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Lender Confidence and Compliance

April 2008, F&I and Showroom - Feature

by Lee Domingue - Also by this author

Securing strong business relationships with the lending community has always been a priority for automotive dealerships that offer indirect lending options to their customers. But building and maintaining those connections may become more challenging. In light of the recent subprime mortgage debacle and the corresponding softening in the mortgage market, lenders are acutely aware of the credit and regulatory compliance risks associated with conducting business with any third party. Dealers must show lenders that they have the necessary processes in place to mitigate risk and meet regulatory compliance requirements.

Many lenders are starting to change their indirect lending standards as a result of today’s credit crunch. The American Bankers Association (ABA) reported that delinquency rates for indirect auto loans rose to 2.86 percent in the third quarter of 2007 — a 16-year high. And it’s not just subprime borrowers that are struggling. According to the ABA, prime borrowers are also defaulting on auto loans. In an interview with The Detroit News, the ABA’s chief economist, James Chesson, said, “Banks will be more conservative in their approach to new auto loans.”

One main concern among dealers is that the credit crunch will result in decreased auto sales for 2008 because consumers may have a tougher time meeting credit qualifications, or may simply hold off on buying new vehicles altogether. Since the beginning of the year, industry analysts have focused on the industry’s expected performance in the next 12 months. Many analysts have shared dismal predictions for 2008, including the National Automobile Dealers Association (NADA), whose chief economist, Paul Taylor, predicted that new-car and light-truck sales will drop below 16 million units in 2008.

Dealers are in a tough spot. Not only are there concerns about new-car sales, but with stricter lending guidelines dealers must also consider how their business relationships with lenders might be impacted. What will make their dealership more appealing to lenders? And how can they stand apart from competing dealerships? The answer will ultimately be tied to regulatory compliance. As indirect lenders build portfolios, it is clear they will be diligent in ensuring that the dealers they do business with are in full compliance with state and federal regulations. That means dealers must be prepared.

Stay Current on Industry Requirements

As regulatory guidelines become increasingly complex, dealers must make sure they are staying current with the constant changes. This has become especially evident in recent years with the requirements mandated by the USA PATRIOT Act, Equal Opportunity Act, and Fair and Accurate Credit Transactions (FACT) Act. Lenders want to be assured that the dealers they do business with are working as hard as they can to meet these requirements.

One area that lenders — and regulators — will definitely be looking at this year is how dealers are addressing Identity Theft Red Flags and Notices of Address Discrepancy — the Red Flag Rule. The Federal Trade Commission (FTC) established the Red Flag Rule to combat identity theft. Dealerships can be prime targets for identity thieves in two ways: thieves use stolen identities to purchase vehicles or they take financial information from a dealership’s existing customers to use elsewhere. The Red Flag Rule, which went into effect Jan. 1, 2008, requires that dealers and lenders implement identity theft programs by Nov. 1, 2008.

The Red Flag Rule is a prime example of the compliance guidelines dealers must constantly strive to meet. Dealers not only face steep fines for non-compliance (it can be thousands of dollars per Red Flag violation) but, more importantly, they can face permanent damage to their business if they don’t follow industry regulations that help protect their customers and the lenders with which they do business.

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