would allow most people to buy a boat.
Do they have to have pretty good credit? Yeah. Do they have to be fairly stable? Yes. Do they have to have a job and earn income and prove it? Most of the time they do. But I don’t think that’s so unusual.
I would have to disagree with those who say they can’t sell a boat because financing isn’t available. I think it’s back to the point where it was prior to the recession. I think there are enough banks out there, some new ones and some old ones, that are still plugging along doing boat loans.
I don’t think it’s a financing issue anymore. I think it’s an affordability issue. Prices are not what consumers think they can afford, and that could be based on a payment, the amount of the loan or purchase, but I don’t really think it’s because financing isn’t available. That’s probably counter to what you’re hearing.
Q: It’s not counter to what I hear in the lending community.
A: (laughing) I know. We say those things, don’t we?
Q: I think it’s fair to repeat the lenders’ perspective because we talk to so many dealers, some of whom are still frustrated. We also hear about affordability, as you touched on, and some industry leaders have brought up income and salary stagnation, making it hard for many to keep up with rising prices. But I wonder if perhaps there was a segment of people pre-recession who couldn’t actually afford the boats, but were able to buy them by sort of betting on their homes.
A: There is some wisdom in thinking that perhaps we as lenders don’t want to repeat the mistakes we made in the past, so we’re not relaxing our standards to the point that we’re going to lend to every single person who wants to buy a boat. There needs to be some sort of stability in each case. And we’d like to get that word out that marine loan consumers are valuable. They pay their bills.
I think that the credit standards are more liberal than they have been. Certainly right after the recession most banks tightened credit standards. That was the knee-jerk reaction to there being a lot of repossessions and lot of delinquencies. Then as time goes on, you can see people are more stabilized and you get to the point where you feel comfortable again.
Our attitude is that we want to make every single loan. We don’t want to turn it down. We want to do every loan that we can and be prudent about it and do the right thing. But we want to make every loan we can. We’re in the business to make loans, not to not make loans.
Q: Yes, you just want it to get paid back. Otherwise, it’s a gift.
A: Right! You’ve got to get paid back or you wouldn’t be doing it anymore. I really think that the health of the industry is that the credit part of it be stable. We do due diligence and take the right steps to make sure we don’t lose money for the banks, and then it will continue on and be healthy. But if we make mistakes and don’t protect the banks’ interest — getting paid back — then there won’t be money to loan.
Q: What do the subprime and near-prime lending markets look like today? Those seem to have arisen after the crisis, but still are around.
A: It’s a concept that was always in the real estate market, and we really did as an industry need to find a way to finance some of those who had credit history problems, with short sales and so on. The subprime is a great market. It’s one in which each lender looks at each applicant to see if they have recovered to the point that they feel comfortable lending to them.
It’s not a huge market now. It’s generally for smaller loans — less than $150,000 — but it serves its purpose.
Q: Where are higher-value boat loans today?
A: In the larger-boat market, say over $250,000, a large portion of people are paying cash. I don’t have data. That’s just off my own history from what I see from dealers we work with, and I think the rest of the industry is seeing that, as well.
What rattles my brain most every day is how do we turn these boat buyers into loan customers in hopes they could make more on their money by not using the cash they have, and instead use the boat as collateral and use the mortgage-interest deduction if it qualifies. That’s a real struggle, turning these cash buyers into loan customers.
I do think the average loan is increasing. For my company, the average loan has increased over the last several years. But our company isn’t probably indicative of the norm because we do deal in the larger loans and larger boats.
Q: It’s interesting to me that people would pay cash if they could actually come out ahead by financing.
A: That’s what they’re doing, and it’s interesting to me, too, every single day. As a service company, we also do Coast Guard documentation as a service to consumers and dealers, so we see it. They’re paying cash — hundreds of thousands of dollars in cash.
It’s been said in our economy that consumers are holding and keeping cash. They’re using it to buy boats, I can tell you. It amazes me.
There’s no tracking in the industry as to whether people borrow or not. I wish some entity would do it. We don’t really know what that percentage is of boat buyers paying cash. But my best guess is that on deals over $250,000, I bet 60 percent pay cash, which is a huge number.
Q: How does the industry seem today from your perspective? Any trends you can spot from where you sit?
A: I believe the industry is healthy. I think it’s growing at a rate that is healthy. As we move into 2016 I don’t believe interest rates will have a big impact on whether people buy or not.
There are some economic factors looming. The election is coming; there is some uncertainty in that. But I think there are all very positive signs in the economy, though it’s slow and steady. There are some concerns about unemployment, lack of growth in GDP. It’s not the best of scenarios, but those are things we’ve been talking about for a while. It’s still better than it was, and it seems to be steady.
Fuel prices are down, and actually that is one of the reasons we brought the boat down to Florida — fuel prices were low, so it’s more affordable to move around. I think there are good things happening.
One of the biggest things I see as someone who’s growing old in the industry, when I look at people buying and people who are getting out of boating, as we get older — and certainly I’m not there yet — but as our generation gets out of boating I hope we see more people getting in.
We’re seeing older people getting out because it’s a lot of work, gyrations, the dock, maneuvering, that sort of thing. But as I look at my son and the children of my generation, I see them busy. I don’t see them getting into boating. They like going out on the boat, but they’re not buying boats because of busy schedules.
So I’m a little bit concerned about the far future in regard to the boating demographic and who will be buying these big boats. Because I grew up boating and I think you almost need to grow up boating to have the passion and be part of the boating scene. I hope that continues. That would be my biggest concern: the younger generation, marketing to them and promoting boating to them.
Q: Those busy schedules certainly put pressure on the affordability-versus-value equation, especially for people who live in places that get cold in the winter.
A: Exactly. And that’s why some of the fractional ownership companies and boat clubs are an attractive option for young folks.
But as far as the lending market is concerned, we can’t lend on those entities. Well, we don’t right now. Maybe there’s a way we can work something out. But right now lenders aren’t lending on fractional ownership. That could be something to look into.
I don’t know that industry that well. I just know from the lending perspective that we don’t do those loans because then it becomes kind of a business loan, rather than a personal loan.
This article originally appeared in the February 2016 issue.