BHPH Report Mar/Apr 2016 : Page 1
So, what’s the secret to a successful BHPH business? 6 11 America’s Best BHPH Dealers Sponsored by: CFPB offi cials examine Car-Mart’s compliance management system A Publication of NABD and SubPrime Auto Finance News 12 March/April 2016 | Volume 3 | No. 2 Capital: A complicated process Top 9 regulatory priorities at the CFPB By Nick Zulovich, Editor WASHINGTON, D.C. — Th e chief of staff at the Consumer Financial Protection Bureau recently spelled out nine priority goals the regulator intends to work toward during the next two years. While listed alphabetically, the fi rst three men-tioned by Chris D’Angelo certainly could be connect-ed with auto fi nancing. Th e rundown included: 1. Arbitration 2. Consumer reporting 3. Debt collection 4. Demand-side consumer behavior 5. Household balance sheets 6. Mortgages 7. Open-use credit 8. Small business lending 9. Student lending “We selected these goals based on the extent of the consumer harm that we identifi ed and our capac-ity to eliminate or lessen that harm,” D’Angelo wrote in a blog post on the CFPB’s website. “We weighed each of our tools — for example, set-ting basic rules of the road, improving consumer edu-cation, or holding institutions accountable for break-ing the law — to determine the right mix for achiev-ing each priority goal, and we developed a plan to make sure that we put our limited resources to work in the most eff ective way possible,” he continued. D’Angelo indicated that the CFPB articulated these nine topics as a way to help its Consumer Advi-sory Board. But he also conveyed a message that the bureau is staying busy beyond these nine subjects. “It’s important to note that these priority goals do not capture all of the important work we are doing,” D’Angelo said. “In particular, we will continue to po-lice all markets within our jurisdiction for compli-ance with consumer fi nancial law and regulations. So, fi nancial companies should continue their focus on complying with the law beyond the particular issues described in the goals, whether or not they see their particular industry or product mentioned explicitly. CFPB continued on page 7 Compliance, other challenges are making acquisition of more working funds diffi cult By Nick Zulovich, Editor CARY, N.C. — Earlier this year, the Powerball lottery jackpot approached a record $1.6 billion. Perhaps some buy-here, pay-here operators believe they need that much cash to really make a go of it in this industry that’s getting more competitive and costly. “Because the buy-here, pay-here busi-ness has become so capital intensive, cap-ital is absolutely essential today,” said Ken Shilson, president and founder of the Na-tional Alliance of Buy-Here, Pay-Here Dealers. “No longer can you start up one of these things with little or no capital be-hind you. You’re probably looking at least $1.5 million to start up on a small scale.” Of course, some operators have a cap-ital commitment of double, triple or qua-druple that amount, depending on their business plan. While the need for cash is paramount to staying afl oat, Rick Potter discussed what’s changing with regard to the acquisition and deployment of capi-tal in BHPH. Potter is president of CAR Financial Services, which purchases fl oor plans and provides third-party servic-ing for subprime and BHPH loan port-folios for approximately 1,200 dealers in 46 states. Potter has more than 30 years of fi nancial experience and shared with CAPITAL continued on page 3 How TIADA helped to keep capital collateral out of jeopardy By Nick Zulovich, Editor AUSTIN, Texas — Imagine the value of your portfolio — which is so crucial to obtaining your capi-tal and maintaining your entire buy-here, pay-here operation — becom-ing compromised because of a me-chanic’s lien taking priority in the TEXAS continued on page 3 Y FOR A GET READ Cherokee Automotive Group | 301 Cascade Pointe Lane | Cary, NC 27513 TAX SEASON GANZA EXTRAVA 1-877-318-8072 | spireon.com/tax-season *Limited time only. Restrictions apply. BUY 10 GPS TRACKERS GET A FREE PAYMENT REMINDER BUZZER!* E. GREENVILLE, PA US POSTAGE PAID PRSRT STD Permit No. 555
Capital: A Complicated Process
Nick Zulovich, Editor
Compliance, other challenges are making acquisition of more working funds difficult
CARY, N.C. — Earlier this year, the Powerball lottery jackpot approached a record $1.6 billion. Perhaps some buy-here, pay-here operators believe they need that much cash to really make a go of it in this industry that’s getting more competitive and costly.
“Because the buy-here, pay-here business has become so capital intensive, capital is absolutely essential today,” said Ken Shilson, president and founder of the National Alliance of Buy-Here, Pay-Here Dealers. “No longer can you start up one of these things with little or no capital behind you. You’re probably looking at least $1.5 million to start up on a small scale.”
Of course, some operators have a capital commitment of double, triple or quadruple that amount, depending on their business plan. While the need for cash is paramount to staying afloat, Rick Potter discussed what’s changing with regard to the acquisition and deployment of capital in BHPH. Potter is president of CAR Financial Services, which purchases floor plans and provides third-party servicing for subprime and BHPH loan portfolios for approximately 1,200 dealers in 46 states. Potter has more than 30 years of financial experience and shared with BHPH Report his assessment of the capital market evolution.
“Banks have become more cautious in the last six to nine months, and therefore, many operators are being asked to either reduce their debt obligations, or operate under a lower advance rate,” Potter said. “This has caused some dealers to sell assets to get back into compliance, or revise their underwriting to create assets that perform better in an effort to operate given a lower advance rate from their bank.
“This has created some near-term opportunity for the note purchasers in our space,” he continued. “However, the note buyers are also being subject to tightening advance rates, which controls what they can pay for assets. This is another cycle that our industry goes through from time to time in that we become ‘overbought,’ then recede back into a level where the performance supports the buy rate, or potentially drop even further from an availability perspective.
“I get the sense that today we have tightened some, much as was the case in 2005 and 2010, but given performance metrics I see a little more tightening coming,” Potter went on to say. “There was a lot of capital deployed into our market since 2011, and the results are having a hard time supporting the advance rates the last year or two.”
Impact of compliance and record keeping
An element both Shilson and Potter referenced as having an influence on how BHPH operators can secure capital is the regulatory burdens they now face. For example, the Consumer Financial Protection Bureau is taking a much greater interest in BHPH, having doled out actions ranging from Herbie’s Auto Sales — a single point operation in Colorado — to CarHop — a chain with a network of more than 50 locations in the Midwest and West Coast.
“If you don’t have a chief compliance officer and a compliance management system, they’re not interested in doing business with you because there is too much risk associated with that,” Shilson said.
Potter echoed the point, stating that a dealer’s compliance has become as important as the portfolio performance due primarily to regulatory oversight.
“In the past a bank or finance company would rely upon financial performance, and neglect to analyze in detail the business practices used to derive the results,” Potter said. “Today, banks want to understand the company’s potential risk with regards to any potential fair trade, deceptive practice, or equal credit violations as much as they want to see favorable financial performance.”
Besides being in compliance with federal and state regulators, Potter touched on another component that can be an obstacle between the BHPH operator and the capital provider.
“Many operators do not have audited financial statements, and as such they rely on tax returns — many of which are insufficient to support their request for debt,” he said. “Unfortunately, the dealer does not consider the need for audited financials until it is very late in the process, and as such is not prepared to provide the level of detail required by the auditing company.
“I think this is something every dealer who will be requiring third-party financing to consider obtaining prior to applying for credit,” Potter continued. “Smaller banks who have traditionally done business via relationship in a specific geography have turned more conservative and as such are not excited about financing a BHPH dealer. This is forcing the dealer into larger mainstream lenders who have more detailed financial reporting requirements.”
How much capital do you need?
Russ Algood is chief executive officer of Ace Motor Acceptance Corp., which because of growth experienced in 2015 expanded its capital providing footprint to serve BHPH operators in Alabama, Florida, Georgia, Kentucky, Mississippi, North Carolina, South Carolina, Tennessee, Texas and Virginia. Al-good explained that basic capital needed for a BHPH operation that completes less than 10 deals monthly is about $500,000. That figure ramps up to several million for operators that turn upwards of 50 vehicles monthly.
“There are three major areas requiring substantial capital for the BHPH dealer,” Algood said. “The first two, working capital needed to fund the daily operations of your dealership and the capital required for the inventory on your lot are required for all dealerships.
“The third and largest capital requirement for BHPH dealers is to fund your contract receivables,” he continued. “Only a few dealers are able to handle all of their capital needs without borrowed funds. The lack of adequate capital forces many dealers to sell off contracts after three to six months aging. This practice should only be used as a last resort because it will reduce repeat and referral business.
“It is recommended you have sufficient working capital to cover two months of expenses, plus 25 percent of the cost of your vehicle inventory to cover curtailments and inventory which is not eligible for floor plan,” Algood added.
Shilson cautioned BHPH operators about what asking for too much capital can do to their business.
“If you’re highly leveraged today, you have a lot less flexibility so you’re forced to make decisions that maybe you don’t want to make, but you need to make to keep the down payments coming and keep cash turning over. You don’t want to be in that position,” Shilson said.
“What the smarter operators are doing is rather than trying to compete with securitizations as the business models are changing by laying off the risk to investors, they’re allowing the cash flow that comes off their portfolio to reduce debt and increase their financial flexibility,” he continued. “Rather than try to outsell these guys who are not retaining the risk, they instead are trying to free up financial flexibility so they can be in a position to capitalize in the future.”
Read the full article at http://digital.subprimenews.com/article/Capital%3A+A+Complicated+Process/2426433/294204/article.html.
How TIADA Helped To Keep Capital Collateral Out Of Jeopardy
Nick Zulovich, Editor
AUSTIN, Texas — Imagine the value of your portfolio — which is so crucial to obtaining your capital and maintaining your entire buy-here, pay-here operation — becoming compromised because of a mechanic’s lien taking priority in the legal pecking order with the customer over you as the creditor attached to the vehicle installment contract.
That potential nightmare nearly happened in the Lone Star State where the Texas Independent Dealers Association (TIADA) counts about 70 percent of its membership as BHPH operators. It’s been nearly a year since TIADA claimed what deputy executive director Danny Langfield described as “the biggest legislative victories the association has ever had.” The state enacted a law that squelched the possibility of a mechanic’s lien from being transferable and kept BHPH operators as the top priority lienholder of a vehicle.
The entire situation germinated decades ago when the Texas Supreme Court ruled that the mechanic’s lien could overtake the vehicle creditor in holding the top position for payment and claim to the collateral. Langfield said the ruling created “a thorn in creditors’ sides for many years” that possibly had been eradicated in 2009 when extra processes were put in place for mechanic’s liens’ priority to rise in Texas.
Then a year ago, a potential lawsuit against the Texas Department Motor Vehicles brought the issue back to TIADA’s attention with renewed fervor. The association realized the “intent” of an out-of-state finance company “wasn’t to get a car or two. It was to build an entire business model around it.”
And when TIADA discussed the situation with capital providers about the potential ramifications, Langfield said, “They told us it would have a chilling effect on our interest in doing business with car dealers. If the first position isn’t rock solid, then it’s not a guaranteeing that line of credit we’re issuing them and we would pull back.”
With the legislation session closing, TIADA worked quickly with legislators to explain the situation. “The ones who understood banking and financing immediately understood that if the value of those receivables would be called into question, they said we can see how that would have a domino effect that would be incredibly damaging,” Langfield said.
Now Texas BHPH dealers can breathe easier that mechanic’s liens are one less potential pitfall damaging their attempts to secure capital. And as far as elsewhere in the United States, Langfield urged operators to check with their respective state associations.
“Any state where a mechanic’s lien is superior to a prior recorded car creditor’s lien would have some very serious concerns,” he said. “The whole lynchpin of what this company was trying to do was to leverage the superior mechanic’s lien position. If you’re in a state that has a heavy BHPH population that also has mechanic’s lien superiority over the car creditor’s lien, this would be an enormous deal.”
Top 9 Regulatory Priorities At The CFPB
Nick Zulovich, Editor
WASHINGTON, D.C. — The chief of staff at the Consumer Financial Protection Bureau recently spelled out nine priority goals the regulator intends to work toward during the next two years.
While listed alphabetically, the first three mentioned by Chris D’Angelo certainly could be connected with auto financing. The rundown included:
2. Consumer reporting
3. Debt collection
4. Demand-side consumer behavior
5. Household balance sheets
7. Open-use credit
8. Small business lending
9. Student lending
“We selected these goals based on the extent of the consumer harm that we identified and our capacity to eliminate or lessen that harm,” D’Angelo wrote in a blog post on the CFPB’s website.
“We weighed each of our tools — for example, setting basic rules of the road, improving consumer education, or holding institutions accountable for breaking the law — to determine the right mix for achieving each priority goal, and we developed a plan to make sure that we put our limited resources to work in the most effective way possible,” he continued.
D’Angelo indicated that the CFPB articulated these nine topics as a way to help its Consumer Advisory Board. But he also conveyed a message that the bureau is staying busy beyond these nine subjects.
“It’s important to note that these priority goals do not capture all of the important work we are doing,” D’Angelo said. “In particular, we will continue to police all markets within our jurisdiction for compliance with consumer financial law and regulations. So, financial companies should continue their focus on complying with the law beyond the particular issues described in the goals, whether or not they see their particular industry or product mentioned explicitly.
“In addition, while this strategy focuses primarily on forward-looking priorities, there are some priority work streams that are well-established and ongoing, and we will see that work through to completion,” he went on to say. “This includes, in particular, our fair lending oversight of indirect auto lenders and our rulemaking on prepaid cards.”
Cordray reiterates issues with arbitration agreements.
Back just before Thanksgiving, the CFPB made a special page on its website where individuals could submit complaints about the auto financing process while the agency reiterated its warnings about signing arbitration agreements, cautioning consumers how they might “waive other rights, such as your ability to appeal a decision or to join a class action lawsuit.”
CFPB director Richard Cordray repeated many of his issues with arbitration agreements during a late February appearance before the American Constitution Society as part of its Access to Justice Series. Cordray told the gathering in prepared remarks that “arbitration clauses, as they are used today both in the field of consumer finance and more generally, often have been deliberately designed to block Americans from effective means of vindicating their rights.”
Cordray continued to paint arbitration clauses in a negative way.
“Some of the broader ramifications are surprising and even breathtaking in their scope. But now both the Congress and the courts are beginning to turn away from the extreme philosophy that says a take-it-or-leave- it provision buried deep inside a form contract can nullify an individual citizen’s ability to vindicate rights conferred on them by federal and state law,” he said.
Cordray referenced a study the CPFB commissioned and released to Congress last spring when the bureau attempted to show how much consumers misunderstood arbitration agreements.
“Importantly, our study showed that arbitration clauses restrict consumers’ relief in disputes with financial service providers because companies are using them to block class proceedings in any forum — whether court or arbitration,” Cordray told the American Constitution Society.
“This affects consumers’ access to justice because group proceedings are often the only practical way to seek relief for relatively small claims. Class actions also create a mechanism to bring about much-needed changes in business practices,” he continued.
“By inserting an arbitration clause into their contracts, companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm consumers,” Cordray went on to say.
So how does the CFPB want to rectify the problems alleged in its reports stemming from arbitration agreements? Cordray maintained the bureau’s stance, noting the CFPB could have pursued actions that would have banned these agreements altogether. But the director acknowledged the CFPB is not taking that course at this time.
“While the proposals we are considering would not impose a total ban, we are concerned that consumer harm could arise if arbitrations are conducted in an unfair manner,” Cordray said.
“So we have also been considering whether to require companies to send to the bureau all initial claims and awards in consumer financial arbitration disputes,” he continued.
“By gathering this data, over time we will be able to refine our evaluation of how such proceedings may affect consumer protection, if at all,” Cordray added.