Acquisitions

Give Your Loan Portfolio A Quick Pre-Sale Checkup

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.

datafiletemplate01

Sample data file template: Account, Contract, and Collateral Information

datafiletemplate02

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.

 

Paperwork

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.

Avoid or Reduce Buybacks After A Loan Sale

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.

broken down vehicleAccounts 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.