Entering a Brave New World

Well, it’s been a month since I’ve been here, and it seems to be pretty good so far. Let me give you an update on what’s been going on lately.

Back in January, the Toyota dealership that ASKED me to come down and run their special finance department decided to undergo a “workforce reduction”. For those of you who aren’t familiar with that phraseology, what it means is “ we decided that your assistant, who we can pay less than we’re paying you, can do your job, so don’t go away mad, just go away!” Needless to say, business is off these days, but to cut personnel that don’t cost you anything because they only get paid on what they produce, well, that never made sense to me. The dealership eliminated my position as well as the special finance manager in the new car showroom. We were offered the “opportunity” to go on the floor as sales reps. He took the job. I didn’t!

So here I am, at an independent lot, as Sales/Finance Manager. We do about 30 cars a month and we’re growing, and we make nothing but money. Our average PAYABLE gross is over $2500 per unit, and while we do a good deal of buy-here-pay-here, I’ve brought on a number of new lenders, and our finance business is growing nicely. This gives me an opportunity to learn about BHPH first hand, since it’s been a good 25 year since I had my lot and things have definitely changed!

BHPH is definitely not your typical auto sales. As a manager here, I have to treat every deal as if it’s my own money. There’s a lot more to rolling a unit than collecting the down payment and watching the taillights hit the curb.

When we determine a customer is a BHPH candidate, things change in how we approach the deal. First of all, we need a minimum of 30% of the sale price down. No pick up payments, no promissory notes…its cash or dash. Down payments have to cash or certified funds, no credit cards or checks. Our terms run between 24 and 30 months, the shorter the better. Interest rate is 17% add-on, which is roughly 29.9% APR. We use rule of 78’s contracts, but there is no prepayment penalty. If the customer pays off the loan early, better for us, so we encourage this by eliminating a prepayment penalty,

Payments are setup bi-weekly, beginning 14 days from delivery. Each vehicle is equipped with a GPS device, either pre-installed before delivery, or we make an appointment for the customer to come back and have it installed. All standard stips are collected up front, POI, proof of residence in the form of a bill, as well as 3 pieces of junk mail addressed to the buyer. As dumb as that sounds, it verifies their address in a way that can’t be manufactured. Bring me the sealed envelope and we’re good to go! Phone bills as well as ten complete references are required, and insurance must be verified and faxed to us with the dealership as lien holder and loss payee before the vehicle leaves our lot.

We typically steer customers to older units in inventory. BHPH has come a long way from $1000 ACV’s that sell for $4995 with $1000 down. We stock BMW’s. Mercedes, Lexus, Jaguars, Volvos, Hondas and Toyotas to name some of the inventory we keep on hand. Yes, I have some older units, like the 97 Ford Explorer, or the 96 Cavalier, but these are for the customer who just needs wheels, and has limited down payments, typically $1000. Most of our customers can come up with $4000 or more as a down payment on the right unit.

Every deal is desked at maximum selling price, typically $3000 profit, plus all the interest that we collect. Our default rate runs pretty low, in that we have someone who calls the customer constantly to collect late payments. Yes we have a few scoundrels, but for the most part our customers seem to pay pretty well. Right now, out of 56 units in inventory, only 4 are repo’s. I try to be careful what I put out on the road BHPH wise, and I avoid problem units, like the F350 dually diesel with 100K plus miles. High risk loans shouldn’t be done on high risk vehicles, since the likelihood of payment declines as the likelihood of mechanical problems increases.

BHPH is typically the last resort in my lender portfolio. We’ll take a shorter deal if we can get a deal funded outside. After all, I’d rather let someone else handle the collections so we can concentrate on selling cars. Obviously, while we may be primarily in the collection business, we still have to sell cars.

I’m sure this is nothing new to a lot of you reading my blog. However, for you folks at franchise dealerships, as lenders tighten up or fall out of business, it’s going to be harder to do deals as time goes on. We’ve already seen it happen; I can say with a great deal of confidence that business will become a lot harder in the next 12 months. We’ve been through it before, and we’ll get through this slow down as well, but the lender landscape is going to be littered with the casualties of this crisis, and new lenders are becoming reluctant to expand into markets like Florida and Nevada, where credit seems to be taking the hardest hit.

BHPH can be a very profitable business, if done properly and with restraint. Not every customer can drive off with a vehicle. Some risks are just not worth taking. New relocated customers, unverifiable jobs or references are some of the things that disqualify a customer in my mind. If it smells fishy, best to pass the risk to someone else. This dealership has been here for 30+ years doing business the right way, and we’d like to be here 30 more!

Lessons I’ve Learned So Far in 2009:

1. There is no such thing in a dealership as a “job well done”. You’re only as good as the last deal you delivered.
2. A GM can loose $250K in the used car department and still keep his job as long as he gets the sales force to sell all the old age units on the lot!
3. Sales people will complain about costs and packs until the GM puts a ridiculous bonus on those units, then they’ll sell every one of them.
4. Lowest prices on the internet bring lots of customers who buy lots of cars at lots of losses. They’ll all pay cash, and never come back to your dealership, because they typically live too far away to have ever considered your dealership before, but felt it was worth the drive to steal a unit from you. Nothing like loosing money and never getting any residual business from a customer.
5. Customers believe you’ll do anything, and take any offer, because the news shows keep telling them how bad our business is.
6. Sales Managers never want to hear they’re doing anything wrong, ethically or legally, until they’re about to get caught.
7. Sales people will stand and stare at you when you say no, hoping that if they look long and hard enough, the answer will change!
8. Never believe a GM who tells you to get to work and he’ll get you a pay plan, and never believe a GM who says, “Don’t worry, I’ll take care of you!”
9. It’s never a good sign when the GM calls a management meeting for 8PM on a Sunday night.
10. A finance director who puts all his eggs in the captive’s basket will soon find himself unable to make an omelet after so many of the marginal deals he forced on them go bad. It’s tough to build relationships with lenders these days when they know they were never the first choice, or even a top 3, for a dealership.
11. A GM will always choose to keep the guy who makes the least amount of money when business gets bad.
12. A “workforce reduction” is just a fancy way of saying “Don’t go away made, just go away!”

Lying For A Car Loan Is A Dead End

This is an article that was published in the Miami Herald last weekend. It's another 'let's scare the heck of the consumer' article that seems to pop up every so often.

Posted on Sun, Jan. 25, 2009
Miami Herald.com

BY PATRICK DANNER

No job and no salary was no problem for Pat Callahan when she agreed to buy a $36,000 Ford Expedition.

Callahan, a Homestead retiree on Social Security, says the dealership persuaded her to lie on her credit application by claiming a nonexistent job.

When the finance company phoned to verify the salary, an employee of the dealer answered and pretended to be her boss, she says in a lawsuit.

Callahan got the loan, but lost the car. It was repossessed.

Mortgage brokers aren't the only ones with a propensity to fib on credit applications. Staff in dealerships' finance departments, sometimes with the customer's wink-and-nod consent, have played the same game -- with similar results, according to various auto industry insiders.

And unlike mortgage brokers, they are unregulated by the state, even though they have access to some of your most intimate financial secrets and can make a mess of your credit.

The state has considered requiring background checks and fingerprinting of car dealer employees who handle financing, but nothing is imminent, says Terry Straub, finance director for the Florida Office of Financial Regulation.

The scope of the problem is hard to gauge.

Duane Overholt, a former car dealer turned consumer advocate, runs the website StopAutoFraud.com that gathers complaints from car buyers and dealership employees.
''We have gotten more complaints from Florida than any state in the union,'' he says.

According to Moody's Economy.com, auto loan delinquencies rose 12 straight quarters in Miami-Dade County -- to just under 6 percent of all loans -- before dipping slightly in the last quarter. But the faltering economy is clearly a factor in that.

The practice of falsifying credit applications is ''widespread in the more desperate stores in our market, where they are looking for volume any way they can,'' says Craig Zinn, who own nine South Florida new-car franchises. ``It's something we are watching internally, constantly.''

He says there is a van that makes the rounds to dealerships that offers to produce phony tax forms, phone bills and pay stubs -- essential ingredients of a fudged credit form.

To simplify the deception, some dealers have the customer sign a blank credit application so the dealer can fill in the information as they please, consumer lawyers say.

Luis Lopez ended up going to court, his credit smudged, after buying a 2002 Mercedes-Benz CL500 from Auto Trend in Hallandale Beach. According to his lawsuit, which went to arbitration, the finance company first approved, then rescinded the auto loan -- after discovering the finance application included a phony W-2 form that misspelled his employer's name and inflated his annual income by $125,000.

The car was repossessed.

In a deposition last year, the dealer denied his employees were involved in the fabrication. In the end, an arbitrator awarded Lopez $2,907 -- about a third of what he sought -- plus costs. Lopez remains upset.

''I don't understand if I won the case, why I am getting peanuts back?'' says the 29-year-old Pembroke Pines man. Auto Trend's phone number is no longer in service, and its lawyer could not be reached.

David Alejandro Lopez, former finance director at Maroone Chevrolet in West Miami-Dade, is suing the dealer, alleging it routinely falsified customers' incomes so they could qualify for car loans. The dealership is owned by Fort Lauderdale's AutoNation.

Lopez claims finance managers, working under him, would either fabricate or obtain fake pay stubs, tax forms and utility bills to support the inaccurate applications. He says he got fired after rebelling against the practice.

''AutoNation did nothing about it,'' says William Amlong, a Fort Lauderdale lawyer who is representing Lopez in the whistle-blower suit in Broward Circuit Court.

In an e-mail, AutoNation spokesman Marc Cannon says the company conducted its own investigation and found no evidence to support Lopez's charges. He says Lopez was fired for ``valid reasons.''

''The company is committed to maintaining high standards of business ethics and conduct and will vigorously defend its position in this case,'' Cannon says.

Jack Tracey, executive director of the National Automotive Finance Association, which primarily represents subprime car lenders, concedes there are incidents of fraud but nothing widespread.
''When people read about it, they think it's going on all of the time,'' Tracey says. ``My experience with financing sources is that . . . if they find a dealer doing it, they just cut them off.''

George Fussell, chairman and CEO of Fort Lauderdale's Southern Auto Finance, believes the level of fraud peaked in the boom times before the auto industry hit the skids this past fall.

''Right now, all lenders have their tail between their legs and they are looking very deep into these credit applications to see if there's anything wrong, and if there's a hint of anything wrong, they're not making the loans,'' Fussell says.

Southern Auto says it does its own rigorous investigations to determine the veracity of credit applications and has discovered various wrinkles.

For instance, Fussell says a dealer might claim that it accepted a $3,000 down payment when in reality a portion of that $3,000 was fronted to the buyer by the dealer in the form of a loan. In egregiously deceitful cases, Southern Auto will make the dealer take back the loan, relieving Southern of its risk.

As for Callahan, the Homestead retiree who couldn't handle the $713 monthly payments on the Expedition, she's suing the dealer, Armstrong Ford of Homestead, over the aggravation she says she endured. The dealer did not respond to calls from The Miami Herald.

''I feel like I was pressured into something I didn't want to do,'' Callahan says. Her suit in Miami-Dade Circuit Court seeks unspecified damages.

The Expedition is gone. Today she drives a Hyundai that her daughter bought.

© 2009 Miami Herald Media Company. All Rights Reserved.http://www.miamiherald.com

Car Repo Men Had Busiest Year Ever

Posted Jan 08 2009, 07:06 PM by Karen Datko
http://blogs.moneycentral.msn.com/smartspending/

Vehicle repo men were in overdrive last year, picking up a record 1.67 million cars and trucks.

According to Automotive News, that figure is from Tom Webb, chief economist at Manheim Consulting, and represents a 12% increase over 2007.

In the only bright note in this story, Webb expects an overall increase of only 5% for all of 2009, with an actual decrease in repos coming in the second six months of the year.

Other factlets from the story:

• Big unsold inventories of new vehicles depressed the value of used cars, Arlena Sawyers of Automotive News reports. The Manheim Used Vehicle Value Index last year experienced the biggest annual decline of its 13-year history.
• Just as the price of gas-guzzlers fell during the summer of $4 gas, they're worth more now that gas is much, much cheaper, and the value of compact cars has dropped.
• Not only that, but our partner blog ConsumerAffairs.com reports that only half of the buyers of small cars feel "extremely happy" with the purchase, much lower than the average rate of new-car glee. Market research firm Mintel, which conducted the survey, speculated that small cars on the market now don't have enough amenities to satisfy many buyers.

"The transition from expensive, gas-hogging SUV to cheaper, fuel-efficient compact will feel like less of a sacrifice if the smaller car offers similar luxury features," Mintel senior analyst Mark Guarino said.

And Another One Goes Down For the Count!

Seems like we're running out of lenders these days. Nuvell/National closed there doors today, giving their people 6 months severance pay or a chance to apply for a job at GMAC. Based on the agreement that GMAC had to make in order to become a bank holding company, it seems doubtful that they are in an expansion move, so I guess we'll just add a few more folks to the ranks of the unemployed.

I have friends who work for Nuvell/National, and worked for National nine years ago as their south Florida Area Sales Manager. I have tried to do business with them since I've been back in the seat, and while it hasn't been easy, we have managed to fund a couple of deals with them each month. The truth is, I've try to fund deals fund deals with every one of my lenders. I firmly believe in NOT putting all my eggs in one basket, and as such, when one lender shuts down, or tightens up, I'm not stuck without someplace else to go with a deal.

No doubt business is getting harder these days. HSBC, Triad, Wells Fargo, and now Nuvell/National have all fallen by the wayside. It started last year, when AmeriCredit and Wells Fargo upped their minimum criteria for applications, and followed by HSBC and Triad pulling out. Funding slowed down with some of my other lenders, but they warned us ahead of time, and we were prepared to ride out the rough times along side them. Lenders have long memories, and I'm confident that my patience will pay off several times over in the long run.

My friend a Nuvell/National told me yesterday that it all came down to their cost of funds, and the inability to remain profitable as that cost increased. It probably won't be the last time we hear this story. Lenders and dealers who are in a position to ride out the storm will undoubtedly came out stronger and more profitable. Hang on tight, and look for smoother waters ahead. It's all we can hope for these days!

New Threats to Credit Scores

A revised FICO formula will kick in soon, and the balances you carry will matter more than ever. Luckily, little missteps will count less. Plus: How you can protect yourself.

By Liz Pulliam Weston, MSN Money

A long-delayed update to the leading credit scoring formula is rolling out in 2009, offering a few advantages to consumers -- and some serious new risks.

FICO 08, the latest version of the FICO scoring model, was initially supposed to be introduced in the fall but was delayed by lawsuits between its creator, Fair Isaac, and the nation's three main credit bureaus.

Everybody's since made up, and TransUnion will offer the new score to lenders starting in late January, with Equifax introducing it in the spring, said Craig Watts, a Fair Isaac spokesman. (Experian, the third bureau, hasn't yet announced when it will offer the score.)

Fair Isaac says the new score will do a better job of predicting defaults than the classic FICO, which is used in more than 75% of mortgage lending decisions and by 90% of the largest U.S. lenders.

But FICO 08 is even more sensitive than the classic FICO to how much of your available credit you're using. If your credit card issuer slashes your credit limit -- which is increasingly likely these days -- you could see your scores plunge, regardless of whether you carry a balance.

Another hazard: The new scoring formula responds more negatively if consumers have few open, active accounts. Because more credit card issuers are shutting down unused and unprofitable accounts that boosts the chances of damage to your scores.
3 victories for consumers

Not all the news is bad. FICO 08 offers some definite improvements for consumers in several areas, including:

• Collections. The new formula ignores small collection accounts in which the original debt was less than $100. This is a big victory for consumers and one I've advocated for years, because niggling little debts -- created by unpaid library fines, forgotten parking tickets or a small medical bill that slipped through the insurance cracks -- had an outsize impact on people's scores.
• Credit missteps. Fair Isaac says the new version is less punishing to those who have had a serious credit setback, such as a charge-off or repossession, as long as their other active credit accounts are all in good standing.
• Authorized users. Fair Isaac initially said FICO 08 would combat potential fraud by ignoring any "authorized-user" accounts in a borrower's credit report. After a big consumer outcry and potential credit fairness issues, Fair Isaac backed off and decided some authorized-user information would be included.

Adding a spouse or child to your credit card as an authorized user has long been a good way to improve that person's credit score, because your good history with the account typically could be imported to the relative's credit file. But in 2007, credit repair companies began abusing this feature by "renting" authorized-user slots from good credit risks and selling them to strangers who wanted to boost their scores. Some of these strangers bought slots on dozens of different people's cards, boosting their scores by tens or even hundreds of points.

Lenders pressured Fair Isaac to drop authorized-user information from its calculations. But consumer advocates protested, noting that the change could punish millions of innocent parties, including spouses whose entire credit history depended on authorized-user information. Legal experts also warned that ignoring information regarding spouses on authorized credit lines could be a violation of the Equal Credit Opportunity Act.

So now Fair Isaac says the FICO 08 formula will factor in authorized-user accounts "while materially reducing potential impacts to the score," according to the company's FICO 08 marketing brochure. Fair Isaac won't disclose exactly how it does that, but speculation is that the new score will count a limited number of authorized-user accounts and ignore the rest.

Better? Worse?
Fair Isaac made another course change regarding how FICO 08 would handle "inquiries," or applications for credit. At first, the company said applying for new credit would hurt less than in the past, since initial research seemed to show that inquiries had become less predictive of future defaults. Subsequent research, though, contradicted that finding, said Watts, the company spokesman. So you still want to be cautious and apply for credit only when necessary.

But clearly, one of the biggest hazards for consumers is the credit utilization issue. As issuers slash credit limits, the gap narrows between customers' balances and their limits, which is generally bad for their credit scores.

How bad is tough to predict. A limit reduction on a single account won't necessarily trash your credit, Watts said. Because FICO scores assess a lot of data, the effect of a single factor like a credit limit reduction will depend on what other data is on the credit report and how much the line is reduced.

"The person's score could be unchanged; it could go down," Watts said. "Or in some cases, it could go up."

It's fair to say, though, that big reductions in credit limits, and reductions affecting more than one account, aren't going to be good for your scores. Credit card expert Ben Woolsey of CreditCards.com noted that issuers' credit limit reductions so far -- and the promise of more to come -- are "clearly a hazard" to consumers' scores.

Still, Fair Isaac defends the accuracy of its formulas. Watts said the company's research has so far found the credit limit reductions have affected "a relatively small population and those line reductions have been a relatively small amount for a sizable part of that population."

At the same time, he said, a "notable number" of consumers have reduced their use of revolving credit such as credit cards, which is helping to minimize any impact to their FICO scores from credit limit reductions.

"Our most recent performance study," Watts said, "indicates that the FICO score continues to appropriately rank-order consumers based on credit risk."

Different yardsticks, same strategies

Other ways to protect your scores:

• Watch those balances. The less of your credit lines that you use, the better, even if you pay your balances every month. The credit bureaus and your credit scores don't distinguish between balances you pay off and those you carry month to month; the balance that's reported to the bureaus is typically the one that shows on your most recent monthly statement.
  If you're in the habit of using a big portion of your credit limit -- because you travel on business or are chasing credit card rewards -- consider asking for a higher limit or using more than one card. Ideally, you'd use no more than 30% of your available limit at any time during the month; under 10% is even better.
• If your credit card issuer slashes your credit limit, try to get the decision rescinded (read "Thaw out your frozen credit" for details). If that's not possible, use the card less and move at least a portion of your balance to other cards or to an installment loan. For credit scoring purposes, it's better to have small balances on a number of cards than a big balance on a single account.
• Don't close accounts. Fair Isaac has made it clear that closing accounts can never help a classic FICO score and may hurt it. With FICO 08, that's even more true. You get more points for having open accounts in good standing; conversely, having a higher proportion of closed accounts can hurt you more.
• Keep your accounts active. Issuers increasingly are shutting down unused accounts, which reduce your available credit and can hurt your scores. Even if your account isn't closed, though, FICO 08 doesn't like to see a bunch of unused cards -- it wants to see you actively and responsibly using a variety of credit accounts.
• A simple way to keep an account active is to have a monthly bill charged to it, and then arrange for an automatic monthly payment to ensure you don't miss a due date (a single skipped payment can devastate a great credit score).
• Consider an installment loan. There are two main types of credit: revolving accounts that allow you to build up and pay down balances, and installment loans that typically have fixed payments that require you to pay down your balance over time. Credit cards and lines of credit are examples of revolving accounts, while auto loans and mortgages are considered installment loans.

The FICO formula has always rewarded folks who had and successfully managed both types, which is why getting an installment loan was often recommended as a way for people with troubled credit to rehabilitate their scores. The new scoring formula is even more sensitive to the mix of credit types people have and use. In the past, people were able to get and keep very high scores using only credit cards; it's not clear if that will still be true under FICO 08.

Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.
Published Dec. 29, 2008

The Truth, The Whole Truth and Maybe Nothing But The Truth!

Maybe it's just here, but lately, I've run into a number of cases of customer fraud. I'm not talking about identity theft. That I can deal with. It's customers who think they can fool me and the bank!

A few examples:

• One customer provides pay stubs on delivery that are over 30 days old. She sends an "updated" pay stub to us after we spot the car... the only problem is the only thing that changed on the pay stub was the date! The dollar amounts were the same as the first pay stub she gave us, but the customer cut and pasted a new date over the original one!
• A customer provides a pay stub on delivery that appears to be legitimate. We package the deal and send it out for funding. The bank does a verification of employment and finds out that the customer is a part-time employee, and the pay stub he provided us is "not consistent with how he gets paid"
• A customer fills out a credit application and tells us he has been at his job for over 6 years. On verification, the bank finds out "Customer was just re-hired at current job 11/24/08 after being gone for years". So much for that approval.
• Three separate cases of fraudulent Social Security numbers, with one customer who could not provide the original card, but had a real good photocopy for us!

It seems as though all the press about the car business being in trouble has got some customers believing that we'll do anything for a deal. I've been approached by customers offering "bonuses" to get their loan approved. Some customers believe that we'll look the other way at indiscretions and questionable activities in order to make a deal. Others are amazed that the banks actually verify everything, and many are dumbfounded by the idea of a customer interview. I constantly have to tell my customers to make sure they answer their phone when the bank calls. Yet I still have to chase customers to get their welcome call done.

One of the things I have done to help cut down on the brain damage is require my sales people to get a "Verification of Employment" form signed by the customer when they complete the credit application. When the customer is reluctant to sign this form, it's a heads up to a potential problem with the deal. In addition, we do a reverse look up on both the home and work numbers provided. Not surprising, we find a lot of cell phones for employers, and either get a proper number, or we don't deliver the vehicle.

It's getting harder to do business these days. Every deal counts, but only when it gets funded. It only makes sense to make sure, up front, that a deal is indeed a deal, and not a repo or rollback!