When gathered amongst themselves, sometimes dealers and finance company executives who specialize in working with customers with checkered credit pasts say they're not in the car business — they're in the collections business.
"If you have a weak leg in collections, you're dead. I don't care if your ACV is $1,000," said Michelle Groover, chief executive officer of Members Choice Auto, which helps credit union members in Georgia find a vehicle that fits their budget while assisting a half dozen institutions with collecting on those contracts after the sale.
"The reality is some people are going to have bad credit for the rest of their life because they don't care," Groover added.
While those customers might not be too concerned about the contract, dealers and finance companies sure are, especially during current times when contract terms are lengthening, down payments are shrinking and the wholesale cost of inventory isn't softening much. As if those factors didn't make collections vitally important, regulators are intensifying their look at collection practices, making the vetting of third-party service providers all the more vital.
"If you think about it in collections, it includes outside third-party collectors, collection attorneys, repossessors and forwarding companies, anybody who is involved in the process on the collection side in communicating with the customer," said Mark Edelman who is based at the Cleveland office of McGlinchey Staford, a law firm that services the auto industry with offices in six states.
"There is a much greater emphasis on entities that are subject to the supervision or oversight of the Consumer Financial Protection Bureau and by extension its analogous agency, the Federal Trade Commission, to be very mindful of the vendors they're doing business with," Edelman continued.
More on Due Diligence of Service Providers
Edelman surmised that heightened investigation of third-party vendors first started about a dozen years ago. That's when the Office of the Comptroller of the Currency issued guidance to commercial banks about third-party vendors and third-party outsourced providers and the level of diligence.
"I think what the CFPB did was kind of leverage off of that," Edelman said. "It was always out there, but obviously the OCC didn't have any supervisory or precedential guidance over any non-federally chartered depository institution.
"If you were an independent finance company, it's certainly something that wasn't on your radar," he continued.
Now that collections compliance is very much a point dealers and lenders must consider when evaluating their providers, Edelman shared a recommendation he's been giving to clients for years.
"The best standard to take is looking at it from the perspective of if you were buying the company you were about to do business with," Edelman said. "What level of diligence would you do on that company if it wasn't just going to be a business partner that you outsourcing, but actually a company that you were going to acquire and in doing so acquire all of their warts, faults or anything that was hanging out there? You would obviously have a high level of scrutiny if you were looking to buy them.
"To a certain extent, this is obviously unprecedented because it's creating a greater emphasis on knowing the people you're doing business with beyond just are they performing as you've contracted with them. It's certainly a different perspective," he continued.
Tools to Boost Collections
Back in Atlanta, Groover pointed to two elements that have helped her company's collections and losses improve.
First, starter-interrupt/GPS devices are installed on all vehicles that have a contract facilitated through Members Choice Auto. Groover indicated she received discounted repossession rates because of the technology and customers respond much quicker when a 45-second alarm is triggered because a delinquency arises.
"I tell them, ‘If you communicate with us and tell us what's going on we're human beings, too, and we're going to be helpful. If you run, you're not going to have to worry about the payment anymore because we're going to come pick the car up from you,'" she said.
Groover highlighted that the combination of a lengthy underwriting process - that includes an in-depth interview and the opportunity to have the APR reduced after a year of consecutive payments, no lapses in insurance coverage and the completion of credit education courses - along with the payment devices has resulted in the need for only about 25 repossessions since the Fresh Start Program for subprime customers started in October 2009. Since the launch, Members Choice Auto has facilitated more than 1,000 contracts for financing worth more than $12 million.
"It's all about communication," Groover said.
Best Collection Practices
Teresa Fransen is a consultant and trainer for Houston-based RecoveryMaxx. Fransen began as director of collections for a law firm in Grand Rapids, Mich., collecting medical, credit card, commercial and subprime accounts.
After five years, Fransen transitioned from a third-party collection environment to a buy-here, pay-here finance company and specialized in developing a successful in-house recovery department. When talking with clients, she said the primary question remains the same.
"The No. 1 thing that people always ask is, ‘How do I find this person? What's the one button I can hit and magically, their current address and phone number, job location appear?' My response is I wish it were that easy. Typically, there are a number of sites you have to hit and it may take hours to find that exact address," Fransen said.
"It's a timing issue and how much you're willing to invest in the right collectors and skip-tracers, the right systems to be able to efficiently work through your recovery portfolio," she continued.
Fransen then offered a recommendation that might help any size dealer or finance company.
"My No. 1 advice is to put the right systems in place to where your computer system is generating the documents for you and you're not spending your time doing the administrative part of it," Fransen said.
"If you want to maximize your recoveries, you've got to be banging on the phone. Collections is all about phones. A letter series works if you can't get them on the phone. It's important to develop a first step, second step, third step in a letter series. But most of it is spending as much of your time on the phones as possible," she continued. "Free up all of the administrative and clerical duties to get back on the phones."