Inventory Costs, Underwriting, Collection Practices Take Spotlight at NABD Conference
ATLANTA — As collectors, dealers and vendors converged on Manheim's DRIVE Center for the National Alliance of Buy-Here, Pay-Here Dealers Collection conference last week, one overall theme of the event quickly became clear from the presenters and panelists — the buy-here, pay-here business is more difficult and demanding than ever in an environment of uncertainty, fluctuating gas prices, skyrocketing heath-care care costs and overall growth in the cost of living.
Going hand-in-hand with the difficulties consumers are facing in today's society are the issues dealers are facing in finding the right vehicles and paying a higher cost for them, presenters explained.
As Rick Potter, president of CAR Financial Services and a resident of Florida, pointed out at the conference, "In 2004, Florida was hit by four hurricanes. It seemed like every two weeks we were hit by another hurricane. These storms wiped out about 250,000 units, meaning dealers had a harder time finding cars. You could not take that many cars out of the market without feeling the impact."
What was the impact? According to Potter, these storms led to a higher cost for older units that are great candidates for the BHPH and subprime business.
Still struggling to recover from the hurricanes in 2004, the market took another hit the following year with Hurricane Katrina, which wiped out an estimated 250,000 on its own, Potter continued.
"Then came Katrina," Potter explained to attendees. "There was simply not enough supply, which created an artificially high expense for vehicles, which we're still seeing now."
The market reacted to these higher wholesale prices by extending loan terms for consumers by 15 to 20 percent, which in turn has resulted in higher loss and default rates in the industry as consumers struggle to pay all their bills in addition to affording a vehicle, Potter noted.
"We're stressed at both ends, with the higher cost of vehicles and consumers being squeezed by higher gas prices, interest rates and more," Potter said.
Jim Currey, director of dealer national accounts for Manheim, verified that inventory for BHPH stores is harder to find.
"There are probably more independents in the business than ever before," he said. "Also, more franchised dealers are entering the business, looking for different ways to bust even."
In order to find these vehicles, dealers need to be more resourceful than ever, Currey pointed out, saying that the Internet is playing an ever-growing role in this aspect of business.
The vehicles are out there, according to Currey, it's just a matter of finding the right source or auction for them. For example, he highlighted the fact that Manheim's Anaheim, Calif., facility sold 5,300 five-year-old or older units in 2006, while the Manheim, Pa., auction, sold 6,000. As for NADE Bordentown, N.J., it moved 8,000 of these vehicles, he said.
Currey suggested reviewing pre-sale listings online at various auctions and visiting the facility a day before the sale to get the lay of the land if a dealer or representative has never been to that particular auction before. Oftentimes, if the dealer contacts the auction, its staff will take time to explain the ins and outs of the facility and offer tips as to which lane offers the older, most desirable units.
Another good avenue, Currey noted, is OVE.com. Through the site's search capabilities, dealers can look for specific units or certain range of vehicles that meets certain specifications.
Ken Shilson, founder of the NABD, Potter, the collection panelists and other presenters all agreed that in order to be successful in this challenging environment, it comes down to good underwriting and making sure the consumer is put into a vehicle he can afford.
Shilson reported, "One in every four deals will go bad."
While there will always some loss associated with the BHPH business, one of the primary ways to reduce this loss is to gather the right consumer data and stipulations from the start, Shilson said.
"Dealers don't always gather and verify the customers' stipulations (time on job, income, actual expense, debt, time in residence, etc.) Salespeople get paid to sell cars not gather underwriting information," Shilson pointed out.
His solution to this is that dealers and underwriters should enforce CASH — capacity, ability to pay, stability and history — as a way to make sure the customer can afford a unit.
"When you're not doing good underwriting, you're burying the customer and burying the deal. Be an underwriter, not an undertaker," he told attendees. "The more you learn about customers, the more you earn."
Shilson also shared some new industry benchmarks this year, as his company, Subprime Analytics, analyzed customer data for the first time. To view this data, please see the Early February edition of SubPrime Auto Finance News.
Tips for Collection Success
To highlight best collection practices, the NABD gathered a panel of three experts with daily hands-on experience in this area of business — Frances Chatman, of Cavenaugh Automotive Group in Walnut Ridge, Ark.; Cereice Earp, of Jim Keras Automotive Group in Memphis, Tenn.; and PJ Turner, of J.D. Byrider in Carmel, Ind.
One of Chatman's key points was that a dealer simply cannot finance everyone. Dealers and underwriters need to be sure they can collect on what they're financing, she said.
Chatman is the operations manager for Cavenaugh Auto Group and has been in the BHPH business since 1993. She manages her company's two BHPH stores and related finance company.
"If underwriting and sales have done their jobs correctly, then half of our collection battle is won," Chatman explained. "For collections to be successful, you must have good, accurate and true information from sales. Without this information, you'll never be able to collect your contracts."
As to what she looks for when hiring a collector or account representative, Chatman said, "Well, I look for life experience, good communication skills and an even temper. I also look for an individual who can handle their money. I have found that if they can't pay their bills on time, they usually aren't successful in helping others pay."
It is her belief that a BHPH operation should have one collector for every 300 to 350 accounts.
"If you don't have enough collectors for the number of accounts you have, then your collections will suffer greatly," Chatman noted. "I would rather have one too many collectors than one too few. I feel that each collector can efficiently work 100 past-due accounts."
Cavenaugh's BHPH stores also offer other services for their customers, such as check cashing, money orders, taking payments for various other bills and selling prepaid credit cards.
"We try to find a way to provide services for our customers and keep them coming to us and not going to a third party that will take some extra portion of their money," Chatman said "This will allow the customer the ability to pay us easier if we can eliminate someone else taking their money."
Meanwhile, Earp also added her input to the collection panel. She oversees all aspects of Keras' BHPH lots and related finance company. Earp started in the BHPH business in 1988 after spending two years learning the dealership business.
For collectors or dealers seeking help or advice regarding the industry, Earp strongly recommends joining 20 Groups.
"I got involved in 20 Groups and that's how I met PJ and Fran. I found people I could call to get advice," she mentioned.
While other stores may be firm when it comes to charge-offs, Earp said her collection team does its best to get the customer paying again.
"We try to work with a customer to get him back in the car, especially if the vehicle is in rough shape," Earp explained. "We offer some payment extensions, but the customer must have paid well for the prior six months, and we won't offer another extension until another six months have passed of clean payments."
She went on to say her stores do finance some repairs on the vehicles to keep customers paying, but Earp said Keras doesn't use any door knockers.
"My best decision was bringing on board a full-time collections supervisor. I tried doing it myself, but I would have to leave to visit other lots and do other things," Earp pointed out.
"Good collectors need to be street smart, motivated and able to deal with our kind of customers," she added.
One of Earp's specialties is working with consumers filing Chapter 13 bankruptcy.
"We have $1.4 million in receivables under Chapter 13," she said. "It can be done, and the new laws have helped. My suggestion is to learn the system. Get to know the debtors and attorneys. Get a good creditor attorney to go to the courthouse to represent you."
For consumers who come in after hours to purchase vehicles, Earp said her staff is very cautious in their underwriting as it can be difficult to verify the customer's information.
"We look at income, need two years in the area and 12 months of consecutive employment," she said. "If the stipulations check out, then we can deliver the car. But, if anything looks funny, the staff sends for me.
"Within 24 to 48 hours, we have everything verified," Earp continued. "If there are any problems, we need to tell the customer we need the car back as quickly as possible."
On the same topic, Turner said J.D. Byrider will deliver the car if the stipulations look OK and the credit bureau report shows the same address.
"We require 12 references on every customer," she added. "And we verify everything between 24 to 48 hours. If a consumer isn't sure he can provide information for 12 references, we hand them a phone book."
Turner has been in the collection industry for 30 years. Currently, she travels to the various J.D. Byrider franchises throughout the country, training the staff and ensuring laws and regulations are met in each state. She said Jim DeVoe Sr., the founder of J.D. Byrider, who died last year in plane crash, asked her to join his team when he was beginning the company in 1980.
"He (Jim) and his father taught me the car business, and I taught them the finance business," she explained. "A portion of Jim's dream was to be able to help people.
She went on to say, "Jim was my best friend and I was on a roller coaster ride with him for 26 years."
"The industry suffered a tremendous loss when with the passing of Jim DeVoe," Shilson commented.
According to Turner, J.D. Byrider has 16 corporate-owned stores, soon to be 17 when the company finalizes the opening of a new store in Florida. Overall, the company services almost 22,000 accounts and has centralized collection agencies in the states it does business in.
"All the payments are due on Friday," Turner said to attendees. "We close each week on Saturday. We never change a due date or give an extension."
J.D. Byrider's policy is that a collector can handle 75 delinquent accounts. She said the company never re-contracts a customer, with the only exception being if the contract was based on a tax refund and the refund wasn't quite what the customer expected.
Turner said the company rarely finances repairs, as it has 793 of these accounts and 476 are delinquent.
What was Turner's worst decision? "My worst decision would have been collecting by buckets, or by delinquencies. Meaning, one collector covers accounts one to two days late, another collector covers accounts three to four days late and so on," she said.
Finally, J.D. Byrider does a personality profile for all its employees and has certain characteristics it looks for in the collectors it hires, Turner said.
To learn more about the NABD or its offerings, visit www.bhphinfo.com/bhphinfo.asp, or call (713) 290-8171.