Compliance and Market Challenges Focus of NABD Conference

HOUSTON — About 400 dealers and vendors descended on Houston earlier this week for the National Alliance of Buy-Here, Pay-Here Dealers Underwriting & Collections Conference.

As usual, a variety of industry experts, finance professionals and dealers were on hand at the event to share insights and best practices with attendees.

A few of the speakers included Terry O'Loughlin, director of compliance with Reynolds and Reynolds; Rick Potter, president of CAR Financial Services; Jennifer French, assistant vice president in Equifax's marketing group; Ron Brown, president and general manager of CSI Group; Tom Hudson and Chuck Dodge, of Hudson Cook; and more.

Kicking off the event as the keynote speaker was O'Loughlin from Reynolds. Introducing O'Loughlin, Ken Shilson, founder of the NABD, said, "We wanted a keynote speaker that would be important in these challenging times. I believe we found him in Terry," indicating that O'Loughlin will offer tips to attendees about how to run their businesses without stirring up problems from general attorneys.

O'Loughlin offered unique insights as he spent several years in the office of the attorney general in Florida, serving in the economic crimes section. For many of those years, he was involved in the investigation and prosecution of dealers and automakers, in addition to finance and leasing companies.

According to O'Loughlin, he's settled with more than 1,500 dealers for a total amount of about $15 million. In fact, he said, "I collected about $17 million in fines."

Recalling one of his experiences, O'Loughlin said at one time a BHPH dealer was put in jail and he was placed in charge of collecting on the business.

"I thought the people (customers) would respect the attorney general's office. However, I found out that wasn't really the case. I had people tell me, ‘You'll never find me.' And, eventually, I thought it was best just to let it go (and stopped collecting).

"You do not want to attract the attention from an attorney general or any government office," he recommended. "Car complaints are No. 1 on their hit list."

O'Loughlin also stressed the need for dealers and industry executives to keep a close eye on legislation. He also referred to RICO, which in essence means that if a dealer breaks the law, the government can come in and take over the business. This was what occurred when he was forced to try collecting on a dealer's notes once that dealer had been placed in jail.

"Most attorney generals distrust the BHPH business and distrust the profit dealers make," he explained.

If a dealer does find an attorney general is focusing on him, he should always do everything he can to cooperate, with the exception of inviting the attorney or his representatives to the business.

"Press releases and press conferences from the attorney general are not good. I've seen these seriously hurt businesses," O'Loughlin indicated. "This is the last thing you want to have happen. See if you can participate in a press release if there is one after a settlement. Also keep business cards of everyone you talk to."

He pointed out that the Better Business Bureau can refer cases to the attorney general, so it's best to try to deal with customers when they have complaints rather than waiting  until outside action is taken.

"Always cooperate with an attorney general, even if you think you're right," O'Loughlin said. "You should know everything there is to know about the issues in your business. And you definitely don't want the attorney general coming to your store to look around. That's the worst thing you can do — inviting them to come to look around. Make an appointment at the attorney general's office. Try to educate them about your business.

"If you made an error, admit it. Offer a reasonable solution. Show them due diligence, internal controls and compliance efforts," he suggested.

He went on to explain that some attorney generals receive awards on the amount of money they bring in, while others do not. He recommended finding out which situation is the case in a dealer's state.

Above all, O'Loughlin said, "Give the attorney general reasons for closing their file."

It just takes one bad apple to cause problems for a business, which is why O'Loughlin agreed with other industry experts that it's important to get the dealership regularly audited.

"One employee can cost you thousands and thousands of dollars," he pointed out.

"Hire an attorney who understands car law," he suggested, remembering a case where a dealer's lawyer knew nothing about the business and actually hurt the dealer instead of helping.

"Also, state penalties for violations of your company's policies. Make sure your attorney has some notion of how your business works," he added.

Another way to limit employee problems is by awarding those who follow the rules.

Moreover, O'Loughlin recommended legal compliance training, in addition to maintaining a rate matrix.

By rate matrix, he means that dealers should make sure they're charging the same interest rate for customers that fall into similar credit categories. If rates vary widely despite similar customer credit histories then a dealer may be open to liability.

"If there is an upset customer, the dealer principal or general manager should know about it," O'Loughlin concluded.

Continuing on, Potter, of Car Financial Services, discussed the marketplace in his presentation titled, "Why the Old Ways Aren't Working."

His company specializes in purchasing subprime and BHPH loan portfolios from about 1,200 dealers. His company provides third-party servicing for the acquired loans.

"We tend to tell you how it is rather than what you want to hear," Potter told attendees. "We're pretty entrenched in the market."

One of the things he talked about, which he has touched on in past conferences, is the impact the hurricanes in past years have had on the market.

Basically, due to the violent storms, consumers were getting checks to replace vehicles that had been totaled, he explained. These consumers had basically free money so they weren't as concerned about what they were spending on a vehicle. The units sent into the hurricane-stricken areas tended to be expensive and somewhat hard to come by, he continued.

Potter also discussed how the subprime market relaxed terms in recent years, which has caused "many dealers to default on credit lines. Defaulted customers' averaged 2.3 percent to 2.8 percent annually."

Some stores that perhaps did not work in the subprime arena previously decided to expand and received capital to enter this marketplace.

"Large stores received capital, then started focusing on growth rather than on their credit or collection policy. Companies with little or no experience entered the market."

Some hedge funds, or money gathered by investors that is designed to get a higher return, turned to the subprime auto industry to invest.

"A lot is going on with hedge fund investments. There is a very high level of defaults. Many of these loans are going bad at an alarming pace," he pointed out. "These grew too fast without being prepared.

"Competition in franchise financing has forced traditional finance companies to look for other growth avenues and expand to more independent dealers," he explained.

Potter basically said some of the finance companies that have been reaching out to independents may not really understand how these dealers do business and require dealers to meet certain requirements in the units they sell.

"Dealers start selling newer vehicles and relying more on the finance company," he said. And in the independent marketplace, credit scores tend to vary more and are not as indicative as to how the loan performance will play out, he noted.

"No one wins in a low down payment market. Low down payments only work on existing customers who have proved they will pay," Potter said.

He went on to indicate that he sees subprime capital tightening in 2008 and beyond.  

As for starter interrupt devices, well as they become more affordable, it is driving more folks into the subprime business that have no experience or training, according to Potter.

"Non-experienced people are coming into the business and relying on these devices for good deal structures. At the end of the day, these devices do not increase income or a customer's ability to pay," he reported, indicating that companies that use these devices must have good business models in place.

He looked to the future, hoping that standards will be developed for businesses that use the starter interrupt devices.

"BHPH is a collection business, not a gross profit on sale business," Potter stressed. "Be realistic to yourself and your lender. Be honest today."

He means that if a dealer is having trouble collecting, don't cover the amount in default as it will eventually add up and cause more problems. Just be honest with the lender as to what is going on.

Editor's Note: For more information from the conference, including the latest benchmarks from Subprime Analytics, stay tuned to SubPrime Auto Finance News.

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