Talk To Your Lawyer.

Thats a quote I find myself using a lot in my line of work advising used car dealers. The reasons I say it range from the mundane to the shocking.

First, and foremost: I am NOT a Lawyer. I do not pretend to be one, and frankly, not sure I’d want to be one. (No offense, Counselor, but I’m just not the type.) I do read extensively and research a lot, which leads me to a lot of legal decisions. My telling you ar anyone else what I have read or what my experience is does NOT constitute “legal advice,” and I always make it a practice to remind listeners/readers of this. Don’t misinterpret anyones advice for qualified legal advice, if it refers to a situation that may involve a law or legal situation.

The latest opportunity for me to lay the “Talk to your Lawyer” on a dealer stemmed from a request to add a “binding agreement” that the customer signs that says that the customer agrees NOT to add the car loan to bankruptcy proceedings if they file. Bankruptcy rules do not permit such agreements, and in fact, the laws specifically say they are not permitted. In some situations, you can ask the consumer to reaffirm the debt or to waive discharge at the time of the bankruptcy proceedings.

More info: https://www.hg.org/legal-articles/waivers-of-your-bankruptcy-rights-are-unenforceable-24216

I’ve had dealers call me and want to read me a summons or subpoena they have gotten, and they say, “Will you tell me what to do?” I say yes, gladly. Take your phone and find the number of your attorney, dial it, and ask them to meet with you. That’s my advice. I’ve gotten that call one day and the dealer was whispering. I asked him to speak up, he said he couldn’t, he was in the hallway outside the courtroom. He was literally about to walk into a courtroom to answer this subpoena, and wanted advice on handling it and what to say. I stopped him before he could read me the details of the case. I asked him to find any attorney walking that hall and offer them a fee to just go in there and ask for a continuance. He gets mad at me, and asks why won’t I help him.

Another instance I get a lot is a request to have an “agreement” signed saying the customer cannot take the BHPH car out of the state (or county!) at any time for any reason. I read some years ago a scathing decision by a judge excoriating a dealer who had such an agreement, and when the customer went over the state line to visit relatives, the dealer repossessed the car the moment the customer returned home even though the customer was paid ahead. A short version of the judge’s commentary was basically that the dealer, as a lienholder, could NOT control the movements of his customers. Adding to the judge’s ire was that he discovered that the dealer had been using a GPS device to track his customers, and had put in a “geo-fence” notification to alert them when the customer crossed a state line. Also, the dealer charged the customer an EIGHT HUNDRED DOLLAR “repo fee” even though all he did was send a guy over to the person’s house with a spare set of keys to drive it back.

Side Note: If you are using GPS devices like that guy to track the movement of customers who are not in arrears, please stop. It’s called Stalking.

In a similar vein, I get asked periodically to add a clause to the finance contract that moving out of state is grounds for repossession. Again, judges have said that you cannot control where your customer lives, and you cannot even require them to get “prior approval.”

Also on the “Ask Your Attorney” list is the “How much can I charge as a Repo Fee, and under what circumstances can I repossess the car? ” Short version from me is that the contract allows repossession if the consumer breaks the contract. That may mean being late on a payment, failing to have insurance, or other clauses. How late is late? Good question! Please comment on this post if you can find someone to officially put that value in writing. In my nearly 30 years in and around this industry, I have never seen that defined. How much repo fee? I have heard a judge say that the dealer can “recover expenses related to the repossession.” So, your flat $500 fee won’t hold up, especially if you can’t demonstrate but around $75-$100 of it.

One of the most frustrating is when I advise someone that in my experience, this thing is not allowed, but, again, ASK YOUR ATTORNEY, and the caller will say: “But Fred down the street has been doing this for 20 years, and he’s never been sued or fined over it.” My clarification: 1. Fred has never been caught at it. and therefore, 2. Getting away with something doesn’t make it legal.

“But that’s an outrageous law!” — OK. And sometimes, I agree. But I can’t give you permission to break it, nor, for that matter, can your attorney. But the attorney can at least agree to represent you for breaking it. No, I can’t give you a “workaround” for it, because you could still be found to have violated the law, and now, I’m an accessory to the act.

You want to argue about a law, fine. Some days, I even have time to listen and commiserate with you. But be sure to get your legislator on 3-way for the call, too, because that is where your complaint needs to start.

Ask your attorney, because Fred and I can’t give you legal advice. Fred’s actions and his dumb luck aren’t legal advice.

Talk to your lawyer. That’s why you pay them, that is what they train for, and mostly, because when it goes wrong, they are the ones have to help you clean up the mess.

Thanks for the visit, tune in next time, when, hopefully, by then I will have a new topic to discuss.

What do we do about COVID-19 ?

The current Covid19 / CoronaVirus situation has changed a lot of how we do business. With the recommendations against in-person meetings or personal contact, it’s time to re-think the business model, at least temporarily.

First and foremost, do not allow your employees to spread rumors or scare stories. Manage the messaging. Only present what is coming from the official scientific channels. Regardless of how you feel about certain political figures, please realize that they have proven themselves to be dangerously uninformed, and some have been found to be outright lying. Trust the medical professionals and scientists.

Understand that people are scared of the possibility of getting either very sick or even dying from the disease. This is going to affect how they interact with others. Anxieties are heightened, and you should respect that. This includes employees and customers. People are going to be hesitant about coming in to the dealership to pay their payments, so you have to come up with incentives. If you do not take credit card payments, then now is the time. At least during the current state of emergency, do not attempt to collect “convenience fees.” Accept the 3% or so fees for the cards as your part of helping people out.

People who are out of work and are not earning pay will be late or struggle to make any payments. Be willing to waive late fees for a while, and forego repossessions at this time. Work with people.

If your collections or accounting people have a good internet service, consider allowing them to work from home. Remember that with so many of the school systems closed, there are a lot of people with kids at home who are also being expected to provide at-home instruction that the school has sent home.

If you have an employee who exhibits symptoms, be on the safe side, and send them home! You owe it to the other employees to provide a safe working environment. It is generally allowed to request an employee get tested, if the testing is available, but if they decline, just ask them to remain away from the dealership.

If an employee does test positive, and shares this information with you, analyze who was in close contact with them, and proactively send those employees away from the location.

Do not name or shame any employee! Be discreet. It is your place as owner or manager to also curtail any attempted bullying or abuse of employees by their co-workers over suspected illness.

Next, CLEAN the dealership, especially if there are suspected symptoms. Provide sanitizing wipes or materials to the employees who are on site and request that they clean their workspace daily. Consider paying a local cleaning company to deep clean the office.

Last, place a large sign on your door requesting that any customer who is sick or who has been around sick people to please remain away from the dealership. Put a phone number and email address on the sign to allow customers to contact you. Put a note to this effect on your website, Facebook page, or other social media interaction sites.

There are new laws concerning paid leave in these times, and you should contact an attorney who will advise you on them. If you do not have an attorney, you should contact The Gregory Law Group. This firm has experience with used car dealers and the industry, and has done some tremendous research on these new rules.

Consumers: If you are a consumer reading this blog, please go to https://www.bankrate.com/finance/credit-cards/protect-credit-score-economic-uncertainty-coronavirus/ to make sure you are prepared.

(Referral Disclaimer: I am not compensated for these referrals, nor used these services personally. Both BankRate.com and The Gregory law Group consented to the usage of their links.)

Is Rule of 78’s Theft, a Trick, or a Trap?

Well, that’s what some financial people would have you believe, anyway. (BankRate.com gleefully titled a column by Lucy Lazarony – “Watch Out For This Auto Loan TRICK.”)

The Motley Fool also calls it a “trick” in a column by Kailey Hagan:

Hint: It’s another trick lenders use to line their pockets at your expense.

https://www.fool.com/the-ascent/personal-loans/articles/what-is-a-precomputed-loan/

Does Ms Hagan think that the banks are NOT earning money off of Simple Interest? Surely she can’t think we are than stupid. Has no bank EVER lined it’s pockets by collecting Simple Interest?

Debt.org has a column called “The Rule of 78 – How To Avoid a Debt Trap.

Short answer is, NO, it is not. A brief explainer:

Example Loan: 15000 Financed for 48 Months @ 9.25 % APR. Payment=375.06/month, Total Finance Charges= 3002.88

Rule of 78’s uses a formula to allocate the Finance Charges (Aka Interest) on each payment that does not use the number of days, it uses the payment number. Also called “Pre-computed,” because the Finance Charges are pre-computed for each payment. The formula uses the inverse payment number over the “Sum of the Digits” as a fraction multiplied by the Total Finance Charges to arrive at the Finance Charges due for this payment.

Using the above Loan Example, 48 Months: 
The "Sum of the Digits" has a value of (1+2+3+4....+48) = 1176.
If you are on the first month, then the fraction is: 48/1176 = .040816
3002.88 x .040816 = 122.56 Finance Charges due for first payment.
(See Amortization Comparison below.)

By contrast, Simple Interest uses a formula that takes the APR/Days in Year to arrive at the Daily Rate. This rate is multiplied by the current Principal Balance to arrive at the Daily Finance Charges. That value is then multiplied by the number of days since the last payment or Loan Date to get the Accrued Finance Charges. Another version uses APR/Periods to arrive at a Periodic Rate. So, instead of APR/360 x Principal x 30 days, you’d simply have APR/12 x Principal to get one Month of Finance Charges.

Again using the Loan Example:
APR/Days in Year: 0925/360=.0002569444 = Daily Rate
.0002569444 x Principal 15000 = 3.854166 Daily Finance Charges.
Then, 3.854166 Daily x 30 days = 115.62 Accrued Finance Charges for the first payment.
Noted, some Financial Institutions use 365 Days instead of 360.
Also note that this is the Standard Amortization. When the payment is paid, the Lender will typically use the Actual Days, So it will matter if the First Month has 30, 31, 28 or 29 Days to use for the formula for the Accrued Interest.

If the debtor pays his loan as agreed, on the due date, then the Simple Interest or Rule of 78’s loans will pay the same amount of Finance Charges.

The irresponsible and unprofessional scare tactic being used on some web pages is that with Pre-computed loans, the debtor owes ALL the future interest on Day one of the loan, and that the Lendor sneakily does the Debtor a “favor” by allowing them a “Refund” on the unearned interest. Note the implication of a full payout and scare quotes in the below quote:

Let’s set this straight: Number One, the Debtor is LEGALLY entitled to only paying the Earned Interest. Calculating this, and removing the UN-earned Finance Charges, is NOT a “Favor” to the consumer, the Lender is following the LAW. What some of these so-called “Financial Experts” call a “Refund” is actually a Rebate, that is, unearned finance charges are calculated and removed from the balance before a Payoff is paid. Calling it a Refund makes the user believe that they have to pay it all, and hope that the Lender is gracious enough to give them some BACK. Websites like the clip shown below also make people believe they have to pay off the gross balance.

Anyone claiming that this “refund” is an Optional or Voluntary to the Lender are either being intentionally dishonest or are proving they do not understand Financials as well as they claim. Ditto for the claim that Rule of 78’s is an intentional “trap.” You people making such claims are actually hurting the entire industry. Interesting that Debt.org, who calls it a “trap,” sheepishly admits in it’s column, that the prepayment “penalty is really not that severe.”

BankRate.com, on the “glossary” page for Rule of 78, uses the scare tactic that a precomputed loan pays “75 percent of the interest in the first 24 months of the (48 month) loan:

SEVENTY-FIVE Percent? — Cue screaming villagers running from the evil Lender.

OK, let’s use that comparison. Bankrate.com supposes a 9.25% APR to arrive at a 48 month loan on $15,000. The image below is a comparison of Pre-computed vs Simple Interest payments over the first 24 months of the loan. At 12 months, the difference in Total Interest earned is just $50.18, a mere 1.67% of the original $3002.82.

At Bankrate.com’s marker, the 24th payment, the difference is just $46.24, a pittance of 1.54% of the total. The Simple Interest Loan actually collects 72.95% of the interest at this point compared to the (oh, horror) Rule of 78’s 74.49%. These are NOT “taking the deed to the widow Smith’s ranch” levels of bank evil.

Note that the Simple Interest Loan collects nearly 73% compared to 74.5% For the Rule of 78’s Loan, a difference of just 1.5%.

These sites all swoon and clutch their pearls because “people who want to pay early or ahead won’t save any money.”

Gather round, me children, there’s a secret I will tell:

People who actually pay early and stay ahead have a credit score that in all but a few unusual circumstances, allows them to choose a loan or offer of credit that suits their needs.

Pre-computed or Rule of 78’s loans are typically offered to Sub-Prime, if not Deep Sub-Prime, clients who do not seem to have an issue paying early. Quite the opposite, in fact, these people tend to pay late, and in many cases, very late, and Rule of 78’s is actually the better loan for them!

Yes, I said it’s the Better Loan! Let’s explore why before you sharpen the pitchforks. Because the finance charges on a payment DO NOT CHANGE based on the date you pay it, (hence the word Pre-computed) there is no penalty for paying a few days (or weeks) late, except for Late Fees or Delinquency Charges, which either account type would pay.

If you are 12 days late with your first payment on the above loan with Simple Interest, you will pay additional interest for those 12 days. That amount is easily calculated at:

$15,000 x (9.25%/360) x 12 = $46.25 — And that is OVER and ABOVE the other interest charged. (Ignoring Late Fees for the moment)

Now, you can pay this extra, making your payment 421.31, or, you could pay just the 375.06 payment, and let it ride. HOWEVER, if you do this, then the Principal portion of that payment goes from 259.43 down to 213.18. This means the Principal Balance for calculating Payment #2 is higher than the original amortization, and therefore the interest on that payment rises, making the principal portion lower, and that makes Payment #3 have more interest. That 46.25 will cost you 66.35 over the life of the loan, even if you pay every other payment from 2 to 48 on time. That one late payment on #1 also makes the % of total finance charges earned at Payment #24 now higher on the Simple Interest Loan.

As we saw above, 15,000 at 9.25% is $3.85 additional interest per day in the first month. I have been in or advised this industry for over 30 years, and I have yet to see a Sub-prime or deep-sub-prime lender offer a loan below 18%. Most of what I see is 28% or more.

$15,000 at 28% APR is 11.67 PER DAY. 12 days costs you 140.04 on the first payment, and letting that ride will cost you $414.05 over the life of the loan.

At 28%, the Rule of 78’s guy can be few days late here or there, and not incur any additional interest. Would we rather a person who already has credit issues be able to pay off a car, or owe one or more payments at the end of the loan?

If you want to whine about what people pay for interest, tell your legislator to fix the maximum rates, not how it’s collected, especially when it’s proven that the two methods are almost within a rounding error of each other.

Thanks as always for the read, see you next time.

Listen To Yourself!

Go ahead, just listen. Listen to the radio ad you have, really *watch* the TV ad you paid for. Read those automated marketing emails.

Do they sound ok? Are you comfortable with the image that these things project of your dealership? If you said yes, then go get someone else to listen, watch, or read these things, and see if they agree.

Now, find out the dealerships in your area with the worst reputations and compare your marketing efforts to theirs. Find out what image you are projecting vs the Bad Guys.

The reason I venture into this topic today is because of an email I got from a high-end franchise dealer over the weekend. I’m not going to name names, because after reading the email, I have decided that this dealership has already embarrassed itself enough.

Quick back-story: I *can* change my own oil, but prefer that this dealership does it, simply because they have a great reputation for excellence and professionalism, and they wash the car as part of the deal. Best part is, I don’t have to spend my Saturday rolling around on my driveway in the heat and dirt and finding ways to dispose of the used oil myself. It also helps that their price is just a small bit more than my cost of doing it myself. Note that one of the cars in my driveway is an older 2001 Honda CRV. It’s an adequate car with good insurance rates for my 20-something college student.

So, College Boy gets the oil changed at the dealership last week, and then I get an email from the dealer’s marketing bots:

“My General Manager noticed your 2001 HONDA while you were in for service and would like to acquire that vehicle from you! We have quite a few customers looking for a vehicle like yours and are wondering if you have any interested in selling it to us or trading it in and looking at a newer vehicle for yourself?”

Really? At a dealership whose average unit price is above $40,000, you have “quite a few” customers in your Prospecting system who are pining away for an eighteen-year-old compact SUV with over 200K miles?

I also own Nissan and Buick marks, and they all go to this dealership. I have to drive past the Nissan, Honda, and Buick dealers to get to my chosen service department. I even drive past a couple of Quick-Lube type places, and three tire stores who change oil. Why? Because of their reputation. Because of the professionalism that my chosen place offers that the others just do not match.

All that image is tarnished now, because they lied to me. They also came off sounding desperate and that they would say anything to get me into the showroom.

Do not misunderstand me, there is NOTHING wrong with expressing your desire as a business owner to earn the trade of the citizens in your demographic market. Keep in mind, though that customers who were polled overwhelmingly preferred car dealers whose marketing was informative, honest, and respected their intelligence. Dishonesty, sirens in your ads, and screaming deceptive terms may grab you a few customers, but by and large they are not loyal customers, and you end up having to up the sleaze to generate the leads. Honest, intelligent marketing just keeps working.

The following suggested email would have gone worlds farther to me as a customer:

“Thank You for trusting us to service your 2001 HONDA. We would like to discuss trading you out of it for a newer vehicle, and would appreciate an hour of your time one day for a member of our Sales Team to show you what we have available, or to gather your requirements and see what can be found. Please call John Smith at 202-555-1234 or email John.Smith@FranchiseDealer.com to arrange an appointment that fits your schedule.

Thanks again for your service business, and we hope you give us the opportunity to earn your sales trust as well. ”

See that? It’s sincere, honest, and humble. It recognizes that I am a service customer, expresses appreciation for that, and requests some of my valuable time to talk. It is respectful of me as a consumer and potential sales client. Close by again expressing gratitude, and asking for an opportunity.

Consumers love to be respected. Customers love to hear appreciation. Buyers with money to spend and referrals to spare HATE being lied to. Contrary to what some of you car dealers believe, yes, they can tell. After all, some of you make it so obvious.

See you next time. Thanks as always for visiting and reading.

ARE YOU AN INFORMED CAR DEALER?

Yes, many of you are “informed” in that you know how and when to buy cars, what price to sell them, and know “the business” fairly well.

But there is more to it than just moving units.

I wrote a post called Where Are The Snakes?. In that post, I asked you to revise your Situational Awareness to identify the hazards in your industry, and to make a plan to deal with them.

Let’s touch on that a little more. I got a call from a dealer (let’s call him Bill) recently who had a title application rejected because he did not charge enough sales tax. Seems the county surcharge went up and he was unaware of it. Cue the angry music as he asked, in all seriousness: “Why didn’t your company tell me about this?”

I reminded Bill (nicely) that his state Department of Revenue does not notify us about these changes. They do, however, notify everyone (that includes you, Bill) with a Sales Tax Registration about these changes, and do so typically a number of months before the change will take effect. I asked Bill if he remembered getting such a letter or notification. He sputtered a bit before declaring that he “doesn’t have time” to read everything that comes from the State, because he has a business to run! Well, yes, but reading those notifications from the State are PART of running your business. If you are going to ignore the state in a business that is very heavily regulated by the state, then you are NOT running your business.

A few years ago, a dealer (we’ll call her Linda) scanned and emailed to me the letter she got from her state that informed her that they were moving to an Electronic Titling System, and it would take effect six months or so from that letter. She asked me if we were ready (we nearly were, in fact) and how we planned to notify the dealers that it was in place in the software. We did send out an email to the dealers a month in advance of the date, and let them know it was ready.

Cut to two weeks after the cutoff. My phone rings, and another Dealer from that state is angrily asking why he cant take his title app down to the tag office anymore. Seems he went there that morning and they told him to process it electronically. He wants to know how to do this. I asked him why he did not get prepared when he got the notice six months ago, and at the very least, six weeks ago when we, the DMS software company, sent him an email saying that we had his state’s electronic titling ready? Well, you see, he was “too busy running his business” to read emails or open letters from the state. I gave him the web page and phone numbers to get started. Because of his delay in getting that process going, he was late filing the title, and paid an extra fee. He told me later on he did not think it was “fair” to punish him for something he did not know about. I reminded him he had at least two chances to check into it, and surely he overheard talk in the used car community about it? Well, he admitted he had heard “something” about it, but again, “too busy running a business” to find out about it.

I will repeat this: If you are “too busy” running your business to pay attention to the governmental units regulating your business, then you should not be in business.

Over my years in this chair, I’ve seen the notices of fines about sales taxes, and the letters from the DMV reminding the dealers to process the titles. Most states require the dealer to do both. I’ve seen the levy notices from the IRS because dealers filed income taxes wrong, and the penalties from State Department of Finance for overcharging interest. These are almost always accompanied by a dealer saying “I didn’t know.” In these situations, I can usually find the information within mere moments available on the internet, not only from the State or Federal websites, but also from industry advisers discussing it.

Make time to run your business. Set aside a time each week to open and review all State Notifications. When you see an Effective Date, open your calendar and set the date, and set a reminder a month and a week in advance. Be ready.

Set aside another time each week to review the regulations for your business. Find and talk to an experienced consultant that knows your business. We’ve talked before about having an attorney and a CPA that knows the industry well. Join the business associations that can keep you informed. In our case, it’s usually your state’s Independent Auto Dealer Association. Go to https://www.niada.com/ and find your state under the “Membership By State” links. Membership is dirt cheap considering all the information they will give you. (Disclosure: I am not a member of the NIADA or any State IADA, nor do I get anything if you join.)

So, do you want to run your business, or do you want to pay fines?

Thanks for reading, see you next time.

What is a Related Finance Company?

Reminder: I am not a CPA or an attorney. None of the information in this article should be considered qualified legal or financial advice. It is your responsibility as a business owner or manager to obtain and retain licensed, qualified advisors for your business. Make sure you get the people who know your area of business. See THIS article.  

A Related Finance Company (RFC) is simply a second company or corporation set up to collect receivables. It is either captive, meaning it only buys notes from the sister car dealer corporation, or it is open, which means it can and usually does buy notes from any dealer. Due to licensing requirements, it is not a Point-of-Sale finance operation, in other words, it does not directly offer loans to the public, nor does it make decisions on which loans can be offered. It can set limits on which loans will be purchased, and the dealer(s) are free to offer only loans to the public keeping those limitations in mind. But all in all, the dealer must initially finance the note, and in states where a Finance License is required for BHPH, hold the license to do so.

The big issue with car dealers is that since 1986, companies that hold an inventory for profit must use the Accrual method for income taxes. Prior to that, car dealers who did Buy Here Pay Here would simply use the Cash Method of taxation, allowing them to only pay taxes on the profits when collected. Accrual method has the dealers paying taxes on the sale price profits in the year of the sale. The idea, then, is to utilize an RFC to defer those taxes by selling the note with a loss. The dealer offsets current year profits with the loss, and the RFC will pay taxes on the profits later.

In most situations, the RFC purchases the note from the dealer at a discount. For example:  a Deal with 10,000 amount financed, @28% APR, 36 Months gives a total payment stream of $ 14,891.04. The dealer would sell this account to the RFC for about 55% of the Total Balance, if Precomputed, or 80% of the Principal (10,000). The RFC writes a check to the dealer for 8190.07 (55% of 14,891.04).

  • The IRS requires that such purchase agreements be in writing, reasonable, and customary for the area. Each dealer needs to get a qualified quote from at least three companies who purchase receivables. The average rate or percent paid, quoted is the basis for the RFC-Dealer purchases. A qualified quote means that the dealer shows the note purchaser his portfolio, and gets a specific quote based on his accounts.  

The Discount here is the difference between actual Principal (10,000) and the RFC purchase price (8,190.07 ) — $1,809.93. The dealer declares this a loss on the sale, and the Finance Company uses this as a (potential) profit basis. Hopefully, the dealer has made a little profit on this deal, even after only collecting the 8190.07. The RFC will incur taxes on this profit later.

The RFC is now the lien holder and the customer makes payments to the RFC instead of the dealer. Most dealers simply collect the payments on behalf of the RFC.

  • States typically require that the RFC file as Lien holder on the Title. If you have a captive RFC, try to do this at the time you print the title application.

Remember that the RFC *must* pay for the note. The IRS requires, among many other things, that the RFC be financially capable of conducting business, and that all transactions between the Dealer and RFC be at “arms length.” This also means that the RFC must be incorporated or otherwise registered legally as a business, have a state license where required, local business license if required, and a “presence.” Presence means existing. The RFC should have a phone number, its own bank accounts, its own files, at least one employee, and a physical place to conduct business.

The dealership should have a Contract of Sale for the Sold Notes, and make copies of the relevant contract paperwork for the RFC to have as it’s records. These records must be maintained separately from the dealership. Remember that the IRS requires the dealer to deal with the RFC on an  “arm’s length” relationship. Treat the RFC the way you would treat any third-party Finance company buying your notes.

The NIADA published a guide that uses information from an IRS Field Guide the IRS Agents use to audit a car dealership with an RFC.

There are many rules and conditions to having an RFC. Loss of recognition of your RFC can lead to an assessment on the claimed losses, and potential penalties. Add to that the money already spent setting it up and maintaining it, and the dealer can be out a lot more than if he had not bothered with it in the first place.

An RFC is not a simple thing, nor is it to be entered into lightly. It *can* be used to defer taxes on profits, but should be dealt with as that. It is not a tax dodge.

Once again, consult with an experienced CPA and an attorney before taking this on.

WHERE DO YOU STACK UP?

The NIADA analytics for 2015 had some interesting statistics.

By and large, BHPH dealers are spending more on cars, and getting less down. A quick comparison to just 4 years ago(2012) shows that the average BHPH unit cost is up almost $1400. At the same time, the average down payment is down by about $125.

The good news is that average percent of accounts past due from 2012 to 2015 slipped from 28.6% to 17.6%, a significant drop of eleven percent. However, reflecting the higher costs as mentioned above, the average charge off per vehicle is up by $800. Bad debt as a percentage of sales climbed from 18% in that timeline to 25%.

Here’s the meat of this matter: Even though there are less past due accounts, dealers have higher bad debt ratios. This could simply mean that you are repossessing or managing the receivables more.

Are you in the Sub-prime business? Most say yes, but analyze your average credit score. Experian Scorex puts sub-prime at credit scores between 550-619. Anything below 550 is considered Deep Subprime.

What “business” you are in should be a determining factor as to how you manage it.

The deeper into subprime you get, the worse your collections will be. This is just simply the nature of it. People don’t have poor credit because they pay on time. Understanding and accepting this is part of the deal. The trick is how to work with them.

We said it before, you can’t just look at the score, you have to look at what makes up the score.

I’ve heard so many dealers complain bitterly about 50-60% collection ratios, but the same dealers are the ones with “Everybody Rides” posted out front in huge letters. I’m not saying you can’t have expectations, but again, you have to temper the expectations based on the customer.

I am a firm believer in working with people instead of screaming at them or threatening them.  If you tell them a car is going to cost $500 a month, and they hesitate, then take that as a cue to ask more questions. Ask yourself, can I accept $425 for 42 months instead of $500 for 36 months?

Point is, find out what works for the people you have chosen to do business with. Ask. Large companies spend huge amounts of money targeting their bases. They take the demographics and desires, and retool advertising and stock to meet the needs and wants of the chosen base. There are so many BHPH dealers out there who simply stumble on the business, but make no real effort to determine what business they are in. This is a major reason why so many BHPH lots are here today and gone tomorrow.

If you realize you are in the wrong business, then it’s worth a little money to remake that business into the niche you want it to be, because you will profit rather than spend a few years losing money until you are bankrupt.

 

 

Collections

If you are a BHPH Dealer, you have to have a Collections Plan.

To start that plan, you need to decide where the boundaries are.

It is also vital that you understand your own underwriting processes. I’ve said before, Poor Underwriting leads to Poor Loan Performance.

Two questions:
1. Do you run a Consumer Credit Report on each customer applying for credit?

2. Do you know how to read and understand the report? If the answer to either of those is “No,” then we have identified the first major issue.

If you read this blog regularly, you may have seen my entry about “Everybody Rides.” The “No Credit Check” signs are a large problem. You simply cannot make an informed credit decision about a consumer from his last two pay stubs.
Look, you have two choices as a BHPH dealer. Do you want your business model to collect the payments, and make a profit, or do you want to be in the repossess and re-sell business? Underwriting is the key to the first option. Lack of it inevitably leads to the second. By the way, those who make the second choice usually aren’t around very long.

Next question is, do you know how to ascertain a consumer’s availability to make a payment? Simply put, how do you find out how much money is going to be available for a payment, and how often? This is a huge key to payment collections. It is hard to collect what they do not have.
Be realistic here, and leave them some room. If your payment puts them at the absolute edge of their solvency, then any small unexpected emergency for them means you don’t get paid.

Lastly, have you sold them a car they *want* to pay for? Now, this question is not a trick. Go read (or re-read) my topic on Right Sizing The Customer. Click Here.  Also read the Happy Customer entry, found here.

Once you sell the car on a contract, the next bit is collecting the contract. On paper, that sounds simple, but in the BHPH industry, that is when the road gets bumpy.

First, since your customer is sub-prime, then you have (hopefully!) already understood that this person has a problem with credit obligations. I am not saying it is unreasonable to expect on-time payments, but I will say it will not be the norm.  

Most BHPH customers are actually not Sub-Prime, since this designation is typically for borrowers with FICO scores from 580-670. This is the designation for Fair Credit risk. Most of these customers can get loans from institutions, albeit at a higher rate. 

Those with scores below 580 are considered Deep Sub-Prime, and the credit risk is considered Poor. Quote from Investopedia.com: “Experian reports that 27% of Fair Credit category borrowers and 62% of Poor Credit category borrowers are likely to become seriously delinquent.” (Emphasis added.) 

Put bluntly, that means three out of every five of your Deep Sub-Prime customers WILL be very late with one or more payments. 

Learn More about Credit Scoring at:  https://www.experian.com/blogs/ask-experian/infographic-what-are-the-different-scoring-ranges/

Some of these people work well with an early reminder or two. If your DMS has an email system that can reference the due date, schedule a Friendly Reminder for about a week in advance.
So you have to set policies for “how late is too late?” and stick to them.

Picture a square area. The people inside this area are within the boundary of your payment tolerance. Make two or more larger lines outside that.

The first area between the sheltered harbor of your patience and the next line out is the “Ok, you are late, and let’s deal with it” area. Blow the whistle, ring the bell, and try to get them to wander back into the inner area.

Across that line, straying further, is the “make or break” area. Have enough rope to wrangle those strays back into one of the first two areas. The boundary to this area, once crossed, is hard to get back across.

That third area should be the last one they reach before hitting the wall that encloses your business model. The people in this area will almost never be good payers again. They reach this area for a reason. Whether it is their own decision, or the cruel hand of fate has pushed them into it (almost) doesn’t matter. They will hit that outer wall. That “wall” is the act of repossession.

So, what defines the areas? For most established first-tier finance operations, the Due Date of the payment is the first line. 10 days past due is usually the second line, and 30 days is the wall. For these companies, that Danger Zone is very thin.

For sub-prime customers, you may set your safe area line at 10 days past due. Second line is 20 days, and the Danger Zone is 21-30+. Your Danger Zone may be a bit wider than first-tier, and needs an observation post.
Is the customer simply meandering in the bad areas, or are they drifting slowly outward, or, are they at a full run prison-break style?

What is the whistle? Simple (but pleasant) reminder texts and emails.
Phone calls and more strongly worded emails are the rope you use to try to get them back into the fold. Remember that you own a business, and should be professional. Screaming, insults, threats, and foul language should never be used.

The faster or more determined they are about moving outward is the faster you use the tools at hand.

What about the repo wall? Here is they way I see it: It is a final wall. It should be. Repossession should not be an everyday collections tool. It should be a final admission that this loan did not work out. Remember that if you repossessed legally, then you are (typically) not required to reinstate the account. The customer has the right to accelerate the loan, and pay it off to retain the car.

Some dealers use a first temporary repossession as their rope to try to draw the customer back in, and to remind the customer of the consequences of going afoul of the payment agreement. I will hesitantly agree with this with a few conditions:

  • First, use your words. Make them understand your position and expectations.
  • Second, they get ONE temporary repo. The next one is final.
  • Third, there should be no profiteering (repo “fees”) getting tacked on. Remember that the laws usually allow you to recover your EXPENSES of repossession. I’ve yet to see a state or court that gladly allowed the BHPH dealer to profit from the act of repossession.

The final repossession should be a last resort.

Other tools are available. The first one is your own humanity.

Sit down with the customer, and, with an open mind, ask what the deal is. Remember that things change. Maybe the overtime the plant promised would last for a year suddenly dried up, and they are struggling under the lower income. Maybe they suffered another loss that occupied them and their disposable income for a bit. Be willing to work with people.

Maybe they don’t want to pay for a car they can’t drive because it is broken down. Work out a repair and payment plan for that.

Nothing requires you to keep extending your olive branch if they keep slapping it away, though. I asked you to be a human being, not a doormat.

 

NOTE: If you are a consumer reading this blog, please go to https://www.bankrate.com/finance/credit-cards/protect-credit-score-economic-uncertainty-coronavirus/ to make sure you are prepared.

The Snake House

First, re-read this article: Click Here. 

Let me give a couple of examples:

Dealer in Florida calls and asks me to help him remove the Sales Tax from his Dealer Fee. He says his CPA advised him that since delivering a car is a “service,” the fee is non-taxable.

According to the Florida Department of Revenue’s GT400400 (available here) they specifically state that Dealer Prep is a taxable item. I tried to give the dealer the link, even told him what page to find the wording on. He got angry, and told me that his CPA should know what he is talking about, and to just “fix it” so he is legal. I asked the dealer again to have his CPA read the GT400400, or at least have him call the Department of Revenue or guidance. He refused. I showed him where to remove the tax on the fee.

Same dealer calls me back 6 months later. The DOR sent him a notice that says he has underpaid his sales taxes, by the amount of tax on the Dealer Fee, and not only wants the money paid immediately, they have also penalized him. Now, the dealer wants to know if I am going to pay his penalties and taxes because, and I quote, “let him do it wrong.”

Short answer: No. I tried to get him to put on his snake boots, and told him that he was going to get bit. All he could see was saving a few bucks per sale.

Too many people let their greed blind them to the truth.

A dealer called me once complaining that her state Used Car License Board is considering suspending or revoking her license. Why? Because she thought that when it is a Cash Deal, that you just hand the title to the customer, and let them process it, and pay the sales taxes. I asked her whether this topic was covered when she got her license, and she said “They may have touched on it.”
Even if the instructor lightly skimmed that bit, it is still important to know. If you are in doubt, ASK.  
The IRS requires used car dealers to pay income taxes on the Accrual Method on the sales of the cars. One dealer in the Southeast decided that a Buy Here Pay Here did not constitute a Sale, and decided to pay his taxes only on the amount he collected (Cash Method.)  Three returns later, the IRS realized what was going on and sent him a bill, plus interest, plus penalties. THey told him he could not get a break on the penalties or interest because he either should have known he was wrong, or failed to get qualified advice that would have shown him he was wrong. In other words, No Excuses.

The dealer was furious, but had only himself to blame. He was one of those who felt that he did not “need” a CPA.

These people ignored the dangers, and wandered off into the swamp without protection or the information needed. When someone tried to hand them information, they batted it away  like a nuisance insect.

Most responsible CPA’s would have welcomed seeing a state document that explained the tax question, and spelled it out.

Stop ignoring the warning signs. Start reading the rules, and follow them. You’ll only have more profits in the long run, and who doesn’t want that?

Thanks as always for the visit.

BTW: I’ve been asked if I take suggestions for topics. Yes. Send them in. I’d also appreciate any feedback on the blog.

WHO ARE YOU?

So, who are YOU? What’s your deal? What do you have to offer?

Those are the questions almost every customer wants to ask, but rarely does. See, many of them don’t consciously think about needing those answers, but the lack of answers leaves a hole in their confidence level of you as a dealership.

We’ve touched on this idea before, briefly, back on this topic. Now let’s dig a little deeper.

Most experienced sales professionals work the information into the presentation. As they “sell” the car, they also manage to “sell” the dealership. It is important to do so, because each customer needs to have two questions answered:

1. Why should I buy this car?
2. Why should I buy it from this dealership?

Unless you happen to have a specific one-of-a-kind unit, the customer has lots of places and similar vehicles to choose from in their search. The internet and smart phones made that search not only a lot easier, it also puts it into the palm of their hands.

So, you need to set yourself apart. How? By promoting those things that you do well.

Do you offer service?
Do you offer quality cars?
Do you offer better financing than most of the other dealers?
Do you offer better care after the sale? — More on this topic HERE.
How stable is your dealership?
This bit is important. People want to be assured you are not a here-today-gone-tomorrow business.

Confidence in the sale sells cars. Part of that confidence rests in the seller.

This is part of sales training.  Your sales staff needs to be aware of who you are. They need to believe in the owner, and buy into the process. That’s hard to develop in sales people if you do not own it.

We covered once the idea that your sales staff should be part of the dealership, and not feel like outsiders themselves. I’ll be honest, commission incentive aside, if your salesperson would not refer a friend to the lot, then they are going to have a very hard time convincing any other customer to buy from you.

I get it, having sold cars myself, the pay is the primary driver for most salespeople. Employment longevity in this industry is a rare thing, but there are those out there. What those sales people have in common is an honest belief that they are selling good cars for a good dealer.  You can not, and will not, ever buy that kind of loyalty. It must be earned. This is something that is built over time. It cannot be created out of thin air.

If you are a new dealer, then what you have to sell the employees on first is your commitment to them. Good cars to sell at good pay, good benefits (when you can,) and good conditions to work in.

I personally believe that the days of the “hired gun” are about gone. These are the kinds of sales people that float from one dealer to the next. They can sell a lot of cars to a lot of people, but too often, their games, lies, and cons run out. You may have enjoyed some short term profits, but the long term leaves you with complaints and a bad reputation.

This concept does not end when the ink dries. Customer Relationship Management teaches that customers who buy durable goods must be appreciated not only at the time of sale, but after the sale, as well.

If you look at the FTC Buyers Guide for used cars, there is a place on the back marked “See For Complaints.” This must be the name of someone at the dealership who is authorized ot hear and process complaints about the used car after the sale. I met a dealer once who hated putting a name there, because his position was that “As-Is Means NO COMPLAINTS.”  I went to another dealership once that kept copies of the signed “As-Is” Buyer’s Guides in a desk drawer close to the door. He explained that was so that they could pull them out and show anyone complaining about a car to remind them they weren’t entitled to complain. As I stood at this dealership, a lady who had bought a car just days before, came in asking for help because the water pump literally came apart in the middle of the road. They promptly pulled out her As-Is, shoved it in her face, and the sales manager laughed as her told her she was, and I quote, “Sh*t out of luck.”

Long story short, neither of these dealers lasted long.  Frustrating thing to me is, that it’s dealers like this who complain the loudest about a lack of customer loyalty, that customers won’t pay their notes, and the lack of profits in this business.

Thanks for visiting. Next time, we are going to revisit the Snake House. Put your boots on, and get ready!