So you just had your Chrysler dealership shot out from under you, and now you’re wondering how you’re going to keep food on the table while staying in the car business. Then you remember hearing about the used-car, buy-here, pay-here (BHPH) racket. How tough could it be, right? We’ve seen a number of dealers react this way, and who quickly set up a BHPH operation only to discover that there’s no water in the pool.
Until now, you’ve been involved in what we at our law firm call “the front end” of a finance deal. You’ve advertised, attracted customers, sold the car and then arranged for financing. You’ve then completed the state paperwork and rolled the car. Now you’re about to meet the “back end” of the auto finance business.
For tax reasons, most BHPH dealers don’t keep and service the retail installment contracts. Instead, they form a related finance company, which operates separately from the dealership. The dealership creates the contracts, just like it always has, but then assigns them to its RFC rather than to an unrelated finance company. Let’s focus for a minute on that RFC. There are several items that need to be in place before it starts buying contracts? Let’s take a look at five of those items.
1. Dealer Agreement: The RFC and the dealership need to maintain an arms-length relationship. Consequently, they should have written agreements about the business they transact together, such as the buying and selling of retail installment contracts. The RFC and the dealership should have a dealer agreement that sets forth the terms and conditions of the RFC’s purchase of those contracts.
2. License: Many states require a company buying contracts from dealers to be licensed as a sales finance company. The RFC will need such a license in these states. (Note: Do not call the state and ask whether the RFC needs a license “to make car loans.” That’s not the business the RFC is in — it is buying retail installment contracts from dealers.)
3. Privacy, Safeguarding and Red Flags Policies: Like the dealership, the RFC is a “financial institution” under the federal Gramm-Leach-Bliley Act and the Federal Trade Commission (FTC)’s Privacy Regulations. That means it will need its own compliance policies. (Note: Photocopying the dealership’s policies probably won’t work since the duties of sales finance companies and dealerships are somewhat different under the FTC’s rules.)
4. Underwriting Manual: The RFC should maintain an underwriting manual setting forth the criteria for buying contracts from the dealership. Not only does it insure that contracts being purchased are of a consistent quality, but it also ensures that the credit criteria and the credit application process employed by the RFC comply with the Equal Credit Opportunity Act and any state anti-discrimination laws.
5. Collections Manual: It’s difficult to overemphasize the role of collections in a BHPH operation. BHPH dealers who don’t collect effectively don’t last long. The manual provides a blueprint for effective procedures, but it also has a legal function because it helps collectors follow the laws that apply to them. (Note: The Fair Debt Collection Practices Act doesn’t apply to assignees who acquire retail installment contracts that are not in default at the time of the assignment, but we nevertheless advise such assignees to follow the act’s requirements as “best practices.”)
The collections manual might also contain the collection letters the company uses. Often, the content of these letters is dictated by state law, and the requirements for collection correspondence can be very extensive. The manual also will set forth the RFC’s repossession policies and procedures. I highly recommend that you have everything reviewed by a qualified lawyer, because this is not a job for a do-it-yourselfer.
And those are just the major topics that come to mind. Add such requirements as OFAC, IRS cash reporting rules, the Americans With Disabilities Act, the Fair Credit Reporting Act and any number of state laws, and you’ll have some sense of the structure the RFC needs to have in place before it buys the first deal.
So go ahead and take that dive off the high board. But first, make sure there’s some water in the pool.
Tom ([email protected]) is a partner in the law firm Hudson Cook LLP, and the author of several books. For information regarding the books, call 410-865-5411 or visit www.counselorlibrary.com. Copyright CounselorLibrary.com 2009, all rights reserved. Based on an article from Spot Delivery. Single print publication rights only to Special Finance Magazine. HC# 4828-4698-1636 (7/09).