Vol. 4 No. 4 • July/August 2015
Non-PrimeOfficial Publication of the National Automotive Finance Times Association
Navigating the Consumer Law Minefield
Transaction Based Pricing: Freedom or Frightening? page 24
The Key Ingredient The Top Five for 84-Month Loan Predictors of Profitability Sub-prime Risk page 20 page 22
TABLE OF CONTENTS OfficialNon-Prime Publication of the National Automotive Finance Times Association
DIRECTOR’S NOTE July/August 2015 4 So Much Happening... Publisher / Editor Jack Tracey Rick Sly PRESIDENT’S MESSAGE Associate Editor Cindy Sly 6 Incoming President’s Message Mark Floyd Editorial Committee Ian Anderson Westlake Financial ASSOCIATION 8 Association/Member News Jim Bass Starboard Advisors, LLC 12 Navigating the Consumer Law Minefield Jack Tracey Eric L. Johnson NAF Association Executive Director
Asbel Perez Viciedo COMPLIANCE CORNER Chairman, National Automotive 15 Five Tips to Get your Compliance Ball Rolling Finance Association Jonna Boyle Marguerite Watanabe Connections Insights THE CREDIT PROCESS Elizabeth Webb 18 The Price is Right …or is It? Exeter Finance Corp. Daniel Parry
Advertising & Editorial TRENDS [email protected] 20 The Key Ingredient for 84-Month Loan Profitability 810-309-8345 Barrett Teague
Non-Prime Times is 22 The Top Five Predictors of Sub-prime Risk published by Dealersbiz LLC. Lou Loquasto Dealersbiz LLC makes every attempt to report and print accurately all published works. However, Dealersbiz TECHNOLOGY LLC cannot be held responsible for 24 Transaction-based Pricing – Freedom or Frightening? facts supplied or opinions expressed in this publication. Nothing may Stephanie Alsbrooks be reproduced without written permission from Dealersbiz LLC. All materials submitted become the LEGAL property of Dealersbiz LLC. 26 Is too much Knowledge Ever a Bad Thing? Copyright 2015 Steve Levine Reprints with permission only. HIRING & RECRUITING 28 Executive Recruitment Quiz – Test your Recruiting Knowledge Don Jasensky
nafassociation.com July/August 2015 Non-Prime Times 3 Association Jack Tracey Director’s Note: So Much Happening...
here has been so much happening in the NAF Association At the conference we also introduced the NAF Association’s 19th since I last I wrote this column. We have just completed the annual Non-Prime Auto Financing Survey. This year we combined T19th Non-Prime Auto Financing Conference and it was our our survey efforts with the American Financial Services Association most successful. We had 400 people who attended the event, the (AFSA) and doubled the number of auto finance companies who exhibit hall was full to capacity and we had an outstanding response responded to the survey. There were 45 companies, who represent to the conference program. We provided a special track of panel over $20 billion in outstanding principal, who contributed to the presentations from three other associations that work closely with survey. The scope of the survey was also expanded and additional our industry: The American Recovery Association; The National non-prime data was provided by two credit reporting agencies: Association of Retail Collection Attorneys; and the Debt Buyers Experian (traditional credit reported data) and Factor Trust (alter- Association International. The dynamics of closer ties with these native credit data). The report is 50 pages in length and has 130 associations are just beginning to be seen. I believe that our asso- graphs representing data on the market environment, geographic ciation members will benefit from the bonds we’re building with coverage, industry characteristics, originations, portfolio admin- these organizations. istration, loss management, compensation levels, IT systems and financial metrics. It is truly the most comprehensive collection In conjunction with the conference we held the second Module of data on non-prime auto financing available. Survey results are 4 session of Consumer Credit Compliance Certification Program. provided to eligible NAF Association and AFSA member companies Over 100 students graduated to bring the total number of NAF and information about purchasing the report can be found online Association Certified Compliance Professionals to 225. Additionally, at www.nafassociation.com. 125 students are in process and working toward graduation. The next Module 1 class is scheduled for September 15 -16, in Irvine, During the annual membership meeting, held at the conference, California. The certification program continues to exceed all of our members expanded the Association’s Executive Committee to seven expectations for acceptance by the auto financing industry. members and industry leader Mark Floyd was elected president by the board. Membership in the NAF Association now exceeds 175 We have just announced a “spin off” of the certification program members. called the Compliance Certificate Program. We have grouped the laws and regulations that most closely relate to key line functions. Before closing I want to thank outgoing Association president, We’ve grouped them together to educate collectors and underwriters Steve Hall, (driversselect, president) for his service over the past two in compliance law that directly relates to their work responsibili- years. During his tenure the organization grew significantly and some ties. We use case studies specific to the collection and underwriting of the best member services were introduced. Steve will continue disciplines to test their knowledge of the law and how to apply it to serve on the Executive Committee as chairman. to their daily work. Over the next few months we will introduce three additional certificate programs for funders, sales representatives Jack Tracey and customer relations personnel. These five line functions directly Executive Director impact successful customer experiences and are the areas where it is 410-865-5431 most likely that consumer complaints will arise. The Compliance [email protected] Certificate Program is online training and available only to NAF Association member company employees.
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s I begin my term as president of the NAF Association, I want to start by thanking Steve AHall for his service the past two years. In his last letter as president of the association he said his primary goal when he took office was to leave the association in a better place than when he started. I believe he attained that goal, and we’re fortunate that he will continue to be closely involved as chairman of the association. I look forward to working with Steve, the rest of the board and Jack in the months ahead to build on everything the association has accomplished over the past 19 years.
The theme of our just completed conference was “Relationships Matter,” and it was clear from feedback we received during and after the conference that our theme was spot-on. Session content was exceptional, and the exhibit hall was filled with some of the top vendors in the business. One of the biggest draws for most attendees is always the opportunity to network – catch up with old friends, swap stories and get a sense of what’s really going on in our industry. The hallways and exhibition hall were abuzz with conversations throughout the week, which further validated the importance of the conference Mark Floyd to those in attendance.
Feedback about this year’s conference was overwhelmingly positive, and a consistent theme that emerged was members wanting to get more involved in the association. That’s great news, and the executive committee has agreed to develop a short list of areas in which more members can get involved in the further development of our association. To be effective we need to maintain our focus on a few important initiatives, but I’m confident there will be ample opportunities for our membership to become more engaged. Look for more information on this in the near future and give some thought to where you would be willing to get more involved.
Mark Floyd, President NAF Association
About NAF Association The National Automotive Finance Association is the only trade association exclusively serving the non-prime auto financing industry. Organized in the fall of 1996, the NAF Association supports its members and the industry with programs and education. Among the association’s accomplishments to date are:
• The Annual Non-Prime Auto Lending Conference • Creation and publication of standards of financial reporting • Annual Non-Prime Automotive Financing Survey, providing the • Development of a code of responsibility for the industry. industry’s only measurements of growth and changes; available • Policy statements (See statement on voluntary standards) to members at no charge or for purchase by non-members • Regional workshops
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FactorTrust Hires Dan Richard to Head Toyota Finance to our platform,” stated Mike well-informed lending decisions utilizing its Analytics, Product Strategy Jurecki, RouteOne chief executive officer. comprehensive scoring platform. ATLANTA, June 11, 2015 – Anticipating “This integration brings our Toyota dealers continued growth in the underbanked con- access to a leading finance source that shares “FactorTrust offers data on a crucial sumer market, FactorTrust announces the hire a similar commitment to customer service market of non-prime borrowers and helps of Dan Richard as vice president, analytics and strong dealer relationships.” non-prime lenders make educated lend- and product strategy. Richard will lead ana- ing decisions,” states Greg Rable, CEO of lytical development, product strategy, data RouteOne’s credit application system is FactorTrust. “Leveraging our data will help acquisition and strategic delivery of scoring complimentary to dealers and provides a wide AFS Acceptance evaluate borrowers’ ability to models for the company. range of options, such as payoff quotes, com- repay, allowing the company to lend to reli- pliance, and reporting tools. As a result of able consumers and in turn help rehabilitate Richard joins FactorTrust as an experienced RouteOne and Southeast Toyota Finance’s the credit of non-prime borrowers.” statistical consultant with industry vertical integration, Toyota dealers will receive a win- experience in auto, communications, retail ning combination of great service, technology, AFS Acceptance offers dealer partners flex- banking, retail card, underbanked, lines of and finance programs. ible non-prime lending options, underwriting credit, third-party debt purchase and collec- and pricing. The company also offers flex- tions. Before joining FactorTrust, he worked “We are committed to providing the best ible financing options to consumers. Now, for a “Big 3” credit bureau where he managed possible service to our dealers,” stated Brick with FactorTrust’s scoring platform, AFS a team of statisticians, scoped and managed Toifel, vice president of Southeast Toyota Acceptance can better tailor loans to each analytics product development and research Finance. “This provides our dealers with specific customer. initiatives, and drove third-party analytics. multiple service provider options they can Prior to that role, Richard served as senior utilize to submit credit applications to our “We work specifically with the non- project analyst at Scoring Solutions where dealer service department, streamlining the prime demographic to provide greater access he developed actionable consumer scoring process for them and providing Toyota cus- to financing options,” says Scot Seagrave, models and attributes among other services. tomers with the best experience possible.” president of AFS Acceptance. “By using He holds a Master of Science in Statistics FactorTrust’s alternative consumer data, we and a Bachelor of Science in Industrial can uncover new ways to help our consumers Engineering from Georgia Tech. gain access to the loans they deserve.” AFS Acceptance Partners with “I’m thrilled to join the FactorTrust team,” FactorTrust to Expand Consumer states Richard. “This company understands Credit Options the underbanked marketplace inside and out. Auto lender leverages proprietary data PassTime Raises Money at NABD 2015 I look forward to driving lucrative insight and custom scoring models to provide viable LITTLETON, CO (June 2, 2015) – for our clients through innovative analytical financial solutions to non-prime candidates PassTime, a leading provider of GPS and pay- products developed from the richest and most ment assurance technology solutions, proudly predictive alternative credit data available.” ATLANTA (June 4, 2015) – announced that it raised over $10,000 during FactorTrust, the leading provider of under- this year’s National Alliance of Buy-Here- FactorTrust uses an internal team of predic- banked consumer data, analytics and risk scor- Pay-Here Dealers (NABD) Conference in tive analytics experts and statisticians as well as ing solutions on those underserved by tradi- Las Vegas. a deep, proprietary database of underbanked tional banking channels has announced AFS consumer loan performance and best-in-class Acceptance, an established, full service auto Through its “mustache campaign”, third-party data sources to serve a variety of finance company, as a new automotive lend- PassTime – a key sponsor and exhibitor of lenders throughout the U.S. and U.K. The ing customer. Utilizing FactorTrust’s propri- the conference offered to make a donation for company has served lenders in alternative and etary data and custom scoring models, AFS every photo taken at its booth with a mus- non-prime automotive lending since 2005. Acceptance now has the ability to better tache – real or fake. The money raised will qualify customers and provide each individual go to the Terry Underkoffer Fund, to help Southeast Toyota Finance Integrates to with the best, most customized type of auto aid in Terry’s recovery from a major stroke the RouteOne Platform loan for their lifestyle. last month. Farmington Hills, MI – RouteOne has announced that Southeast Toyota Finance, FactorTrust has provided alternative credit Terry has worked in the auto indus- premier provider of automotive financing to data, analytics and risk management solu- try for more than 20 years and has repre- 176 Toyota dealers in the Southeastern United tions on consumers who lack traditional sented PassTime for the past eight years in States, has elected to activate RouteOne’s credit options for lenders since 2005. The Oklahoma. He is a beloved father of two automotive finance platform. company has tens of millions of data points and grandfather of three. Terry is known for on this consumer segment and works with its his caring nature and unparalleled support “We are excited to welcome Southeast customers to enable them to make instant and of his customers.
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PassTime, through the GoFundMe used cars and trucks without the need for “We are excited to work with Paige on account setup for Terry, was thrilled with the Wi-Fi access Exeter’s continued growth and evolution,” generosity of others who made personal and • Intuitive design for faster and easier vehicle said Exeter CEO Tom Anderson, who professional donations to the fund during the searches brought nearly three decades of management conference. As an additional gesture, CEO • Cutting-edge VIN-scanner technology and financial services industry experience to Stan Schwarz also matched each personal • 360-degree valuation perspective with layers the company last October. donation to the fund. of vehicle insight • Access to CARFAX® and AutoCheck® “She has a proven track record of success With the tagline, “The GPS Solutions reports and a keen understanding of the financial that’s right under your nose”, the company • Comprehensive Demand Index illustrating opportunities presented by this industry,” handed out stick-on mustaches, set up a regional pricing trends Anderson continued. “We expect that Paige photo booth where visitors could put on fake • Seamless inventory management and infor- will continue to build upon the success mustaches and wear props to take a photo, mation share capabilities she established in her former roles, serving and some PassTime employees even grew respected organizations such as FHLMC/ mustaches themselves. “In today’s world of car shopping, it’s Freddie Mac.” important to have accurate vehicle value “It was a great way to do something a little data with split-second access, especially in a Wisdom also served as a CFO for key different at NABD this year and of course, language that’s familiar to my sales team and business units at Bank of America, includ- raise money to help Terry,” said Stan Schwarz, customers,” said Hector Rodriguez, presi- ing global business and financial services; CEO and founder of PassTime. “It is out- dent/owner of Bronco Motors. “We recognize business, lending, and global technology; standing to see the outpouring of support the significant growth in our Hispanic car and service and fulfillment. Prior to joining from the industry.” shopper volume and Black Book Digital en Bank of America, Wisdom served at Bank Espanol provides the timely, accurate insight One Corp./JP Morgan from June 2000 to If you would like to find out more about needed to remain profitable.” July 2004. PassTime or to contribute to the Terry Underkoffer Fund, please email info@pass- “Black Book is thrilled to offer its mobile Her additional experience includes leader- timeusa.com or call 877-727-7846. application to Hispanic dealers and remar- ship positions with UBS/Warburg Dillon keters in their native language so they can Read, Citibank Salomon Smith Barney and Black Book Launches Black Book Digital have access to critical valuation insight for Swiss Bank Corporation/SBC Warburg Mobile Application in Spanish more profitable business growth,” said Mike Dillon Read. LAWRENCEVILLE, Ga. (May 27, 2015) Williams, vice president of Direct Sales and – Black Book has announced that it has Mobile for Black Book. “With Black Book defi SOLUTIONS Acquires OpenRule launched Black Book Digital en Espanol, Digital en Espanol, Spanish-speaking industry Systems one of the industry’s first mobile applications professionals can access real-time pricing data Offering double the innovation and double for Spanish-speaking dealers, remarketers and and share it more seamlessly with their whole- the freedom other automotive professionals. sale and retail customers for faster decision- making potential.” GRAPEVINE, Texas – defi SOLUTIONS Black Book Digital en Espanol is a Spanish announced the acquisition of Grapevine, language version of the mobile application For more information and directions on Texas-based OpenRule Systems APM offering the latest accurate and reliable vehicle downloading Black Book Digital en Espanol (Application Process Manager). The two valuation data, built to accommodate today’s to an iOS or Android mobile device, visit companies will combine to create an even speed of business. The application’s simple-to- http://blackbookauto.com/esp/. stronger technology team to serve lenders use design and features allow Spanish-speaking seeking flexible and affordable loan origina- dealers, remarketers and other professionals tion technology. to make smarter decisions to accelerate and Exeter Finance Names New CFO amplify profit potential among the growing Friday, May 22, 2015: Exeter Finance “defi SOLUTIONS and OpenRule were cadre of Hispanic auto shoppers. According to Corp. went outside of the auto finance sector founded with the same goal in mind, to the most recent HispanicBusiness Automotive to find its new chief executive officer last fall, provide lenders with a level of freedom they Report, Hispanic auto buyers have grown and on May 22, 2015, the sub-prime opera- don’t have with other LOS providers,” said 16% year-over-year, totaling 677,799 as of tion repeated the process when choosing a Stephanie Alsbrooks, defi SOLUTIONS June, 2014. new chief financial officer. Taking on the CEO and founder. “By combining forces with CFO role for Exeter effective June 8 is Paige OpenRule, defi can offer even more func- Black Book Digital en Espanol offers the Wisdom, who has served as chief enterprise tionality to current and future customers.” following features for Spanish-speaking risk officer and executive vice president of industry professionals: the Federal Home Loan Mortgage Corp. • Real-time valuation data for thousands of (FHLMC/Freddie Mac) since 2010. continued to P-11
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Member News, continued from P-9 According to Alsbrooks, the company plans initial migration to the defi family, we want Hudson Cook, LLP Adds Rebecca E. to quickly integrate the features and functions OpenRule customers to rest assured that Kuehn as Partner of APM into a single, powerful defi system. we are focused on their needs and coming Top financial services attorney joins industry The new combined defi SOLUTIONS together in a seamless fashion so they can leading compliance law firm system will offer lenders: even more easily overcome the challenges they • Automatic upgrades and key feature face when attempting to balance technology, Hanover, MD – June 23, 2015– Hudson enhancements compliance, and risk operations.” Cook, LLP, a nationwide provider of legal • Increased support from a combined and compliance services for the financial services larger defi team The OpenRule team has re-located industry, announces the addition of Rebecca • Fully configurable settings to allow for to the defi headquarters, also located in E. Kuehn as a partner in its Washington, D.C. easy changes to programs, processes and Grapevine. The combined teams will be on office. With over 15 years of experience in integrations the road for the next several weeks, meet- consumer financial services and consumer • Quick access to more than 30 pre-integrated ing with customers and completing plans protection matters, Becki counsels financial credit bureaus, valuation services and servic- for integration. institutions, consumer reporting agencies, ing providers service providers, and others in complying • Access to alternative credit data offered via “We see joining the defi team as an oppor- with consumer financial laws and prohibi- existing integrations with ID Analytics, tunity to advance our functionality and scal- tions against unfair, deceptive, or abusive FactorTrust,TransUnion, CreditSmarts a ability through a hosted technology solution trade practices. She represents clients before nd more. while still offering all the critical support and federal and state agencies, particularly the functionality our customers count on with Federal Trade Commission and Consumer “We look forward to working with the APM,” said Kevin Perkins, technology direc- Financial Protection Bureau, in investigations OpenRule team to integrate the many tor, OpenRule APM (now technology direc- and other proceedings. great features of APM that their customers tor with defi SOLUTIONS). enjoy today,” said Alsbrooks. “During this continued to P-30
nafassociation.com July/August 2015 Non-Prime Times 11 Association
Eric L. Johnson Legal Committee Chair Navigating the Consumer Law Minefield
’m often asked to consult with clients who Chapter 5 of TILA (the federal Truth in National Commerce Act (ESIGN): ESIGN want to start an automotive sales finance Lending Act), but it is usually referred to is a federal law that was passed to facilitate the Ibusiness to purchase retail installment as if it is a separate piece of legislation. Reg. use of electronic records and electronic signa- contracts (RICs) from dealers. They often M is a regulation of the Federal Reserve tures in interstate and foreign commerce. The think that once they have the form of RIC Board (FRB) and the Consumer Financial general intent of ESIGN is that a contract reviewed and get their dealer agreement in Protection Bureau (CFPB) implementing or signature may not be denied legal effect, place with the dealer that they’re ready to start the CLA. validity, or enforceability solely because it is buying paper. That’s all that’s needed, right? in electronic form. Not so fast, my friend! Controlling the Assault of Non-Solicited Pornography and Marketing Act (“CAN- Equal Credit Opportunity Act (ECOA) They’re often not aware of the vast array SPAM”): CAN-SPAM was enacted to regu- and Reg B: The ECOA prohibits credit of federal and state laws and regulations that late the delivery of commercial e-mail. discrimination on the basis of race, color, could potentially maim them if they don’t religion, national origin, sex, marital status, navigate the laws correctly. Over the years, Dodd-Frank Wall Street Reform and or age (provided that the applicant has the I’ve come to think of the compilation of these Consumer Protection Act (Dodd-Frank capacity to enter into a binding contract); federal and state laws and regulations as a Act): As you know, the Dodd-Frank Act the fact that all or part of the applicant’s “Consumer Law Minefield.” was a sweeping reform of federal laws that income derives from any public assistance deal with the regulation of financial institu- program; or the fact that the applicant has I want you to picture a sprawling field with tions. It was enacted on July 21, 2010. One in good faith exercised any right under the bright green, freshly cut grass, that’s been of the principal parts of the Dodd-Frank Act Consumer Credit Protection Act or any beautifully manicured. You’re standing at one created the CFPB. Under the Dodd-Frank state law on which an exemption has been end of the field and your goal of running a Act, all covered persons or service provid- granted by the FTC or CFPB. Reg B is compliant sales finance company is at the ers are required to refrain from committing regulation of the Federal Reserve Board opposite end. What you may not know is unfair, deceptive, or abusive acts or practices (FRB) and the CFPB implementing the that between you and your goal, buried just (UDAAP) in violation of the Dodd-Frank ECOA. On this mine, you could activate beneath the surface, are a multitude of mines Act. In addition, the CFPB expects every the “disparate impact” pressure plate and not that have been placed there by Congress, regulated entity under its supervision and even know it until it was too late. federal and state regulators – the mines of enforcement authority to have a Compliance federal and state laws and regulations. Our Management System (CMS) that is adapted Fair Credit Reporting Act (FCRA) and shared goal is to plot a course through that to its business strategy and operations. The Fair and Accurate Credit Transactions Consumer Law Minefield and get to the other CFPB has identified four interdependent con- Act (FACT Act): The FCRA regulates the side safely. Navigating that minefield is kind trol components of an effective CMS: board activities of consumer reporting agencies of like a game of Frogger, nearly as exasperat- and management oversight, a compliance (CRAs), the furnishers of information to ing, but not nearly as much fun. program, a complaint resolution program CRAs, and the users of consumer reports and compliance audit and testing. to achieve certain objectives. The FACT So, what are the landmines that make Act was an amendment to the FCRA up the Consumer Law Minefield? Here’s a Electronic Fund Transfers Act (EFT Act) that permitted consumers to obtain a free summary of the federal laws and regulations and Reg E: The EFT Act establishes the rights credit report, established the Red Flags that could impact an indirect auto finance and liabilities of consumers and the responsi- Rule (which requires entities who engage business: bilities of all participants in electronic funds in financing activities to establish a written transfer activities. Reg. E is a regulation of Identity Theft Prevention Program) and Federal laws and regulations: the FRB and the CFPB implementing the required the secure disposal of consumer Consumer Leasing Act (CLA) and Reg EFT Act. information. Reg. V is a regulation of the M: The CLA governs disclosures in con- FRB and the CFPB that implements the sumer lease transactions. The CLA is actually Electronic Signatures in Global and FCRA. The FACT Act also mandated the
12 Non-Prime Times July/August 2015 nafassociation.com
Association
RBP or Risk-Based Pricing Rule which was Federal Trade Commission Act (FTC Safeguards Rule. The Privacy Rule is con- intended to inform higher risk consumers of Act): The “granddaddy” of them all. The cerned with how financial institutions share the fact that a creditor’s “risk-based pricing” FTC Act was enacted over 100 years ago. NPI about customers who obtain, or apply decision could result in the consumer receiv- The FTC is empowered under this Act to for, credit or lease products from them. It also ing less favorable terms than those offered prevent unfair or deceptive acts of practices requires financial institutions to disclose to to other customers. An impacted consumer (UDAP) in or affecting commerce. The consumers how they collect, share and use may receive a “risk-based pricing” notice or FTC has also promulgated several rules, NPI. The Safeguards Rule addresses how a a Credit Score Disclosure Exception Notice. including the Preservation of Consumer financial institution protects NPI. Reg. P is Claims and Defenses or Holder Rule which a regulation of the CFPB, which implements Fair Debt Collection Practices Act permits a buyer under a RIC to assert the GLB Act’s privacy provisions. (FDCPA) and Reg F: The FDCPA was against the holder of the contract certain designed to eliminate abusive, deceptive and claims and defenses the buyer has against Junk Fax Prevention Act: This Act permit- unfair debt collection practices. It applies to the selling dealer, and the Credit Practices ted faxed advertisements if they are based on the collection of debt incurred by a consumer Rule, which is a rule that regulates certain an established business relationship or the primarily for personal, family or household creditor practices, such as the pyramiding recipient’s advanced permission. The Federal purposes. Reg F. is a regulation of the CFPB of late charges, garnishing wages, notifying Communications Commission (FCC) issued implementing the FDCPA. cosigners, and the like. two regulations that provide the dos and don’ts of faxed ads. Federal Arbitration Act (FAA): The FAA Gramm-Leach-Bliley (GLB) Act and Reg provides the parties to a dispute may agree P: GLB governs the treatment of nonpublic Magnuson-Moss Warranty Act (MagMoss): to arbitrate the dispute, rather than settling personal information (NPI) about consum- MagMoss regulates warranties on consumer the matter in court. The CFPB is currently ers by “financial institutions.” An entity will products. Its purpose is to make warranties on tinkering with this mine and may make it be acting as a “financial institution” if it is consumer products more readily understood more deadly to finance companies. significantly engaged in financial activities, and enforceable and to provide the FTC with such as entering into finance or lease transac- the means to protect consumers. Federal Odometer Act: The Odometer Act tions with consumers or taking assignment was designed to curb abusive practices dealing of finance or lease agreements. GLB has Servicemembers Civil Relief Act (SCRA), with vehicle odometers. two main parts — the Privacy Rule and the formerly the Soldiers and Sailors Civil
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Relief Act: The SCRA protects service mem- to the name on the SDN list, OFAC imposes acts promulgated in efforts to harmonize bers, their dependents, and persons who may additional research and reporting require- the laws of commercial transactions in all be primarily or secondarily liable on obliga- ments, and prohibits the creditor from doing states. Articles 1 (general provisions), 2 tions with service members from the financial business with the person on the list. (sales), 2A (leases) and 9 (secured trans- hardships that may result from the service actions) should be of great interest to a members’ call to active duty or transfer of Other federal rules: finance company. duty station. IRS Form 8300 Cash Reporting Rule: A rule by the Internal Revenue Service that gen- Uniform Consumer Credit Code Telephone Consumer Protection Act erally requires you to file Form 8300, Report (UCCC): The UCCC is another uni- (TCPA): The TCPA regulates contacts with of Cash Payments Over $10,000 Received in form act promulgated by the Uniform consumers by telephone, text message and a Trade or Business, if your business receives Law Commission, originally in 1968. It telefax. The TCPA directed the FCC to issue more than $10,000 in cash from one buyer was revised in 1974 following criticism regulations implementing the TCPA. as a result of a single transaction or two or from consumer groups. The UCCC was more related transactions. adopted in 9 states: Colorado, Idaho, Telemarketing and Consumer Fraud and Indiana, Iowa, Kansas, Maine, Oklahoma, Abuse Prevention Act (TCFAPA): Congress Telemarketing Sales Rule (TSR): The TSR Utah and Wyoming. South Carolina and enacted this legislation to offer consumers is issued by the FTC and is the primary fed- Wisconsin have enacted consumer protec- necessary protection from telemarketing eral regulation of telemarketing. It is supple- tion codes that are similar to the UCCC. deception and abuse. The law directed the mented by the TCPA. The UCCC was proposed as a means of FTC to prescribe rules prohibiting decep- making the law of consumer credit, includ- tive telemarketing acts or practices. The Used Car Rule: The Used Car Rule was ing administrative rules, more uniform TCFAPA established basic standards pro- issued by the FTC and requires a Buyers throughout the states. hibiting deceptive and abusive telemarketing Guide be displayed on each used vehicle acts and practices, and the FTC filled in the offered for sale and requires certain language In addition, a state could have buried details of these standards in its Telemarketing regarding the Buyers Guide in the contract other mines, such as specific advertising Sales Rule (TSR Rule). The TSR Rule is of sale. requirements, anti-discrimination laws, supplemented by the TCPA. collection and servicing laws, electronic These are the federal laws and regulations transactions acts, insurance laws, leas- Truth in Lending Act (TILA) and Reg Z: that require you to have certain written ing laws, lemon laws, “plain language” The TILA governs disclosures in consumer policies and procedures, such as a written requirements, privacy laws, security credit transactions. This is the “granddaddy” identity theft prevention program (Red Flags breach notification requirements, service- of federal disclosure laws, dating from the late Program), written information security pro- member protection laws, telemarketer 1960s. Reg Z is regulation of the FRB and gram, written furnisher and credit dispute restrictions, and unfair and deceptive acts the CFPB implementing TILA. resolution program and a robust compliance and practices statutes. management system. Uniting and Strengthening America by So, the next time a consumer activist or a Providing Appropriate Tools Required State laws: state regulator spouts off that you’re “unregu- to Intercept and Obstruct Terrorism Act Here’s a summary of a few of the state laws lated,” or they claim they need another law of 2001 (Patriot Act): The Patriot Act was that could impact an indirect auto finance to curb some perceived abuse-of-the-day, designed to assist law enforcement in identi- business: you make them aware of the Consumer Law fying, monitoring, and preventing potential Minefield that you have to navigate each and terrorist activity. The Patriot Act requires Retail Installment Sales Acts (RISA): Nearly every day. certain creditors to “know their customers,” every state has a RISA. Some states (about identify and report suspicious financial trans- half) have a special version of a RISA for Eric L. Johnson is a partner in the Oklahoma actions, and make reports and respond to motor vehicle financing and a separate RISA City, OK office of Hudson Cook, LLP. He is inquiries from government officials. Creditors for other kinds of personal property financ- a frequent speaker and writer on a variety of must also comply with rules or requirements ing. RISAs typically regulate finance charge consumer credit topics. Prior to pursing his legal issued by the Treasury Department’s Office rates, late charges, grace periods, bad check career, he spent many years working in various of Foreign Assets Control (OFAC), includ- charges, disclosures, and the like in financing departments for his family’s car dealership. Eric ing checking the names of every person with agreements between dealers and customers. can be reached at (405) 602-3812 or ejohn- whom a creditor does business against the [email protected]. This article is provided for “Specially Designated Nationals” list (SDN Uniform Commercial Code (UCC): informational purposes and is not intended nor list) maintained by OFAC. If there’s a match The UCC is one of a number of uniform should it be taken as legal advice.
14 Non-Prime Times July/August 2015 nafassociation.com Compliance Corner Jonna Boyle Five Tips to Get your Compliance Ball Rolling
You have compliance requirements in reference. Employees should always be made most recent version is being used, and you can hand, but deciding where to begin has you aware of and have access to the most up-to- pinpoint when and what changes were made stuck in neutral. Here are some tips and start- date information. if asked by auditors or regulators. Making this ers to help you gain focus and move forward part of your documentation process now will on your compliance journey. 5. Build a library. You have forms, letters, prevent headaches later on. policies, procedures, and other templates that 1. Pick an area…any area. You could pick are being used throughout your organization. Jonna Boyle, CRCM, is the founder of Iron any area of operations and dive in. Or you Do you know when they became effective or Compliance, LLC, which specializes in opera- could take a more risk-based approach by when/why they were last revised? When draft- tional compliance consulting for the auto finance evaluating your operational state of com- ing or revising policies, procedures or other industry. She has over 13 years of compliance pliance. Perform a top to bottom review of forms, develop a coding system to track the experience and has established compliance pro- your operations to identify your most press- revision history. Also document the changes grams at bank-owned and non-bank finance ing compliance risks. Then make a “to do” that are made. This way, you will know if the companies. list, addressing the most serious deficiencies first. Correct, document, train, and repeat for each area.
2. Create a roadmap. Writing policies and procedures is an overwhelming challenge for most of us, but it must be done. After you’ve picked a focus area, make a roadmap or simple flowchart of the processes in that area (i.e. all steps from receiving credit application to account boarding). Use the roadmap as a guide to create your policies and procedures, one at a time.
3. Get others involved. Collaborate with the managers that oversee your focus area to get the compliance and operational poli- cies knocked out all at once. You may have to dedicate a few weeks or months to the process, but the result will be worth it and your message will be consistent. (Side note: The compliance officer should not be writing the operational policies and procedures, but should review them for coherence with com- pliance policies and adherence to regulations.)
4. Train as you go. As you start looking at your practices and putting them in writing, you will make some significant changes to your current policies. As you complete the policies and procedures in each area, train the affected employees before moving on to the next area. Also make sure they have access to the policies and procedures for future
nafassociation.com July/August 2015 Non-Prime Times 15 16 survey ad 17 survey ad The Credit Process
Daniel Parry
The Price is Right …or is It?
he game show The Price is Right has Pricing is an important function for any Market-Clearing. Cost-Plus suggests that aired on American television for company selling a product, but it is critical in lenders estimate all of their costs, and tack Tover 40 years. The show consists of the world of consumer finance where many on a desired profit. Market-Clearing holds to contestants bidding on a variety of common of the costs associated with the loan cannot the notion that lenders all have similar costs, household products. The player whose guess be known with certainty at the point of sale and thus the best price is the one that closes (bid) comes closest to the actual retail price (e.g., borrowing costs, credit losses). While the desired number of loans. without going over wins the game. there are many great conferences, workshops and publications in the auto finance industry, Both strategies have merit, but they repre- Some contestants do a lot of homework, none of them are fully tackling the issue of sent extremes. The Cost-Plus approach can with elaborate methods for deducing the cor- pricing. This is understandable, as industry result in a strategy that is completely out of rect price. Others are simply happy to be one groups wish to avoid the topic for fear of market, leading to additional losses due to penny better than the last bidder. In both running afoul of antitrust regulation (price adverse selection. The Market-Clearing strat- cases, contestants are often surprised to find collusion), but it is still a subject that deserves egy can lead to a volume-chasing mentality out how far off they were from reality. This attention. Just like collections, risk manage- that leaves a company wildly unprofitable. is not too different from what we see in auto ment and compliance, pricing is a discipline finance when it comes to the problem of pric- with established ideas and best practices that A balanced pricing model will address two ing. Like the game show contestants, many lenders would be well-advised to embrace. basic issues. First, the average price booked lenders have complex models that attempt must cover all of the lender’s costs or the to account for every cost, while some are Common pricing strategies lender won’t be around very long. Second, merely focused on how close they are to the There are generally two basic pricing strat- the price actually booked must provide an competition. egies used in auto finance: Cost-Plus and adequate return to owners or investors or the
Figure 1
18 Non-Prime Times July/August 2015 nafassociation.com The Credit Process
funding sources won’t be around very long. return (after deducting the borrowing cost/ have the lowest delinquency, and therefore As such, the pricing methodology must be interest). Therefore, the ROE would be 20% lower funding costs. In addition, the worse risk-based and return-based. ($10mm/$50mm). The limitation in only the credit profile, the more front-loaded the looking at ROE is that it does not consider loss timing is. This adds up to fewer payments Risk-based pricing how that money comes in over time. made before charge-off, a higher gross charge- The concept of risk-based pricing in auto off amount, and a worse return. APR alone finance is quite old, yet a surprising number can be very misleading as far as how profitable of lenders have not adopted this approach. a particular loan is, which is why lenders must Pricing by risk-tier allows a company to employ risk-based pricing in conjunction extend credit to more consumers while at “...many lenders have with a return metric like IRR that considers the same time better matching losses to risk. how money comes in over time. A flat price means that a lender’s best custom- complex models that ers subsidize the performance of the worst Factors to consider customers. This leads to worse performance, attempt to account for We operate in an environment that is and the ability to make fewer loans due to every cost, while some always changing. The credit cycle, economy reduced margins. Risk-based pricing, on the and competitive environment are always in other hand, matches consumers with a rate are merely focused on flux. Because of this, models must be continu- that is tied to their expected individual loss ally re-evaluated to ensure that assumptions profile. This can result in more loans to more how close they are to remain relevant and accurate. consumers, many at better rates. Consider the example in Figure 1 on previous page. the competition.” The next article in this series will con- sider the following factors and how they In the flat pricing scenario, the lender fails impact the assumptions in a well-con- to cover its costs on the worst loans, and structed pricing model: fails to close many of the best loans. What is not revealed in the table is that those who Internal Rate of Return (IRR) is the rate • The impact of operations – Concerns over accept a higher price in the High Tier will of return that makes the net present value incentive plans and dealer relationships can probably perform worse than the estimate of all cash flows equal to zero. A complete create resistance that leads to poor execu- of 6% (adverse selection). In the risk-based treatment of IRR is beyond the scope of this tion, which can thwart the effectiveness of scenario, the lender closes slightly fewer low article, but it suffices to say that it measures a good model. quality loans (as they are less price-sensitive), how money comes in over time to create a and more of the higher quality loans. This return. A dollar today is worth more than a • The impact of the credit cycle – Credit leads to more loans closed and a substantially dollar tomorrow, because that dollar could go is a moving target. Where losses are now better return. in the bank today and earn interest or be rede- represents what was originated a year ployed as a new loan. In the prior example, if ago. What is booked today could end up Return-based pricing the bulk of the $10 million is earned early in in a completely different place based on The previous example demonstrates the the life of the pool it is worth more. market factors. need to assign price objectively, based on the consumer’s individual risk, but it does Why does all this matter? It matters • The impact of selection bias – A confus- not address the issue of financial return. because APR alone masks what lenders are ing or non-competitive program will push Return on Assets (ROA) measures the return truly making on each loan. Equity investors a lender to the back of the line with deal- against the asset base (portfolio balance). For typically have the highest return expectations, ers, while increasing losses and reducing example, if a lender with a $100 million which can sometimes be as much as 20% efficiencies. portfolio yields $10 million in annual return, or more. As a result, every dollar that is not the ROA is 10% ($10mm/$100mm). The leveraged carries the highest cost of funds. Daniel Parry is co-founder and CEO of Praxis limitation with this approach is that it does Warehouse lenders, and other debt providers, Finance, an auto finance company based out not consider leverage. usually do not lend against severely delin- of the Dallas/Fort Worth area. He was formerly quent accounts and so they must be funded chief credit officer at Exeter Finance Corp, a Return on Equity (ROE) measures the out of equity (the most expensive capital). company he co-founded in 2006, and senior vice equity capital compared to the return. For president of Risk Management at AmeriCredit example, if the lender in the previous instance Accounts in the worst risk tiers have the Corp. He has more than 16 years of experience in had a $100 million line of credit at a 50% highest delinquency, which makes the cost of analytics, business development, capital markets, advance rate, they would only need to put in funds on those accounts significantly higher. and executive leadership. Please direct comments $50 million in cash to achieve the $10 million Conversely, accounts in the best risk tiers or questions to [email protected].
nafassociation.com July/August 2015 Non-Prime Times 19 Trends Barrett Teague The Key Ingredient for 84-Month Loan Profitability here continues to be much interest in and even specific vehicle depreciation data Conversely, com- the growth and viability of loans in consideration, allow risk personnel to be at pact cars and EVs Texcess of 72-month terms. There is a ease with their portfolio. have been under natural interest on both the lender’s part and more stress, and their depreciation patterns that of the consumer for these types of loans. Whether a lender’s portfolio strategy is to have reflected this pressure. More car shoppers Benefits include the lender getting to write mitigate or take on additional risk, access to have opted for larger cars, crossovers and SUVs, more paper while the consumer gets to keep collateral data performance and insight can and as a result, smaller car segments have felt monthly payments low. help identify the right vehicle or segments for larger depreciation outside of the spring tax- a loan with 72-month terms or longer. buying season. Longer loan terms are necessary today to keep monthly payments beneath $400 – a When a lender is looking to evaluate the Luxury car segments have been stable at sweet spot for many consumer auto bud- amount of risk tolerance in a long-term loan, the higher end of depreciation. Mid-size cars gets. In order to accomplish this, lenders there are four things to consider: How much equipped with more luxury features have cap- must extend the terms to offset the lack of initial loan-to-value they want to establish; the tured more car shoppers who have become household income growth and the increase rate of annual depreciation of the collateral; content-loyal as opposed to brand loyal. Mid- in auto transaction prices over the last sev- credit profile of customer, whether sub-prime size cars in segments not traditionally known eral years. or prime; and determine if the risk-adjusted for luxury now offer features such as in-car return on capital is sufficient. Wi-Fi and safety technologies, stealing market According to the U.S. Census Bureau, from share from luxury-heavy segments. 2007 through 2012, household incomes rose Collateral data can help bring the right deci- just 1.6% from an average of $48,729 to sion into focus. Savvy lenders use this data to Leveraging collateral to obtain better vis- $49,486. However, during that same time, help determine the loan-to-value ratio during ibility on specific vehicles and segment per- the average price of a 2-6 year-old vehicle rose origination, historical depreciation patterns formance then allows the portfolio manager to 24.9% from an average of $11,160 to $13,949 and the projected residual forecast based on the focus on the right strategy to maximize profit according to Black Book vehicle valuation data. desired time frame for the loan term. Several potential. Profitability on loans underwritten non-prime Lenders have begun using term to traditional standard terms lack the desired As a result, consumers are interested in based projected residuals as part of their under- loan margin at current low rates. Increasing risk longer loan terms. It’s easy to see signs of writing guidelines. is the common method to profitable growth in growth for loans of this length. According to a market exploding with competitors. Many Experian, loans with terms of 73 to 84 months These considerations are critical since not lenders seek the opportunity to enhance their represented roughly 26% of new-vehicle origi- all vehicles depreciate alike, and even seasonal portfolio margins through the portfolio man- nations during the fourth quarter of 2014, an patterns can experience hiccups making the agement via increasing loan terms versus relax- increase up from 20% during the same time a forecasting phase even more challenging. ing credit criteria. year earlier. These loan terms rose from 13% to 15% for used vehicle purchases during that Which segments or vehicles are right for Simply put, strong analysis of collateral data same time. a portfolio? Collateral trends can amplify can help a lender take on more calculated risk, insight into the decision-making process. As even in a longer loan environment. The key Additionally, lenders are entering the space an example, pickup trucks have performed well is leveraging this data to determine the right for loans of 72 months or longer. Ally Financial in recent history based on collateral patterns. segment or even the right vehicle for portfolio Inc. recently announced an 84-month loan These vehicles are expected to continue to out- expansion. package to well-qualified customers this past perform the market over the next several years. February. As with all portfolio decisions, the However, as supplies continue to increase, this Barrett Teague is the vice president of Lender question must be asked: what’s the risk versus outlook may change. Solutions for Black Book, a leading provider of reward for growth and profitability? timely, independent, and accurate vehicle pricing Gas prices can also have an impact on vehicle information. Through its Lender Solutions divi- Oftentimes lenders will focus on the appli- depreciation patterns. As such, pickup trucks sion, Black Book offers innovative data solutions cant’s credit profile as a large part of their loan are expected to perform well in the near term to help lenders find profitable vehicle opportunities decisions. However, collateral insight can bring against the backdrop of moderate fuel prices, for their portfolio. To schedule a portfolio audit, longer loan risk into focus. Timely and accurate which are expected to remain stable through call 855-371-7532 or visit www.BlackBookAuto. data, tracking the residual values of segments the remainder of 2015 and into 2016. com/lender-solutions.
20 Non-Prime Times July/August 2015 nafassociation.com
Trends Lou Loquasto The Top Five Predictors of Sub-prime Risk Better assess sub-prime opportunities by looking at data and attributes
ost of the conversation around of balances owed have decreased overall, with state-of-the-art risk models to analyze infor- automotive finance is currently that trend looking to continue in 2015. mation about sub-prime borrowers. These Mfocused on the growth of origi- models are the result of analyzing financial nations to consumers with sub-prime credit It would seem to be common sense that characteristics that have been prioritized by scores, but there is more remarkable growth lenders would avoid consumers who do not statistical algorithms. Using these databases in originations made to consumers who do have a traditional credit score. After all, it and algorithms can reveal that different indi- not have a credit score at all. should be difficult to accurately gauge an viduals who have the same sub-prime credit individual’s financial situation without that scores may actually have entirely different As seen in Chart 1, sub-prime origina- three-digit number. So how can sub-prime financial situations. tions (designated by credit scores between originations be growing and performing well, 550 and 619) increased 2.16 percent from especially among consumers with no credit For example, two borrowers applying for 2013 to 2014. Growth was even higher in scores? an automotive loan could have the same sub- the deep sub-prime segment (designated by prime credit score despite a glaring difference credit scores below 550), with originations The answer is that lenders are starting to – one of them has recently filed for bank- increasing 2.9 percent from 2013 to 2014. Yet leverage non-traditional financial attributes ruptcy, while the other has no reported bank- the group that grew the most were consumers that are often more predictive for the sub- ruptcies. Additionally, the second individual with no score at all, with originations growing prime segment, as well as consumers with- with no bankrupticies has also established a 7.89 percent from 2013 to 2014. out a traditional credit history. In the past, steady track record of paying cell phone and these attributes were used anecdotally and utility bills every month. Some lenders would These originations are not only growing were reliant on information that consumers deny both of these applicants based on their in number, but also performing quite well. shared willingly. Moreover, it took time for sub-prime credit scores alone. However, a Chart 2 on the next page displays sub-prime consumers to hunt for their latest pay stub closer look at that second individual would auto delinquency rates from 2006 to 2015. In to prove they currently had a job and stable reveal a person who is more than capable of the last five years, both the number of delin- income. This ultimately led to delayed or staying current on an auto loan. quent sub-prime accounts and the amount derailed sales opportunities, which are lose- lose situations for A growing number of lenders are look- all parties involved. ing at these alternative attributes to find the Now lenders have sub-prime borrowers similar to the second access to alterna- individual in the example above – individuals tive risk scores and who are rebuilding their credit history after databases of com- hard times to demonstrate they can manage prehensive financial an auto loan. information. These alternative databases can be a gold- Many of these mine of information, and lenders may be emerging databases surprised at which financial attributes are are more than a the most predictive at assessing the risk of a simple pooling of potential borrower. Five of the most impor- data sourced from tant financial attributes identified by these different companies databases and algorithms include: and public records, with data provid- Size of delinquent telco and utility bal- ers going a step ances: Individuals having larger telecom- Chart 1 further to generate munications or utility balances tend to be a
22 Non-Prime Times July/August 2015 nafassociation.com Trends
cell phones, Professional licenses: The presence of a cable service or professional license (RN, MD, CPA, etc.) can other telco or be indicative of less risk for lenders. utility service disconnected These attributes are only the tip of the ice- due to nonpay- berg – there is a wealth of alternative data that ment represent can provide lenders with the insight they need greater risk for to formulate a more comprehensive evalua- lenders. tion of consumers in the sub-prime market. With automotive sales remaining strong, Number of lenders can use these resources to quickly utility inqui- and efficiently assess applicants, communicate ries: The pres- with their partners and close more deals. ence of utility inquiries is Lou Loquasto is the automotive finance leader indicative of of Equifax Automotive Services. He has more payment risk than 20 years of experience in the automotive Chart 2 for lenders. and financial services industries. Prior to joining Risk increases Equifax, he served as chief marketing officer for greater risk for auto lenders. This is particu- as the number of utility inquiries increase. Global Lending, an Atlanta-based automo- larly true for thin file individuals or those with tive lender; head of lender solutions for Black a bankruptcy on file. Number of address changes: Individuals Book; and head of marketing and the central- who have changed their physical address mul- ized direct-to-consumer business at Wells Fargo Presence of an involuntary disconnec- tiple times represent greater risk for lenders. Auto Finance. tion: Individuals who have had their utilities,
nafassociation.com July/August 2015 Non-Prime Times 23 Technology
Stephanie Alsbrooks Transaction-based Pricing – Freedom or Frightening?
ith our recent purchase of a in the form of reinvesting in new features, for.” I thought he was crazy and just wanting competitor who was one of the integrations and performance enhancements. to buy the cool stuff. But indeed it is often the Wlast hold-outs in the origination Other less progressive vendors starve R&D case. However, as with most things the truth software industry not pricing per transaction, to maximize profit and maintain the status lies somewhere in the middle. The saying is a I am often asked to explain why transaction- quo. One of these strategies is good for lenders great rule of thumb, but you still need to be based pricing makes sense for lenders and and the other not so good. Technology is ever a savvy buyer. Total cost of ownership is the why SaaS is the right technology model for changing; if your vendor isn’t out there work- most effective way to evaluate your options an origination technology provider. Following ing for you, keeping up with the changes, and determine the true value of what you is my take on the subject. making sure your technology is relevant, you are getting. will pay the price at some point – you can SaaS vendors and lenders are not so only push it off so far. When I was young, I was incredibly different attached to my money, so I always wanted As a lender you have profitability targets to go cheap – clothes, electronics, or furniture for each deal, the hurdles you have to face on “As a lender you – it didn’t matter, cheapest won – cheap “felt” each loan so that the portfolio performs and like the best deal. the business thrives – so do your SaaS vendors. have profitability You are covering losses, operating costs and targets for each deal, For instance, I would have rather paid $500 cost of funds, but SaaS vendors have to cover for a desktop computer rather than the $675 these areas to remain viable: the hurdles you have for the laptop. But that desktop needed a monitor, cables, a keyboard and mouse, plus 1. Infrastructure: The cost of infrastructure to face on each loan a larger desk to store it all on. After all was ranges from 30-40% of transaction-based said and done the desktop cost $615 total, pricing and is directly tied to volume. When so that the portfolio but when I went away to college I could not volume goes up, your vendor is having to take it along since the space I had would not scale architecture. It would be great to think performs and the fit the desktop. So I ended up buying a laptop this is a fixed cost, but it’s very much driven in 24 months for the then lower price of $625. by transactions. Isn’t it comforting to know business thrives – so do Total cost of laptop $675 versus total cost of that you can grow as much as you want and your SaaS vendors.” desktop choice $1,240. all the burden is on your vendor to make sure this scales with you? So how do you decipher the total cost of ownership (TCO) to determine if transaction- 2. Support and maintenance: It would be • Remember the “good” days of subvented based pricing is really providing freedom or ideal to think that these were fixed costs rates and an abundance of new car incentives? only more cost? as well, that whether you do 1,000 apps a Car buyers were buying more often, money month or 100,000, it doesn’t cost the vendor was flowing – but it wasn’t sustainable. Cheap With transaction-based pricing, the idea is any more to support you, but that is not the pricing may feel good in the moment, but it’s not for you to pay more, but to pay for what case. It’s like hoping a sub-prime customer not sustainable. Instead of looking for cheap, you use. Some of the strategic benefits of pay takes the same amount of servicing as a prime look for value. per use include: customer. With hosted technology as your volume goes up, so do the number of ques- • As Steve Jobs so eloquently put it, “If you 1. Lower fixed costs, which is good for cycli- tions, issues and support needs. keep your eye on the profit, you’re going to cal industries, anyone remember 2008? With skimp on the product. But if you focus on SaaS you only pay for applications you get, 3. R&D: Here is where you might find the making really great products, then the profits not for servers, network people, DBAs and largest variance in providers. will follow.” others to keep the system on every day.
• Progressive technology providers are con- You get what you pay for 2. Lower enhancement costs. A progressive stantly updating and adding to the platform My dad always said, “You get what you pay SaaS vendor will continue to enhance the
24 Non-Prime Times July/August 2015 nafassociation.com Technology
product to support multiple clients, which lender and technology partner. So feel free to lenders that compete on price have to deal provides value for the entire network of cus- get creative, but remember, it is full structure with the pitfalls that go with finding new tomers. In the traditional install software you are negotiating with a long-term impact, lenders and learning new programs when model, you install the software once, but not just a lower price on a single transaction. that lender leaves the market. then you pay for new features and integration When you are negotiating with the dealer and services (these costs are typically billed hourly you have given a 15% rate, which matches the Your call, freedom or frightening? so the more time it takes the more you pay). risk and profitability target of the deal and the Yes, we know new and different can be dealer comes back and needs 13%, what do frightening, but those who can fight past 3. Reap additional operational efficiency you do? You don’t just say yes, you work to the fear and look a little bit deeper are find- rewards. If you find ways to book more loans adjust the structure so it works for you and the ing creative ways to partner with vendors to with fewer applications (higher closure, better dealer. You have the dealer put the buyer in create new value, reduce risk and experience targeting) you save on technology costs in a a better car, or put more down, or adjust the freedom! Think network power. The power SaaS model. With a traditional model the cost discount. You also know you will need more of many with open access, crowd sourcing to license and run the system does not change business from the dealer in the future so you and blogging has certainly changed the way with better operational efficiency. want a mutually beneficial deal that ensures we live by making information more free and the dealer makes profits to keep selling cars made the knowledge field flatter. We think Making money benefits everyone so you can keep lending. the same network and platform power will Doesn’t it upset you when suppliers or regu- free lenders to focus on lending while savvy lators suggest you shouldn’t charge the rates Smart lenders don’t compete on price technology partners build a lending network you do and make profits? Profit margins for and the same is true for SaaS providers, they of the future, free of high fixed costs, long smart SaaS businesses can be good, no doubt, compete on value. If you are looking for a vendor timelines and misaligned goals. just like they can be good for a savvy lender. vendor who competes on price, you will have But it’s risky, much like lending can be. We to accept the rock bottom value to go with it. Stephanie Alsbrooks, chief freedom fighter and have to keep adding value, improving the net- Just like the dealers who are looking for the CEO. work and serving customers. If your vendor isn’t constantly improving at being your tech provider, it will catch up eventually, you will easily find another vendor (think loan charged off here) – the business model isn’t any more sustainable than a lender throwing a bunch of business on the books to hit volume targets with no thought for the inevitable losses.
A SaaS model inherently aligns profit motives of lenders and vendors. In the “one price regardless of volume” scenario, the vendor makes the same regardless of how you do. “One price” vendors are not incented to help you succeed and grow, only to maintain and stay in business. In the pay by the seat model, again, there is no direct alignment CLEARLY, THEY TOLD with seeing you succeed – the vendor makes more if you add seats even if adding seats YOU AGAIN was not growth related. True, you may add THEIR GPS IS AS RELIABLE AS PASSTIME. seats because you are growing, but you also add seats if you are inefficient. If you want Some of our competitors will do and say anything to sell your success tightly aligned with your key you their GPS and Starter Interrupt devices. Even tell you technology providers, the SaaS model is the they’re as good and function the same as PassTime. But only way to go. PassTime creates, manufactures, and sells PassTime products. Experience the difference of PassTime’s reliability. Trade-offs not price drops Much like rehashing a deal between the dealer and the lender, there are many ways to Call today and fi nd out why so many structure the deal so that it works for both the dealers are switching to PassTime. CALL 1-800-828-1564 passtimeusa.com
nafassociation.com July/August 2015 Non-Prime Times 25 Legal Steve Levine Is too much Knowledge Ever a Bad Thing?
’m wearing a different hat these days. them. I am troubled by this approach, espe- work to be done. In some institutions, I’ve After four years of serving as counsel for cially given the increased regulatory scrutiny observed the dilemma of acquiring “too much Ia dealer management software provider, we’ve lived under for the past few years. knowledge” because of the potential negative I’ve become lawyer, head cook and bottle impact it could have on volume. washer of SecureClose, a technology company I think that most sophisticated finance that recently released a tool to help car dealers companies already know a lot about their Much like the natural tension between explain to customers the terms and conditions dealer relationships. Basic static pool analysis underwriting and collections departments, associated with financing. A virtual “closer” provides guidance on how any given deal- there is almost a moral debate about how delivers legally compliant explanations of er’s paper performs, bankruptcy data helps much information is a good thing. Companies the finance documents while recording the analyze loss trends, repossession rates give consider how much volume they are willing to customer’s interaction with the presentation. further indication of performance, and the sacrifice, especially when the information per- list goes on. There are a multitude of met- tains to something not quantifiable and not Can you take a guess why I’m so pas- rics and reporting on hard factors that affect easily applied to things like revenue or losses. sionate about filling the information gap performance. between dealers and consumers? That gap is The CFPB’s battle cry responsible for a lot of conflict these days. It “...dealers are searching As an industry, we need to get ahead of this also caused the CFPB to emphasize the need issue quickly before it is too late. The CFPB for transparency and education, illustrated for a way to make the has already invested much energy into its by the bureau’s recent push into tracking customer experience Consumer Complaint Database, and this is consumer complaints. just the beginning. more friendly and In response to all this, dealers are searching The CFPB is also mandating that institu- for a way to make the customer experience transparent. I’ve found tions maintain their own complaint tracking more friendly and transparent. I’ve found they they are enthusiastic system to identify trends and issues. Much like are enthusiastic about getting their employees its preference for the creation of compliance out of the process of delivering complex legal about getting their management systems, the CFPB has provided explanations, and they like the idea of record- a name but not a whole lot of other guidance ing the whole experience so they can prove employees out of the on how to go about creating such a system. what the consumer was told. process of delivering The one thing that’s definite, though, is that they are very interested in how finance com- Similarly, capital providers are excited complex legal panies track and handle complaints. because it gives them eyes into the opera- tions of the dealership and comfort that their explanations.” Revenue versus risk investment is protected. Industry lawyers, When I was in house with an indepen- regulators and even other vendors have all These types of losses are quantifiable dent finance company, I classified and tracked embraced this technology. and, thus, subject to exacting analysis. That complaints searching for trends and ways to explains why significant money is invested mitigate risk. I know there are lots of ven- Out of sight, out of mind into constantly improving underwriting tools dors that have created their own versions of Speaking with finance companies that to create more predictive models, as well as a complaint management system, and many acquire contracts from dealers, however, robust metrics to slice and dice collateral and bright folks in the industry already use their has been a different conversation. They’ve understand loss rates. Companies want to find own spreadsheets and formulas to accomplish expressed concern about whether they really every last kernel of knowledge when there is these things. want to know what happens at the dealership a direct relationship to revenue. before they acquire the contract. There seems Sometimes the information we gath- to be a belief that they are somehow protected When it comes to things that don’t directly ered suggested bad acts on the part of the by not actually knowing what goes on beneath impact revenue, though, there is still a lot of dealer, and other times it suggested a process
26 Non-Prime Times July/August 2015 nafassociation.com Legal
needed improvement. Gathering the infor- institutional analysis, and ultimately customer Steve Levine is chief legal and compliance officer mation wasn’t difficult – that is, once it was satisfaction and performance. of SecureClose (www.secureclose.net), a technol- decided what to look for and communicated ogy that facilitates compliant closings for auto properly at the various touch points within Maybe the choice is yours, or maybe it’s dealers. SecureClose uses an automated closing the company. already been made for you. Either way, it’s system that verbally walks customers through time to attack customer complaints with the each closing document, while recording and The greater challenge was what to do with same vigor that we’ve attacked more data- storing the entire process in cloud. Steve can be the information once a trend was found. For driven parts of our businesses. reached at [email protected]. instance, on one occasion, it was obvious that a dealer wasn’t explaining their warranty very well, which was creating call volume in our customer support department. That was INTRODUCING easily solved by our local manager contact- ing the dealer to let him know what our data suggested. We couldn’t mandate that the dealer do anything with that informa- NADA LENDER tion, but if he wanted us to keep buying paper, he knew that we needed to see an improvement. ADVANTAGE On another occasion, we found a series of customer complaints that suggested a dealer was using some questionable business tac- tics. This dealer provided us a good deal of volume, so the internal conversation was a lot more heated. The business folks weighed the incremental losses we seemed to be suffer- ing against the possibility that we’d lose that volume altogether if the dealer chose to start sending contracts elsewhere.
The conversation played out much differ- ently when we discovered a similar situation with a dealer that supplied fewer contracts. Helping lenders get ahead Should the volume of business produced play in tomorrow’s marketplace. a role in the discussion? Our readers may say “of course,” but I believe regulators would answer differently.
Our expanded job description Given the CFPB’s preference for businesses to be proactive and take corrective measures, the days of gathering the information and Getting ahead is going to get harder, but NADA Lender Advantage stopping there are a thing of the past. The is here to help. Our team of experts provides a full suite of vehicle industry will not only need to demonstrate analysis services that put you in the fast lane so you can keep up that it captures and quantifies this type of with marketplace changes. From vehicle risk assessments to portfolio information, but that it also acts upon it for analysis, remarketing planning and stress testing, we’ll give you the betterment of consumers. the data and insight you need to make the best business decisions. Depend on NADA Lender Advantage for better outcomes. We can choose to view this as a negative and look at it as another cost of compliance. See how we can help your business. Or, we can recognize that – even though these complaints aren’t directly quantifiable Call 866.975.6232 or visit nada.com/advantage and related to losses – they lead to losses in the form of employee time spent handling,
nafassociation.com July/August 2015 Non-Prime Times 27 Hiring & Recruiting Don Jasensky Executive Recruitment Quiz – Test your Recruiting Knowledge Find Don’s earlier answers in the e-zine archives at NAFassociation.com.
The best indicator of a candidate’s future performance Which is more reflective of a career seeker vs. a job and success with your organization is: seeker? 1. How well they present themselves during your interview. 1. Comes to your interview enthused and willing to jump through 2. They say all the things you were hoping to hear. any hoop for you. 3. Strong record of successful past performance. Answered in 2. Willing to commit to your position during first interview. 4. Aced your corporate testing. MayJune 2015 ezine 3. Wants time to reflect on your opportunity and where it will lead them. The best indicator that a sales representative candidate will be a great hire for you is: Check each that apply – When interviewing candidates 1. Blows you away during the interview. in-person: 2. Toss a stapler in his lap and ask him to “sell it to you” and he q You are able to spell out a compelling reason why any candi- does very well. date should consider leaving their current position to join your 3. Past record of high performance. company. 4. Aced your “Profile Assessment.” q You can explain “what the candidate can become” by taking If they can “sell you” during the interview, they will sell to your your position. clients as well. q You tell her about the team she will be joining. q (If candidate is from a different industry) You have compelling Which point is often overlooked by employers when reasoning for him joining your industry. creating a winning job posting to attract a superior q Provide literature for candidate to take home to review and share candidate? with spouse/mentor. 1. Very detailed job description covering the duties and responsibili- ties of the opportunity. To save everyone’s time, do you prepare a list of “knock- 2. List of stringent qualifications to ensure the best candidates will out factors” when beginning a search such as: reply. 4 Candidate’s ability to commute to your office daily or relocate. 3. A description of your company and what a person can ascend 4 A non-compete exists that may affect their current employment to in this position. 4 Specific knowledge necessary such as “EXCEL Expertise” The best method to delegate responsibilities to a hiring 4 Needed licensure (driver’s license needed to do job, CPA required?) committee is: (Example is five people on hiring committee deciding between four 4 Credit and criminal background checks needed before offer letter candidates interviewed) 4 Ability to travel as required 1. Majority rules. 2. Unanimous or keep looking. q Yes 3 All committee members have a say, but final decision rests with q No the member who the candidate will report to. Post interview – Check all which you do regularly in your When you are interviewing a sales rep or mid-level man- post interview meeting with your hiring committee: ager, the best sign that you have a good candidate is: q Ask what concerns exist for each candidate. 1. Willing to start right now with you. q Ask how candidate will fit into your corporate culture. 2. Cautious, asks a lot of questions, needs time to think about . q Ask if candidate can duplicate their past success in your position. 3. Blows you away during the interview. q What obstacles will candidate have in achieving the same level of success with your opportunity? Which is correct – What a candidate wants from a career q What help – training – investment will candidate need from you move, (candidate’s mindset ) is: and can you pay that price? 1. Just as important as their education and experience. q Does candidate have a compelling reason to take your opportunity? 2. Not your problem and should be left to the candidate to sort out. q What concerns does the candidate have and can you overcome them?
28 Non-Prime Times July/August 2015 nafassociation.com Below is the continuation of last month’s national sales manager. The hiring committee This is an interesting story from a large article on testing your recruiting knowledge. gave us a long job description. As with nearly auto dealership hiring a director of service for We pick it up with Question #4. all job descriptions, there was nothing of value their very large service department. I had a to help us hire a great candidate. The usual unique candidate who was a terrific service 4) The best method to delegate was included: manager running a very large service depart- responsibilities to a hiring committee is: ment. He was actually a practicing CPA audit- • 15-20 years experience in the sub-prime auto- (Example is five people on hiring committee ing auto dealerships early in his career and later motive finance industry deciding between four candidates interviewed) decided to become a service manager because • College degree required 1. Majority rules. he saw the fast pace in a busy service depart- • The accounting person on the hiring commit- 2. Unanimous vote or keep looking. ment and liked it. Additionally, he did not tee wanted a candidate who was very experi- 3. All committee members have a say, but final want to travel. enced with financial statements decision rests with the member who the can- • The head of credit wanted a candidate who didate will report to. I arranged a phone interview between the started as a credit buyer so that they under- dealer and the service manager. They got along stood the credit process We like answer #3. I have a long winded well and the dealer wanted to fly the service • The COO wanted a person who could also philosophy on this, but keep the following manager out the next week to meet with his assist in the recovery area because that has been points in mind. One person will be managing management team and see the facilities. The a challenging area the new hire and that person needs to take dealer had a very good controller who had • HR wanted the candidate with the highest ownership of the hire. I have frequently seen worked her way up in the business from a high score on corporate assessment tests other committee members vote down a very school part-time receptionist. She had no college strong candidate because they felt threatened by background. Intelligence, drive and hard work Do you see what just happened? The request the candidate’s experience, charisma, education, earned her the controller position. for a camel was just drawn up! drive, etc. “Majority rules” and “unanimous or keep looking” often provided for vanilla hires. When the dealer told her about this great This is why it is hard for a company of well- service manager candidate coming in the next intentioned executives to see the mistake of this All committee members need to be on the week she was elated, that is until the dealer approach. They think the more the criteria, the same page. It is critical that they are looking told her that the service manager has a degree better the candidate. But with so many crite- for “the same candidate.” That is why we ask in accounting and was a CPA. He further ria that is not a part of what will drive success the question: “A year from now what will the communicated that maybe he could help her in this position, they are eliminating most of new employee need to accomplish to be con- close the month and prepare their financial the pool of candidates. They are not selecting sidered a great hire?” I have seen this question statements. from the best of the best, they have just greatly create arguments among committee mem- reduced their chances of hiring the best! Now, bers. Good! They need to hash this out and As you could have guessed, the controller a much smaller group of candidates will be left know what they are looking for. may have be intimidated and she told the dealer to select from. that she thought he would be a terrible fit for Also, remember the adage a “camel is a race ….whatever reason she had. She did not want When we asked the hiring committee the horse designed by a committee.” Committee someone better educated with better credentials question: “A year from now what will the NSM members frequently have different agendas. taking any piece of her hard earned corporate need to accomplish to be considered a great What often happens is that they will compro- turf! The good news is that after interviewing hire,?” we quickly got to the root of their needs. mise or add on too many parts and get the the candidate in person, the dealer listened camel when the position needed is a race horse. to the other managers’ input and made the The client was getting fewer deals from decision to hire the service manager. It was a its dealer base and because of the increased In my 26 years in professional search, this is win-win for all! The service manager is still competition in their space, they felt forced what we have seen work best: there doing a great job and focuses on running to fund deals of lesser quality yielding poorer his large department and letting the controller • All committee members should be part of the performance. run her office! interviewing and assessment process. • They should all be part of the discussion To solve this we needed a candidate who truly To summarize, all committee members regarding the candidates. understood the industry and how to raise the should have a say, but the final decision rests • However, the candidate will be reporting to individual achievement of each field salesperson. with the member who the candidate will someone and that someone should take own- report to. ership of the hire, make the decision and be In the end we did not need 15-20 years of responsible for their success. experience, a college degree, expertise with Donald Jasensky is the founder and CEO of • This person’s boss should retain the right financial statements, experience as a credit Automotive Personnel, LLC. It is in its 26th year to veto the decision, but must do so very underwriter, ability to assist in recovery, nor providing executives, managers , and sales profes- judiciously. someone to ace their corporate assessment. sionals to the automotive finance, aftermarket and automotive dealership industries. 800-206- Let’s look at a recent example We needed a race horse and focused on find- 6964x21, [email protected], www. The search: A mid-size sub-prime automo- ing one. All race horses have a very proven track searchpro1.com tive finance company was looking to replace its record.
nafassociation.com July/August 2015 Non-Prime Times 29 Association
Member News, continued from P-11
“Becki’s valuable experience at the Federal The integration between Spireon GoldStar Spireon’s industry-leading automotive solu- Trade Commission and as counsel for a major GPS and Megasys Omega marks the auto tions, including its groundbreaking GoldStar information services corporation perfectly lender industry’s first integration between GPS, support the broad automotive ecosys- aligns with the firm’s practice, and she will be a major companies and allows customers to tem, allowing dealers and lenders put more of great asset for our clients,” said Tom Hudson, save time and money by centralizing all criti- their customers into vehicles. GoldStar GPS chairman of Hudson Cook LLP. Becki served cal information into one convenient loan is built on Spireon’s award-winning NSpire as an assistant director in the FTC’s Division servicing system. API’s enable automotive M2M intelligence platform, providing unpar- of Privacy and Identity Protection, where she finance companies to automate order entry alleled reliability and the industry’s first 99.9 led the Fair Credit Reporting Act program and use key GoldStar GPS features within percent performance guarantee. and oversaw the commission’s enforcement, Megasys Omega such as locating vehicles, outreach, and rulemaking activities in that enabling or disabling the starter and sending “Our partnership with Megasys allows us area. payment alerts. to provide customers with a turnkey, end-to- end system to automate auto loan manage- Spireon to Become Preferred Provider “We are excited to enter this partnership ment. We teamed up with a proven market for Integrated Automatic Vehicle with Spireon,” said Theo Austin, president leader in order to help customers save time Location, Order Entry, Remote Disable, and chief operating officer for Megasys. and money by enabling them to focus on and Payment Alerts “Time is money to our lender customers, their core jobs and maximize productivity,” Irvine, CA – June 24, 2015 – Spireon and we are thrilled to offer additional time- says David Meyer, executive vice president Inc., a leading innovator of Mobile Resource saving tools with the performance and reli- for Spireon’s Automotive Telematics Group. Management (MRM), announced that ability that GoldStar GPS has brought to the Megasys, a leading provider of consumer loan market for years. This integration will give servicing systems, will partner with Spireon to lenders the best analytical tools available to provide out-of-box integration with Spireon help them improve their bottom line and gain tools. the competitive edge.”
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30 Non-Prime Times July/August 2015 nafassociation.com WE KNOW. THEY’RE MORE THAN FACES IN THE CROWD.
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