Current economic conditions and the squeeze on credit have many auto dealers refocusing their efforts on used-car sales. For franchise dealers, that may include considering in-house financing for the first time. Whether you’re new to the game or ready to move your portfolio for the first time, you owe it to yourself and your store
to be aware of the many compliance issues that can either make or break your business. Like any new venture, entering a new market requires research and preparation to help ensure the most successful outcome.
As foreclosures continue to mount, consumers who are accustomed to the comfort and benefits of a high Beacon score have found themselves facing financial troubles or bad credit ratings for the first time. That might make it tempting for a dealer to jump right into special finance — and even buy-here, pay-here — to meet the new demand and keep their doors open.
However, in addition to looking at the external factors driving the decision, dealers also must effectively evaluate if they are in the best position to make a change. That’s a call only a dealer can make because, after all, who knows your business better than you?
Survival in the BHPH industry, for instance, really boils down to one thing: access to capital. Dealers who don’t have it won’t be able to finance their businesses and meet customer demand. So before making the decision, dealers must determine whether they have the ability to appeal to lending institutions that will purchase their portfolios. If you’re an established dealer thinking about putting your in-house finance portfolio on the open market for the first time, ask yourself the following questions:
1. Are my loan documents compliant?
Is there any chance the loan contracts you use are out-of-date? If so, there’s a chance that some of your loans have been documented on paper that is no longer compliant. Industry regulations change on a regular basis and loan documents must be updated to reflect these changes. This makes their shelf lives very short.
Lenders need to know that the dealers with whom they are doing business are actively working to mitigate risk. If loans are not documented on compliant contracts, it’s a deal breaker.
Mike Sheridan, founder/president of Global Debt Network, agrees. His company offers GDNAuto.com, an online marketplace where dealers, financial institutions and other investors connect to buy and sell auto loan portfolios.
"Today’s market environment demands that portfolio sellers, including dealers, banks, finance companies and credit unions, put their best foot forward," Sheridan says. "This requires a seller having compliant documents and complete loan packets. Few buyers are willing to deal with the hassle of a poorly documented loan portfolio and will just move on to the next deal."
2. Can all loan information be validated?
Lenders want to make sure all auto contracts they purchase are legitimate and can be validated. That means being able to show satisfactory payment history and how payments were collected. Lenders also want to see good consumer references and accurate contact information. These may sound like simple pieces of information, but they are critical for a lender to begin servicing the loan.
"Verifiable pay histories, servicing notes and any other borrower or loan updates are as important as strong and transparent underwriting," Sheridan says. "Portfolio buyers demand much more information now than they have over the past several years. More stringent risk management practices mean buyers must take the time to confirm all information before funding a portfolio purchase."
One way to help ensure your contracts are well-organized is to implement a standard documentation process for all loans. Technology systems not only help ensure that all documents are properly populated, but they also can catch mistakes and missing pieces of information that could cause you problems down the road.
3. Which buyers will be interested in my portfolios?
It’s a basic rule for selling cars, and it applies to selling your portfolios as well: Know your customer. Most buyers are looking for a certain type of portfolio. Some might only be interested in vehicles that are less than 10 years old, for example.
"Many buyers are becoming more niche-focused and others are going back to their comfort zone in order to mitigate servicing and collections risk," Sheridan says. "Several buyer preferences are changing weekly, depending on their business metrics."
To run a successful in-house financing program, you need to know who is most interested in the portfolios you have to offer, and which portfolios have the greatest potential for sale. It might take some research, but knowing what you want to market and to whom you should market it can help you get the most cents on the dollar.
Sometimes it can be difficult to decide which portfolios to sell. For example, let’s say you have a portfolio that is doing very well and it’s helping your business. However, you also know that it fits into the "sweet spot" of a buyer and could generate cash that would allow you to write more new loans. It might be a tough call to make, but ultimately, it’s not a bad problem to have. If you can easily identify which portfolios would be attractive to the buyers you work with — or want to work with — you are more likely to match your portfolios with lending sources.
These three simple questions can uncover bigger issues that dealers need to address before jumping into new areas of auto finance. Dealers who have well-organized documentation systems, reliable and accurate data, and a strong knowledge of the industry resources and partners with whom they can work will be better positioned to find the capital they need to serve their credit-challenged customers in the current marketplace.