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.
[PAGEBREAK]Technology Adoption to be Key
Keeping up on the most current industry regulations can be daunting for dealers of all sizes. Fortunately, technology exists that can simplify the task and help maintain compliance safeguards.
Some of the most basic compliance problems can be related to paperwork. In some cases, the problem starts with the loan documents themselves. With industry regulations changing all the time, dealers who store hard copies of documents run the risk of using outdated forms. This is a problem that can be easily avoided by using compliant loan documents that are supplied electronically. Dealers know that the documents are always in compliance with regulatory requirements because the forms provider updates these documents when required. This means the dealer doesn’t run the risk of sending a non-compliant document to a lender, which means the loan process can be expedited since all the forms have been validated and meet auto lending laws.
By using compliant loan documents through an online system, dealers can essentially eliminate hard copies of loan applications. This ensures the security of document flow between the dealership and the indirect lender. Automated forms on online platforms can also flag discrepancies, such as a Social Security Number that matches the number of another applicant in the same database, or identifying information that is associated with fraudulent activity.
The bottom line is technology helps ensure loan applications are well-documented and accurate, which eliminates unnecessary problems. Lenders receive complete and compliant loan documentation — something they not only require, but also greatly appreciate.Choosing the Right Technology Partner
Implementing new technology will most likely involve support from a vendor. Establishing partnerships within the industry and implementing new technology is a big undertaking — especially for smaller dealerships. However, experienced technology providers work to understand a dealer’s operations so they can help implement the solutions that are best for their individual business needs and ultimately improve everyday business activities.
A technology partner helps simplify a dealer’s administrative and compliance issues, and can help dealers quickly catch inadvertent documentation mistakes or suspicious activity before it creates problems. These partners complement compliance processes the dealer already has in place.
It is important to remember that dealers are the first line of defense when it comes to certain compliance issues. For example, the Red Flag Rule requires the dealer to check the photograph or physical description on the loan applicant’s identification to make sure it is consistent with the appearance of the applicant. This is something that only dealers or their on-site staff can do since they work directly with the applicant. Conversely, industry partners can address issues dealers struggle with due to lack of technological or staffing resources, such as fraud prevention databases, customer interviews, approval stipulation verification, adverse action notice management, and credit checks that look for activity that is inconsistent with the history and usual pattern of activity of a loan applicant.
Long gone are the days where a dealer just sold a car, got the deal approved and funded by the indirect lender. If the bank doesn’t catch credit problems or misrepresentations before funding, it’s not just the lender’s problem. The lender’s inherited problem is also the dealer’s problem because the dealer is essentially the lender for a brief moment in the credit sale transaction.
Indirect lenders are looking for dealers who will work with them to find inaccuracies and misrepresentations. Even if a dealer has worked with a lender for years, or sends a high volume of loans to that lender, it really means nothing if the dealer is not taking steps to comply with regulatory requirements. Lenders want to know that dealers are providing them with solid, profitable loans for their portfolios. As Benjamin Franklin once said, “An ounce of prevention is worth a pound of cure.” Dealers who apply this adage to their business will likely be in the best position to build lender relationships that withstand ongoing changes in the marketplace.
Lee Domingue is the founder and CEO of AppOne, now a part of Wolters Kluwer Financial Services, a provider of regulatory compliance solutions to the indirect lender, banking, mortgage, insurance and securities markets. AppOne is a national provider of Internet-based risk mitigation and financial technology to banks, auto finance companies and independent auto dealers throughout the United States. For more information on AppOne, visit www.appone.net.