Perhaps you've heard of, or witnessed yourself, stories about dealers getting sued by a sub prime auto lender; or a lender running out of money when a dealer had scores of contracts waiting to fund. On a smaller scale you may have heard of a lender not honoring an approval because employment and income information did not verify at time of funding, or charging the dealer back on an old deal because it was repossessed and the equipment on the vehicle was not as stated when the deal was originally approved.
Sub prime risk can be broken down in three categories, Fraud, Carelessness, and Market Risk.
Some sub prime customers will do whatever it takes, including criminal activity, to obtain financing. Here is how it most often works. John Doe tries to get financed through ABC Chevrolet. The application is declined and the finance manager tells John Doe, "If you had 1 year on the job or made 2 thousand a month I'd be able to get the deal done." Armed with this information John Doe alters his pay stub to reflect 1 year on the job and an income greater than 2 thousand dollars. Then he shows up at your store and applies for an auto loan.
The opportunity for fraud is not only present with the consumer but with dealership employees as well. Sales personnel and managers are paid on gross profit, if they can sell more cars or increase the profit on a deal they will make more money. Sometimes, they cross the line, the line that separates aggressive and reckless behavior. The most common reckless actions include, power booking, forging documents, and misrepresenting the down payment.
Power Booking is the intentional misrepresentation of vehicle accessory options to increase the book value of the vehicle. With a higher the book value, the funding source will lend more money; more money equal more gross profit. If a vehicle is repossessed, lenders will charge back the car dealership if the vehicle options are not what were represented at time of sale.
Employee carelessness is often the root of document fabrication. For example, out of haste the F & I manager does not see a large garnishment on the customers pay stub. When checking the STIPs after the sale he sees it, whites it out, and photocopies the altered pay stub.
Employment, Income, & Debt should be verified on every deal. If the employment, income, and debt does not verify as stated on the application the lender may charge additional fees to fund the deal. Or worse yet, they may determine that the customer no longer qualifies for any of their lending programs and return the contract to the dealer unfunded. In addition to employment, income, and debt, specific stipulations are often listed on the approvals sheet. Overlooking these stipulations may cause your contract to go unfunded.
More often than not, misrepresenting the down payment is not a decision made by an employee; it is the policy of the car dealership. Methods I've seen include trade purchases, in-house rebates, and buying items from consumers. Any of these practices violate most agreements with lenders.
Risks that fall outside of your stores direct control are market risks. The market risks are the danger period, lender capitalization, and sporadic sub prime sales volumes.
The dealership is lender until the deal funds. Time period of time from when the customer leaves the car lot with their new car until the time the lender verifies employment and insurance, you are at an increased risk. We call this the danger period. Many lenders will not honor the original call if the customer lost their job after the sale but prior to funding.
Lender capitalization is another area of concern. Capitalization is the process of converting into a present value anticipated future installments of income. Most sub prime finance companies obtain a line of credit against their expected future portfolio income. When the expected value drops significantly due to current losses the lender could be in trouble. They may not receive the amount of cash necessary to operate their business. When this happens, you could have a perfect deal but the lender is unable to fund the deal because they have no money.
Stores that have a stand alone, one person, sub prime department, or place the majority of their business with one lender, often see sporadic results in sub prime. If they loose their guy to a competitor, are cut off from their main lender, or their main lender changes their buying patterns dramatically, sales dwindle.
If you average 50 sub prime sales per month and your sales suddenly drop to 5, 10, or 15, you most likely have too much inventory on your lot. You'll risk paying additional floor plan charges or suffer losses at the auction. With investing, you're risk increases if you place all your money in one investment. The same hold true for sub prime. If you use only a few lenders or have a sub prime manager that operates autonomously, your risk increases.
Prior to implementing our solution you'll need to commit personnel resources. For most stores, this means additional responsibilities for existing employees; to start you will not need to hire additional people. These additional roles include a Bankruptcy List Clerk, Inventory Clerk, and Funding Clerk. The bankruptcy list clerk will not help reduce risk, is included here only because we are on the subject of personnel resources.
Our bankruptcy list is one of the most cost effective and under utilized marketing methods. Each prospect on the list should receive three timely mail pieces. Once per week, the Bankruptcy List Clerk prints and mails letters to bankruptcy prospects.
The Inventory Clerk maintains the NADA, Black, and Kelly book values of your inventory. In addition to deleting sold vehicles and updating cost, this person will book out new vehicles and verify their equipment. Only the inventory clerk should have the permission to edit vehicle equipment options.
The Funding Clerk re-verifies employment and income, packages deals, records missing STIPS, and maintains a Funding Log.
By delegating essential sub prime process tasks to a inventory and funding clerk, you will be well on your way to lowering the risk of power booking and held offerings at time of funding.
Another way our process minimizes risk is by getting more people involved in the sales process. The foundation of our subprime selling system is the sales representative. By integrating the sales representative in the sub prime process, you will have a solution that is scalable. Your sub prime sale volume will not be limited to the efforts of one employee or stand alone department. With our method you will see consistent sub prime sales volumes.
Our system also removes many of the barriers traditional F & I managers have with sub prime; collecting and chasing STIPs, maintaining inventory, and funding follow-up.