In the last issue I promised to visit the topic of sub-prime lender dealer agreements. It seems I am receiving more calls than ever that relate to situations where exposure is created under the dealer agreement. So how do you wrestle with this compliance issue?
Just so we are clear, lender agreements are in place for one reason to protect the lender. These agreements typically are as unilateral as you can imagine. Have you ever read a lender agreement that provides the dealer protection when the lender goes out of business or files bankruptcy? I don't think so. Within the framework of any standard lender agreement there are dozens of hidden potential "land mines". These "land mines" give the lender power and leverage to protect against unwanted or undesirable dealer actions. The problem is, what exactly do these agreements say?
To give our lenders a break, I am aware that certain representations and guarantees are necessary to protect against the dealer who plots a course to systematically or even occasionally defraud a lender. All agreements should protect against that exposure. But let's be reasonable. Not one of our corporate giants would sign a lender agreement if the tables were reversed. I'd like to hear from lenders who would refund moneys advanced under all securitizations when one block fails to perform.
What concerns me is the trend among lenders whereby they "look the other way" when it is convenient or self-serving. "No, this can't be," you say. Let's talk real dollars and sense. When a dealer relationship is profitable for a lender there is a certain tolerance level for hold checks on down payments for instance. Or certain other items may be overlooked in order to "accommodate" the dealer.
Then one day a dealer finds there is a better game in town. A more aggressive lender comes along. So this same dealer does less business with the original lender and eventually the relationship dries up. Now the losses in the portfolio start piling up. Now the lender realizes that maybe the relationship wasn't always that profitable. So if we are a lender, how do we limit losses? What about all these items we let "slide by". The answer is the sliding is over. Items like the down payment verifications or documentation or lack of verification all come to light. They are assembled in a nice neat document called a law suit and the dealer is asked to buy back some, most or all of the portfolio.
Now you might think this can't happen in your store. Well you are dead wrong. It is my strong advice to you that you better be certain that the deals in your portfolio are in strict compliance with the terms set forth in your lender agreement. Make sure you comply 100% with the terms set forth in these agreements. If you certified the entire down payment was cashit better be cash. If you indicated the vehicle has certain optionsit better have those options. If you think the salesperson helped the customer obtain false income verificationyou better hope he didn't.
After you read this article do yourself a favor. Go read the lender agreement for the lender where you place most of your sub-prime business. Read it carefully. Don't rely on "well my field rep told me how to do this". Last time I checked that didn't really hold up in court too well.
When evaluating your lender agreements make suggested modifications or changes. These documents usually have some room for negotiation. Sometimes you may have to walk away. In the long run you will be in a better position.
Until next time Good Luck!
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