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NABD Payment Assurance Study Released

December 03, 2009

HOUSTON — Last month’s National Alliance of Buy Here, Pay Here Dealers Underwriting and Collections Conference featured the release of a highly anticipated study on the effectiveness of payment assurance devices. The results were announced by NABD founder and conference chairman Ken Shilson, who is also a CPA and president of Houston-based Subprime Analytics, a dealership accounting and consulting firm.

“Payment Devices — Inside the Numbers!” is part of NABD’s ongoing effort to study the effects of evolving technology on auto finance collections efforts. The findings were based on 83,000 originations on vehicles equipped with starter interrupt or GPS devices. Shilson stressed that the study was fully independent.

“Many people have asked me to do this study, but none of them paid me to do it,” he said. “None of the data was provided to me by any of the payment device companies. I feel this study has been long overdue.”

Shilson began the presentation with a brief review of key terminology analysts use to determine how loan portfolios are performing. He stressed the importance of developing metrics to chart losses and project cash flow, encouraging dealers to continually monitor their progress.

Starter Interrupt Devices

The study included 67,000 loan originations for vehicles equipped with code-based starter interrupt devices. These devices are programmed to prevent a vehicle from starting if the customer has failed to make a payment and obtain and enter a code at predetermined intervals. 

Shilson found that equipping vehicles with such devices resulted in a default rate (number of deals gone bad against total originations) of 28 percent, compared to 29.4 percent without them. The effect of the devices on loss to liquidation (dollars lost divided by dollars liquidated), which demonstrates the pace at which losses are occurring, were mixed: The gross loss-to-liquidation rate was higher with the devices than without them — 39.23 percent to 34.69 percent — but the net loss-to-liquidation rate dropped from 25.63 percent to 24.20 percent with the devices in place. 

“We believe that code-based systems ... cause you to be more diligent in your collection efforts,” Shilson said. “You’re not using judgment as to whether or not to repossess the car. So it may cause an increase in the number of defaults as we’re seeing here in the gross loss-to-liquidation calculation. However, on a net basis, because you’re being more diligent, because you’re picking up those cars and, presumably, getting them back quicker, before they’re torn up, [the devices] are having a positive effect on the bottom line.”

GPS Devices

Shilson also analyzed 15,000 loans for which vehicles were equipped with Global Positioning System-based tracking technology, noting that this segment is much newer to the market than code-based systems.

The study found a default rate of 27.0 percent with a GPS device in place, compared to 29.4 percent without. The loss-to-liquidation numbers were even more dramatic: Gross loss-to-liquidation rate was 31.74 percent with GPS and 34.69 percent without, while net loss-to-liquidation rates clocked in at 20.18 percent for GPS-aided originations compared to the 25.63 percent baseline.

“We believe the reason that gross loss-to-liquidation rates is so much lower than for code-based [systems] is that they’re a psychological deterrent ... The customer is aware, through disclosure, that you’re putting this device on the car,” he said. “They realize if they don’t pay that they can’t just ‘walk away’ from the deal.”

Citing testimonials from users, Shilson said that both forms of payment assurance technology seemed to allow for a more consistent and, often, efficient approach to collections.

“I surveyed a number of operators using code-based systems, and they assured me they have seen a reduction in the number of collectors they have to have ... They can potentially double the number of accounts the collectors can handle,” he said. “It makes the collection effort more consistent and it does lower gross losses over the entire life of the loans. In other words, it’s a proactive tool.”

The full results of the study are available under the “News & Views” tab at NABD’s Website, http://www.bhphinfo.com.

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