"There are two guys here in dark suits and sunglasses driving a Crown Victoria with government plates on it that would like to have a word with you"

In a recent visit to a dealer client, the conversation turned to how they were submitting credit applications to their lenders. I asked the sales rep I was training if the sales desk was submitting applications to the lenders on EVERY application they completed with a customer. He responded that he didn’t believe that was the case, so I framed my conversation with the general manager of the dealership to approach that issue. When I asked him if they were submitting every applicant to at least one lender for a decision, he responded with a resounding “no”. The dealership’s philosophy on this was that, if they knew a customer would not qualify for a loan, they would not submit an application, but would send out their own adverse action notice to the customer.

Now, I’m all for compliance, and it was a definite positive sign that this dealership knew enough about the law to be sending Adverse Action Notices when required to do so, but, as I finished my training with the rep I was working with, a nagging image was left lingering in my mind.

I pictured the general manager, the GSM and the desk manager, who were the ones who determined whether or not to submit an application, standing in front of a federal judge, in handcuffs, trying to justify their decisions, when in fact, the dealership did not have a buy-here, pay-here lot or their own finance company, and therefore was not in the position to extend credit to customers. How could they determine, with any degree of certainty, who would or would not be approved for a loan if they could not grant credit themselves, and did not give any lender the opportunity to make such a decision?

There are so many rules and regulations surrounding the retail automobile business these days, I would think that it would make more sense to err on the side of caution instead of playing the odds. All it takes is one customer to tell a story about a unpleasant experience at your dealership to the right (or wrong) person, and the consequences of a class action law suit can be financially devastating. Even if you think you’re right in what you are doing, and with the best of intentions, the mere fact that your actions may be just outside of the legal requirements could put you out of business. I would hate to be the “former” general manager of a dealership forced out of business by a legal settlement that bankrupted that dealership because I “thought” I was right.

Compliance is something that cannot be ignored. Here is a brief summary of the rules and regulations that affect Subprime business in a dealership. This is not a complete or comprehensive list, and in no means is a substitute for legal advice, but it may get you thinking about how business gets conducted in your dealership, and whether you are leaving yourself open to some costly litigation.

Truth in Lending Act – TILA - Regulation Z
- Requires financial disclosures in a “timely manner” – prior to consummation of deal

- Regulates advertising disclosures regarding credit

- Requires proper disclosure of “negative equity” as additional amount financed

- Does NOT specify a 3-day right to rescind a car purchase

- Requires dealerships to sell vehicles for the same price to credit customer as cash customers


Equal Credit Opportunity Act – ECOA
- Prohibits discrimination - cannot treat one person less favorably

- Regulation B – contains rules for implementing ECOA

- Tell consumers what action will be taken on their credit application:
- Extending credit as requested
- Declining to offer credit
- Extending credit if the applicant will agree to different or additional terms

- Defines “Adverse Action Notice” requirements
- Required when creditor refuses to grant credit substantially in the amount or on substantially the terms requested.

- Dealers are creditors when they:
- Determine APR
- Set the loan term
- Set other terms i.e. down payment or amount financed
- Refers customers to direct lenders

Gramm-Leach-Bliley Act & FTC Privacy Rule
- Requires consumers get privacy notices explaining information-sharing practices, restrictions and right to limit

- The Privacy Rule applies to car dealers who:
- Extend credit to someone (for example, through a retail installment contract)
- Arrange to finance or lease a car
- Provide financial advice or counseling

- Any personal information collected to provide these services is covered.

- The Privacy Rule does not apply if a person buys a car with cash, or arranges financing through outside lender.

- When a dealer enters into a retail installment, it must provide privacy notice to the customer, even if the contract is assigned to a third party lender

- Does NOT require a customer’s signature in order to pull a credit bureau, only the expectation of a credit transaction


Fair Credit Reporting Act – FCRA
- Regulates “permissible use” of consumer credit reports

- Makes dealer liable for employee’s misuse of customer’s credit information

- Prohibits “mouse type” in dealership ads

- Regulates direct mail “credit offers”

- Does NOT require a customer’s signature in order to pull a credit bureau

- Reasonable expectation of credit transaction

- Customer must indicate they want to finance transaction for “permissible use”

- Allows a customer to view the credit report obtained by the dealership


OFAC/Patriot Act
- Office of Foreign Assets (OFAC) “bad guy list”

- Established to “deter and punish terrorist acts”

- Prohibits doing business with any person or business on Specially Designated Nationals (SDN) list

- Transactions must be blocked if on the SDN list & report must be sent to OFAC with details of blocked transaction.

- Implements regulations similar to IRS “8300 rule” regarding cash transactions and money laundering

- Must report any transaction or series of transactions from an individual or business which involve cash amounts in of $10,000 in either a single transaction or two or more related transactions.

- Penalties include 30 years jail time, $10 million in fines against corporations and $5 million against individuals, with civil penalties of up to $1 million per incident



Disposal Rule
- Protect the privacy of consumer information

- Reduce the risk of fraud and identity theft

- Businesses must take appropriate measures to dispose consumer credit reports.

- Disposal practices must be reasonable & appropriate to prevent the unauthorized access to or use of information in a consumer report.
- Burn, pulverize, or shred papers containing consumer report information
- Destroy or erase electronic files or media containing consumer report information
- Conduct due diligence by hiring document destruction contractor

CBA Study: Credit Quality Deteriorates, Repossessions a Concern

Special-Finance.com, Apr 15, 2008

Arlington, Va. The results of the Consumer Bankers Association (CBA)’s annual study weren’t shocking. If anything, the results provided a snapshot of how the industry got to the point it is today.

Conducted by Benchmark Consulting International, the CBA’s 2008 Auto Finance Study showed that 2007 loan terms stretched, advances increased and credit quality worsened. It also provided a clearer picture of what is becoming a major concern for the industry this year: repossessions.

“I think when you look at the data next year, you’re going to see a significant increase in those numbers,” said Rich Apicella, an executive for BenchMark Consulting International. “The biggest thing we see this year is the decrease in credit quality and the increase in repossessions. Terms are up as well, which is also a continuing concern.”

This year’s study attracted 32 participants, which, combined, accounted for more than 12.5 million loan accounts. The total outstanding principal balances for all was more than $223 billion. Surveyed were 16 large national banks, eight regional banks, five captive finance companies and three independent finance companies.

The study results were released at the CBA’s annual conference and expo. Apicella said attendees weren’t too surprised by the findings, and added that many are looking to retrench this year.

“Many lenders are changing underwriting guidelines,” Apicella added, “some are withdrawing from certain segments of the market, states and dealers.”

Liquidity is a challenge today, said Apicella, especially for consumers who relied on home equity, and lenders who rely on the asset-backed securities market for funding. This is one reason why new 2009 vehicle sales are forecasted at their lowest levels in more than 10 years.

“Historically, many consumers have funded vehicle purchases by drawing down on their home equity lines. Today, this is less often the case, due to the slump in housing prices. With respect to the capital markets, investors are not buying ABS debt instruments as freely,” said Apicella, who added that many investors are looking at other markets. “As a result, lenders are picking their spots more carefully, they’re raising their underwriting criteria and many of them are cutting back their originations.”

Signs of Housing Market Spillover

Credit quality for new-vehicle purchases was 31 points lower than last year’s study, with FICO scores dropping from 709 in 2006 to 678 last year. Scores for used-vehicle purchases dropped one point.

“That’s a pretty sharp decline in the average FICO for new vehicles,” said Apicella. “I think part of that is the credit crunch for the homebuyers and the subprime market spillover effect, which is leading to higher debt levels for the typical car buyer.”

The slight up tick in delinquencies was another side effect of the credit crunch, noted Apicella. Delinquencies increased six basis points last year for new-vehicle purchases, and 27 basis points for used-vehicle purchases.

The average for loan terms on new-vehicle purchases jumped one month last year, increasing from 64 months in 2006 to 65 months in 2007. Loan terms for used-vehicle purchases also increased by one month last year.

What is concerning is the increasing percentage of new-vehicle originations that were greater than 60 months. In 2006, 61 percent of new-vehicle loans were longer than 60 months. Last year, that percentage jumped to 65 percent. Additionally, 40 percent of respondents said they now offered terms greater than 84 months.

The average loan amount for new-vehicle purchases last year realized a 3.5-percent decrease. However, the loan-to-value (LTV) ratio experienced a 2-percent increase. Amount financed on used vehicles experienced a 2.9-percent increase last year, while the LTV jumped one percent.
Apicella said the reason for the higher LTV on new-vehicle loans could be attributed to consumers coming to dealerships with higher amounts of negative equity.

In 2007, about 25 percent of consumers who financed their vehicles were upside down by an average of more than $4,000, said Apicella. And while dealers sought to cover the difference by requesting higher advances, they also extended terms to keep payments attractive to today’s payment buyer.

Lenders Retrenching; Dealer Reserves to Suffer

Apicella said there were signs in the data that finance companies began to change their lending habits in the second half of 2007. However, he said the results of those changes won’t be clearly visible until next year, as 2007 lending habits remained highly competitive.

“There’s probably going to be a moderation of that if you look at the data next year,” said Apicella. “It will be interesting to see what happens next year as a result of the marketplace response, because most of the actions were not really started until the fourth quarter of last year, which was at the tail end of this study.”

This expected retrenching, however, may hurt dealer reserves, a trend that was already being seen in the fourth quarter of 2007. “With higher advances and longer terms, in general, reserves are higher,” said Apicella. That won’t be the case next year, he added, as lenders require deals to be restructured to conform to their new underwriting guidelines.

One statistic to keep an eye on next year will be repossessions. Apicella said he expects that to be a bigger problem this year than the predicted increases in bankruptcies.

“Repos are much more of a problem right now,” said Apicella, who noted that more than 2 percent of accounts are repossessing. “Repossessions were four times more prevalent than bankruptcies during 2007, and the average net loss for repos is about $1,000 higher than bankruptcies.”

Despite the challenges ahead, Apicella said the automotive finance industry will not suffer a fate similar to that of the mortgage industry.

“In the car business, the fundamentals are sounder, and the good lenders know how to originate and liquidate loans,” Apicella said. “From a risk standpoint, there’s been a slight worsening in some of the overall metrics, but fundamentally there is still good business to be had. And I think the general mood of the bankers at the CBA event is ‘we’ve seen markets like this before, and it causes us to re-look at our operations and improve them and manage them much more carefully. But sooner or later we’re going to come out of this cycle, leaner and meaner.’”

Middle Class Glum on Economic Status

Study: negativity is highest since 1964 - Majority say they've made no progress, or have fallen backward
HOPE YEN - Associated Press (Charlotte Observer – 4/10/08)

Growing numbers of middle-class Americans say they aren't better off than they were five years ago, reflecting economic pressures amid growing debt, a study released Wednesday shows.

Their short-term assessment of personal progress, according to the study, is the worst it's been in nearly half a century.

The survey by the Pew Research Center, a Washington-based organization, paints a mixed picture for the 53 percent of adults in the country who define themselves as "middle class," with household incomes ranging from below $40,000 to more than $100,000.

It found that a majority of Americans said they haven't progressed in the last five years. One in four, or 25 percent, said their economic situation had not improved; 31 percent said they had fallen backward. Those numbers together are the highest since the survey question was first asked in 1964.

Among the middle class, 54 percent in the current survey said they had made no progress (26 percent) or had fallen back (28 percent).

Asked about their financial experiences in the past year, 53 percent of middle-class people said they had to cut spending because money was tight. About one in five said they had trouble getting or paying for medical care, while 10 percent said they had been laid off or lost their jobs.
Looking ahead to the coming year, half of the middle class surveyed said they expected to have to cut more spending.

Among those employed, one in four, or 25 percent, expressed worries that they would be laid off, that their job would be outsourced, or that their employer would relocate in the coming year, while 26 percent were concerned that they would see cuts in salary or health benefits.

At the same time, most middle-class people remained upbeat when asked to measure their progress over a longer time frame. Two-thirds say their standard of living is better than the one their parents enjoyed at the age they are now.

"It's been a lousy run for the American economy, and people feel it," said Paul Taylor, director of Pew's Social & Demographic Trends project and lead author of the study.

He noted that people's pessimism largely tracks annual median household income, which has gained little in recent years. Middle-class people also may be disproportionately feeling the pinch because they tend to borrow more heavily against their homes to support their lifestyles, Taylor said.

Among other findings:
- Nearly eight in 10 of all people, or 78 percent, said they believe it has become more difficult compared with five years ago for the middle class to maintain their standard of living, up from 65 percent in 1986.
- Among the income winners 1970-2006 were seniors 65 and older, blacks, native-born Hispanics, and married adults.
- Losers included young adults (ages 18 to 29), the unmarried, foreign-born Hispanics, and people with a high-school education or less.

The Pew poll involved telephone interviews with 2,413 adults, conducted Jan. 24-Feb. 19. The margin of sampling error was 2.5 percentage points.

Blogger's note: If this is the perception the public has regarding their "buying power" , makes you wonder how they see their credit status. "The 700's of today are the 550's of tomorrow!" -GC

CNBC’s Phil LeBeau looks at a worrying new trend in U.S. auto loans

Opening Day!

Ah, spring is in the air! It’s getting warmer outside here in Charlotte, and the showers are becoming more frequent. The drought may soon be over, and once again, a young man’s fancy turns to thoughts of …baseball?

No, it’s direct mail season again, and once more, Chooch is on the receiving end of some high profile pitches.

For those of you who may not remember, Chooch is my border collie! In order to identify telemarketers who call my home at the most inconvenient times, I have listed my home phone in Chooch’s name! There’s nothing better than getting a call from someone asking to speak to Chooch, and laying the phone on the floor for her!

Yesterday, Chooch got an invitation form a local auto dealer to come in for a test drive, and get a chance to win a “racing experience” at Lowe’s Motor Speedway here in Charlotte. So I called the dealership and asked to schedule a test “ride” for Chooch – after all, she has a dog license but not a driver’s license! I set one up for this weekend. I let you know what happens when Chooch goes in to claim her prize.

My point here is once again, who’s getting your mail? Cheap mailers are just that…cheap. The old saying “You get what you pay for” is especially true here. How many of these mailers, sent out on a list based on the Charlotte phone book, were sent to undeliverable addresses or people who could not participate for one reason or another. I have a friend of mine in New York who still has his home phone listed to his dad, who passed away ten years ago! And who doesn’t get a phone call for the person who last had your number…guess they’ve probably moved since the number was re-assigned! After all, how often do they update the phone book anyhow?

You need to ask where a lead provider is getting their lists from. Saturation mailers based on public information lists may be inexpensive, but all you end up with is a showroom full of people looking for their free gift or NASCAR ride, but not a buyer among them. How many of these “gift grabbers” does your sales force have to weed through to find a real customer? If you have to offer something for nothing in order to get customers into your showroom, you’re probably going to end up with lots of activity, but no sales!

Consider using a mailer that targets a specific audience for your dealership. If you are using an owners list, target specific competitive makes and models to sell across franchise lines and increase your market share. Look for specific interest groups that may have a need or desire for your vehicles, like a local PTA for family vehicles, or a local sporting group for SUV’s and pickups. And if you are considering using a credit mailer, find a provider who using lists created from credit files that make a bona fide offer of credit to the recipient. Consider a blind mailer that directs the recipient to an 800 call center, so you can sell across franchise lines and capture that additional market share.

Buy-Here,Pay-Here May Grow

Arlena Sawyers - asawyers@crain.com Automotive News 3/31/08

Home foreclosures. Vanishing jobs. Even good credit histories are at risk. As the economy worsens, people who once had good credit may be unable to get car loans through traditional sources. But one consumer's loss might be a gain to a buy-here, pay-here dealer, industry experts say.

"This is going to be a pretty good growth year for any dealer that's in the buy-here, pay-here business,” predicts Mike Unn, president of the National Independent Automobile Dealers Association. About 1,000 of the association's 20,000 members are franchise dealers who operate standalone used-car lots. Some people, he says, "can't get credit anywhere else."

Buy-here, pay-here dealerships sell older, higher-mileage vehicles to people with bad credit. The dealerships hold the loans and assume the entire risk. They charge interest rates of 25 percent or more, depending on state usury laws. 50 far, there's scant evidence that dealers are having problems obtaining credit for their customers. That could change.

Ken Shilson is president of the National Alliance of Buy-Here, Pay-Here Dealers, an organization representing 10,000 dealers in the United States. He says buy-here, pay-here business may pick up, but not until about a year to 18 months from now.

Last year in Florida, some buy-here, pay-here stores suffered as many of their traditional customers - construction workers in the housing industry-lost their jobs, Shilson says. Now, those same stores are seeing an increase in business from consumers who lost their homes and good credit standing in the home mortgage mess.

Shilson predicts that as other parts of the country are hit by the deep downturn in real estate that has plagued Florida for more than a year, buy-here, pay-here dealers will see their business grow.

"People who are losing their homes are not our customers now," Shilson says. 'The traditional buy-here, pay-here customer rents. He doesn't own a home. All those losing their homes are new customers.”