White Paper - Tips on How to Start up a Buy Here Pay Here Business at your Dealership to increase your Profits, Cash Flow, and Customer Satisfaction

White Paper

Tips on How to Start up a Buy Here Pay Here Business at your Dealership to increase your Profits, Cash Flow, and Customer Satisfaction

September 15, 2021

by Patrick Inks, MBA

Thinking about starting up a Buy Here Pay Here (BHPH) business for your dealership??If so, here are some tips that I have learned on first, how to explore if a BHPH business will succeed in your market and dealership, and second, how to set up the major items you should consider when starting up a Related Finance Company (RFC) to support your Dealership’s BHPH business, driving more sales and profitability to your bottom line, while increasing customer satisfaction.?

I learned of these major items to complete (listed below) while starting up a new $15M BHPH business, Right Direction Finance, and improving the operations of an existing $200M BHPH business, Navigator Acceptance, and continue to work with BHPH dealers nationwide in my current role, and wanted to share them with you to help you get started on the right foot, and not just accidentally getting into this business and learning as you go, as I did, and many other BHPH dealers have stated they did too at the numerous industry conferences and 20 groups that I’ve attended and participated.

Disclaimer – I have listed several companies that offer services to help you with your BHPH business, one of which I am currently employed with, and this is not an endorsement for any of them, I just listed many of them from the latest NIADA and NABD Conference to help you get started with your research of them to determine which is the best solution for your customers and business.?However, many of them I have good personal experience with when I used their services with the BHPH companies that I worked with running and starting up from scratch.

Also, please work with your attorney and accountant to validate that your Related Finance Company meets all State and Federal/IRS regulations and requirements, including your Policies and Procedures, Accounting Methods, Disclaimers, Notifications, Waivers, Licensing, etc. See IRS Link (https://www.irs.gov/businesses/new-vehicle-dealership-audit-technique-guide-2004-chapter-11-related-finance-companies-12-2004)

1.??????Identify the Market Opportunity

To begin this process, you will want to make an assessment if your Dealership and Marketplace will benefit from setting up a BHPH business or not.?To do this, I recommend you think about the following items.

a.??????Current Indirect/Direct Auto Lenders

Do the local Auto Lenders, Banks, and Credit Unions meet the needs of your prospects and clients? Do you have lenders/credit unions that approve high to low Credit Scores? If over 15% of your applications are being declined/not funded by the lenders you are working with, or if they limit you loan amounts too much and inhibit your ability to offer you customers Extended Warranty and Insurance Products, you probably have a good opportunity to set up a BHPH business.

b.?????Other BHPH dealers

Do many other dealers in your market offer BHPH financing? How well do they serve their clients? How do their customer reviews look, or comments you hear about them? What interest rates do they offer? How much in total Down Payments do they require? What is their collections strategy, do they repossess their vehicles after clients are 15 days past due? Do they report their clients credit history to the Credit Reporting Agencies (Experian, Equifax, Transunion) to help rebuild their credit scores??If you feel you can offer better or even different options to your customers, then it’s a good idea to start up a BHPH program at your dealership.

c.??????Location

Do you have the ability either set up a BHPH lot at your dealership, separate your inventory from your BHPH inventory, or close to your main location? Are you able to set up a Related Finance Company at a different physical address than your dealership? The reason I ask these questions are first, many dealers move/advertise their slower moving inventory as their BHPH eligible inventory, where the pricing/sales strategy may be different than your standard inventory. Also, the IRS requires a separate physical and mailing address to set up a Related Finance Company.

d.?????Potential BHPH Customers

What is the average makeup of your customers applying to finance their vehicles from your dealerships? What is their average monthly Total Gross Income, Net Income after expenses, Credit Score, Length of Time at their Job and Residence, how much do they typically have for Down Payments, what percent have bank accounts??I’ve seen these numbers change dramatically from the Northeast to Southeast to Midwestern markets, all of which you can be successful with, but you should look at these items to develop your BHPH strategy, which will determine what inventory and financing plans will best fit your customers.

e.??????Profitability

Most Franchise Dealers are now making more profit on the “Back End” of their deals than from the “Front End” profit on the sale of the vehicle only, with obtaining Loan Participation/Origination fees from their lenders, selling Insurance products such as Extended Warranties, Prepaid Maintenance, GAP (Guaranteed Asset Protection) Insurance, Credit Life & Disability Insurance, etc.

Many Independent Dealers not taking advantage of offering these products to their clients for several reasons.?Opening a BHPH operation will help sell and finance these products to your clients. dramatically increase your profitability and increase your customer satisfaction rates.

By starting up a BHPH you can generate income from both the Front End (Sales Price minus Actual Cash Value of the Vehicle) and the Interest Earned on your loans, Commissions on Warranties and Insurance Products sold, which your indirect lenders/local banks are unable to do the same, making this business worth the risk you’re taking in meeting the needs of your community/clients.?One of the main reasons why your lenders don’t offer or dramatically limit the amount credit extended to many of your subprime BHPH clients is they cannot profit from the vehicle sale, Warranty, and Insurance product sales, to offset their risk where you can!

2.??????Develop your BHPH Strategy

a.??????Deep Subprime, Large Down Payments, Quick Repossessions

This BHPH strategy is focused more on the value of the vehicle than the customer’s credit worthiness, where you collect 15% to 50%+ of the vehicle price in the Down Payment, covering your profit and depreciation, and if you repossess the vehicle, you have your Actual Cash Value (ACV) equal or greater than the payoff, so you can resell it again without taking a cash loss.?Dealers that either do not pull Credit Reports or have clients that have sub 500 scores typically employ this strategy.?They typically go through a Monthly Budget with the client, advise them they have 1-3 days to make their payment, or they will disable the starter in the vehicle and repossess it immediately.

Typical Loan to ACV is 150% to 200%, and Average ACV is $4,000 to $8,000, Loan Terms are 24 to 36 months. Most dealers sell these loans to their BHPH company at 65% to 75% of loan amount due to their charge offs for bad debt is around 25% to 35%. GPS/Starter Interrupt systems are mandatory, with many requiring codes to be sent to their GPS units on a weekly basis to keep the vehicle operating.?Collectors are assigned 200 to 300 accounts per collector.?Payments are due either weekly or bi-weekly.?Dealer typically only stocks BHPH units at one location.

b.?????Subprime to Deep Subprime Customers, Medium Down Payments, Medium Term Repossessions

This BHPH strategy is a blend between the traditional BHPH strategy mentioned above and indirect lending by banks and finance companies, focusing on both the vehicle and creditworthiness of the customer.?The dealer qualifies applicants based upon their Credit/FICO Score, typically between 500 and 650; job stability of 6+ months, Payment to Income not to exceed 15%, Down payment equal to 3 payments (collect 1st payment at delivery, then 2 Deferred Down Payments (DDP payments) before regular payments begin 45 days from delivery, 6 references with contact numbers, validation of Proof of Employment/Income, and they will allow customer to go past due on their payments 15 to 30 days prior to repossession (as long as customer keeps regular contact with collectors). If the customer does not make all their DDP payments, the dealer will quickly repossess the vehicle, and “unwind” the deal in their Loan Management System, taking it out of their Static Pool reporting as if the loan never happened and not impacting their portfolio losses.

Typical Loan to ACV is 125% to 175%, and Average ACV is $6,000 to $12,000, Loan Terms are 36 to 60 months. Most dealers sell these loans to their BHPH company at 75% to 80% of loan amount due to their charge offs for bad debt is around 20% to 25%. GPS is typically mandatory; Starter Interrupt is optional.?Collectors are assigned 300 to 500 accounts per collector.?Payments match Customer’s Pay dates, bi-weekly, semi-monthly, monthly; ACH payments are required. Dealer usually separates BHPH and Retail inventory on lot or at 2 different locations.

c.??????Full Credit Tier Customers, Risk Based Pricing, Low Down Payments, Long Term Repossessions

This BHPH strategy mirrors finance company, bank, and credit union lending focusing more on the credit worthiness of the customer.?The dealer will pull credit reports, and based upon the customer’s credit score, the lower the score, the higher the interest rate charged, the higher the down payment required, and the lower the Payment to Income allowed. The dealer is really focused on keeping the client for as long as they can, including helping to keep the vehicle running, more flexible collections, repossessions 30 to 60 days past due, reporting the customers payment performance to the Credit Reporting Agencies.?

Loan to ACV is 90% to 125%, and Average ACV is $8,000 to $20,000, Loan Terms are 48 to 72 months. Most dealers sell these loans to their BHPH company at 80% to 85% of loan amount due to their charge offs for bad debt is around 15% to 20%. GPS/Starter Interrupt systems are typically optional, based upon the customer credit worthiness.?Collectors are assigned 400 to 600 accounts per collector.?Payments are set for bi-weekly or monthly, ACH payments are optional, based upon client’s creditworthiness. Dealer doesn’t need to separate inventory based upon BHPH or Retail Sales.

3.??????Identify the correct inventory for BHPH Customers

The main point for correct inventory for your BHPH customers is not to purchase vehicles where their ACV/Selling Price is too high to qualify for Payment to Income caps for your customers.?Therefore, you need to understand the typical income and down payments for customers in your market, the higher their monthly incomes and down payment, the more expensive vehicles you can stock and sell.?Once you determine what these amounts on average are, they you back into the Average ACV you are targeting for your inventory by using Payment to Income.

?For example, let’s say your average client’s Monthly Gross Income is $2,500, and after subtracting taxes, child support, benefits, etc. their Monthly Net Income is $2,000.?Based upon the BHPH strategy you employ, you set your maximum Payment to Net Income at 20%, or in this case maximum car payment would be $400 per month ($200 bi-weekly payments).?Then if you plan on offering 5yr, 60-month loan terms at 21% Interest, the loan amount after down payment would be $14,785.?Then you should target vehicles with ACVs in the $9,000 to $11,500 range, to allow for vehicle profitability and room for F&I products included in loan.?With less down payments, shorter loan terms, and higher interest rates, the lower you need to make your target ACV and vice versa.

4.??????Setting Up a Related Finance Company

a.??????Why? Tax Deferrals/Avoidance for Improved Cash Flow and Significantly Higher Profitability

One main reason for Setting up a BHPH Related Finance Company (RFC) is to help you with your Cash Flow by matching up your tax obligations with your customer payments, not all due at time of sale, and avoiding paying taxes on income never received due to customers defaulting on their loans or paying them off early. When you normally sell a vehicle to a customer, you owe taxes on the profit amount at time of sale, but when you set up a Related Finance Company, the IRS allows to pay taxes only the income you actually receive from your customer payments as they are collected.?The other main reason for setting up a Related Finance Company is to drive significantly higher profitability for your dealership, many times 200%+ higher than standard retail sale (see example below).

How this is done is by discounting the loan when you sell it from your dealership to the Related Finance Company, based upon your projected/actual historic loss rates on your loans, so you will not have to pay taxes on money you never receive.?If you project or realize that you will not collect 25% of the loan amounts on your books due to repossessions\early payoffs, or Allowance for Bad Debt, then you would sell/assign the loan to the Related Finance Company for 75% of the loan amount financed.?This will cause your dealership to record a much less profit than standard retail sale only, or even takes a loss on the sale of the vehicle when it is sold, therefore minimizing the tax liability is incurred a t time of sale, deferring it over the time of your loan periods. Your income and tax liability will be made up on the Related Finance Company side as your customers make their payments on their loans.?

For example,

Actual Cash Value (ACV) on a Vehicle ??????????????????????????????????????????$12,000

Sales Price (150% Loan to Actual Cash Value)???????????????????????????$18,000 (including fees, taxes, etc.)

Down Payment(s) from Customer??????????????????????????????????????????????????-$1,000

Customer Loan Amount??????????????????????????????????????????????????????????????????$17,000?

Sell/Assign the loan to the RFC at a Discount Rate of 25% ???-$4,250

RFC pays/funds the loan to the dealership????????????????? ??????????????$12,750

Dealership shows only Gross profit on the sale of $1,750 = $12,750 from RFC + Down Payment Collected $1,000 = $13,750 - ACV of $12,000 instead of the full $6,000 (Sale Price $18,000 – ACV $12,000)

The $17,000 loan is at 21% interest rate for 60 payments, the monthly payment would be $460, total payments due by customer would be ??????????????????$27,600

Minus how much the RFC paid the dealership for the loan??-$12,750

Potential Gross Revenue on the loan of ???????????????????????????????????????$14,850?

Now take out Bad Debt losses/early payoffs of 25%??????????????? ??-$3,712

Add in the down payment collected by Dealership?????????????????+$1,000

Gross Profit for Dealership and RFC combined?????????????????????????$12,138 ?(instead of $6,000 for just the retail sale of the vehicle)

$6,138 or 200%+ Gross Profit with BHPH RFC, collected and taxed over the 5-year loan term

b.?????Licensing your Related Finance Company

To properly license your Related Finance Company, you will need to register the business and owners with your state via the Nationwide Licensing System (NMLS). I have listed the links and instructions below to assist you with this registration.

NMLS registration (https://nationwidelicensingsystem.org/Pages/default.aspx)

Step 1 - Determine if an NMLS account is necessary

Go to the?State Licensing?page to review the state agency's licensing requirements?to:

·????????Apply for a license

·????????Transition an existing license

The?State Licensing Requirements?page provides license descriptions and checklists?for licenses managed through NMLS.?The?NMLS Expanded Industries?page provides information on additional financial service industries that manage licenses on NMLS.

?Step 2 - Complete the Company Account Request Form

You must create an NMLS account to apply for a state license, register, or transition an existing license.

Complete the?Company Account Request Form. When the request is validated by the NMLS Entitlement Group, the system will create an account for the company and issue usernames and passwords to the designated Account Administrators.?

?Note for Sole Proprietors:

Sole proprietors are?required to have two accounts, one for the company record and one for the individual record. A company account request form is required to obtain a company account.

?Step?3 - Complete the Company Form

Complete the Company Form (MU1) to apply for a state license (or registration) or transition an existing license. Individual Forms for certain control people, direct and indirect owners, executive officers, branch managers, and qualifying individuals may also be required.

Review the following resources for assistance with completing the Company Form (MU1):

·????????Company Form (MU1) Filing?

·????????Transitioning an Existing Company License

·????????Individual Form (MU2) Filing

o???State Licensing Forms?- Provides sample forms to help you gather the necessary information.

c.??????Policies & Procedures

You will need to create your Policies and Procedures for the RFC, including that your RFC will comply all regulations such as Reg B. Equal Credit Opportunity Act (ECOA), ?Fair Credit Reporting Act (FCRA), Fair Debt Collection Practices Act (FDCPA).?See below example on the Policies and Procedures I created for my BHPH company to comply with all State and Federal regulations.

One new item to consider with the Sensitive Customer Information, please add a section on Deleting Customer information from all vehicles computers that store their contacts, garage door codes, GPS directions, etc. from all the vehicles you are selling, which were loaded when pairing their smartphones.

SECTION A - UNDERWRITING????

FAIR LENDING UNDERWRITING POLICY?A1.1

UNDERWRITING PROCEDURE????A2.1

RED FLAG PROCEDURE??A3.1

PROGRAM GUIDELINES

THE SIMPLE TRUTH ABOUT HOW (Your Dealership/Related Finance Name) DOES BUSINESS

(see Common Complaints and Resolutions example below)?????????

?

SECTION B – FUNDING/ACCOUNT ACTIVATION

FUNDING ACCOUNT ACTIVATION POLICY?????????????B1.1

FUNDING ACCOUNT ACTIVATION PROCEDURE???B2.1

GAP WAIVER STATE EXHIBIT???????B3.1

STATE COSIGNER FORMS EXHIBIT????????????B4.1

TITLE HOLDING VS NON-TITLE HOLDING STATES EXHIBIT B5.1

???????????????

SECTION C – LOAN SERVICING AND COLLECTIONS???????????

SERVICING AND COLLECTION MANUAL?C1.1

CUSTOMER SERVICE PROCEDURE?????????????C2.1

CONSUMER COLLECTION PROCEDURE???C3.1

GPS STARTER INTERRUPT PROCEDURE???C4.1

SKIP TRACER LIST EXHIBIT????????????C5.1

SENSITIVE CUSTOMER INFORMATION EXHIBIT???C6.1

STATE FORCE PLACED INSURANCE EXHIBIT??????????C7.1

STATE PAYOFF REQUIREMENTS – EARLY PAYOFF REFUND EXHIBIT?????????????C8.1

STATE SECURITY INTEREST- TITLE REQUIREMENTS EXHIBIT????????????C9.1

STRICT COMPLIANCE NOTICE EXHIBIT????C10.1

REPOSSESSION PROCEDURE???????C11.1

REPOSSESSION LAWS BY STATE EXHIBIT C12.1

LEGAL COLLECTIONS PROCEDURE????????????C13.1

WRITE OFF PROCEDURE C14.1

MONTH END PROCESSING PROCEDURE C15.1

?

SECTION D – INFORMATION SYSTEMS??

DMS LOAN ORIGINATION AND LOAN SERVICING SYSTEMS HELP MANUAL

EXPERIAN TRAINING GUIDE

WRITTEN INFORMATION SECURITY AND SAFEGUARDS PROGRAM

I understand this is a large undertaking, but it’s necessary to guide your employees with how to conduct your BHPH business, and the Regulators will definitely want to review it as part of their annual review process.?Fortunately, there are several resources to assist you with creating your Policies and Procedures, including the ones listed below.?Once you are completed with creating your Policies and Procedures, please have your attorney review and approve them to ensure your Related Finance Company is compliant with your local, State, and National regulations and rules.

???i.?????Bankers Online (https://www.bankersonline.com/compliance)

???ii.?????Hudson & Cook (https://www.hudsoncook.com/index.cfm)

d.?????Setting up Customers for ACH (Automatic Clearing House) Payments, Cash Payments, and other tools?

I recommend that you highly encourage your customers to set up automatic bank account withdraws (ACH payments) to match their pay periods, depositing their funds directly into your bank account on a regular basis, saving time and effort for all involved, while keeping your delinquent accounts low.?For your customers that do have bank accounts, you will need to set up a Cash Payment process at your dealership, and ensure the payments are being logged into your Loan Servicing/Dealer Management System.?Additionally, several new vendors now allow your customer to send you payments via their smart phones, pay at local retailers, etc. see below for more information.

???i.?????Payment Vision (https://www.paymentvision.com/)

???ii.?????Pay Near Me (https://home.paynearme.com/)

???iii.?????Repay (https://www.repay.com/)

e.??????Setting your Discount Rate on your loans sold to RFC – Allowance for Bad Debt

As previously mentioned, accurately setting your Discounts Rates, or how many pennies on the dollar does your Related Finance Company funds your customer contracts sold/assigned by your dealership is very important for a couple of reasons.?The first reason is to satisfy the IRS standards, which allows you to match your cash flows with your tax obligations, and second to ensure your BHPH program is profitable overall.

To start out I would recommend that you use the industry average for Allowance for Bad Debt (see BHPH Financial Metrics below), which usually floats around 25% historically, down to 22% for last year due to better than average performance of customer delinquencies with the Government Assistance programs implemented in 2021.?Then after a couple of years of seasoning on your loans, you can adjust it to your customer’s actual loan performance, by reviewing your Static Pool Analysis.?

What this means is that anyone reviewing your loans is reviewing the loans you booked for a specific period of time, such as loans funded monthly for only the year in 2021, how much was funded in dollars, how much was charged off after all repossession costs and recoveries from the client included by month.?This is visually represented by a Net Cumulative Loss Curve graph, usually showing for auto loans with almost 0% Net Bad Debt losses for first 6 months, then gradually increasing to 25% for months 7 to 30, then leveling off at almost 0% for remainder of the loans.?This happens between 6 and 30 months on average since the honeymoon period is usually over for the customer and payment priority drops for them, customer has some life changes such as job change, marriage change, etc., car starts to experience mechanical issues, vehicles being wrecked and customers not carrying physical damage insurance at time of accident, customers start to refinance/payoff their loans early etc. (See Example from Kroll KBRA link - https://www.kbra.com/documents/report/65/abs-auto-loan-abs-global-rating-methodology)

If your portfolio shows the Cumulative Net Loss Rate of 28% (left axis of graph) then adjust your Discount Rate and Allowance for Bad Debt to be 28%.?You just need to be cautious setting your Discount Rate higher than your actual Bad Debt rate realized, because the IRS will penalize you for overstating your losses and understating your tax liabilities.

f.???????Tracking Static Pools to Adjust your Underwriting, Collections, and Discount Rate/Allowance for Bad Debt

??i.?????Net Cumulative Loss Curves – You can find many more details on this subject from the links listed below, and the other main reason to use this analysis to run your BHPH business than taxes is to adjust your Underwriting and/or Collection Strategy.?If your Net Cumulative Loss Curves have significant losses before 6 months, you need to tighten up your Underwriting Criteria since you are taking losses you shouldn’t be taking that early in the loan or maybe you need to adjust your Collections to work more with the customers and not repossess your customers vehicles so aggressively. On the flip side, if to your Net Cumulative Losses are too low after 7 to 36 months, you are missing sales opportunities by being too strict with your Underwriting or too flexible with past due clients and not repossessing their vehicles in a timely manner.

I have seen several BHPH portfolios be profitable with average Discount Rates/Bad Debt Rates from 15% to 35% Net Losses, I would take a closer at your Underwriting/Collections if your customer’s loans have Bad Rates either below 15% or above 35%.

?ii.?????Loss to Liquidation Ratios – This analysis is typically used for new loan portfolios or not very seasoned loans, by setting a maximum Net Cumulative Loss Rate/Bad Debt Rate for your loans, which will start high and gradually decrease over time, as your customers make their loan payments and portions of it get applied to the principal amounts funded.?It is calculated monthly by taking the total Net Losses for your loans divided the total Payments made on your loans (Liquidation Rate) on a monthly basis.?Early in your loans this will be a high number since your losses will be substantial compared to the principal payments received from your customers, since all simple interest loans collect most of the interest first, then principal later.?This Ratio then will come down as more of your customer principal payments are received over the loan life.

At the time a pool of loans pays off completely, the Net Cumulative Loss Curve will meet your Loss to Liquidation Ratio Curve. ?The Net Cum Loss Curve will increase, and the Loss to Liquidation Ratio will decrease over time, as payments and losses are recorded, and they will end by meeting together at your total Bad Debt/Net Losses for those loans.?This is your actual Bad Debt rate for those loans and should be used when considering on how to determine your future Discount Rates/Allowance for Bad Debt projections for new loans purchases from your dealership.

For more information and assistance with understanding and applying these loan valuation techniques, and/or to validate your Loan Portfolio Performance/Loan Estimated Values at any time, please see below.

1.??????Agora Data (https://agoradata.com/)

2.??????SGC CPA, Shilson, Goldberg, Cheung & Associates, LLP (https://www.sgcaccounting.com/index.htm)

a.??????Subprime Analytics (https://www.subanalytics.com/?ai_sid=7775&ai_sid_key=1ae1wwmkqt)

3.??????Kroll KBRA – Auto Loan ABS Global Rating Methodology(https://www.kbra.com/documents/report/65/abs-auto-loan-abs-global-rating-methodology)

4.??????Moody’s Analytics (https://www.moodysanalytics.com/microsites/auto-finance-insights)

g.??????Preparing for Regulatory Audits and working with State Regulators/Auditors

Since your BHPH Related Finance Company is Licensed by your State, you will have annual audits by their State Regulators and Auditors.?They typically review your Policies and Procedures, a sampling of your loans to review how they were underwritten, how applicants declined received their Adverse Action Notices, your Customer Complaint Resolution Process and Logs, your Advertising Disclosures, how you handle Non-Public Customer information, your retail installment contracts, F&I waivers and contracts, and your collection/repossession practices, etc.

Please consult with your local attorney and request they do a Test Compliance Audit, this will help to ensure your Related Finance Company is operating in a legally acceptable manner, and a good business practice to ensure your customers/applicants are being treated fairly.?Please see below links for some more information and resources to assist with your compliance to all regulations and laws for consumer lending.

?????i.?????Complynet (https://www.complynet.com/)

?????ii.?????Banker’s Compliance Consulting (https://www.bankerscompliance.com/)

????iii.?????Banker’s Online (https://www.bankersonline.com/compliance)

h.?????Hiring Related Finance Company Staff Members

You will need to hire new/or assign current staff members separate from the dealership staff members to underwrite your loans to qualify for Related Finance Company status with IRS, and depending on if you plan to keep and service the loan in house, you will need to hire/assign Customer Service Agents/Collectors too.?

Since your dealership Sales and/or F&I staff will typically collect and submit the applicant’s application, Proof of Income/Employment, references, loan documents, F&I product contracts/waivers, typically you can use 1 to 2 Underwriters for BHPH portfolios with $200M or less in outstanding loans.

If you plan on servicing/collecting your own accounts in house, the number of collectors you will need on your SFC staff depends on which BHPH strategy you use, the more clients with Deep Subprime Credit, the fewer the number of Accounts to Collectors you assign to each Collector, and I gave some averages previously.

i.???????Liquidating Repossessions

How you sell your Repossessions depends on your State Laws and if you plan to collect from customers after you have charged off their loans.?If your state allows wage garnishments, then you need to take all your repossession to an auction, showing that you attempted to recover as much of the customer’s loan amount with the sale of the vehicle as you could via a public auction, then you are legally allowed to pursue any deficiency balances/net losses on your customer’s loans.?If your state doesn’t allow wage garnishments, such as Texas, then I have seen many BHPH dealers purchase their vehicles back into their inventory valued by the same method as they choose, such as MMR, Wholesale/Average Trade-In value with Kelley Blue Book, NADA, or Black Book (plus any reconditioning costs), and not pursue the customers for any charge off balances with wage garnishments.

j.???????Reporting Customer Payment Performance to Credit Reporting Agencies

Should you report your customer’s payment performance to the Credit Reporting Agencies, such as Experian, Equifax, and Transunion??Some BHPH dealers prefer to not report any customer information to the Credit Agencies since they fear their competitor BHPH dealers will be able to obtain a list of their clients and will solicit their business.?Of the dealers that do not report on a regular basis, about half of them will report repossessions/charge offs on an individual customer basis to credit reporting agencies as a leverage method to collect from the customers post write off.?Other dealers promote the benefit to their clients that financing with their BHPH will help to establish and build their credit ratings by reporting to Credit Reporting Agencies, and they complete the process to become a registered lender/data furnisher with the Credit Reporting agencies they choose to work with.

If you plan on reporting to the Credit Reporting Agencies, you will need to contact them (see below) to become an approved credit data furnisher, along with getting set up with E-Oscar, a centralized system to respond and resolve customer complaints about their credit reports being inaccurate.

???i.?????Experian (https://www.experian.com/consumer-information/reporting-credit)

???ii.?????Equifax (https://www.equifax.com/business/data-furnishers/)

???iii.?????Transunion (https://www.transunion.com/data-reporting/data-reporting)

???iv.?????E-Oscar (https://www.e-oscar-web.net/EntryController?trigger=Login)

k.??????Utilizing Floorplan Lenders to Increase Your Inventory

By financially levering your Floorplan line, you will be able to free up cash to help stat up your BHPH program, and floor more inventory to increase your sales and number of loans that you can originate.?Many BHPH dealers utilize the National Floorplan Lenders listed below, where they have several different programs that will meet your business goals.?Others will work with their local banks and credit unions to obtain these Lines of Credit for inventory and working capital.

?i.?????NextGear Capital (https://www.nextgearcapital.com/)

?ii.?????AFC (https://www.autofinance.com/)

?iii.?????Kinetic Advantage (https://www.kineticadvantage.com/)

l.???????Obtaining Capital to Grow Your Portfolio

The beginning stage of Starting up a BHPH portfolio takes a lot of cash since you are purchasing vehicles for thousands of dollars and only receiving hundreds of dollars from customer payments, so to continue your sales and increase the number of loans you have in your BHPH you will need to either set up a Line of Credit or Sell/Assign your loans to lenders/investors companies such as the ones listed below.?

They will offer you a variety of interest rates, fees, loan discount/advance rates; lend on or buy a pool of loans or loans on an individual basis; allow you to collect and service the loans, or they will collect and service the loans for you. Please research the best options to meet with your business goals.

????i.?????Agora Capital/Credit (https://agoradata.com/)

????ii.?????Westlake Financial (https://www.westlakefinancial.com/)

????iii.?????Lobel Financial (https://www.lobelfinancial.com/)

????iv.?????Nicholas Financial (https://nicholasfinancial.com/ )

????v.?????Nationwide Acceptance (https://www.nac-loans.com/)

?????vi.?????Primalend Capital (https://www.primalend.com/)

????vii.?????First Horizon Bank (https://www.firsthorizon.com/)

??????viii.?????Sterling Credit Corp (https://sterlingcreditcorporation.com/)

??????ix.?????Spartan Financial (https://spartan-financial.com/)

??????x.?????LHPH Capital (https://www.lhph.com/)

??????xi.?????Pacific Western Bank (https://www.pacwest.com/)

xxi. SDA (www.SDAinc.com)

5.??????Acquire and setting up your Loan Origination and Loan Servicing Systems

You will need a system to underwrite your loan, store the customer/applicant information, pull credit reports, send Approval and Declination Letters, store the vehicle information, print your loan documents, fund the loans, track payments, collect/service your loans, talk with the GPS/Starter Interrupt systems, create your monthly Accounting Reports, track your static pools, track your repossessions/write offs, report to Credit Reporting Agencies, and integrate with your Dealer Management Systems.?There are several vendors that offer several of these products and services at a variety of costs, with several listed below, so please take time to ensure the Loan Origination/Loan Servicing System will handle your current and future BHPH program and customers.

a.??????Auto Master Systems (www.auto-master.com)

b.??????DealerTrack (https://us.dealertrack.com/)

c.??????Wayne Reaves Dealer Systems (www.waynereaves.com)

d.??????Lot Wizard (https://lotwizard.com/)

e.??????Deal Pack (https://dealpack.com/)

f.???????Frazer Dealer Management Software(https://www.frazer.com/?msclkid=dad6b1b09bde1a876d8ad08bf16c8b00)

g.??????Auto Manager (https://www.automanager.com/)

h.??????Adam Systems (https://www.adamdms.com/)

i.????????Dealer Center (https://www.dealercenter.com/)

j.???????Loan Documents

Once you have set up your Loan Origination/Servicing System, you’ll need to create and store your customer’s Loan Documents.?A majority of BHPH and Dealers in General use Reynolds & Reynolds/Bankers Systems Retail Installment Contracts. See below for more details.

????i.?????Reynolds & Reynolds – Retail Installment Contracts (https://www.reyrey.com/reynolds-document-services/traditional-marketing)

ii. Secure Close (www.secureclose.net)

k.??????Custom Risk Scoring

Many of the previously mentioned Dealer Management Loan Origination/Servicing Systems have Custom Risk Scoring as part of their offering, several start with a Generic Score from industry averages, and then they begin to learn about your customers loan performance and adjust the score tailored to your business over time.?They review the loan attributes from your loans such as Gross Income, Net Income, Payment to Income, Debt to Income, FICO credit scores, time at residence, time at business, down payment amount, Loan to Value, previous auto loans/repossessions, etc. and see which ones have defaulted and which ones perform until the customer payoffs off their loan.?Based upon this data, they weight the significant loan attributes that correlate most with how your customer has paid on their loans and develop Custom Risk Scores.?Reliable and validated Custom Risk Scores will allow you to approve every good opportunity and decline the riskiest opportunities, as possible and prudent, while meeting your business goals.?Many BHPH dealers start with the customer FICO credit scores and then move to their individual Custom Risk Scores over time, including offering Risk Based Pricing to their clients, higher the risk, higher the interest rate/down payment required.

You can rely on these systems to assist you with this Custom Risk Scoring process, or you can contact companies such a NEO (listed below), or you can do it manually with Excel, as I did with my BHPH portfolios with proper training.

i. NEO (https://neoverify.com/)

ii. Trust Science (www.trustscience.com)

6.??????Setting up GPS/Starter Interrupt Systems in your vehicles

One of the biggest technology innovations in the BHPH industry is the use of the GPS units or GPS/Starter Interrupt units in the customer vehicles to ensure the dealer knows where their vehicles are located, can disable them for their repossession agents to recover the vehicle, can disable them if they lose contact with past due customers, and to report to the police the location of the vehicle if they are stolen from their customers.?Many customers request to keep the GPS units in their vehicles after they pay them off as theft protection, passing the control to the customer, and lowering their insurance premiums.?Other customers request the units to be removed from their vehicles once the loans are paid off, which the BHPH dealers that I worked with would do for free.?Some BHPH dealers install the GPS units in all of their inventory during reconditioning process with their own service staff, others wait until the vehicle is sold and send a GPS installer from one on the companies listed below to install it at the customer’s employer or residence within a couple days of sale.?That latter option is usually for dealers that offer both regular retail direct lending/Indirect lending and BHPH lending options for all their vehicles on the lot.

One common misconception about these units is that they can “turn off the engine” while its running and/or moving down the street, this is incorrect, they are just able to interrupt the vehicles starter when the customer tries to start it up after being turned off.?I would recommend that if you choose to use the Starter Interrupt services, you only do it for repossession locations and recovery, and not as a regular collection tool.?I have experienced several Voluntary Surrender repossessions from frustrated customers once we turned their vehicle off more than 3 times in a few months, which you want to avoid so you can maximize the profitability of your BHPH program.?Lastly, if you choose to use a GPS or GPS Starter/Interrupt system in your BHPH vehicles, please ensure the customer signs the GPS acknowledgement forms to ensure you are conducting your business in a legal manner.

a.??????Passtime GPS (https://passtimegps.com/)

b.??????Spireon – Goldstar GPS (https://www.spireon.com/goldstar-gps-vehicle-tracking/)

c.??????SVR Tracking (https://www.svrtracking.com/)

d.??????True Spot GPS (https://truespot.com/)

e.??????Ituran (https://www.ituranusa.com/)

7.??????Setting up with Warranty or Reinsurance Companies and Offering Finance and Insurance Products to your Customers

A large part of the increase in profitability per vehicle sales and in customer satisfaction for BHPH dealers is due to their ability to set their own Loan to Value caps, allowing room on the customer loans to include financing of Warranties and Insurance Products offered, versus being capped with a low Loan to Value by their indirect lenders, where only the vehicle and taxes are allowed on the loan by the indirect lenders, local banks, and/or credit unions they use.?

Many feel this is a great benefit of having a more flexible BHPH loan solution to better protect the customer and their vehicle, keeping their vehicles running and them paying their payments on time.?Whether you decide to offer F&I products from Warranty and Insurance companies, where they pay the claims and take this risk for a portion of the premiums paid, or whether you decide to offer you own products via Reinsurance companies and pay your own claims and keep more of the premiums, setting your own Loan to Value levels with your BHPH loans should increase your Profit Per Vehicle, your bottom line, and your customer service satisfaction rates.

Some BHPH dealers start by offering products from the Warranty and Insurance companies and then switch one product a year over to reinsurance, taking on some additional risk gradually and gaining additional profit over time, and typically set aside 30% of their premiums to pay for claims on average.?One of the other benefits of reinsurance is your ability to keep customer satisfaction high by having control over your claims process and having the ability to approve some claims that may not be approved by a third party.

a.??????Extended Warranties/GAP Insurance/Collateral Protection Insurance

??????????i.?????Freedom Warranty (https://www.freedomwarranty.com/)

??????????ii.?????GWC Warranty (https://gwcwarranty.com/)

??????????iii.?????AUL Corp (https://aulcorp.com/)

??????????iv.?????Proguard Warranty (https://www.proguardwarranty.com/)

??????????v.?????Assured Vehicle Protection (https://www.preferreddealersolutions.com/)

b.?????Reinsurance

??????????i.?????Preferred Dealer Solutions (https://www.preferreddealersolutions.com/)

??????????ii.?????Buckeye Dealership Consultants (https://www.buckeyereinsurance.com/)

8.??????Fraud Risk

I have experienced 2 main types of Fraud Risk with BHPH business, one is Customer Fraud and the other is Dealer Employee Fraud.?Customer Fraud happens when the customer provides information/documents that are not true and valid, such a fake paystub or paychecks, applications with bad information, non-existent references, bad contact numbers, Straw Deals where one consumer finances the vehicle on the behalf of another consumer, which can cause a high level of defaults and repossessions in your portfolio.

The second type of Fraud, Dealership Employee Fraud, is where the employee provides fake paystubs, paychecks, contact information, etc. on the behalf of the consumer, falsifies the down payments collected, assists with Straw Deals, lists random people from phone directories as consumer references, coaches the client to make false statements with phone audits, etc.?This type of fraud can be more difficult to detect, especially with paystubs/paychecks, and I have found them by placing several paystubs/paychecks on the table at once, then identifying the trends where the same paycheck vendor is being used (ADP is common), specific numbers match, such as taxes or tax rates, or numbers being rounded off, not correct tax rates, etc.

I would recommend that someone on your staff in the Related Finance Company validates these documents directly with the consumer’s employer, references, and banks/credit unions via telephone contacts or direct electronic methods before you approve any loans, to ensure you minimize the fraud that may occur with your BHPH loans.

9.??????Sales/F&I Commission to Dealership

There are many different ways to compensate and commission your Sales people, General Manager, Sales Manager, and F&I Manager to support your BHPH business, which can be explained by several dealership consultants offering this service, but the main point to focus on when setting up a BHPH loan offering at your dealership is to not penalize anyone’s compensation for sending/selling/assigning the loan to your Related Finance Company versus sending it to another indirect lender, local bank, or credit union.?Please make sure compensation plans are relatively equal regardless of where they place their loans for your customers, or it will be an uphill challenge on growing your BHPH portfolio over time.

10.??Presenting Positives of BHPH to Press and Public

It’s always a good idea to be prepared to speak to the Press and Public about some of the common complaints, misconceptions that may occasionally arise, and have good responses to promote the positive impact you are making for your customers and local community on hand.?Please see an example of those below.

Example of some Common Complaints and Responses

Is Your Dealership one of those companies that lure unsophisticated consumers into heavy debt which they cannot repay?

Our Dealership doesn’t finance customers for vehicles they can’t afford. Early into the sales and financing process, (Your Dealership Name) utilizes an internally developed risk assessment program and budget analysis to determine if the customer can afford their vehicle payment, and whether he or she can meet the terms of their loan.

Since we recognize that many of our customers are inexperienced or challenged with vehicle buying and financing process, we have implemented a very detailed and structured loan closing to fully disclose and discuss all of their terms and conditions prior to them finalizing the sale. In addition, as a follow up, we ensure that every customer receives a Welcome Call and Letter to review and confirm all information on their Application, Retail Installment Contract, and Purchase Agreement prior to their first payment due date.

Does Your Dealership have sophisticated technology to determine the price a customer can afford, and then increase the price of the vehicle accordingly?

Our Dealership does utilize technology and detailed budgeting analysis to assess the credit risk of each customer, and to determine which vehicle(s) he or she can afford or if the customer can afford a vehicle at all -- only XX percent of applications are approved, but the price of each vehicle is not affected by this process.

Our prices are price checked for XX miles from our dealership to guarantee the lowest price in the market and are publicly displayed in the dealership and on the internet for all our vehicles, regardless of the customer’s financing options or lending institution utilized.

Does Your Dealerships encourage low-income customers to live beyond their means?

No, we are meeting our customer’s needs for transportation and assisting them in repairing their credit histories so they can qualify for better financing programs in the future. People need vehicles to get good paying jobs and studies have shown that 85%+ of US workers drive to work. One of the studies by a UCLA professor found that residents of the poorest section of Los Angeles who can drive to work have 59 times as many jobs to choose from as their neighbors who must rely on public transit. As one theorist said, "Few things are better at helping the poor pull themselves out of poverty than improved mobility."

We recognize that there may be some predatory lenders in the finance industry, but we want nothing to do with those businesses or their practices. We show all our customers the type of respect and provide better value that they don’t often receive from other Buy Here Pay Here merchants. And if our customers aren’t satisfied, we’ll make it right. That’s why so many of our customers are either returning to purchase more vehicles or providing several referrals.

Does Your Dealership sell junk vehicles?

All Our Dealership’s vehicles are put through a XXX-point inspection, have extensive warranties, and come with a free Carfax Vehicle History report. We understand that we win when the vehicle operates as expected, and the customer completes their payment on the financing contract. We lose when the vehicle doesn’t run, and the customer cannot afford to make repairs and their loan payments. That’s why we pick the best low mileage late model pre-owned vehicles to sell, investing more than $XX,000 in each one to make sure it meets our standards, and offer excellent extended warranties.

Does Your Dealership charge sky-high interest rates?

The fact is that interest rates are regulated in every state, and we follow the law. What’s more, in most cases, the interest rate we charge is less than what the law allows us to charge, for example we charge XX% in Our State and many other lenders are charging 24.99%.

Our rates reflect a business truth: Because of past credit challenges, our typical customer brings risk to the table and the higher the credit risk, the higher the interest rate.

Does Your Dealership use vehicles as an avenue to a higher profit item -- an expensive loan?

Our customers need vehicles to get to work. Most of them can’t pay cash for a dependable vehicle, and most conventional lenders turn them away. Our core business is selling good vehicles to people who need credit. By providing affordable financing and we make sure it’s affordable -- we can enable those customers

11.??Attend BHPH Industry Conferences, Publications, 20 BHPH Dealer Groups

I highly recommend that you stay informed and up to date on the BHPH industry, gain some best practices and understand average Key Performance Metrics, by taking advantage of some of the great BHPH Industry resources offered include the following Industry Conferences, Publications, and 20 Dealer Groups are listed below.

a.??????NABD (https://bhphinfo.com/?ai_sid=19843&ai_sid_key=cowwv4b2sn)

b.??????NIADA and NIADA Dealer 20 Groups (https://niada.com/)

c.??????BHPH (https://bhph.com/)

d.?????BHPH Dealer Magazine (https://bhphinfo.com/bhph-dealer-magazine)

e.??????NCM Associates – Dealer 20 Groups (https://www.ncmassociates.com/)

f.???????SGC CPA – Subprime Analytics (https://www.subanalytics.com/?ai_sid=7775&ai_sid_key=1ae1wwmkqt)

12.??Buy Here Pay Here Key Financial Benchmark Metrics

I have included a link to some of the most recent Key Financial Benchmark Metrics for the BHPH Industry from SGC Certified Public Accountants, NIADA 20 Dealer Groups, and NCM 20 Dealer Groups so you can compare your financial results to the industry averages. (https://www.sgcaccounting.com/Resources/BHPHBenchmarks2020.pdf)

Written by Patrick Inks, MBA – Over 30 years’ experience in the Dealership and Financial Services Industry with companies NextGear Capital, Cox Automotive; Right Direction Financial, Merchants Auto and Fleet; Navigator Acceptance; Harley-Davidson Financial Services, Harley-Davidson Performance Consulting; Bank of America; Green Tree Financial; Trier Lincoln, Mercury, and Ford.