by Chet Heughan, Director of AppOne® Risk Mitigation Services and Indirect Lending, Wolters Kluwer
*This article originally appeared in the June /July 2016 issues of the NIADA State Magazines.
How many times have you heard the phrase “The devil is in the details?” That statement has never been more applicable to automotive dealers than it is today.
When considering financial risks to their business most dealership owners and managers tend to spend more time focused on these issues – hidden damage on vehicles purchased at auction, aging inventory, contracts in transit and the possibility of another downturn in the economy – and often omitting an issue of critical importance to their business.
One of the largest risks to a dealer’s financial future is accuracy or better stated the lack of accuracy in loan documentation. Inaccurate sales documentation in financed transactions can create a lingering risk to your business.
Your risk starts from the time you submit a credit application to the lender. Something as simple as an incorrect bookout submitted along with the credit application to a lender can create an ongoing financial liability.
For example, if you submit a credit application that incorrectly states that a Nissan Altima has an SL trim package when really it was an S trim package, your dealership could be responsible for the difference between the stated value and the actual collateral value. Many lenders will audit the loan documentation when a loan results in a repossession and subsequent charge-off. If the lender finds that the dealer overstated equipment, which inflated the stated value of the collateral, the dealer will likely be requested to compensate the lender for the difference.
In the past this could cost dealers several hundred dollars to a few thousand dollars, in addition to creating tension between the dealer and its retail lender. Today, however, with advancements in technology the stakes are higher for dealers as lenders now see this behavior as a red flag. Lenders can easily audit a dealer’s entire portfolio by using technologies that use vehicles’ VIN numbers to access the actual manufacturer’s build sheet for a vehicle in question leaving no doubt as to exactly which loans contained “power booking”. This could result in the lender terminating their relationship with the dealer and requesting a larger demand letter.
Compliance and accuracy go hand-in-hand. Repeatedly making simple mistakes when completing forms or using the wrong forms to document a transaction can appear to be predatory or deceptive. Inadvertent noncompliance with state and federal guidelines when preparing loan documents can be another area where risk can accumulate over time.
A typical retail installment contract can contain more than 150 fillable fields. Making sure that the correct information goes into each field may seem like a no-brainer, but what if you’re selling four aftermarket products and your retail installment contract only provides three lines to disclose the information? Some dealers simply combine two of the products or include the product in the selling price. These aren’t good ideas!
This approach may pass a lender’s due diligence process so it must be compliant, but don’t rely on the lender to be your failsafe. Lenders are not perfect and they don’t catch everything. This issue could be caught months or years later during an audit of the lenders indirect loan files or it could be questioned by your customers. What was a simple solution to a problem caused by not having enough lines on the contract could easily be viewed as nondisclosure or as deceptive and predatory practices, which can carry large financial penalties or be the basis of a consumer lawsuit.
Choosing the right loan documents that are up-to-date with current legislation along with the enhanced market features needed to support the sale of the many insurance and aftermarket products available in the market today is a sure way to reduce noncompliance and ultimately financial risk. Using the same old loan documents you’ve always used or the free documents made available from your lender may not be the best practice.
Choosing a loan documentation supplier that warrants their product, has a comprehensive program for monitoring pending and enacted regulations, along with completing timely revisions of their products can go a long way to reducing your compliance risks.
Of course, there are many more risks to your business –market conditions, competition and availability of inventory, just to name a few. Many of these risks are outside of your control, but you can control a large portion of your risk by demanding data accuracy from your staff and the vendors who provide you with products and services.
Chet Heughan is director of AppOne® Risk Mitigation Services and Indirect Lending for Wolters Kluwer. For more information, please visit www.wolterskluwerfs.com.