JM Family Enterprises recently promoted one of its executives to be vice president and general counsel for Southeast Toyota Distributors and JM Lexus.
Taking on this role is Todd Clarke, who will report to Carmen Johnson, executive vice president and general counsel of JM Family. Clarke will oversee the legal teams that support the companies with compliance, transactions, litigation management and all other legal functions.
Prior to joining the JM Family in 2004, Clarke was a trial attorney for six years in Colorado and Florida. Since starting his career with JM Family’s subsidiary JM&A Group, he’s held various positions in its legal departments and has been a key contributor on many successful legal initiatives.
Most recently, Clarke served as the assistant vice president and deputy general counsel for Southeast Toyota.
Clarke is active in the community, serving as a committee member for the Veterans Pro Bono Project, a part of the United Way's Mission United program offering free legal services to eligible veterans and their families.
Additionally, Clarke is a volunteer with the Justice Teaching Program, an initiative sponsored by the Florida Supreme Court that pairs legal professionals with state schools to educate students on the justice system.
The California New Car Dealers Association (CNCDA) named Dealertrack Technologies as a strategic partner this week, recommending the company’s solutions for F&I, inventory, CRM, compliance and digital marketing.
CNCDA explained that it recognizes that dealers are looking for solutions that will help them streamline and advance their automotive retailing operations. Association officials emphasized that naming Dealertrack as a strategic partner assures California franchised dealers that Dealertrack’s integrated technology solutions have met the CNCDA’s criteria and have proven value in the marketplace.
CNCDA explained that it selected Dealertrack because of its ability to continually improve efficiency and productivity in franchised dealerships through technology. Additionally, the company’s commitment to customer service and support was also recognized as a critical component in enhancing the overall customer experience in automotive retailing, according to Brian Maas, who is president of the California New Car Dealers Association.
“Choosing Dealertrack Technologies as a strategic partner was an easy decision,” Maas said. “Dealers share their vision about how to transform dealer interaction with consumers both online and in the showroom, and we do our best to provide them with a trusted list of resources to help guide their decisions toward the best solution to serve their needs.”
The Dealertrack solutions and services that are now recommended by the California association include:
— Compliance Solution: Safeguards against potential loss, protects customer information and helps maintain compliance with federal and state regulations.
— eMenu: Drives efficiency and profitability by integrating the entire aftermarket product sales and submission process in one easy-to-read menu.
— Salesmaker: Integrates into dealers’ existing sales and F&I workflow, and helps them identify the vehicles that best meet the needs of their customers.
— Inventory+: Provides dealers with an integrated data-driven inventory management system that delivers desktop to mobile appraisal, pricing, syndication, merchandising, stocking and transportation functionality.
— CRM: Offers visibility into every level of the dealership’s customer relationship management processes through intuitive dashboards that organize customer information and sales progress.
— Digital Retailing: Improves website lead quality and increases sales by streamlining the vehicle purchase process offer through powerful tools that serve up pricing and payment solutions in line with dealership criteria.
“California is a progressive state at the leading edge of technology innovation. It is also an advanced market for automotive dealers where technology innovation is key to driving growth and a richer customer experience,” said Raj Sundaram, co-president of Dealertrack.
“This partnership with the CNCDA reinforces our focus on delivering innovative technology that transforms both dealers’ operational processes and car shoppers’ experiences,” Sundaram continued. “We are appreciative that they have chosen Dealertrack as a strategic partner, and look forward to helping California automotive dealers grow their businesses.”
Editor’s Note: Watch for some recommendations from Dealertrack associate general counsel Randy Henrick focused on creating compliant advertising campaigns coming in the March-April print edition of SubPrime Auto Finance News.
As the company ramps up its prime financing program, General Motors Financial still is keeping an eye on its subprime business as a Wall Street analyst touched on recent inquiries from the U.S. Department of Justice and the Securities and Exchange Commission.
GM Financial rolled out its prime loan product to all GM dealers on Nov. 1, and with just two months to generate paper, the company reported that its prime bookings totaled $493 million for the year. The extra prime paper also elevated the average FICO score for Q4 originations as the company pegged the typical score at more than 40 points higher than what it saw in the same quarter a year earlier.
However, 31.1 percent of the subprime auto financing the parent automaker generated in the fourth quarter still went into the GM Financial portfolio. The company reported Q4 North American originations came in at $1.934 billion with $507 million of that figure being connected with used-vehicle financing at GM stores, an amount more than triple the figure posted in the year-ago quarter.
With subprime still a major part of the company business, BlackRock analyst Bryan Jacobi asked GM Financial leadership during its recent conference call about subprime securitizations. Jacobi’s question arrived in light of the federal agency inquiries and since, in his opinion, performances have been “quite good.”
In response, GM Financial chief financial officer Chris Choate said, “The performance of auto ABS, not only currently but back across the economic cycle, was strong and stable. Everybody got repaid interest and principal in a timely manner as really no defaults occurred.
“Auto ABS is maybe being evaluated by the different governmental agencies perhaps unfairly, in light of what happened with subprime mortgage securitizations as kind of the go by,” Choate continued.
Then Choate discussed why GM Financial didn’t have any of significance to share in connection with the DOJ or SEC matters that first were disclosed last summer.
“Really the reason we haven't updated or changed any of our disclosures related to those ongoing matters is really they’ve been fairly stagnant, if you will, relative to the interactiveness between us and those agencies. We certainly are cooperating. We provided lots of data,” he said.
“There have been certain direct interactions between the company and different agencies. But really, sort of the ball is in the agency’s court to move forward. We don’t really have a timeline for when or how that may happen,” Choate continued.
“Certainly any time you have agencies investigating your business, it's a serious matter and we take it seriously. And there is a certain element of concern. But again, the facts on the ground relative to how auto ABS performed, in our view, sort of mitigates a negative outcome,” he went on to say.
More Details About Portfolio Health
GM Financial’s North American delinquencies stayed relatively flat year-over-year during the fourth quarter. The company reported delinquencies up to 60 days came in at 7.4 percent of the portfolio, and total delinquencies stood at 9.9 percent as of Dec. 31. A year earlier, the readings were 7.5 percent and 10.0 percent, respectively.
GM Financial mentioned its annualized net quarterly credit losses remained almost flat year-over-year as well, coming in at 3.6 percent. The company’s recovery rate did soften a bit on a sequential and year-over-year basis, dipping to 53.1 percent.
“Consumer loan credit performance in North America, these metrics are very stable quarter-over-quarter, year-over-year,” GM Financial president and chief executive officer Dan Berce said. “I should say, just like subprime originations, we see a distinct seasonal trend in subprime credit, with the March and June quarters being the strongest and the December quarter typically being the weakest.
“We’ve seen a bit of softness in the market year-over-year, and we do expect to see continued moderation in used-car pricing throughout 2015, albeit from a historical standpoint still quite good,” Berce continued. “Going forward, our credit metrics will be impacted by our increasing mix of prime originations and so we should see a favorable impact to overall North America credit metrics, delinquencies and losses going forward.”
Enhancing Floor-Planning Business
GM Financial closed the year with 487 dealers with an active floor-planning account, up from 309 stores a year earlier. The increase pushed the company’s outstanding commercial lending portfolio past a new threshold — up to $3.2 billion
Berce insisted GM Financial’s goals for its commercial business haven’t changed, even though analysts believe the conditions are ripe for more activity there since the company now offers a full suite of financing products and GM is pushing its leasing activity to the captive.
“When we launched the business less than three years ago, we articulated that over a number of years we'd like to get to a 20-percent type share target. And we’re kind of halfway into reaching the target. We’re at around 10 percent now,” Berce said.
“If we keep going on the rate we're on of market share gains, I think we’re very comfortable with that,” he continued. “I think that one thing that could change that trajectory is the fact that for the first time now going into 2015, in the U.S. we have complete captive type capability.
“We didn’t have the prime product in our suite before, and we got a lot of feedback from dealers saying, ‘Well, we'd like to use you as our floorplan source, but we’d also like to use you for all the products.’ We didn't have all the products so we were a bit handicapped,” Berce added.
“So I think that'll help the momentum in 2015 and beyond, but we still don’t have outsized share targets for commercial. We’re really quite pleased with the trajectory we’re on,” he went on to say.
Top-Line Performance
GM Financial reported earnings of $59 million for the fourth quarter, down from $121 million for the same quarter a year earlier
The company’s earnings for the year came in at were $537 million, down from $566 million for 2013.
Officials mentioned earnings include $13 million and $42 million in pre-tax acquisition and integration expenses for the quarter and year ended Dec. 31, 2013, respectively.
Additionally, earnings for the fourth quarter of 2013 include $15 million in pre-tax charges associated with discontinuing the Chevrolet brand in Europe.
IDDS co-owner and vice president Max Zanan recently became the latest F&I executive to pass the certification exam orchestrated by the Association of Finance & Insurance Professionals (AFIP).
Zanan passed the AFIP test in January.
Based in New York City, IDDS provides F&I products, training and consulting services to dealers in New York and Florida.
Zanan has 14 years of experience in F&I. He rose through the dealership ranks to serve as the general manager of a Mitsubishi dealership. During his tenure that store rose to be No. 1 in sales volume nationwide for Mitsubishi.
Zanan then worked as executive director of Vehicle Manufacturer’s Services until he co-founded IDDS in 2012.
As part of a trio of company developments, CDK Global announced its Contract Validation solution will be released later this year to Fiat Chrysler Automobiles (FCA) dealerships in the U.S.
During the vehicle buying process, the CDK Contract Validation solution can check a vehicle purchase contract for accuracy and acceptability by Chrysler Capital. Contract Validation can complete this task within the sales workflow while the customer is still engaged in the buying process and prior to the contract being reviewed by the financial institution.
Santander Consumer USA through Chrysler Capital, its full-service finance provider for FCA, noted that all Chrysler/Dodge/Ram/Jeep/Fiat/Alfa Romeo dealerships utilizing a CDK Global dealer management system (DMS) in the U.S. will be eligible to use Contract Validation.
“Our technology is developed to make the car buying process more efficient for our dealership clients and their customers,” CDK Global president and chief executive officer Steve Anenen said. “We’re pleased to be the partner that brings this to FCA dealerships.”
CDK has worked with other manufacturers' captive finance organizations, including Volkswagen, Mercedes-Benz and BMW, to launch similar versions of Contract Validation.
According to Tom Dundon, chairman and CEO of Chrysler Capital, “Finance and lease agreements can be complex. Nothing is more aggravating to a consumer or dealer than having to go back to the dealership to re-sign a contract.
“In working with CDK and their jointly-owned financial development organization, Open Dealer Exchange, we have designed a best-in-class approach to assisting our dealers with ensuring the accuracy of contracts prior to them being sent to our team for acceptance,” Dundon continued.
Dealerships using the CDK Drive or w.e.b.Suite DMS platforms can validate contracts from within their normal workflow, allowing them to streamline the vehicle-buying process and give customers a better experience.
Chrysler Capital will be assisting in the roll out by providing benefits to dealers who subscribe to the new offering, such as faster contract funding through a flash-funding process for deals that have had the Contract Validation process applied.
CDK Global, Open Dealer Exchange and e-SignLive Roll Out E-Signatures and E-Vaulting
In other company news, CDK Global, Open Dealer Exchange and e-SignLive recently completed the successful integration of e-SignLive e-signing service into CDK’s platform, as well as the use of the e-SignLive eVault within ODE’s platform.
The companies explained the integration of these technologies is geared to solve an almost universal challenge within the buying and selling experience — the need to speed up the time it takes to prepare, review and sign loan documents on paper and close bookings, while securely storing financial documents and meeting lender program guidelines.
“The collaboration between ODE and CDK Global is an industry-first for e-signing the Retail Installment Contract, known as the RIC, and ancillary documents within the dealer management system and not exporting data to a separate system,” e-SignLive CEO and co-founder Tommy Petrogiannis said. “The dealer has a single process for every deal, customers have a better buying experience and lenders gain maximum benefit with the Retail Installment Contract completed, signed and transmitted electronically.”
While digital or e-contracting has been around for a decade, the companies acknowledged adoption has been limited because of the transaction often falling to paper when it came time to sign the documents. There was also the challenge of meeting regulatory guidelines around the transfer and storage of financial documents. Both these challenges impacted the customer and the dealer experience.
CDK, ODE and e-SignLive believe they have surmounted these challenges and brought an integrated and completely digital approach to vehicle buying, selling and financing.
Here is how the solution can works for dealers and finance companies:
— Through CDK Global’s Dealer Management System (DMS)-based “See What You Sign” technology, which includes e-SignLive e-signatures, customers can electronically sign and complete nearly every document in the funding package on an iPad or touchscreen, with CDK’s eForms library offering 8,500 documents to support the F&I process.
— From the DMS, ODE can process the signature capture sequence and the electronic vaulting of the Retail Installment Contract (RIC), using e-SignLive’s eVault technology. A key advantage of the e-SignLive eVault technology is its ability to support a unique e-vault for each lender, thereby assuring their control and possession of the RIC.
Open Dealer Exchange president Steve Luyckx emphasized that for CDK and ODE customers, e-contracting has become a reality.
“It’s taken several years to build the infrastructure to support e-contracting, and we’re very pleased that we’ve added the final component,” Luyckx said.
“With electronic vaulting complementing our existing electronic document and data transmission and contract validation, we have all of the pieces in place to transform the car buying experience and transmit the entire funding package from dealers to lenders,” he continued. “2015 is the year of the digital deal.”
To find out more about this partnership, visit www.silanis.com/partners-and-apps/partners-and-solutions/open-dealer-exchange.
CDK Global Offers Complete Paperless Payables and Receivables Workflow
In yet another development from CDK Global, the company also launched Cash Management, a completely paperless payables and receivables workflow solution.
The receivables portion of CDK's Cash Management Solution is ePayments. Building on CDK's strategic relationship with CenPOS and its cloud-based payment engine, CDK's ePayments workflow can allow dealerships using the CDK Drive DMS to have an integrated solution to accept online, mobile and alternative payment options such as Apple Pay, Google Wallet, and PayPal.
Integrated with CDK’s Service Edge mobile application, CDK ePayments can give a dealership customer the choice on how they want to pay. They can receive a text/email invoice notification, pay the service balance online via their secure digital wallet, and arrange their vehicle pickup time — all within one application.
Through CDK's strategic relationship with Yooz AP Automation and Nvoicepay, ePayments is coupled with account payables applications that can provide end-to-end, “no touch” invoice processing — automating tedious and error-prone tasks like general ledger coding, approval of invoices, and payment to vendors.
CDK Global vice president of product marketing Justin Sprague pointed out a single dealership may need to process thousands of invoices per month so the time savings can be significant.
With CDK's integrated solution, Sprague indicated dealerships can process payments faster and more accurately.
"With the increasing prevalence of mobile payment transactions, consumers are expecting a similar experience in all retailers, including dealerships,” Sprague said. “By transforming the traditional Receivables and Payables process, we can help dealerships increase revenue, reduce expenses, control risk and improve cash flow.”
Within a year of settling charges with the Federal Trade Commission, Consumer Portfolio Services is now dealing with matters from the U.S. Department of Justice.
The subprime auto finance company said in a filing with the Securities and Exchange Commission last week that it received a civil investigative subpoena pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The Department of Justice sent this subpoena to CPS on Jan. 14.
In the SEC filing signed by CPS executive vice president Jeffrey Fritz, the company said, “The subpoena directs us to produce documents relating to our subprime automotive finance and related securitization activities.
“Other purchasers of subprime automotive receivables have disclosed receiving similar requests at various times since July 2014,” CPS added.
Last May, the FTC said CPS would pay more than $5.5 million to settle charges that the company used “illegal tactics” to service and collect consumers’ loans, including collecting money consumers did not owe, harassing consumers and third parties, and disclosing debts to friends, family and employers.
According to regulators, CPS agreed to refund or adjust 128,000 consumers’ accounts constituting more than $3.5 million and forebear collections on an additional 35,000 accounts to settle charges the company violated the FTC Act.
The FTC also indicated CPS will pay another $2 million in civil penalties to settle FTC charges that the company violated the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA)’s Furnisher Rule.
CPS is not alone in getting subpoenas from DOJ. Credit Acceptance confirmed reception of one just before Christmas.
As Ally Financial announced in December that the U.S. Department of the Treasury had sold its remaining 54.9 million shares of common stock producing an exit from the Troubled Asset Relief Program (TARP), the finance company was being subpoenaed by DOJ.
And last summer, General Motors Financial received a DOJ subpoena to produce certain documents relating to their and their subsidiaries’ and affiliates’ origination and securitization of subprime auto loan contracts since 2007.
The captive arms of Toyota and Honda also are involved in regulatory matters, according to reports filed with the SEC.
With regulators such as the Federal Trade Commission honing in on advertisements that focus on the financial elements of a vehicle transaction, the National Automobile Dealers Association responded by issuing a new publication during this year’s NADA Convention.
The association highlighted the new guide will assist franchised dealers in complying with federal advertising requirements on the sale, financing and leasing of automotive products and services.
A Dealer Guide to Federal Advertising Requirements provides examples of “bad” ads and “good” ads and chapters on 41 different federal advertising topics, such as the use of discount claims, email advertising, green marketing claims, Internet advertising, satisfaction guarantees and trigger terms. Readers can access the content quickly by clicking the hyperlinked topics in the table of contents page in the PDF document.
“The guide is user friendly and is a valuable resource for the entire auto industry,” outgoing NADA chairman Forrest McConnell said. “We are encouraging dealers to provide the publication to their advertising agencies, manufacturers, finance companies and others involved in advertising operations.”
The release of the guide coincides with recent intense scrutiny by the FTC of dealer compliance with federal advertising standards and follows an NADA University Online webinar on the topic that was presented last March by attorneys with the FTC’s Division of Financial Practices. To access the webinar, NADA members can log in to NADA University Online at www.nadauniversity.com and enter the search term, “Comply with Federal Advertising Requirements.”
Since 2012, the FTC has initiated five separate rounds of advertising enforcement actions against 18 dealers in 12 states for multiple types of advertising violations, including actions against three dealers that the FTC announced last December.
“The guide does not address additional advertising requirements that may be imposed at the state or local level, which vary considerably and need to be fully addressed when dealer ads are reviewed for legal compliance,” said Paul Metrey, NADA chief regulatory counsel.
“It’s essential that dealers consult with their legal counsel to determine — and to ensure that their advertisements are consistent with — the full scope of their advertising responsibilities,” Metrey continued.
Metrey also mentioned this new guide is part of NADA’s Management Series called, Driven. It is available at www.nada.org and will be included in the suite of compliance products at NADA University Online at www.nadauniversity.com.
The ability for federal regulators such as the Consumer Financial Protection Bureau to use disparate impact theory to hand out enforcement actions against finance companies that provide auto financing could be reduced or even eliminated, depending on how the Supreme Court rules before summertime heat reaches Washington, D.C.
During the Vehicle Finance Conference hosted by the American Financial Services Association, attorneys and company executives kept watch on smartphones and tablets on Wednesday because oral arguments took place in front of the Supreme Court that could narrow the scope of discrimination claims made under the Fair Housing Act (FHA) by leveraging disparate impact.
Legal experts from AFSA and other firms contend that if disparate impact no longer can be used in FHA matters, it would be prohibited in cases regarding the Equal Credit Opportunity Act, which is a regulatory tool often associated with the policing of auto financing.
While holding his laptop on stage and pouring over emails from colleagues and other sources, Severson & Werson chairman Mark Kenney attempted to give conference attendees an assessment of what happened during the hour-long oral argument session at the Supreme Court. The specific case pits the Texas Department of Housing and Community Affairs versus the Inclusive Communities Project to determine whether FHA encompasses claims for disparate impact.
The Pacific Law Foundation (PLF) joined many other organizations arguing that FHA only prohibits intentional discrimination. PLF officials contend the threat of being sued under a theory of disparate impact encourages private and public decision makers to act on the basis of race. The theory of disparate impact holds that practices in employment, housing, or other areas may be considered discriminatory and illegal if they have a disproportionate "adverse impact" on persons along the lines of a protected trait. Although the protected traits vary by statute, most federal civil rights laws include race, color, religion, national origin, and gender as protected traits, and some laws include disability status and other traits as well.
PLF went on to mention that Justice Antonin Scalia observed in his concurrence in Ricci versus Destefano, a disparate impact provision not only permits but affirmatively requires race-conscious decision making when a disparate impact violation would otherwise result.
“The Supreme Court has repeatedly held that race-conscious decision making is presumptively unconstitutional. Therefore, any law that requires, or even encourages private or public entities to act on the basis of race is also presumptively unconstitutional,” PLF officials said.
During AFSA’s conference, Kenney focused much of his assessment of the oral arguments on how Scalia approached the proceedings.
“By piecing together bits and pieces of this oral argument, we are reading tea leaves,” Kenney said. “In the first part of the oral argument, Scalia came out very aggressive against the Texas counsel arguing against disparate impact.
“In the second half of the argument, he went after the other side as he often does, asking counsel that if we allow legislation that supposedly prohibits disparate impact, doesn’t that leave businesses and government enterprises to create quotas, which themselves run afoul of the equal protection clause of the Constitution,” Kenney continued.
“The FHA allows prosecution based on disparate impact claims but that in and of itself is a violation under the equal protection clause of the Constitution,” he went on to tell the scores of attendees gathered in San Francisco ahead of a host of other industry events such as the National Automobile Dealers Association Convention.
“They could not get to that second bigger question unless they found that the FHA allows disparate impact. It may be where they’re going. The clever argument is that there is disparate impact analysis out there but you can’t use it because it’s unconstitutional to achieve a bigger result. We don’t know,” Kenney added.
Before discussing Wednesday’s Supreme Court proceeding, Kenney recapped why this case could alter how agencies such as the CFPB operate in the auto finance space. The bureau used disparate impact theory in late 2013 against Ally Financial to level an enforcement action, which included total penalties approaching $100 million.
“As in the FHA context, the CFPB has been saying that even if you have no intention of wanting to discriminate, if you’re engaged in supposedly neutral activities like buying paper that’s as the result of an automobile financing negotiation which includes a dealer mark-up and regulators can conduct statistical analysis to show that racially protected group pay higher markups than non-protected groups, that has a disparate impact,” Kenney said.
“The hope was the Supreme Court would say, in the FHA, there is no disparate impact analysis. It’s not in the statute. And then by extension, the language is very similar in ECOA so you can’t have it there, either,” he continued.
The Supreme Court is expected to make its ruling on this disparate impact case sometime before its current decision-making session ends in June. Typically, the court takes anywhere from two to five months to make a final decision. But AFSA executive vice president Bill Himpler, who joined Kenney for a regulatory update, thinks a decision might come sooner because “the justices have been weighing in on this issue for a long time.”
Himpler also pointed out that CFPB director Richard Cordray has argued on multiple occasions that the FHA and ECOA are “two separate statutes and not related so regardless of what the Supreme Court says.”
But Kenney left AFSA attendees with a clear message, saying, “The CFPB is hanging on this one just as much as this association is.”
Dealertrack Technologies associate general counsel for regulatory and compliance Randy Henrick will be a featured workshop speaker at this week’s National Automotive Dealers Association Convention and Expo in San Francisco.
Henrick will conduct two workshop sessions to educate dealers on what regulators consider “deceptive” dealer advertising and share insights regarding advertising “must-nots” in accordance with recent directives from the Federal Trade Commission.
The workshops, titled “Dealer Advertising: New Federal Compliance Mandates,” will take place in the Moscone Center on:
— Thursday from 12:15 to 1:30 p.m. PT in Room 3020W
— Friday from 10:30 to 11:45 a.m. PT in Room 3000W
“With the rise of digital and social media, the FTC has ratcheted up its enforcement of deceptive dealer advertising and this has become a growing risk for and threat to the integrity of the automotive industry," Henrick said.
“As the industry continues to trend toward more emerging advertising technologies and the FTC has increased its regulatory scrutiny and standards for what makes advertising unfair or deceptive, it’s crucial that dealers remain up-to-date and compliant with FTC mandates to protect their businesses,” continued Henrick who has more than 25 years of experience in banking and consumer financial services..
Prior to coming to Dealertrack, Henrick served on the legal staffs of GE Capital, Citigroup, MasterCard International and FleetBoston Financial.
Dealertrack will be showcasing its connected and integrated solutions designed to help dealers and finance companies at Booth 2219S in San Francisco’s Moscone Convention Center.
In addition to his workshops, Henrick will be in the Dealertrack booth to answer F&I compliance questions.
Since half of the specialty finance companies that participated in a recent survey conducted by McGladrey experienced some form of fraud during the past 12 months, senior manager Ronnie Lee devised four strategies institutions can implement to overcome possible unscrupulous activity.
Lee discovered several common characteristics among the finance companies that sustained fraud activities within its operations; many of which had a significant auto finance presence.
The survey data showed branch managers and customer service personnel were the most common positions identified as involved in the fraud. They usually were not long-term employees as most employees had between one and five years’ experience with the employer.
Most firms found the fraud being committed within six months of the initial incident with thefts of cash and fraudulent loans being the most common types of fraud. The majority of frauds involved losses of less than $10,000, but in most cases, little or none of the losses were recovered, according to the McGladrey survey.
“These findings reveal some interesting patterns that specialty lenders can use to strengthen their internal controls,” Lee said. “Most fraud studies find that frauds are committed by long-time employees, more often male, with college educations.
“Yet, among the specialty lenders surveyed, the perpetrators are most likely to be females with the company for less than five years and with only a high school education,” he continued.
“In addition, the frauds reported in the survey were almost exclusively committed at branch locations, not at the home office,” Lee went on to say. “These frauds were almost always detected through internal controls or by management at home office locations.”
With those thoughts in mind, Lee began his fraud-prevent recommendations by mentioned that finance companies that sustain losses demonstrate a lack of controls and insufficient segregation of duties at branch locations.
For example, Lee explained fraudulent loan schemes often involve someone at the branch office recording a loan on the books and then writing it off.
“By ensuring those duties are performed by separate parties, this type of fraud could be largely avoided,” Lee said.
Next, Lee suggested that specialty lenders should ensure that branch locations have strong internal controls on-site and not rely exclusively on controls at the home office.
“While fraud losses among the surveyed lenders were relatively small and generally caught quickly, stronger controls at the branch locations, where fraud is most likely to occur, could prevent many of these instances from occurring in the first place,” Lee said.
The McGladrey senior manager noted that improved systems that would allow real-time reporting between branches and the home office could play a key role in improving controls and providing real-time oversight of operations.
Moving on to a third point, Lee noted that weak or poorly documented operating policies and procedures, including formal fraud policies, also play a role in increasing the likelihood of fraud.
“By making it clear to all employees exactly what your operating procedures are, deviations from those procedures are more immediately obvious to everyone,” he said.
Lee closed by recommending that specialty lenders should also consider educating new employees on common types of fraud. He contends this strategy would help honest employees spot malfeasance by co-workers.
“In addition, it would also underscore to employees who might be considering fraudulent behavior how small the gains from those frauds generally are, how quickly they are usually discovered and the consequences they could face,” Lee said.
