Protecting your Customer from Collateral Damage
The recent assault on F&I practices has overlooked an important feature of dealer directed financing; namely, that the agreement between the lender and the dealership protects the customer from obligating additional collateral to secure the vehicle loan.
When a retailer arranges financing on behalf of the customer, the only collateral in play is the vehicle title.
On the other hand, when a customer walks into a credit union, applies for a loan, and signs the loan documents at the credit union, a clause in the credit union’s Truth in Lending disclosures states that the customer pledges all shares they now have or hereafter may have in the credit union as additional loan security.
Likewise, the customer who goes to a bank to apply for a loan automatically provides additional security for the loan through the bank’s “Terms and Condition of Deposit Accounts” she accepted when opening a checking or savings account.
Based on these scenarios, what is at risk if the customer’s loan goes into default? A credit union loan that goes into default will cost the customer access to his accounts as well as the vehicle. That goes ditto for the customer who got her loan at the bank. With dealer directed financing, the customer will lose only the vehicle, since the agreement between the lender and the dealership protects the customer from obligating additional collateral to secure the loan.
Most financial institutions employ people to read local daily newspapers to compare public notices with their account holders and outstanding loans. The focus is on taking immediate action to protect the lender, not necessarily to protect the consumer.
A professional dealership finance representative researches lending practices, shares this information with customers, and can provide proof that some lenders are not always completely forthright about additional collateral. Instead these lenders may choose to focus on a lower APR, which may not be in a customer’s best interest.
Nothing works better than the original documents for a proof statement. I encourage each dealership finance representative to walk into a local credit union and ask for a credit application. Truth in Lending disclosures usually appear on page three. After all these years in the business, no credit union officer I have ever encountered has reviewed these disclosures with me.
I also encourage each of you to visit a local bank. Ask the new accounts representative for a copy of the bank’s “Terms and Conditions of Deposit Accounts”. This booklet describes what the lender uses as loan collateral, and under what conditions the bank can seize funds in a customer’s account(s) to satisfy loan terms.
The credit union’s Truth in Lending disclosures and the bank’s “Terms and Conditions of Deposit Accounts” make very interesting reading for dealership financial representatives who want to make sure vehicle financing is done in their customers’ best interest.
When you share this information with a client who is considering securing his own financing you must be polite. If your customer believes you are attacking his choice of lender, he will not listen to the facts. Your task is to be a conduit of information, identifying the risks. Only then can a customer make an informed choice.
Everyone acknowledges that a dealership profits from a lender relationship that provides the convenience of dealer directed financing for the customer. Upon closer scrutiny, it appears the customer may also profit from the additional financial security dealer directed financing offers along the way.
World of Special Finance, July 2004, p. 38