Every finance source you do business with has underwriting guidelines that are based on the three Cs of credit. This age-old philosophy looks to balance the customer’s character, capacity, and collateral: Character intends to gauge the customer’s intent to repay the obligation. Capacity measures the customer’s ability to repay the obligation. Collateral quantifies the potential loss if the customer defaults on the obligation.
You can see any finance source’s lending philosophy and collection capabilities by understanding how its guidelines determine what deals it will buy. Superprime sources place a high value on credit scores above 750. These customers rarely default. Collateral value is of less importance. Because they have lower losses, and lower collection expenses, they offer lower rates.
On the flip side, subprime companies are less concerned about credit scores, but are highly focused on the customer’s capacity and collateral. They have higher buy rates but will buy paper the superprime sources will not approve.
A finance source’s lending philosophy is translated into its underwriting guidelines and lender agreements. These guidelines lead to portfolio or transactional stipulations. Knowingly violating these stipulations can lead to charges of potential bank fraud.
Let’s look at some of the common potential violations of underwriting guidelines.
1. Sales Reps Committing Bank or Employer Fraud
A reader named Joseph penned a letter printed in the March 2019 edition of this magazine, responding to “Dealers Are From Mars, Finance Companies Are From Venus,” a recent article by Tom Hudson. The topic was the rampant confusion over the word “lender,” which more accurately applies to the dealer than the finance source, and all that it implies.
“Yes, dealers are not aware of their liabilities,” Joseph wrote. “One reason may be bank reps. Do you think they accurately disclose the extent of those liabilities?”
A credit union rep recently lost her job because she told a dealer the credit union would accept credit cards as down payments. She followed up with a text message confirming same. When the dealer’s general counsel asked the credit union’s legal department to confirm this policy in writing, the credit union terminated the rep for misrepresenting its position on credit card down payments.
I can envision a Federales case to prosecute sales reps or credit analysts from federally insured institutions when they knowingly misrepresent the finance source’s position on contractual reps and warrants. I’m not aware, though, of any instance where an employer pressed charges against a terminated employee for misrepresenting the employer’s contractual reps and warrants.
Like kinky F&I managers who are fired for fraud, the employee can easily obtain employment at another finance source.
2. Self-Employed/No Auto Approval
A few finance sources state specifically on either their callbacks or in their programs guidelines that self-employed applicants are not eligible for auto approval. They are often asked to prove income via a bank statement or tax returns. These more stringent stips or conditions are in place because of the higher failure rate of small businesses and the potential default risk if the applicant’s business goes under.
Because it can be more work, many dealership managers believe it is okay to change an applicant’s employment status from “self-employed” to “employed” and change the applicant’s job title from “owner” to “manager.” The Federales are adamant that this attempt to circumvent the auto approval algorithm or the potential stipulations for additional documents is an attempt to defraud the finance source.
3. No Negative Equity
We have run into kicked deals from some finance sources that state they do not buy contracts with the prior loan or lease balance disclosed.
Many dealers and managers think this simply means they should put the prior loan or lease balance in the cash price, send it to the finance source, and we are good to go. Au contraire! “We don’t finance negative equity” is not code for “Put it in Line One.”
When the finance source says it does not purchase a contract with the prior loan or lease balance disclosed, it isn’t relaying a disclosure issue, it is relaying an underwriting issue. The finance source is saying it does not want deals with negative equity, for whatever underwriting reason it has.
Here are the potential issues for the dealer putting prior loan or lease balance in the cash price and increasing the trade allowance to cover the payoff:
• Reg Z and Reg M require prior loan or lease balance disclosure on the RISC or lease agreement. Hiding it in the cash price violates these federal regulations.
• Dealers sign lender agreements with all their finance sources. The dealer states that contracts are compliant with state and federal laws. Violating Reg Z or Reg M is a violation of the lender agreement and subjects the transaction to recourse.
• Hiding the prior loan or lease balance with a finance source who has expressly stated that it does not finance same is an attempt to circumvent the finance source’s underwriting guidelines. This is considered bank fraud and likely triggers a suspicious activity report.
• Sales tax may be assessed on the prior loan or lease balance, which may be a violation of state tax codes.
• If the deal goes south, the dealer may be on the hook for the inflated trade allowance.
4. Ride-Hailing Units
We have seen stips that state the vehicle must be for personal use. Some dealers hide the fact that the customer is an Uber or Lyft drivers, seemingly to avoid a credit denial from the finance source.
These are but a few of the circumventions of finance source’s underwriting guidelines. Many more exist in our universe. Just be careful that you are not manipulating information submitted to the finance source to circumvent its underwriting guidelines.
And yes, good luck and good selling!