When performing the role of F&I Manager, it was usually pleasant to deal with someone who was buying a new car. Despite the fact that there seemed to be an endless supply of documents to review and sign, the customer was normally excited about their new ride and couldn't wait to show it off to friends and family.
After the paperwork was signed, keys and handshakes were exchanged, and the customer and dealership were enjoying what both believed would be an ongoing, amicable if not friendly relationship. The dealership had worked hard to put the person in the car they wanted and pledged to provide friendly service and great deals on future purchases. Customer's promised to make their payments on time, send referrals, and to return to the dealer when they were ready for their next vehicle.
In too many cases, it was the beginning of the end of a beautiful relationship.
You see, after you sold your customer a car, you turned them into a debtor. Someone who will owe you a lot of money for several years to come. Someone who in the course of those years is all but certain to miss a payment. Or two. Or three. Or... Well, you get where I'm going.
In the BHPH, nonprime lending industry missed payments are inevitable and an expected part of doing business. But is it the part of the business that you really want to deal with? Is debt collecting what you want that hard earned customer who promised referrals and repeat business to associate with your business?
No matter what causes your customer... oops, I mean, debtor, to fall delinquent, you must now remove the hero's hat of the friendly car dealership and put on the hat that represents the most despised villain of the nonprime borrower, "The Debt Collector!"
Sure, in some cases you can collect a delinquent payment or two with minimal effort on your part while creating no or little bad will with the debtor.
In some cases.
But far too often that is not the case. For those that aren't easily cured with a quick phone call, debt collecting is an expensive and time-consuming operation that almost always creates bad will between you and your customers. No matter the circumstances that are preventing your past due accounts from paying on time, you’re likely to be the target of their frustration when you contact them for payment.
Of course, this isn't the case for every delinquent customer. But for the those who regularly remain past due, the prospects of repeat business is now gone, and the promises of repeat business have devolved into negative remarks about your dealership to anyone willing to listen.
Most auto dealers are pros at selling cars but have little desire to run a collection shop for the reasons I've covered above, and the dozens that I haven't. Instead, many of these dealers chose to sell all or parts of their loan portfolio.
When you sell loans, you're not only reducing the need, expense, or liability of in-house collections; someone else has now assumed the role of "villain" when bad things happen. If the customer loses their job and can't make payments: not your problem. If the customer files bankruptcy; not your problem. If the vehicle breaks down or is totaled; you guessed it! Not. Your. Problem.
Ok, it's not exactly a fairy tale, but if you don't have to do so much tedious collection work on your portfolio, you can live happily ever after.
In fact, as soon as you have sold that debtors contract to a finance company, they cease being a debtor and are instantly transformed back into a customer. From a Prince to a Frog and back to Prince, it's like a fairy tale. Ok, it's not exactly a fairy tale, but if you don't have to do so much tedious collection work on your portfolio, you can live happily ever after.
Besides eliminating or reducing the need to run an in-house collection shop, there are many benefits to selling your loans, and I will be covering more of those in future posts.
There's an old joke that goes something like "If you're an educated professional and out of work, you're not unemployed, you're a consultant. There must be some truth behind this because I recently read an article on LinkedIn discussing the problems that can arise by filling gaps in your resume' claiming to be a self-employed instead of unemployed. This is why when I introduce myself as a consultant, people have actually shot me a sympathetic look and assured me not to worry and that I'd find something soon.
After much convincing, usually by producing a professionally printed business card with a real office number, not just my personal cell, and actually business (not Gmail) email address, I hear, "Okay, you are a consultant. What do you actually do?"
As much as I hate to admit it, it’s a fair question. Consulting sounds like the saying about how those who can do, and those who can’t teach. But this is far from true. Unlike most teaching jobs, a professional consultant's knowledge comes not only from a theoretical classroom education but real world business experience. They have either owned, run, or otherwise worked for successful companies and have a proven track record that can be easily checked out by a potential client.
On the surface, it can seem puzzling why a business wouldn’t just solve their own problems internally, or rely on their own ideas for growth or expanding their markets. Fortunately for me, and the mouths I have to feed, there are several good reasons why businesses should turn to a consulting firm for help.
They Need A Fresh Perspective
When you have problems in your personal life, especially when making tough decisions or choices that could impact your family, you often turn to trusted friends and relatives for their advice. There are times when your business should do this, too.
But this isn’t just any advice your getting. Expert consultants have the advantage of working with a large number of companies so chances are they have dealt with your type of problem before and know what works and what doesn’t. That experience also places them in an excellent position to offer a fresh perspective on solving new challenges in your business and providing long-term advice and guidance.
Consultants can provide insight and a clear solution to a problem that you may be too close to see. Even if you already have an idea of how to solve the problem you’re facing, it’s a good idea to speak to a consultant to validate your thinking and get their professional opinion.
They Need Additional Horse Power
Companies don’t always have the time or manpower to focus specifically on problem-solving. After all, you still have a business to run and your employees are already focused on the day-to-day operations. Often the do not possess the experience skill set to take on these types of problem-solving projects. And many of these kinds of projects are one-offs and do not justify the hiring of full-time employees to handle. On your own, compiling an expert team with experience in your business can be a tough, expensive, and time-consuming challenge.
In instances such as these, consultants provide the best of both worlds. They are highly skilled people who serve as a kind of temporary employee to your company. Good consultants need little, if any, time to get aquatinted with your business and can hit the ground running, providing an immediate value add to your company.
They Need Specialized Skills
The most common reason that a business hires a consulting firm is to gain access to a specialized set of skills that does not exist within their organization. For example, if you hired the firm I work for, you’d get access to a group of experts who’s skill sets include portfolio management, operations, information technologies, securitizations, and compliance.
Let’s say you own a Buy-Here-Pay-Here auto dealership and you are concerned about potential compliance issues in your loan portfolio. Considering the repercussions you could be facing for compliance violations, that’s a legitimate concern. Chances are you don’t have anyone on your staff who is an expert on the federal and state statutes required to conduct a comprehensive compliance audit on your portfolio. If not then you’ll need to reach outside of your company to a firm that does. A professional compliance consultant can not only identify any problems with your portfolio but can also provide guidance on federal and state statutes in loan servicing, loan origination, privacy laws and many other areas that pose a risk to your business.
For most companies, hiring a full-time employee who specializes in compliance doesn’t make sense. They would be too expensive, and not enough work to keep them busy. But thanks to consultants, you can bring in highly specialized talent as needed with none of the expense or commitments of hiring a full-time person.
They Need Someone To Be The Bad Guy
There are cases where companies faced with financial or operational problems are forced to do major restructuring. Or, in a worst-case scenario, to shut their doors entirely. In either of those cases, laying off employees is usually an unfortunate reality.
Should you find your business in a situation that requires restructuring, a consulting firm can evaluate your plan and make suggestions where needed. They can also evaluate your staff and help you determine what positions will be necessary to carry out your plan and who the best people are to fill those positions. When a restructuring plan has been made, they can help you present the plan to your staff and answer questions. Bringing in and outside firm shows your employees that you are serious about keeping the doors open and saving their jobs. That’s an excellent moral booster in a time where one may be greatly needed.
Laying off employees as part of a restructure or business closure is a tough chore and can expose you to potential lawsuits if not handled properly. It can also be a very emotional experience if you are close to your staff. Having a professional explain the situation void of personal relationships or office politics can make the process much easier for both parties.
Consultants can also be very instrumental should you be faced with having to shut down your business. In some cases, they can help find a buyer for your business or help you liquidate its assets.
I hesitated before including the last topic in this article as it is generally the job of a blogger to keep things informative but light and casual. Restructuring or closing a business is no fun to write or read about, and it’s even worse if it’s something you are currently experiencing. However, it’s a part of doing business, and if you do find yours in such a situation, a good consulting firm can still be a great asset is helping you to strategize a comeback, or help you recover as much money as possible from your remaining assets.
So as you can see, consultants are more than just teachers, they are doers. They’ll roll up their sleeves and jump in the trenches with clients if need be to ensure their success. If you think your business could benefit from the help of a consultant, please drop me an email and I’ll put you in touch with a professional consultant who is an expert in your industry.
Whether you’re an experienced loan seller or have just recently decided to dip your toe into the market, there are a few simple but important steps you should be taking to help you get top dollar for your paper.
Make A Great First Impression
The vast majority of pre-owned auto dealers today take pride in their business and reputation and take great measures to dispell the unsavory "used car dealer" stigmas of yesterday. They strive to create a brand that generates customer satisfaction and loyalty, both of which typically translate into success and profitability.
Of course one of the most important factors by which customers will judge your business is the quality of the vehicles you offer for sale. For your inventory to make a good first impression, you normally perform a little maintenance on each vehicle before it goes on the lot. For instance, making sure it's clean and shiny, starts quickly and drives well, and that it has a current inspection. If it looks, sounds, and drives it's best, you can expect to receive top dollar.
The same holds true when you are ready to sell the loan.
In a way, you're selling the car a second time. Only this time, you're not just peddling the metal, you're selling the paper and the borrower behind it. Since your loan buyer won't be kicking tires or test driving the collateral, you must make sure that your paper is as clean as possible so that it makes a good initial impression. This not only will help expedite the sale and closing but could go a long way in helping you obtain the best price for your portfolio while building a long lasting relationship with the buyer of your loans. Let's discuss a few steps you can take to make that happen.
Do The Math
Before you can even consider selling loans in your portfolio, you must verify that the numbers add up. Take a sampling of your Retail Installment Contracts and Payment Transaction Histories to check the allocation of principal, interest and late fees to ensure the accurate posting of both. For example:
We’ve seen many cases where a loan buyer received contracts that were written as Simple Interest but the interest was amortized as Precomputed and vice versa. This is an automatic deal killer for buyers and a potential regulatory issue for you, and should be fixed immediately whether you intend to try and sell the loan later or not. You can salvage the loan to sell at a later date, but you will need to fix the issues and make any necessary adjustments.
There are some on-line tools that can help you with the re-amortization of you loan contracts, however, we would always recommend you seek advice from a knowledgable firm that specializes in loan compliance.
I won't recommend any specific online resources here since I cannot guarantee their accuracy, but if you need some help, drop me a note in the comments section and I'll point you in the right direction for a consultant or on-line resources.
Provide A Clean Data File
Since I'm fond of using auto dealer lingo, I will compare providing your perspective loan buyer with a clean, detailed loan file as you would a customer with a clean, freshly detailed, reconditioned car.
Like a clean, nice running car, loan buyers are impressed and willing to buy when they receive a clean loan file from a seller. A clean file means that errors are removed, and accurate, relevant information has been placed in the file in a consistent manner. If you are not proficient in putting together a “clean loan file” please drop me a note and we can make recommendations for that as well.
Sound a touch OCD? Welcome to the world of an Analysts. Sorry, couldn't resist that one.
All kidding aside, scrubbing your data file and including all of the account, contract, collateral, and customer information will do wonders in getting your deal priced fairly and closed quickly. The less time you have to spend going back and forth with the buyer for data, the sooner you can be spending your profits and deploying the cash received from the sale. Also, and this is vital, ensure you have a fully executed non-disclosure agreement in place.
The graphic below is a good example of the information that buyers generally request.
Sample data file template: Account, Contract, and Collateral Information
Sample data file template : Customer Demographics
After creating your data file verify that all fields and headers are lined up properly. It's an easy mistake to make when compiling your file but can make for quite a mess when a misaligned file is loaded into a buyers modeling system.
As the saying goes, no job is finished until the paperwork is done.
Before submitting your loan portfolio to a buyer, you need to check all of your loan documents to ensure that all have been properly filled out and executed. The actual loan files need to be reviewed as to the ancillary documents.
During the due-diligence of your loan files, the buyer will be looking very closely at the following documents at a minimum:
- Copy of the Retail Installment Contract
- Copy of the vehicle title or title application
- Customer credit application
- Any GPS or starter interrupt information and disclaimers
In short, make sure that you've crossed your T's and dotted your I's. It's better for you to identify and correct any issues than it is for the prospective buyer to find them. However, if a prospective buyer finds deficiencies in your data and or documents, take them seriously, speak to professionals and make the necessary corrective actions. Ignoring issues when they are discovered can be very harmful to your business and certain remedies are time sensitive upon discovery of the deficiency.
Presenting clean, accurate, and compliant loans to your buyer will let them know that you are running a top notch shop and motivate them to compete harder for your business and bid higher for your paper.
In the business of buying and selling loan portfolios, buybacks are similar to returning defective merchandise to the store. The retailer ensures the product will perform as advertised, and if the item breaks down within a set timeframe, the purchaser can return it for a refund.
In the case of a loan sale, returns are generally referred to as “buybacks”. Buybacks are a Seller’s guarantee to a Buyer that the loans have a reasonable likelihood of performing, and they conform to all government regulations.
If you have sold loans, especially those of the non-prime variety, you’re probably aware that most loan buyers require a period of recourse. The typical period of recourse is between 30 to 90 days and requires a seller to repurchase a loan under certain specified conditions within that time frame.
Buyers utilize the recourse period to notify customers of the sale, answer questions, and familiarize them with their servicing platform; i.e, who, where and how to make future payments. Account servicing during the recourse period allows the Buyer to identify any serious issues with an account they were unable to discover during the initial due diligence.
Contrary to some beliefs, a seasoned Buyer doesn’t look for excuses to send a loan back for repurchase.Buybacks, especially in large numbers, pose the risk of negatively impacting the relationship between the Buyer and Seller and that Buyer is always part of the “chain of ownership” which can add additional risk for the Buyer.
Also, a high number of buybacks in a portfolio can lead a Buyer to wonder if you are trying to pass off an adverse loan selection and could affect future pricing for your loans, and jeopardizes the potential for a long-term and mutually profitable business relationship. On the flip side, you’re not going to be happy writing a lot of buyback checks, reboarding loans, and having to explain why you are bringing the customer back in-house.
Now that we’ve established buybacks as a lose/lose transaction for both you and the Buyer, you should do everything you can to eliminate them before the sale and take steps to avoid buybacks after the sale.
Remove Problem Customers.
When the opportunity for a sale arrives, it’s only natural to want to dump problem customers on someone else.
The vast majority of your customers are reasonable people who make their loan payments on time and when they do hit an occasional bump in the road, are agreeable in making payment arrangements. Most buyers understand that “life happens”, and so do slow pays.
Then there are the headaches. The hostile, combative, uncooperative, have complained about their vehicle since the day they drove off the lot customer. They are the chronic slow payers, arrangement breakers, and prone to give you an earful of colorful language that would make even a, well, bill collector blush.
Although tempting, it usually winds up being counterproductive to include these types of problem accounts in your file selection. There is no reason to believe that they will treat the new buyer any better than they did you, and sure to be among the first buyback accounts.
It’s cheaper and less hassle to keep those headache accounts than to sell now and buy back later. Besides the aforementioned potential of damaging the relationship between you and the Buyer, selling and buying back a loan could create even more of a strained relationship between you and an already difficult customer.
Go ahead and toss those rotten apples out of the barrel beforehand.
Exclude Loans With Impaired Collateral.
In non-prime auto finance, there isn’t much that will cause a customer to default and force a buyback faster than a broken down or badly damaged vehicle.
Accounts with impaired collateral are not always recognized during due diligence but are usually uncovered during the recourse period, and when they are, you can count on it being an immediate buyback. However, most experienced buyers, especially those with retail auto experience, understand the difference between a complaint where they just need to perform regular maintenance and one that needs a tow truck. You shouldn’t worry about being asked to buyback an account because they need wiper blades or an oil change.
Toss out any loans wherever you are aware that the engine is blown, the tranny is sitting on cinderblocks in the customer’s driveway, or the vehicle has been wrecked or totaled. And don’t forget to exclude impounds.
Communicate With Your Buyer.
Your Buyer should be willing and able provide you with regular portfolio performance reports for all loans under recourse. A good Buyer will provide you with a weekly portfolio review throughout the recourse period.
A regular portfolio review allows you to track the performance and provides a heads up on any accounts that are problematic. Comprehensive reports will alert you of any potential buyback accounts and help identify possible systemic issues.
For example, if you see the Buyer has a high number of customers that they are unable to contact, contact them and verfiy that they have the correct phone numbers and mailing addresses. It only takes one error in an electronic boarding file to cause the wrong demographics to be populated into the buyers servicing system, so it’s a good idea to have them verify the customer demos if you notice a high number of “no contacts” in your reports.
As helpful as reports can be to prevent unwanted buybacks, don’t fail to speak directly to your Buyer’s Portfolio or Acquisitions Manager frequently and find out if there are any problem accounts that you may be able to help with.
Talk To Your Customer.
After the sale is complete, do everything to you can to ensure that your customer is aware that their loan has been sold.
Make sure the seller sends a “Goodbye” and “Welcome” letter to the customer. A Goodbye letter sent on your behalf thanks the customer for their business and introduces them to the Buyer. The Welcome letter contains the Buyer’s information and explains how and to whom they’ll be making their future servicing inquiries and loan payments.
Letters don’t always get read so don’t rely wholly on them to do the job of notifying your customer of the sale. Once your customer discovers their loan has been sold, they are likely to contact you with questions. Make sure that your staff is not only aware of the loan sale but prepared to explain the sale to your customer and provide them with the Buyer’s contact and payment center information.
In my past experience as a Portfolio Manager for a loan buyer, I can assure you that good communication is essential in avoiding excessive buybacks. Talk to buyers, customers, and your staff regularly and you’ll be writing far fewer buyback checks.
To summarize, an ounce of prevention could be worth a pound of cash when it comes to avoiding or reducing the number of buybacks.
If you found this article helpful, or just as an excuse to slack off at work for a few minutes, please let me know in the comments section below and subscribe to our newsletter.
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