Quantum Fund Invests in AutoFinance’s Bad Credit Risks : Finances: The Burbank car loan company sold the international money fund on its 20% interest rates and belief in borrowers with poor financial histories.

Here is how Quantum Fund, N.V., the legendary international investment fund run by renowned money-manager George Soros, made some of its money this year. It reportedly laid down about $900 million on the risky bet that Japanese stocks would take a dive, and staked about $2 billion on the gamble that the fall of the Berlin Wall would cause the German mark to soar. Both bets paid off.

Then Quantum took some of its smart money to Burbank.

In late November, Quantum acquired a 25% stake in AutoFinance Group Inc., an obscure 17-month-old Burbank auto lending company, for about $5 million. On the surface, the investment looks strange. AutoFinance lost nearly $700,000 in the three months ended Sept. 30, and its business is making car loans to people whom other lenders consider bad credit risks. So why did Soros, one of the 400 richest people in the United States, according to Forbes magazine, consider Quantum a good investment?

Quantum doesn’t comment on its investment decisions. But AutoFinance executives, who effectively went to Quantum to sell it on investing in their company, argued that AutoFinance has a chance to grow fast because borrowers with bad credit histories represent a large but neglected market and a risk worth taking.

“There’s a tremendous growth opportunity there,” said AutoFinance Chief Executive A.E. Steinhaus, former chief operating officer of Nissan Motor Acceptance Corp., a Torrance-based financing arm of the big Japanese car maker.

Another attraction is that AutoFinance’s loans carry interest rates of 20%, compared to the more typical 12% to 16% charged to more credit-worthy auto loan borrowers. AutoFinance figures the high rate more than makes up for the risk of lending to people whom other institutions turn down.

AutoFinance makes loans through car dealers in California and New Mexico. Its $16.87-million auto loan portfolio mainly consist of loans to “non-prime credits,” lending lingo for people with scanty credit records or who have been through bankruptcy or have had late-payment problems in the past, but are looking to mend their records.

AutoFinance is dwarfed by lenders such as General Motors Acceptance Corp. (GMAC), which has about $90.5 billion in outstanding auto loans. But Steinhaus says the biggest auto lenders--such as GMAC, the finance arm of General Motors--don’t consistently lend to “non-prime” borrowers, leaving an opening for others. “They come out with a first-time buyers program when they need to sell cars,” Steinhaus said of the big auto makers, but they don’t offer car dealers a consistent source of loans for marginal borrowers.

Longtime auto industry analyst Arvid Jouppi, with Keane Securities in Detroit, agreed. “The Big Three go in and out of it,” he said.

AutoFinance’s strategy for making loans is to stay in much closer touch with the borrowers than do most auto finance companies. The company reminds borrowers that their payments are due 10 days ahead of time, then calls if payments are as little as two days late. Steinhaus said most car loan customers are used to making bill payments 20 to 60 days late. “We are basically trying to educate them,” said Steinhaus. As of Sept. 30, less than 1% of the company’s loans had payments more than 30 days overdue, he said.

That kind of close attention to borrowers requires a big staff. And AutoFinance figured that “in this business the worst thing you can do is hire people after they’re already needed,” said Chief Financial Officer Blair T. Nance.

So in June, 1989, the company hired 34 people before it actually started lending. Today, the same size staff monitors nearly 2,000 loans, and the company only expects to hire a few more people as it grows during the next six months.

Steinhaus said such hiring ahead of time accounts for AutoFinance’s current losses, which he expects to last through much of 1991.

Steinhaus and Nance helped start AutoFinance after both quit top positions at Nissan Motor Acceptance Corp.--Nance was treasurer and controller. They got the money for their company through private placements and bank loans secured by stockholders.