Saturday, November 01, 2008

Kelly's Korner: Lenders


As many of you have noticed, the lending game is changing. What use to be standard credit is now sub-prime, and what was once marginal is now an uphill road to walk in a snowstorm with a headwind. Lenders are exiting our industry and investing their resources in other venues.

I have never witnessed a lender exodus such as this, and my office personnel are busy contacting prospective lenders for our students.

When thinking about recruiting lenders, we must reflect how we got in this situation in the first place. While some say it is all the lenders’ problems, I believe that nothing is all one-sided and that all parties have a stake in these events.

Dealership point of view

Many dealerships’ senior management have the policy that every deal should be sent to all lenders at once. This policy is known as “shot–gunning” deals. I have written about the lenders’ dislike of this practice and have received a few kudos from lenders. However, I have also received e-mails from F&I managers telling me that they are required to send each application to everyone and to take the best call.

This practice should be eliminated. It wastes time on all sides. Lenders do not need additional practice reviewing credit applications and deal structures. F&I managers should know their lenders and have a solid working knowledge of what type of deal will be accepted with what lender. They will also know what lender will most likely grant them an exception on a marginal deal. F&I professionals know the value of strong lender/dealer relationships and work diligently to build and protect them for the good of all parties.

Perhaps senior management should reconsider past instructions. The margins lenders work within cannot accommodate dealer activity that increases their cost of doing business.

Lender point of view

In the recent past, lenders have been dealing with a record number of straw purchases. This is where customer “A” does not qualify for a loan of any type. However, in order to make the sale, someone (could be the customer, the sales consultant or the sales manager) asks customer “A” if he knows someone who will sign the loan documents for him. Customer “B” then comes into the dealership, qualifies for the loan, signs all the documents and is coached how to answer the lender’s telephone inquiry. Soon customer “A” has possession of the vehicle.

This violates the dealer/lender agreement on multiple levels. Yet, lenders have been finding more and more of this practice. Instead of helping lenders, dealership management may claim that they were lied to and are innocent. A war of words ensues and lenders take the loss in enough cases to cause them to exit the industry.

Internet deals

Some deals are now being worked via the Internet and customers are never even seen by the dealerships. Driver’s licenses are scanned into computers and e-mailed to finance departments.

I know the Internet is of growing importance to dealership marketing, and many customers view dealership inventory online. However, when it comes to signing retail installment contracts, dealerships have the duty to verify the identity of customers. How can you verify customers are really who they say they are when you never see them?

Keep in mind that the dealer agreement, signed by the dealer and the lender, has certain warrants in it. One warrant being that dealerships warrant customers are who they claim to be. Breach of this warrant causes the contract to be “Unconditional Guaranteed” and lenders may demand payment in-full of the outstanding balance of the installment contract.

One solution is to have all document signatures notarized. Customers must take all documents to a notary and prove who they are and sign all documents in the presence of the notary. Then, have all the documents returned for processing.

Partners

As an observer of an industry I love, it seems that dealerships need lenders. Lenders need loans. Dealerships can provide more loans than lenders can attract by themselves. They are perfect partners - provided they don’t take advantage of each other.

How can we attract more lenders to the industry? First, dealers must change the way they are doing business. And, I think, they need to change their expectations of the F&I office and of the lenders.

Examples of needed changes:

When there is a breach of policy, buy back the contract, fix the error and move on. Do not leave lenders out on the line by themselves; they are your partners in your future.

Kelly’s Korner, November 2008