During the past few months, I have observed an increase in the number of situations where dealers have significant legal exposure (criminal as well as civil) as a result of poor practices and procedures in the sub-prime department. This exposure can threaten the existence of the entire dealership. As an optimist, I do not believe that anyone intended to create any potential criminal exposure for their dealership-but that was the end result.
Usually these potential problems are the direct result of the mismanagement of the sub-prime department. An F&I person or a sub-prime manager applies one of their infamous "tricks" to dress a deal up. It may be the customer's documentation or stips, or possibly the equipment on the vehicle. The result is a deal containing misrepresentations and fraud. I know this is not happening in your store, right?
Currently there is a significant commitment among the sub-prime lenders to identify and limit dealer and/or customer fraud. I absolutely applaud these lenders for their investment (and it is considerable) in systems and processes designed to identify fraud. These efforts will only protect the industry, and you, in the long run. Limiting the loss rate on a sub-prime portfolio is challenging enough without introducing the element of fraud. We can only guess at what amount of money fraud and misrepresentations have cost investors, lenders, and dealers as a result of companies closing their doors.
But let's assume you are in the majority of dealers who simply want to benefit from sub-prime business and limit legal exposure. As a dealer, the lenders are holding your feet to the fire. How do you hold your employees on the front line accountable? How do you get them to realize that a month of 25 clean deals is better than 37 "hope some make it" deals?
One of the most effective tools we use to limit this exposure is the "Deal Certification Statement." This is a one page document that is signed by your F&I person or sub-prime manager certifying that:
· The deal is in compliance with all of the lender's guidelines,
· There are no known false statements or misrepresentations,
· All documents submitted are unaltered and true and complete copies, and
· The deal as structured meets the lender's approval terms attached to the deal.
In addition to the signature of the F&I person or sub-prime manager, an administrative or compliance person must also sign off on the same form. This provides two levels of checking and double-checking to identify any potential problems.
Now you may be wondering, "What if both my people are bad apples and they sign the certification?" As a dealer, you still have exposure in that you may have to write a check to buy back some deals. Most important, however, you now have a person you can immediately terminate and shift the criminal exposure to if indeed they did fail to fulfill their responsibility. It is not a save-all, but it certainly doesn't hurt the position of a dealership forced into this position by a bad manager. At a minimum it allows some very pointed questions to be asked.
I believe that if more dealers implemented this type of certification, certain practices that cause losses for lenders and legal exposure for dealers would diminish.
Next issue, we will provide some industry benchmarks specific to the sub-prime department. These benchmarks will come rom a special study of sub-prime finance data collected over the past eighteen months. To our knowledge, this study represents the largest compilation of dealer operating results specific to sub-prime finance ever available. Don't miss the article!
Christopher M. Leedom is a Professional Twenty Group Moderator with NCM Associates of Overland Park, Kansas. He is a recognized industry expert on sub-prime finance and is the Chairman and Founder of NCM's National Special Finance and Buy-here Pay-here Conference. If you have specific questions or require more information about this subject, please check the appropriate box on the reader response form on page 3. cleedom@dealeronline.com