Automotive dealers and lenders are facing tremendous profitability pressures this year. In fact, the Federal Reserve raised interest rates by 0.25 basis points in June — and signaled more increases were on the horizon. This increase will most likely exacerbate the trends already present, including low unit sales and soft applications.
Now — more than ever — lenders are working on a very thin line with dealers. As more lenders tighten their credit requirements and leave the subprime market, they are competing for a shrinking prime market. And to make matters more difficult, compliance requirements continue to bring daily challenges.
With all of these pressure points, what steps can a lender take to relieve the stress?
To begin with, focus on the relationship you have with your dealers. It is truly one area of your business you can easily impact. Focus on how you conduct business with your partners. There are compliant — and non-compliant ways to engage in business.
Since the dawn of dealerships, there has been pressure to make the sale or get the loan application approved. When the credit market tightens, it’s not uncommon to see sales managers tempted to put the sale ahead of compliance regulations and falsify data on the credit application. And, it’s not uncommon for lenders to value the dealer relationship over the compliance of one sale. In this case, a lender might consider slapping the dealer on the wrist and addressing consumer complaints on a case-by-case basis.
Bowing under this pressure point equals bank fraud! If caught, the dealer faces penalties upwards of $30,000 and 10-years in prison, on top of any civil penalties requiring the dealer to rectify the loan. If a lender is caught looking the other way, that lender also faces penalties and SEC fines for misrepresenting their loan portfolio. That sale — and the corrupted dealer relationship — just got really expensive.
So what steps should the lender take if encountering a bad loan application? Implement an immediate audit to determine the depth of the issue. Work with the dealer to “make good” on the bad or the affected loans and contact the associated consumers.
Once the near term issue is resolved, the lender should implement more stringent procedures to prevent future fraud. That could include adding another layer of income and vehicle verification to the approval process, such as researching the vehicle identification number (VIN) and calling the consumer directly to verify their income.
The best course of action is to prevent bank fraud from occurring in the first place, using a completely different approach to maintaining good working relationships with dealers. Staying in regular communication with dealer partners enables lenders to better quality assure the applications that they receive. Providing ongoing dealership training on lending requirements can invariably reduce the amount of bad paper a lender receives, increase approvals, and provide a better Look-to-Book.
As a lender’s Look-to-Book improves, it can be expected that dealers will feel empowered to reach out to lenders to help close a sale on a subprime or down-on-their-luck consumer. The point here will be to keep everything compliant by keeping all communication open. Encourage dealers to be up-front with correct information. Help them understand the stipulations required to fund the loan. And, be prepared to take on this type of paper on a case-by-case basis.
In a highly competitive and regulated environment, communication is the key to building successful and compliant relationships for strong business growth. Conduct an audit to determine how wide-spread the issues may be.
At EFG Companies, we utilize more than 40 years of experience navigating the shifting compliance and sales atmospheres to help lenders work with dealers to achieve compliant profitability. Contact us today to find out how.Like This Post