Category Archives: Buy Here

Why Buy Here-Pay Here Sales Seem to Slow Down in the Summer

Now that tax refund season is a memory, we must keep in mind that the summertime blues may follow if we are not prepared. What are the summertime blues, you ask? Simply put, it is at this time every year (June, July and August) where sales volume retreats to normal levels. Customers start missing payments, (June), delinquency rises, (July) repossessions and charge-offs begin (August). This is an annual occurrence and yet every year it becomes more maddening.

Before this phenomenon makes us crazy, we must first examine its causes. The first cause of summertime blues is first quarter sales volume. The additional number of loans originated in January, February and March are at the root of this problem. The bulk of buy here-pay here loans go bad (if they are going to go bad) in the third to the ninth month after origination.

Logic dictates that loans originated in the first quarter will see the greatest number of repossessions and charge-offs from June (3-6 months old) to September (5-9 months old). If we have a great first quarter in terms of sales volume, it is only natural that we will feel the pain in the summer months.

The second cause of summertime blues is that our customers start failing to make their payments consistently and fall behind creating delinquency at this time of year. Right now, we also have to add in the fact that our customers are paying more for fuel than ever.

There are a couple of causes of this phenomenon. The first cause is that our customers go on vacations (June, July) whether they can afford to or not and they spend money for back-to-school (August, September) items including clothing, books, backpacks etc. This can make us crazy, angry, frustrated and tired but trust me when I say, “We can’t change our customers habits.”

The second cause of poor cash collections in the summer is that this the natural time in the life of the loans (3 to 6 months) where customers who have been jammed into high payments start failing. These customers pay us in the beginning of the loan (while they still like their car) while, at the same time, fall behind on their other debts and obligations. At some point they must stop paying us in order to pay other seriously overdue accounts such as rent, power and water.

The combination of fewer ups, fewer sales, less payments and more repossessed cars on our lots is enough to give any dealer the blues. Although this occurs almost every summer it does not make us feel any better. The summertime blues cure I offer is two-fold. First and foremost, is that some of this fallout is naturally occurring and should not be met with grief and frustration. What we can do is focus our energies on our selling, underwriting and closings next spring so that we create better loans from the get-go. We must vow not to “fall in love with down payments but fall in love with our customer’s stability and ability to pay.”

We must contract customers with affordable payments dictated by us and not by the customer. We should also remember to take our time during credit investigations to ensure we feel comfortable with the customer, the loan and the terms. We should also ensure that the customer leaves our dealership with a complete understanding of our finance program. Our goal as dealers is to help customers succeed, not help them fail. This goal can be achieved through a good strong loan closing.

The next step in overcoming the summertime blues involves the customers already on the books. We should ask ourselves if we are doing everything we can to ensure our customer’s successful loan repayment. Are we working with them in their times of need? Are we managing their past due payments and allowing payment arrangements when they fall behind? We cannot forget that these customers will not be cured of bad repayment habits; all we can do is work with them when they fall behind.

It takes so little effort to work with customers and so much effort to replace them. For those of us who do not believe in working with our existing customers and do believe in replacing them, we must ask ourselves why the customers we replace the old customers with, fare no better (lower delinquency and charge-off rates) with loan repayment success.

The reality of buy here-pay here is that 6 to 8 out of every 10 customers will pay us and 2 to 4 won’t (we just don’t know which ones will and which ones won’t). The best dealers strive to get more out each customer on every deal and create more successful loans more often which in turns creates future sales volume and that will alleviate the summertime blues.
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Chuck Bonanno is an Executive Vice President of the firm, Leedom and Associates, LLC. He is an executive Conference Moderator of Buy Here-Pay Here and Automotive Finance Twenty Groups. He is a nationally recognized speaker, author, industry trainer and consultant. Click here to see when a Buy Here – Pay Here seminar is coming near your town!

Leedom and Associates, LLC – Sarasota, FL
chuck@twentygroups.com
800.966.8733

Why GPS?

How does GPS (global positioning system) affect the buy here, pay here (BHPH) market, and what is GPS? GPS has proven invaluable in our daily lives, in ways many of us are unaware. The BHPH market is no exception, and GPS offers many options tailored to the industry, maximizing delinquency management. The following overview will introduce the concept and history, different applications, and a few of the benefits and features it has to offer the BHPH market.

Let’s start with a brief look into the history and concept of GPS. The official name is “NAVSTAR GPS” which stands for Navigation Satellite Timing and Ranging Global Positioning System. A series of two-dozen satellites often referred to as a “satellite constellation” transmits signals to GPS receivers telling the receivers their location, speed, and direction among other details, depending on the programming of the receiver. The information sent to the receiver is then, in the BHPH industry, accessed using Internet-based applications. GPS was developed by the United States Department of Defense. Although the satellite constellation is maintained, managed, and created by the Department of Defense, it is free to civilians as a public good.

As mentioned earlier, GPS is used in our daily lives in ways we may not be conscious of. Do you have a pet with an implanted chip in the off chance they get lost? That is a tiny GPS device. GPS is used for map making, land surveying, telecommunications, dispatching fleets, 911 assistance, and roadside assistance. Those are just a few uses for GPS and, as the technology is explored further, other applications will emerge.

Of even greater appeal is how GPS is being tailored for the BHPH market. The devices or receivers are becoming sleeker and smaller in size, making them more difficult for the delinquent customer to find and remove. The receivers are programmed to report details specific to the industry. Mainly location, as the whereabouts of a delinquent customer’s vehicle is valuable information for a dealer that wants to recover the asset.

In addition to helping with repossessions, there are several other benefits for BHPH dealers. One important benefit is that the devices are re-usable. The dealer can choose to re-install the device in another vehicle. Some GPS suppliers offer 24-hour support. Dealers can locate the vehicle at any time of their choosing using Internet-based applications rendering the dealer independent of their GPS supplier. Another added benefit is that reductions on insurance may be available for BHPH dealers installing these devices on vehicles.

In other words, if maximizing delinquency management is critical to the BHPH market then collections can become more important than sales. GPS devices can save a dealer considerable time and money on collections by locating the vehicle and in some cases disabling the starter.

Written by Stan Schwarz

You Spell Success – P-E-O-P-L-E

As I sat down to write an article for the DBJ this month, I thought about what is the absolute best opportunity available to us in 2009. There are fewer financing sources for automobiles, which theoretically helps the buy here-pay here dealer. Subprime is in retreat. There are fewer buy here-pay here dealers as the market expands its consolidation. There is more and more bad credit as the economy worsens.

While these realities may bring prosperity to the savvy buy here-pay here dealer who has sufficient capital, quality systems and superior marketing, the best opportunity is the opportunity to improve and upgrade our team. There has not been a better time to find quality people, who through no fault of their own find themselves out of work or in lesser jobs with lesser pay. This is the time to upgrade to an all-star team. No more hiring the next person who actually shows up at an interview or hiring the person with the fewest piercings and tattoos or the first one who doesn’t ask when they get their first raise or vacation. This is the time to find true all stars.

I consult for buy here-pay here dealers across America, and I see numerous business models, completely different organizations and diverse organizational missions. I see great companies, good companies, average companies and poor companies. I have analyzed the similarities and the differences between these companies and almost always come to the same conclusion. The best companies have the best people. They recruit, train and retain people. They create great work environments and they understand the value of creating great individuals and, great teams.

Many dealers have high levels of employee turnover especially in the sales and collection areas. While some feel these are the two easiest areas to replace people, I contend that turnover in these job areas create poor performance, lower profits and missed opportunities. The underlying reason for employee turnover is poor job performance and low job satisfaction. The reasons for both of these situations start with poor hiring procedures and a lack of job descriptions and duties and little or no feedback from the workers. This results in low job satisfaction and the promise of a losing season.

Too many employers hire based on their review of resumes and work experience. The truth is that although experience may be helpful, it is, by itself, a poor indicator of future performance. Dealers want experienced people so that they “won’t have to train them.” That is a false statement. We must train every new employee. Nobody comes to our organization trained and ready for the front line. They certainly do not understand our organizational goals, mission, policies and procedures. This is the job of the team owner and manager(s).

It is most important to hire people with energy, personality and willingness to learn and grow. I also like to test applicants to uncover their temperaments to see if they have the personality that fits the job. I can also develop an understanding what motivates the prospective employee. This ability allows us to communicate and motivate in a way that draws out the best from the employee. I also want to take time to interview the prospect and get to know them by asking about their past successes and failures, their personal goals and future plans. I care how they will fit into my culture. I would also much rather call personal and professional references than read resumes. Resumes are filled with exaggerations, omissions, sketchy details, and little real insight into the person applying for the job. All-star teams are diverse.

Once we have determined we have a good candidate for the job opening, we must supply the new employee with the tools for success. We must develop clear and concise job descriptions that outline reporting structure, job duties, communication lines and performance standards. We must also provide written policies and procedures that describe the operation of the company as well as their duties as they pertain to the job. We would be wise to pair up new hires with our most senior staffers to aid in real-world training. We should encourage feedback, allow for mistakes and take an active role in initiating the new employee into the work. I want each new employee to meet the staff, and want everyone to feel welcome. I will make the promise to be a resource for them instead of them being a resource for me. It is my duty to provide every employee with the skill set, tools, training, policies and procedures that ensure the success of both parties. We must show our players how they can contribute to winning.

I want to clearly define pay plans, incentive programs, bonuses, vacations, sick days, personal days, expected work hours, breaks and the opportunities for promotion. Car dealers believe that a good pay plan will always produce the most effective workers. I have yet to see this belief play out in real life. Pay is important to all of us in any job, but true job satisfaction is much more than money. It is a sense of importance, it is respect, it is recognition and it is about playing for a winning team. Individual performance is good but team performance is mission critical. We must also, honestly, review the performance of the team and the individuals on a regular basis. The idea is not to point out failures and shortcomings, but to applaud great performance, turn good performance into great performance and eliminate poor performance all together through discussion, education and problem solving sessions.

The ultimate goal is to create a high performance team made up of quality individuals all functioning for the good of the organization while, at the same time, being valued for their individual performance. These employees, or team members, will stay longer, be happier and more productive and, in turn, generate profits for us and our company. This will result in less turnover and will dramatically reduce the time, effort and cost of recruiting, hiring, training and retaining employees in the future.
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Chuck Bonanno is an Executive Vice President of the firm, Leedom and Associates, LLC. He is an executive Conference Moderator of Buy Here-Pay Here and Automotive Finance Twenty Groups. He is a nationally recognized speaker, author, industry trainer and consultant. Click here to see when a Buy Here – Pay Here seminar is coming near your town!

Leedom and Associates, LLC – Sarasota, FL
chuck@twentygroups.com
800.966.8733

What Buy Here, Pay Here Operators Should Learn

Last month, I wrote an article about some of the lessons buy here, pay here operators should learn from the recent subprime mortgage meltdown. I received numerous comments about this article and several respondents offered additional insights, which I want to share with everyone. If you have not read my previous article, you can download it free of charge at the NABD Website, http://www.bhphinfo.com in the “News & Views” section.

My previous article centered on two of the lessons that buy here, pay here dealers should learn from the subprime mortgage market: Poor underwriting decisions multiply into huge losses, and it takes time for the problems to surface, but ultimately, someone always pays a huge price for the mistakes.

The subprime mortgage losses and the financial pain that they create are expected to increase during the next twelve months. Analysts estimate that approximately two million adjustable rate mortgages are scheduled to reset during the next year, starting in October. The recent Federal Reserve interest and discount rate cuts are an obvious attempt to soften the blow and to reduce mounting foreclosures. Unfortunately, these cuts don’t solve the default problems and many more foreclosures are expected. The government also plans to provide relief by refinancing some of these subprime loans before they default via subsidized loan programs, in order to avoid massive foreclosures.

What is clear is that underwriting mistakes caused the problems and as these adjustable rate mortgages reset the new repayments will, in many cases, exceed the financial means of the customers. This problem highlights the need for better underwriting with structures designed so customers will pay over the entire life of the deal rather than just the initial few months.

Losses increase when principal payments are not made and the collateral depreciates. In the buy here, pay here industry, profit and cash flow are generally maximized when customers pay, not when the collateral is repossessed. The lesson is improperly structured deals cause losses, even when the underlying collateral is good and the customer actually wants to repay the loan.

Losses in the subprime mortgage market are due to unexpected declines in housing values. The owners and the banks that gave them the mortgages did not contemplate such declines. Government subsidized refinancing will help defer the foreclosures in order to give borrowers more time to pay and for property values to recover. In the buy here, pay here industry, however, collateral values (used vehicles) always decline and therefore principal amortization is needed to keep the lender’s loan-to-collateral relationship from deteriorating. Extensions on repayments and refinancing often fail to cure customer repayment problems because during the deferral period, the collateral may deteriorate faster than payments are received. In these circumstances, the loan-to-collateral relationships (i.e. losses) are increased and the customer may default anyway!

I mentioned in my previous article that good underwriting requires the gathering and independent verification of credit information. Sales people (and mortgage brokers in the subprime real estate industry) who receive sales commissions can’t be totally objective about granting credit to a customer. Therefore, some separation between sales, credit approval, and verification is recommended. Failure to independently verify customer information is dangerous, not only because underwriting decisions may be based on inaccurate or incomplete customer information, but also because it increases the likelihood of fraud. Not verifying credit information is like a walk in quicksand. You get in too deep before you realize it, and then struggle to get out!

Everyone in the buy here, pay here industry knows the importance of keeping the vehicle running in order to keep customers paying. Often deferred down payments and repair note financings are used to facilitate the purchase of the vehicle and to pay for repairs, which arise during the term of the installment contract. These additional or supplemental payments must be considered at the time of underwriting to evaluate whether the customer can really afford the vehicle they are purchasing. Just as higher adjustable rate payments should have been considered for subprime mortgage customers, failure to provide for sufficient financial flexibility also causes defaults!

In the months ahead, we will all pay the price for the subprime mortgage meltdown! In order to avoid the same situation in the subprime auto industry, we all have to learn from these losses, so we don’t repeat them. More credit-impaired customers are expected to enter the buy here, pay here market as a result of subprime mortgage defaults, and buy here, pay here operators need to take a more prudent long term approach when underwriting these customers.
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Kenneth B. Shilson, CPA, is a principal in Shilson, Goldberg, Cheung & Associates, LLP and president of Subprime Analytics (http://www.subanalytics.com), which performs electronic portfolio analysis. Mr. Shilson is also the founder of NABD. Visit http://www.bhphinfo.com or call 713-290-8171.

What’s in Store for Your Store

What’s in store for your store in 2011? If it’s anything like 2010, it should be another good year to be in the buy here pay here (BHPH) industry. However, 2011 will not be without its challenges. In fact, there are certain areas of the industry that could become more challenging than ever.

To get an idea of what to look forward to in 2011, we first need to review how 2010 treated the BHPH world. Overall, it received very good treatment in spite of a few bumps and bruises.

From a profitability standpoint, the dealers I have the distinct privilege of working with enjoyed a 22 percent increase in profitability in 2010 versus 2009. This sizable increase was due mostly to the right-sizing of overall operations. Dealers focused on their entire operations from top to bottom to cut the fat and run the operations based on the cash they where generating instead of relying on lines of credit.

I expect this same focus to continue in 2011. Although funding sources have become more readily available, overall I think most dealers will be focusing again on generating the capital necessary to run their businesses from their businesses. As always, there will be those dealers looking to grow aggressively through borrowing, and rates will continue to make this a very viable option. I don’t see rates rising drastically in the coming year, so it will still be a good time to borrow. Having said that, I still see it being more difficult to secure new lines of credit in 2011. It’s going to take some patience and the willingness to educate some institutions on our industry.

With our dealer clients, we saw sales volume increase by almost three percent in 2010 over 2009. Not a record-setting year by any means, but this trend was driven more by cash management. Dealers seemed to want to sell what their cash flow dictated rather than sell as much as possible. We all know that we can sell as many as we want or have the financial resources to in this industry. There doesn’t seem to be a lack of customers needing or wanting what we have to offer.

The same will pretty much hold true for 2011. We should have the customers in the market to sell as much as we would want. The biggest question will be inventory availability. Now I’m normally a glass-half-full kind of guy, but when it comes to this, I think the glass may be half-empty. Even though the prices somewhat leveled off the last half of 2010, the number of vehicles was dwindling even more than usual.

In 2010, portfolio performance saw some stabilization from a dollar-loss standpoint, but from a number-loss standpoint, we saw a slight increase, or worsening. This, I believe, was driven by a couple of factors, the first being the need for inventory. I think some dealers accelerated their repo times when a desirable unit was involved. This also helped stabilize the dollar losses as the vehicles were repossessed earlier and in better condition and thus garnered higher recovery amounts. The other factor was renewed focus on both underwriting and the overall collection process. Dealers remained more disciplined in both areas, seeking quality over quantity.

We’ll see more of the same in 2011. Dealers have seen the error of their past ways and are enjoying the spoils of their more disciplined labor. I expect to see the average charge-off to remain essentially the same and the number as a percent of sold to remain higher than in past years, but I expect collections dollars to improve as well as overall collections effectiveness.

The biggest thing to affect our industry in 2011 will no doubt come from the compliance front. The Consumer Finance Protection Act was signed in July of last year, and with it came the establishment of the Consumer Finance Protection Bureau. The “rules” of the Act have to be drafted by August of this year, so we will know what kind of field we will be playing on. In the interim, I have already heard from a few dealers who have received a letter from the FTC (the Bureau’s governing body) informing them of pending audits.

This is something that has existing dealers debating whether to remain in the industry and is causing some who are looking at getting into the industry to delay their entry until the rules are set. This Act and Bureau will separate the men from the boys, so to speak. The dealers who are trying to the best of their ability to do the right things will survive and those dealers who like to operate in the gray areas will fall by the wayside. I’m sorry to say that the waysiders are going to cause the cost of doing business to increase for everyone else.

So here is the best advice I can give to existing dealers, as well as those wanting to get into the business in the coming year: don’t wait. Don’t wait to get compliant. Don’t wait to spend a little money to do so. Don’t wait to review all processes and procedures. Don’t wait to review all expenses. Don’t wait to review all your employees. Don’t wait to train. And definitely don’t wait to sell cars, collect money and make money.
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Brent Carmichael
Executive Conference Moderator
NCM Associates
800.756.2620
BCarmichael@AutoDealerMonthly.com

What’s The “One Thing”?

In the fall of 2006, I was honored to serve on a panel at the Chris Leedom Conference in Las Vegas. I served with a distinguished group of experts from all areas of the automotive industry. During that discussion, we were asked the same question: What is the most important thing to focus on for 2007?

Although the comments varied from legal and accounting to inventory and financing, I have always felt that it all begins and ends with collections. All things being equal, without collections, there is no cash flow; without cash flow there is no revenue; and without revenue financial institutions will not loan money to a company. There are many factors to consider about the collections department, but I believe there are three key components to being effective.

Underwriting

Exemplary collections begin with quality underwriting. You cannot have one without the other. All too often, credit applications are incomplete, references are not verified and customer data is not scored or analyzed to determine their ability to pay. Credit scoring enables your company to survive portfolio risks more effectively, and creates consistency in loan underwriting. Accurate management of credit decisions and related data will allow your company to increase profits while pushing the recognized limits of BHPH. Dealers must understand that selling cars is not about recycling repossessions; it is about balancing repossession rates with effective collections. Lenders do not make money recycling repos.

Tools

The right technology and reporting helps drive your business processes. Trying to run your company without the right tools is a mistake you cannot afford to make. It begins with good measurement and accountability. Measure your collectors’ call statistics to determine time spent on the phone, number of contacts and promises received to start. Once these promises are made however, you must follow up by analyzing the quality of these promises. This means that you must have systems that can track success rates, including the percentage of dollars promised versus collected, as well as the percentage of promises kept. Understanding your collectors’ promise-to-pay statistics can be one of the most important statistics to watch.

Recently, I spoke to a dealer that told me he has a collector that consistently has the lowest delinquency of any collector on his team. Wanting to learn more he dug further, only to learn that this collector’s repossession rate accounted for almost 40 percent of all the repossessions at his company. Obviously, this is not a good trend. Balancing repossessions and effective collections can be challenging, but it must be tracked and considered.

Reward

Giving your collectors a practical incentive to work hard and affect the bottom line is always a good idea. Programs should balance the overall reward by analyzing contractual and recent delinquency along with dollars collected while at the same time recognizing that repossession rates should be considered as well. Narrowing the reward to just one component can come back to haunt you. I have always believed that your pay structure must have multiple components to be effective.
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Allen Dobbins is the president and owner of Autostar Solutions, Inc., a company specializing in buy here, pay here software and dealership management systems. To find out more about Autostar’s products and services contact Allen at allen@autostarsolutions.com or call him at 800-682-2215.

Watch Your Step

Not addressing problems immediately in your dealership can cause catastrophic results down the road

As a car dealer today, it’s almost impossible to run your business without consulting an attorney on a regular basis. The courts are backlogged with numerous cases of civil dispute, and Attorney Generals around the country target car dealers as watchdogs for the consumer, especially during election years. Identity theft, fraud, illegal immigration, money laundering, discriminatory finance practices and the ever-changing lending laws have made owning and operating a dealership – particularly a BHPH store – a legal war zone. Dealers all over are tiptoeing through the compliance minefield where one misstep could have devastating consequences.

A proactive approach to solving the customer’s problems is critical for a dealer’s survival, and most often it is a tactic that will save you thousands of dollars in legal expense and exposure. The key is to "nip the problem in the bud" before it grows out of control. If you react quickly to the issues at hand and train your staff extensively on policies, procedures and compliance requirements, life at the dealership will be a whole lot easier.

The Business of People

Whenever a problem arises the goal is to strive for 100-percent customer satisfaction. Immediately resolve the problem! Don’t put it on the shelf and hope that it goes away. That’s just burying your head in the sand and that tactic never works. It’s like putting away bad milk in the refrigerator; it’s only going to get worse with time. Instead, deal with it immediately. The same holds true with employee problems. Never leave anything to chance, especially the solution to your day-to-day problems. Competition is simply too high and there are too many risks to operate any other way.

Problems and conflicts are going to happen whenever you’re dealing with people; it is part of doing business and your reputation will be determined by your ability or inability to solve these problems. If a customer has a problem you should address it immediately and work diligently to resolve it without giving away the store.

Think of yourself as a customer. How do you want to be treated by a business? What kind of service do you expect? If we get a bad cup of coffee or the fast-food worker messes up our order, we want an immediate solution. The same holds true for any retail consumer, regardless of the product or service. If an employee, a manager or (even worse) the business owner ignores our problem, we get angry and may even feel betrayed. We tell people about the bad experience. If we believe that our unattended problem is serious enough, we take action. Some complaining customers will call the home office or the Better Business Bureau looking for an ally who will listen and help solve their problem. The whole situation can begin to worsen and mushroom.

Some upset customers will even call an attorney looking for relief. And, as I am sure you are aware, there are several sharp lawyers who work on a contingency basis whenever the business that allegedly wronged the customer is a car dealership. That’s because the stakes are high, the payoffs are huge and the opportunities for critical errors at a dealership are plentiful. Customers elevate their problems until they are satisfied, either directly or indirectly. Either way, the negative actions by an upset client are costly to your reputation and not good for your business.

Actions: Louder Than Words

Conflicts and problems are easy to resolve if you simply listen to the customer, empathize, and sincerely learn about the issue. It is just like sales. In fact, it is sales. You are always selling yourself, your business and your reputation. That does not mean the customer always gets what they want, or that the customer is always right. Right or wrong does not matter. It’s about business and what’s good for the business. It’s about learning what the customer needs and quickly satisfying that need with perceived value before, during and after the original sale.

Many conflicts can be resolved simply by listening, being nice and being proactive. Treat people with respect and your actions will speak louder than your words. It’s when people are ignored that they become angry and unpredictable. So don’t ignore your customers. Instead, solve their problems before they do. Never leave the resolution to chance. If you find a customer with a problem, you have found an opportunity for another sale. If you solve the problem quickly you will reaffirm trust in your organization and gain another sale or at least a referral. That customer will tell everyone about his or her positive experience instead of trashing your reputation all over town.

A BHPH customer’s trust is too hard to gain, too easy to lose, and too valuable to risk. The success of that deal is all about the relationship, negotiating win/win scenarios and staying in contact. If you betray this trust you may never regain it and the associated costs are exponential, as the walls of conflict go up and your profits go down. So, whenever a problem arises, don’t waste any time. Do yourself, your customer and your business a favor by confronting the situation immediately and nipping the problem in the bud.
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Ben Donnarumma owns and operates a car dealership in New England, is president of a regional finance company, and is a partner with Benjamin Herald Associates. Contact him at bdonnarumma@special-finance.com

We Need to Eliminate The ‘Up’ Words

Over the last several months, I have done a few dozen Twenty Group meetings and a couple of words continually popped up when discussing portfolio performance. The two words widely used to describe the status of the loan portfolios were hiccup and clean up: The “up” words. Dealers and finance companies use theses words to describe some serious portfolio issues. Let’s look at these words up close and see what they mean.

The first word is hiccup. “Our Collection Department suffered a hiccup last month, or last quarter or last year.” A hiccup? Well that doesn’t seem so bad. I think you can just hold your breath and the hiccup will go away. Or is that an old wives tale? The hiccup is actually a spike in delinquent accounts. This spike almost assuredly will lead to increased repossessions and charge-offs (also known as a clean up – see the next paragraph).

Hiccups can be caused by many factors. A few factors are external such as a failing local economy, weather, rising costs of living, but the majority of factors causing these hiccups are internal, controllable and require accountability. Poor collection effort, staffing shortfalls, staffing changes, poor leadership and most often, a failure to recognize a trend and react to that trend in a timely, efficient and effective manner. Those are serious issues.

The reason I hate the word hiccup is that a hiccup is a naturally occurring event that can’t be controlled but will go away and there really isn’t any major consequence associated with it. A portfolio hiccup results in higher charge-offs, which reduce profits. I would not define higher charge-offs or reduced profits as a minor event. If I was going to use an “up” word for this phenomenon I would call this a “blow up.” That is a better description.

After the hiccup (blow up) the collection department will have to do some clean up. Now that is a happy term for taking massive charge-offs. “Don’t worry boss, we’ve got it under control. We just need to do a little clean up.” I feel better already. This clean up is where you pay for the hiccup. This clean up is a serious financial event. Writing off an additional 10, 50 or 100 accounts may result in company losses of $50K, $250K or $500K or more. That is not a clean up that’s a collection disaster. And many times it gets worse. When a collection department does a clean up and the delinquency rate of that portfolio does not improve markedly, you will do another clean up. If you do three clean ups in a row you have a serious collection issue and goes far beyond a hiccup and a clean up. This is a sign of poorly executed collection effort.

So I propose that we take these words out of our collection vocabulary. I do not think that this act will eliminate spikes in both delinquency rates and charge-offs from time to time, but it will get rid of the connotation attached to the events.

I challenge you to create a new term for a portfolio “hiccup” that better describes this event and accurately depicts the serious nature of this occurrence so that nobody feels okay about it. I also want to eliminate the word “clean up” for taking extraordinary charge-offs due to collection effort failure. You need to create a word that accurately depicts the financial pain associated with these events. If you come with good adjectives to describe the hiccup and the clean up, please e-mail them to me and we will incorporate the good ones into the collection dictionary. I look forward to your responses.
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Chuck Bonanno is an Executive Vice President of the firm, Leedom and Associates, LLC. He is an executive Conference Moderator of Buy Here-Pay Here and Automotive Finance Twenty Groups. He is a nationally recognized speaker, author, industry trainer and consultant. Click here to see when a Buy Here – Pay Here seminar is coming near your town!

Leedom and Associates, LLC – Sarasota, FL
chuck@twentygroups.com
800.966.8733

Whack-A-Mole Compliance

As a child, I remember begging my parents to give me quarters so I could play games in the mall arcade. I would run right past the skeeball and pinball games, and mosey on up to the game of champions—whack-a-mole.

As most of you know, the challenge in whack-a-mole is to club the moles in the head when they pop up. If you’re too slow or fast—whoosh you miss! To win, you need to react to the moles when they show their mischievous smiling faces.

Games are fun, but adopting a whack-a-mole technique just isn’t the way to go when developing a company-wide ‘Safeguards Policy.’

What do I mean? Well, many dealerships I see have never stepped back and developed an information security program, or Safeguards Policy that is appropriate for the size and complexity of their particular dealership. Instead, many dealers merely react to what they perceive as their risks on a day-to-day basis.

For example, it is not unusual for me to visit a dealership that does not have a written Safeguards Policy, has not appointed a program coordinator, or has not attempted to identify reasonably foreseeable risks to their dealership (all of which are required under the federal Safeguards Rule). Instead, the dealership tries to scare the employees into “lock-down” mode. Signs are posted all over employee areas saying things like, “If it doesn’t go in a deal jacket, it gets shredded!” or, my personal favorite, “If the FTC fines us, it’s coming out of your paycheck!” I could write a complete article about the legal misinformation communicated in these signs, but I won’t. (not today, at least.)

What is the problem with this approach? Well, other than potentially giving your employees ulcers, these messages simply do not reflect the requirements of the Rule. The Rule does not say that “everything must be shredded,” or even that your dealership has to be as tight as Fort Knox. When it comes to Safeguards compliance, there is no substitute for following the express requirements of the Safeguards Rule.

Let’s take a look. The Rule requires you to:

[list:1n8m3zy7]- Designate a program coordinator.

– Identify reasonably foreseeable internal and external risks to the security, confidentiality, and integrity of customer information handled by the dealership that could result in its unauthorized disclosure, misuse, alteration, destruction, or other compromise; and assess the sufficiency of any safeguards in place to control these risks.

– Design and implement safeguards to control the risks you identify through the risk assessment and regularly audit the safeguards to ensure their effectiveness.

– Oversee service providers.

– Evaluate and adjust your Information Security Program.[/list:u:1n8m3zy7]
The FTC intended these requirements to be as flexible as possible. As such, your dealership’s safeguards don’t have to be perfect, but they must be appropriate for the size and complexity of your dealership and its operations, the nature and scope of your dealership’s finance and lease activities, and the sensitivity of the information you handle.

What does all this mean?

It means that when it comes to developing a Safeguards Policy, you need to be proactive, not reactive. As you go through the process of tackling the whopper requirements under the Red Flag Rules this spring and summer, take some time to make sure that your Safeguards Policy is as proactive and responsive to the Rule’s requirements as it should be.

You’ll rest easier once you’ve gone through the steps. After all, whacking those moles can wear you out!
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Emily Marlow Beck is a partner in the Maryland office of Hudson Cook, LLP. Prior to starting her legal career, she spent years working in a family-owned dealership. Emily is an editor and one of the authors of the CARLAW® F&I Legal Desk Book, available at http://www.counselorlibrary.com. She can be reached at 410-865-5438 or by email at ebeck@hudco.com.

Underwriting in Uncertain Times

Every time dealers run into a rough collection patch, they tell me their solution is to “tighten up underwriting.” If that’s all it takes for better loan performance, I say why not tighten up all the time. If it were really that easy and simple, wouldn’t everybody “tighten up?”

The reasons loans go bad and portfolios do poorly are as wide-ranging and diverse as all the dealers who produce the loans.

I have yet to see a magical solution to bad loans, but I am more convinced than ever that portfolios that perform are the ones that are collected better, not underwritten better. The reason I say that “collections” is where you make your money (or lose it) is it is very difficult to determine which of these customers will pay based on typical underwriting guidelines and verification.

There are so many variables in these deals and in our customer’s daily lives that choosing a few traditional guidelines such as time on job and time in residence don’t truly predict. There is, however, one guideline that must be adhered to and more now than ever. That is the question of affordability. While no one can accurately predict if our customers will keep their jobs, we can approve them for a payment that is affordable based on current conditions. That may not always be the case, but I do know that if you put a customer in a payment they cannot afford your loan will fail. It’s simple math. The reason this is so important in these economic times is that job security is sketchy, overtime is being reduced or eliminated, hours are being cut, and bonuses have been cut as business suffers.

Many dealers use debt-to-income ratios as their affordability guideline for a car payment. I am not convinced that is the most-effective method. Those calculations do not consider the lifestyle of our customer. Our customer’s money is spent on cost-of-living items such as cigarettes, lottery tickets and beer, not on revolving debt and mortgages. Other dealers budget their customers by creating a laundry list of monthly bills. They

use the list to determine if there is enough money to pay all bills and add a car payment, gas, maintenance and insurance. (My answer always ends up being no). The flaw in this method is that we assume that our customers pay all their bills all the time and we know that is not the case (hence the 450 beacon score). The third way is to use a payment to income (PTI) method. In this case, customers are approved (pending information verification) based upon their income regardless of debt or budgets. If you use this method, the first thing you MUST do is use NET pay, not gross pay. I don’t know where banks came up with the gross pay strategy, but my gut says they did it to approve more and bigger loans (and look at the mess they’re in now). The trick is to determine what percent of net pay should be used in determining a payment qualification. I have always used a cap of 25 percent of net pay in the past. I am really advising that you back off of that number if that is the percent you use. I think you can eliminate the affordability question (if they stay employed) if you reduce that payment call to 18-22 percent of net pay.

Secondly, I am more opposed than ever to include “transient” income such as overtime, bonuses, child support and certain social security income payments. I advise this action not to approve fewer loans but to approve better loans with a better chance of repayment over the next 2 to 3 years. I am not smart enough to know when we will come out of this recession, but I am very confident it won’t be soon. I also know that if I write loans with reasonable payments I put myself in far better position when the world rights itself again.

Successful buy here-pay here dealers are in business to create successful loans. Those successful loans are originated using sound guidelines through underwriting policies and procedures. Our job in underwriting is to lower the risk we take. We cannot completely eliminate it, but we can make sure WE control the factors we CAN control such as affordability. If we reduce the risk factors we control then we can improve our loan “collectability” and therefore improve loan success rates. That works in any economic climate.
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Written by Chuck Bonanno
Leedom and Associates, LLC – Sarasota, FL
chuck@twentygroups.com
800.966.8733

Chuck Bonanno is an Executive Vice President of the firm, Leedom and Associates, LLC. He is an executive Conference Moderator of Buy Here-Pay Here and Automotive Finance Twenty Groups. He is a nationally recognized speaker, author, industry trainer and consultant.