MAY JUNE Non Prime times

Non-Prime TimesNon-Prime TimesOfficial Publication of the National Automotive Finance Association

Vol. 5 No. 3 • May/June 2016

No Doubt!Targets, recession and reality

Preparing fora CFPB Exam

page 30

Maximize Portfolio Sales Price

page 34

NAF Association Annual Conference

June 1-3, 2016 page 20

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nafassociation.com May/June 2016 Non-Prime Times 3

defi SOLUTIONS created the only auto LOAN ORIGINATION SYSTEM that gives you the freedom to shape it anyway you want. The sugar on top is that it doesn’t cost an arm and leg. How sweet is that? Get a taste for what defi can do for your bottom line. Schedule a demo today.

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Non-Prime TimesOfficial Publication of the National Automotive Finance Association

May/June 2016

Publisher / EditorRick Sly

Associate EditorCindy Sly

Layout & DesignIn-House Graphics Inc.

Advertising & Editorial [email protected]

810-309-8345

Non-Prime Times is published by Dealersbiz LLC.

Dealersbiz LLC makes every attempt to report and print accurately all

published works. However, Dealersbiz LLC cannot be held responsible for

facts supplied or opinions expressed in this publication. Nothing may be reproduced without written

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property of Dealersbiz LLC.

Copyright 2016Reprints with permission only.

DIRECTOR’S NOTE4 I Can’t Believe that it’s Been 20 Years! Jack Tracey

ASSOCIATION 6 Association/Member News

12 Bad Boys, Bad Boys, Whatcha Gonna Do? Eric L. Johnson

THE CREDIT PROCESS 16 No Doubt! Daniel Parry

22 Google Doesn’t Know Everything Scott Brackin

TECHNOLOGY24 Is There Such a Thing as too Configurable? Stephanie Alsbrooks

TODAY’S CONSUMER26 Micro-Moments in Time James Mayfield

COMPLIANCE CORNER28 Find what’s Trending in Complaints Jonna Boyle

LEGAL30 Preparing for a CFPB Exam Michael Benoit and Tom Buiteweg

MARKETING STRATEGIES32 An Auto Finance Fairy Tale, Part 3 Lisa Bundy

COLLECTIONS AND RECOVERY 34 Four Tips to Maximize Portfolio Sale Prices Jorge Gonzalez

36 Debt Sales Enhance Non-Prime Auto Recovery Strategy MaryAnne Kelly

HIRING AND RECRUITING 38 Tough Interview Questions Don Jasensky

TABLE OF CONTENTS

4 Non-Prime Times May/June 2016 nafassociation.com

Title of Section HereAssociation

But it was 20 years ago that a group of non-prime auto finance companies gathered at the Biltmore Hotel in Scottsdale, Arizona,

and decided to form an association devoted to promoting the interests of the non-prime auto financing market.

At the time there were a number of unscrupulous companies operating in the space and the industry was not held in very high regard by traditional auto finance companies. The National Automotive Finance Association was formed and charged with promoting ethical lending practices and transpar-ent financial reporting. Its mission was to help legitimize the non-prime auto financing industry.

Now it’s 20 years later and the non-prime indus-try is a legitimate and integral part of the auto financing industry. The non-prime market is now recognized as several distinct segments: near prime, non-prime, sub-prime, and deep sub-prime and each market segment has a unique operating profile. Another significant development for the non-prime auto finance industry has been the important emer-gence of the securitization market where much of the industry funding is obtained.

As I look back over the past 20 years I see the important role the NAF Association has played in the legitimization of the industry. The association has held an annual conference for the past 20 years where we have showcased industry leaders and best practices while presenting new technology to the industry. For the same period we have complied metrics on the industry in the NAF Association’s Annual Non-Prime Auto Financing Survey.

Over the past few years the NAF Association rec-ognized the need for compliance education and we have developed the Consumer Credit Compliance Certification Program for compliance managers, the Compliance Certificate Program for front line staff who engage directly with the public and we host quarterly Best Compliance Practices Meetings.

I am not suggesting that the NAF Association has been solely responsible for the emergence of the non-prime auto financing market, but we have certainly played an important role and will continue to do so.

Jack TraceyDirector’s Note:

I Can’t Believe that it’s Been 20 Years!

About NAF AssociationThe National Automotive Finance Association is the only trade association exclusively serving the non-prime auto financing industry. Organized in the fall of 1996, the NAF Association supports its members and the industry with programs and education. Among the association’s accomplishments to date are:

• TheAnnualNon-PrimeAutoLendingConference• AnnualNon-PrimeAutomotiveFinancingSurvey,providingthe

industry’s only measurements of growth and changes; available to members at no charge or for purchase by non-members

• Creationandpublicationofstandardsoffinancialreporting• Developmentofacodeofresponsibilityfortheindustry.• Policystatements(Seestatementonvoluntarystandards)• Regionalworkshops

Jack Tracey, Executive [email protected]


Association

PassTime Prevails in Patent Validity ChallengeLittleton,CO–March2,2016–PassTime,

a leading provider of GPS and payment assurance technology solutions, is pleased to announce that the United States Patent and Trademark Office invalidated the entirety ofapatentownedbyLunarEyeandwhichwas the subject of a patent lawsuit claiming infringement by certain PassTime products.

The patent, 6,484,035, had claimed an apparatus and method for triggerable location reportingandlistedAlvinC.Allen,Jr.(a.k.a.ChuckAllen)astheallegedinventor.

In its opinion of February 2, 2016, a panel of three judges of the Patent Trial and Appeal Board for the United States Patent and Trademark Office ruled that PassTime “has shown by a preponderance of the evi-dencethatclaims1–24ofthe’035patentare unpatentable” and entered an order that “claims1–24ofU.S.PatentNo.6,484,035B2 are held unpatentable under 35 U.S.C. § 103.” On September 28, 2015, the Patent Trial and Appeal Board had previously found that claim 3 of the patent was invalid, which had been the sole subject of a prior validity challenge by PassTime.

Stan Schwarz, CEO and founder ofPassTime, stated, “We are pleased to have prevailed both times we have sought relief from the Patent Trial and Appeal Board on this invalid patent, which we had consid-ered to have been used for filing a frivolous suit. We plan in the future to contemplate our options regarding the actions taken so far byChuckAllen,LunarEye,anditscounsel.”

Inpublicfilings,LunarEyestatedthatitintends to appeal the decision of the Patent Trial and Appeal Board.

StewartMesherofConleyRoseP.C.,legalcounsel in the patent lawsuit stated, “We understand that our client is pleased with the result, and we look forward to it being affirmedshouldLunarEyeappealit.”

The patent lawsuit, Case 9:13-cv-00091 pendingintheEasternDistrictofTexas,ison hold pending the outcome of any appeals thatLunarEyecontinuestopursue.

Black Book Announces Premier, Collaborative Partnership with DRIVIN

Collaborative agreement will benefit Black Book’s extensive dealer network through mobile integration, while providing vehicle valuation services to DRIVIN’s inventory trading platform and Insights product

Lawrenceville, GA (March 14, 2016)– Black Book, a division of theHearstBusiness Media Corporation that provides new- and used-vehicle valuation services and custom data licensing solutions, has announced an exciting, collaborative partner-shipwithDRIVINthatwilldeliverrealvalueto their extensive network of over 10,000 active dealerships.

Black Book will be the exclusive vehicle valuation service provider to DRIVIN’sproprietary, inventory trading platform that analyzesover2MVINseverydaytosource,acquire and deliver the right used vehicles to their dealer partners. Additionally, Black Book will power the vehicle valuation service of DRIVINInsights,afirst-of-its-kinddealertoolthat turns 100M data points into actionable stories for a dealer’s lot and local market, based on consumer shopping trends, local market supply/demand, optimal inventory levels, and uniquedealerbehavior.DRIVINInsightsiscurrentlyinpilotandavailabletoDRIVINdealer partners without a subscription fee. As part of the collective agreement, Black Book willintegrateDRIVIN’sBuyConfidenceandnegotiated inventory widgets into their Black BookDigitalmobileapplication,givingtheirnetwork of 10,000-plus active dealers access to retail-ready inventory nationwide. Finally, BlackBookandDRIVINwillpartnertopro-duce data-driven learnings and used-car trend reports available to dealer partners.

“DRIVINisdisruptingtheusedcarindus-try by offering dealers a better way to source, acquire and receive the right, quality inven-tory for their lot,” said Black Book’s Jared Kalfus, senior vice president, Sales. “We are excited by this long-term partnership and look forward to being their exclusive partner for valuation services, while offering our dealers accesstoDRIVIN’spre-negotiatedinventoryand premier sourcing service via our Black Bookdigitalmobileapp.DRIVINhelpsdealers rethink their sourcing strategy and

stock the right used cars for their lot based on consumer demand, local market analysis and profit margins.

Black Book’s vehicle values are an industry standard by dealers and consumers alike when pricing used cars. The company is respected not only for the accuracy of its values, but also the time-tested methodology around how data is collected and reported. Creating actionable sto-riesthroughdataisakeypartofDRIVIN’svalueproposition,andDRIVIN’sdatascienceteamwill leverage Black Book’s trusted information to create regular used-car trends and analysis to educate and help dealers make smarter buying decisions and optimize their lot when requested.

“We are proud to join forces with Black Book, a leader in the automotive industry. Using their data and standardizing vehicle valuations across our suite of products, includ-ing Insights and Marketplace, will help us better serve the needs of our current and future dealer partners,” said Kayne Grau, CEO.“Additionally,weareexcitedtointe-grate our Buy Confidence and negotiated inventory widgets into the Black Book mobile app, expanding our reach and delivering real value to their dealer network with expanded nationwide access and efficient sourcing.”

FactorTrust adds Marla Blow to Board of Directors

Financial industry veteran with CFPB experience brings strategic perspective in rapidly changing market

Atlanta, GA (March 15,2016)–FactorTrust,TheAlternativeCreditBureau, announces the addition of industry veteran Marla Blow to its board of directors. She will lend her expertise to the organization’s audit and risk committee.

BlowisfounderandCEOofFSCardInc.,aWashington,DC-basedcreditcardven-ture designed to offer underserved borrowers flexible, convenient and reasonably priced mainstream credit card products.

Blow previously served as assistant director at the Consumer Financial Protection Bureau

continued on P-6


Title of Section Here

(CFPB)whereshewasresponsibleforpolicyrelated to the credit card, prepaid card and payments’industries.DuringhertenureatCFPB, Blow served as a lead author of the federal government’s most comprehensive analysis of the consumer credit card market to date. Blow’s experience also includes seven years at Capital One, including senior roles in risk management, marketing, finance and business development. Blow is a Henry Crown Fellow at the Aspen Institute in 2015 and is amemberoftheAspenGlobalLeadershipNetwork. She holds an MBA from Stanford University Graduate School of Business, and a BS from The Wharton School at the University of Pennsylvania.

“We are delighted that Marla has joined our team. Her private sector experience and industry acumen, coupled with her CFPB tenure, will prove to be a huge asset to FactorTrust as we continue to grow, expand our offerings and strategically navigate the changing landscape of our industry,” says GregRable,FactorTrustCEO.

“I’ve been impressed with FactorTrust’s commitment to creating solutions for the underserved market. The alternative lending market is more relevant today than perhaps ever before. It’s critically important to offer options to consumers who have shown the ability to be financially resilient in tough times. FactorTrust’s unique credit data and predictive analytics give deserving consumers more options, ultimately empowering mil-lions of Americans and getting them the credit that they deserve and need. I am proud and excited to join their team,” says Blow.

Black Book Launches Bullseye Prospecting to Streamline Dealer Marketing Campaigns to Achieve Higher Results

Economies of scale help drive costs out of campaign execution for dealers and marketers

Lawrenceville, GA (March 28, 2016)–BlackBookannouncesitslatestinnovationcalled Bullseye Prospecting, a comprehensive, all-in-one solution designed to help dealers and their marketing agency partners automate customercampaigns.Duringinitialtests,Bullseye Prospecting was found to deliver

a 30 percent reduction in cost per car sold.

Powered by data from Black Book, Bullseye Prospecting is designed to reduce and con-solidate the many different touch points involved in the development and execution ofacustomercampaign.Dealersandtheirmarketing partners often work with several different vendors, all who add to the overall cost of production after markups are taken into effect. Bullseye Prospecting seamlessly leverages economies of scale for data coming fromDMS,consumer,incentives,andvehicleequity and valuation sources. The program also leverages partnerships with photo and printer vendors for direct marketing collateral.

“With Bullseye Prospecting, dealers and their marketing agencies can leverage true economies of scale by pulling from either template campaigns or custom builds if they choose,” said Jared Kalfus, senior vice president of Sales for Black Book. “Bullseye Prospecting is designed to level the playing field for dealers of all sizes and geographies, with the power to drastically reduce costs and improve the bottom line.”

Dealersandtheirmarketingpartnersneedto re-evaluate the way in which customer campaigns are developed and managed in ordertolowertheirtotalcosts.Dealerprof-its are shrinking, mainly due to tightening margins on the sale of new and used vehicles. According to Henderson, Hutcherson and McCullough’s(HHM)recentautodealereconomic outlook, the gross profit margin for dealers fell from 13.5 percent down to 13.3 percent. The report also stated that the aver-age new vehicle gross profit fell from $1,204 down to $1,193. Gross margins also declined from 3.81 percent down to 3.68 percent.

Conversely, campaign costs remain high for dealers. According to research firm, Statista, theaverage-sizedealership(sellingbetween150-399carsannually)spendsapproximately$616 on advertising per each new car sold. This number increases as dealer size shrinks. The firm points out that dealerships selling between 1-149 cars annually are faced with a per-car advertising spend of $862.

To schedule a demo of Bullseye Prospecting, visit BullseyeProspecting.com.

Drive Down Risk with Auto Industry SolutionsClearwater,FL,March28,2016–Clarity

Services, Inc., the leading real-time credit bureau providing fraud detection and credit risk management solutions for the non-prime market, has announced its newest set of solutions developed specifically for the auto finance industry.

Through its research, Clarity has gained tremendous insight into non-prime con-sumer behavior and how lenders should address many different aspects of consumer risk, including applicants’ stability, as well as intent, willingness and ability to repay debt obligations. Clarity has conducted analyses and collaborated with numerous non-prime auto finance companies to develop custom-ized solutions for the industry.

Many auto lenders currently use auto industry versions of a FICO score, or other custom credit scores as a foundation for their risk assessment. Clarity has shown numerous lenders how to more precisely assess risk by overlaying the Clear Fraud score to enhance their current underwriting framework. The Clear Fraud score, developed to predict a consumer’s intent to repay, can be combined with one or more credit scores to produce a superior underwriting system that provides more precise risk assessment.

A second Clarity solution to be available later this year is a new auto risk indicator. Auto lenders will also be able to overlay this indicator onto existing underwriting frame-works to achieve more precise risk assessment. “Having been a risk executive on the lender side myself, I understand the many benefits that can be derived from more precise risk assessment. Being able to more accurately price and structure deals will have a favor-able impact on loan portfolio performance, funding rates, and operational costs such as verification,” said George Coutros, Clarity’s chief analytics officer.

In recent months, due to increased compe-tition in the sub-prime auto lending market, many lenders have lowered their underwriting standards in an attempt to gain new custom-ers. This decision could prove to be a costly mistake if the proper tools are not in place

AssociationMember News, continued from P-5

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Title of Section HereAssociationMember News, continued from P-6

forpreciseriskassessment.Lendersnolongerhave to rely solely on traditional credit scores developed with traditional credit bureau data. For more information on Clarity’s auto finance risk solutions and integrating with Clarity, e-mail [email protected] or contact Clarity via telephone, (727)489-7266.

RouteOne’s e-Contracting can Now be Accessed Directly by Reynolds and Reynolds docuPADRouteOnewillmakeitsfulleContract-

ing signature process available for the ReynoldsandReynoldsdocuPADsolution.DealersutilizingRouteOne’seContractingwithdocuPADwillreceiveallthebenefitsofRouteOneeContractingwhileprovid-ing their customers with the engaging and seamless closing experience of a vehicle sale transaction on docuPAD. This integra-tion is a valuable functional integration that enhances the current eContracting data inte-grationthatisavailablebetweenaReynolds

andReynoldsdealershipmanagementsystemandRouteOneeContracting.

“We are pleased to provide dealers RouteOne’seContractingsignaturefunc-tionalitywithintheReynoldsandReynoldsdocuPAD,”statedMikeJurecki,RouteOneCEO.“Thisrobustandinnovativeintegrationwill enhance the overall finance and insurance process for both dealers and their customers.”

RouteOne continues to lead the autofinance industry with eContracting. Its volume in 2015 reached two million con-tracts booked and has exceeded five million since inception. Momentum is accelerating because of strong participation by finance sources, and a growing list of over 5,200 deal-ers with coverage in all 50 states. Growth is further building because dealers can easily leveragetheircurrentDMSsandDSPs,likeReynoldsandReynolds,insupportoftheeContracting process through open integra-tionstotheRouteOneplatform.Finally,itprovides compliance auditing throughout

the entire contracting life-cycle, and a flexible, consumer-friendly signing process that can be done using signature pads, tablets, or nearly any touch-screen device.

“Adding this new functionality between docuPADandRouteOneallowsF&Iman-agers to execute contracts and other funding documents more efficiently and seamlessly in docuPAD,”saidRobertSchaefer,vicepresi-dentofOEMRelationsandDataServicesatReynoldsandReynolds.“Overall,theavail-abilityofRouteOne’seContractingsignatureprocessindocuPADisonemoreadvantageforF&ImanagersthatusedocuPAD,includ-ing the large number of Ford and Toyota deal-ershipsthatareRouteOnecustomers.”

Reynolds’docuPADisaninteractive,flattouch-screenF&Isellinganddocumentprocess-ing system for automotive dealerships. With docuPAD,F&Imanagerscanmoreeffectivelyengage consumers and more efficiently handle the finance and insurance steps of a vehicle trans-action, while electronically documenting the process, including electronic signature capture.

Dealers andfinance sources interestedineContractingcancontactRouteOneat866.768.8301.Dealersinterestedindocu-PADcancontactReynoldsandReynoldsat800.767.7879.

RouteOne Launches New Desking ProductRouteOne has launched RouteOne

Desking,anewdeskingproductthatenablesdealers to quickly calculate and present monthly payment options to their custom-ers. It covers multiple sales types, including lease, retail, and cash deals.

RouteOneDeskingfeaturesrates,incen-tives, and residual values from captives and a wide array of finance sources. It also checks for rebate and program compatibility to help reduce errors and the need for manual verifica-tions. It includes dealer configurable options, such as taxes and fees, and default aftermarket values to allow for room on the back-end whenthedealmovesintoF&I.Onceadealhas been desked, all the data from it can gener-ateacreditapplication,inRouteOne,withthe simple click of a button.


Association

SEE THE VALUE FROM EVERY ANGLE

Insight is everything when it comes to accurate vehicle valuation. That’s why the new NADA Values Online makes it easier than ever to see all sides of every vehicle’s story.

Introducing New Vehicle Values — new vehicle pricing guidance from your trusted source for vehicle values! This range of values is based on actual market transactions and market influencers.

Other powerful new features include:

• Inventory valuation — Save and easily update vehicle valuations.

• Vehicle valuation trends — Quickly get insight into wholesale and retail transactions.

• Custom reporting — Select the data that best fits the deal to create tailored reports.

Get deeper insights and the values you trust with the new NADA Values Online.

Subscribe today at nada.com/ValuesOnline

NADA Used Car Guide and its logo are registered trademarks of National Automobile Dealers Association, used under license by J.D. Power and Associates.

with the new NADA Values Online

continued on P-10

“RouteOne’sDeskingtoolisexcellent.Theintegration is great, however what sets it apart for me is the look and functionality of the customer proposals,” said Jesse Akins, sales manager at Pace Chevrolet.

“There are many outstanding desking solutions in the marketplace today, which we will continue to integrate with to fully support dealer choice. So we didn’t get into the business just to get into it,” said Mike Jurecki,RouteOneCEO.“Wegotintodesk-ing because our customers asked us to. They wanted an easy way to consistently calculate payment across all channels that integrates directlyintotheRouteOneworkflowthatthey are so comfortable with and count on for its reliability. With the launch of this new product, they are able to do just that.”

Simplicity Collection Software Integrates with the New BillingTree Payrazr Solution Suite

Simplicity becomes latest partner to benefit from BillingTree comprehensive merchant services and technology solutions

Phoenix,AZ–April5,2016–BillingTreehas announced that Simplicity Collection SoftwarehasbecomethelatestARMsoftwareprovider to integrate with the Payrazr solution suite. Simplicity offers a cloud-based solution that provides clients with real-time access to the status of any of their collection accounts. Integration with BillingTree’s Payrazr gives Simplicity customers access to theARMindustry’s widest range of flexible and com-pliant card-not-present payment suites to increase revenue growth.

Payrazr enables Simplicity to integrate pay-ment channels into their solution, including IVRandonlinepaymentportals.ARMcus-tomers can now securely accept payments, as well as store invoices, manage customer accounts, and payment history. Simplicity cli-ents will also benefit from access to BillingTree merchant services, assisting in maintaining compliance and best practices for secure pro-cessing of payments.

Simplicity becomes the sixth organization to adopt the Payrazr solution suite since its launch in Q3 2015. The evolution of the Payrazr brand will continue later this year with the

announcement of more in-house developed and best of breed partner solutions for organiza-tionsintheARMindustry,aswellasfinancialinstitutions and healthcare.

“We are excited to be partnering with BillingTree to bring additional merchant and payment gateway service options to our cli-ents,”saidChrisCampbell,CEOatSimplicity

Collection Software. “This new partnership allows our clients the ability to quickly, con-fidently, and efficiently increase revenue by incorporating BillingTree’s payment services and Payrazr technology solutions, leveraging theirvastexperienceintheARMindustry.This expansion in partnership provides a fully integrated, robust solution in a very heavily


Title of Section HereAssociationMember News, continued from P-9

regulated industry that we can confidently offer our clients.”

“Simplicity is a great partnership fit for BillingTree,” said Greg Mallin, director of businessdevelopmentatBillingTree.“Earlyindications from our fourth annual pay-mentandtechnologysurveyshowARM

organizations are continuing to look for new technology that better serves the needs of their clients. The Payrazr suite has been developed to service this industry and con-sumer-led demand, which is why we’ve seen robust interest from software vendors look-ing to integrate and take advantage of these innovations.”

J.D. Byrider Adds Two Franchise Consultants to TeamCarmel,IN–J.D.Byrider,thenation’slead-

ing used car and finance company, is pleased to announce the hiring of Tim Bullock and LewisScottandasfranchiseconsultantsforJ.D.ByriderSystems,Inc.ScottandBullock,both currently employed in other roles within the company, will now be responsible for sup-porting franchisees and advising for opera-tional and financial improvement using their in-depth understanding of the business and its customers.

“Developinganoperationsteamwithexpe-rience that spans a range of our businesses has always been an important part of managing our company for long-term success,” said Tom Welter, vice president of franchising. “We are thrilledTimandLewiswillbringoperationalvalue and insight right out of the gate. These two hires allow us more contact, more touches and more impact with our franchisees.”

Tim Bullock,35,hasspent11yearsatJ.D.Byrider, holding the positions of branch sales representative, finance manager, managing partner, regional credit analyst, credit man-ager, and currently as general manager of the Beechmont branch in Cincinnati, Ohio. Tim is a sports enthusiast who follows the Cincinnati Bengals,RedsandNotreDame’sFightingIrish.Tim and his wife Kari have three children: Dominick,SophiaandCooper.

Lewis Scott, 33, has had a six-year career at J.D.Byriderholdingthepositionsofconsumercredit analyst, branch underwriter, branch team lead and currently as general manager of the Greenwood,Indiana,branch.Lewishas13years of progressive automotive, sales and training leadership with Chrysler Financial, WellsFargoFinancialandAccuQuote.LewisisaStateofIllinoisEthicscertifiedteacher,acertifiedAmericanSportsEducationprogramcoach and was an all-conference quarterback and captain of the St. Joseph’s College football team.LewisandhiswifeSamanthaareexpect-ing twins in October.

WiththeadditionofScottandBullock,J.D.Byrider can now devote one consultant to every seven franchisees, representing a network that spans171locationsacrosstheU.S.

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2014



If you’ve ever watched even one episode oftheTVshow“Cops,”you’veheardtheir theme song, “Bad boys, bad boys,

whatcha gonna do? Whatcha gonna do when they come for you, bad boys, bad boys…”. Oops, now that song is going to be stuck in your head all afternoon, isn’t it? Maybethat’sthepointoftheirsong–toget you thinking about what you might do if the cops ever did indeed come for you.

In keeping with the other legal theme of this publication, preparing for an examina-tion, I’ve got five questions I want you to ask yourself before the “cop on the beat” (akatheCFPB)evercomesforyouviatheissuanceofaCivilInvestigativeDemand(“CID”).

What the heck is a CID? ACIDisaformalinvestigationbythe

CFPB(or,itcouldcomefromtheFederalTrade Commission). Essentially, it’s asubpoena for information relating to sus-pectedviolationsoflaw.TheCIDrecipi-ent may be directed to produce documents for inspection, copying and reproduction, submit tangible things, provide written reports, answer questions and appear at a placeandtimetotestify.TheCIDcanbevery broad, arrive with little to no warning and have short response deadlines.

Why did we get a CID? There’s no good answer really. The

Dodd-FrankActrequirestheCFPBtostate the nature of the conduct constituting the alleged violation, which is under inves-tigation and the provision of law applicable tosuchviolation.TherearetargetedCIDs,where you might receive one if there’s bad press about you in the media or have too many consumer complaints filed against you,and“compliancesweep”CIDs,whereyou’re receiving one because of a particular type of compliance sweep being conducted

by the CFPB. The CFPB could even send youaCIDiftheysuspectyoumayhaveinformation in your possession about a suspected violation of law.

What could a CID ask us to produce? There are three main requests of a

typicalCID:(i)documentrequests;(ii)requestsforwrittenreports;and(iii)inter-rogatories. In connection with potential document requests, you could be asked to produce such items as:

•Advertisements,marketingresearchandprograms, and website information

•Organization charts and processflowcharts

•Boardminutes,annualreportsortheequivalent to the extent available

•Relevantmanagementreporting,includ-ing aggregate contract data

•Pricestructure

•Creditapplications,disclosures,accountdocuments and notes and telephone recordings

•Samplecustomercontracts

•Operatingchecklists,worksheetsandreview documents

•Relevantcomputerprogramandsystemdetails

•Historical regulatory examinationdocuments

•Consumer disputes and responses,including individual consumer suits and class actions

•Trainingprogramsandmaterials,anddocumented employee compliance training

•Policiesandprocedures,includingmanu-als and drafts

•E-mailsandinstantmessages(IMs)

•Auditandcompliancereports

•Third-partycontracts

For example, the CFPB could ask you to produce “all policies and procedures related to the company’s compliance with Federal ConsumerFinancialLaw”or“alldocu-ments related to the company’s reposses-sion activities.” Be careful when the ques-tions asks for a document “related to” as theCIDmayreadthattermverybroadly.

In connection with potential written reports, you could be asked to produce written reports with specific information, for example: “Provide a table detailing complaints received during the applicable timeperiodinthefollowingformat:(a)complaint identification number; (b)dateofcomplaint;(c)customername;

Eric L. Johnson

Bad Boys, Bad Boys, Whatcha Gonna Do?

Association

I’ve got five

questions I want

you to ask yourself

before the “cop

on the beat”

(aka the CFPB)

ever comes for

you via the issuance

of a Civil Investigative

Demand (CID).


(d)customer issue; (e) resolution;and(f )dateofresolution.”Youmayhavetheinformation requested, but not in a par-ticular written format. Or, you may not be capturing the information requested, in which case you may have a difficult time gathering the information.

In connection with potential interroga-tories, you could be asked to respond to specific questions, for example: “Identify all service providers used by the company during the applicable time period and describe the function of each service pro-vider”or“Describetheprocessthecom-pany uses for identifying and responding to consumer complaints.”

Are there steps we can take now to prepare for a CID? Youbet!Youshouldidentifyandpopu-

latetheinitialresponseteamsbeforeaCIDisreceivedandinanticipationthataCIDmay be issued to you at some point in the future. Some of the response teams to be formed could include a strategy team, a counsel team, a meet and confer team, an IT and document delivery team and a public relations/investor relations team. The size and number of teams should be basedonyourcompanysizeandCIDrequests.Let’sbreakdowneachofthesepotential response teams a bit further:

• Strategy team. This team is primarily composed of senior management, depart-ment heads and outside counsel. The team develops company goals and response strategies,communicatesreceiptofaCIDto the response teams and other necessary parties,participates(withleadcounsel)in the required “Meet and Confer” and identifiesCIDrequeststhatneedtobemodified, e.g., scope, relevant time period, production schedules, etc. The team also prepares a plan to mitigate potential busi-ness disruptions. Finally, the team obtains a detailed and realistic estimate of the likelycostofcomplyingwiththeCID,as written and within the specified return date to justify requests for modification totheCID.

• Counsel team. Management should identify leads outside counsel to serve as the intermediary between the company andtheCFPB.Leadcounselheadsthecounsel team and coordinates activities oftheotherresponseteams.Regulatorycounsel should be considered to support leadcounselwhenaCIDisdirectedata particular consumer finance law and detailed expertise is necessary. Finally, document counsel may also be consid-ered.Documentcounselwillworkwiththe IT and document delivery team, and the e-vendor if one is employed, to review documents, confirm that they are within the scopeof theCID(relevance),andidentify those that are subject to claims of privilege.

• Meet and confer team. This team’s sizedependsoncompanysize/CIDscope.A “meet and confer” meeting with the CFPB must occur within 10 days after receivingaCID.Thisteamshouldincludepersonnel with the knowledge necessary to resolve issues relevant to complying with theCID,personnelwithknowledgeoftherecipient’s information or records manage-ment systems and personnel familiar with the recipient’s organizational structure. If electronicallystoredinformation(“ESI”)is requested, staff familiar with the com-pany’sESIsystemsandretrievalmethodsmust participate.

• IT and document delivery team. This team should always be staffed and ready. The team should know where documents anddatalikelytoberequestedinaCIDare stored and how they are accessed. The team should be aware of the CFPB’s docu-ment submission standards and be well versed in document retention standards, both legal and company-specific. Finally, the team will work with the e-vendor, as applicable.

• Public/investor relations team. Publicly traded companies may have to disclosereceiptofaCIDinregulatoryfil-ings. In addition, publicly traded and pri-vately held companies may have covenants

with investors and holders of debt that require disclosure. The nature of a com-pany(aspublicorprivate)andcomplexityof debt and equity structure will influence whether this team is separate or merged into the strategy team.

What should we do if we get a CID? IfyoudogetaCID,thefirstthingyou’ll

needtodoisactivatealitigationhold–halting all regularly scheduled document deletion and destruction schedules. Next, the response teams should be activated. TheCIDshouldbereviewedwiththeresponse teams to determine whether it should be modified. The document sub-mission standards should be sent to the IT team. Finally, cost and burden justifica-tions should be prepared.

IfyoureceiveaCID,youshouldbeready to respond quickly because the response deadlines may be short, the requested material may be voluminous and your lack of preparedness may be viewedassuspect.Yourinabilitytoquicklyorganize and produce requested material may be looked upon unfavorably by the CFPB(orFTC).Don’tbelikesomanyof those guys getting chased down by the policeofficerson“Cops”–shirtless,shoe-less and without a plan. Put a plan in place now before the “cop on the beat” shows up at your door.

TheNAFLegalCommitteewillcon-tinue to keep you informed about legal and regulatory changes of interest to the sub-prime auto finance industry.

Eric L. Johnson is a partner in the Oklahoma City, OK office of Hudson Cook, LLP. He is a frequent speaker and writer on a variety of consumer credit topics. Prior to pursing his legal career, he spent many years work-ing in various departments for his family’s car dealership. Eric can be reached at (405) 602-3812 or [email protected].

This article is provided for informational purposes and is not intended nor should it be taken as legal advice.

Association

It’s a familiar scenario: A customer needs to buy a car. He goes to a deal-er, chooses a vehicle and strikes a deal.

Unfortunately, his credit is questionable and he needs financing.

And so begins the lender’s often arduous task of evaluating an auto loan applica-tion. There is constant pressure to keep look-to-book numbers high, while mak-ing sound judgments on which applicants to approve, the dollar amount of approv-als, and how to handle loan default.

Accurate alternative credit data can make the underwriting process not only more bearable, but more profitable when used judiciously.

How Can Alternative Credit Data Help?Alternative data means different things in different circles. Traditional bureaus’ definition relies heavily on payment in-formation on rent, utilities, cell phone bills, etc. While this data shows payment history on the necessities consumers may need to survive, it does not reflect their performance or consistency when paying off debts.

Alternative credit data allows lenders to dig deeper and gather more predictive at-tributes on a consumer. The basic require-ments to evaluate a subprime consumer loan application won’t be found on a tradi-tional credit report. A lender must analyze overall consumer stability, including how well they have fared in repaying past debt, as well as intent, willingness and ability to repay the loan.

The primary benefit of alternative credit data is more precise risk assessment. Sub-prime consumers tend to get lumped to-gether; but this group is comprised of cat-egories that include near prime, subprime and deep subprime. Alternative credit data provides significant incremental

value to help distinguish between them, allowing lenders to approve more credit-worthy applicants.

Avoiding First Payment DefaultDelinquencies are on the rise, especially in the subprime market. One of the most common causes is fraud – an applicant taking out a loan that they never intend to repay – and the first indicator is first pay-ment default.

Another common cause is when a cus-tomer takes out a short-term loan in order to make the down payment on a vehicle. A month later, both the short-term loan and the first car payment are due, leaving the customer with a choice that begins a cycle of delinquency.

Both of these scenarios can be avoided with the right underwriting tools and the additional insight that comes from alter-native credit data. Real-time reports with recent loan activity can identify applicants who may have borrowed their down pay-

ment, and a pattern of delinquent loans can quickly indicate fraud. Eliminating these applicants from consideration can have a significant impact on a lender’s ability to manage risk.

The additional visibility can also help streamline verification efforts, allowing lenders to quickly confirm an applicant’s identity and income history.

Approving More LoansLenders must make decisions based on the information available at the time of un-derwriting. The problem with traditional credit data is that it often leaves informa-tion gaps, especially in the case of subprime consumers. These consumers often turn to alternative financial service providers for access to credit, and that activity is not re-ported to traditional bureaus.

Alternative credit data can open the door to a new market by helping lenders iden-tify creditworthy consumers with little to

The Right Tools to Navigate the Road Ahead

CLARITY’SPROPRIETARYDATABASEcontains over55 millionsubprime consumer

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WHAT MAKES CLARITY DIFFERENTFROM OTHER CREDIT BUREAUS?

DATA FROM SUBPRIME FINANCIAL SERVICE PROVIDERS THAT DO NOT REPORT TO THE BIG 3 BUREAUS

no traditional credit history (thin-file). It also helps detect those consumers who have a positive payment history in the al-ternative finance space that is not reflect-ed on a traditional bureau.

Not only is it possible to approve more loans with more information, it allows for stronger approvals. This results in more funded loans, less stipulations to the deal-er, and less counter-approvals. Having this information in hand at the beginning of the underwriting process takes the guesswork out of lending decisions. Rath-er than using an antiquated decisioning model based on traditional credit scores alone, alternative credit data provides a more targeted approach.

Funding More Applicants With Alternative Credit DataMany lenders, especially those in the subprime lending space, have various methods of safeguarding their invest-

ment. Collateral requirements and re-possession processes have their place, but these methods are reactive. Comprehen-sive credit data and strong underwriting models allow lenders to take a proactive approach to lending.

Clarity Services is a credit bureau specializing in the subprime market. Their proprietary database contains over 55 million subprime consumer iden-tities, the largest footprint in the industry. Clarity offers solutions for fraud detection and targeted under-writing that can be combined with tra-ditional credit reports to provide a com-prehensive view of an applicant’s risk level.

For the auto lending industry, Clarity developed a dual score matrix. By com-bining the auto-specific FICO score that most lenders currently use with Clarity’s

Clear Fraud™ solution, lenders receive a customized score matrix. This matrix can help show the distinction between higher risk and lower risk consumers within the subprime segment of the population for more precise risk assessment.

Clarity’s underwriting tools provide re-al-time reporting of a consumer’s sub-prime financial transactions. Clarity data can help lenders identify consumers most at risk for first-payment default, as well as those who are responsibly handling alter-native finance debt, but have little or no traditional credit history. Clarity fills the data gaps left by traditional bureaus to help lenders save time, and early fraud detection solutions to protect revenue.

The problem with traditional credit data is that it often leaves information gaps, especially in the case of subprime consumers.

For more information on how Clarity’s data can help you, contact Jeff McLeod at 727.400.4603

clarityservices.com

Risk Management

It’s a familiar scenario: A customer needs to buy a car. He goes to a deal-er, chooses a vehicle and strikes a deal.

Unfortunately, his credit is questionable and he needs financing.

And so begins the lender’s often arduous task of evaluating an auto loan applica-tion. There is constant pressure to keep look-to-book numbers high, while mak-ing sound judgments on which applicants to approve, the dollar amount of approv-als, and how to handle loan default.

Accurate alternative credit data can make the underwriting process not only more bearable, but more profitable when used judiciously.

How Can Alternative Credit Data Help?Alternative data means different things in different circles. Traditional bureaus’ definition relies heavily on payment in-formation on rent, utilities, cell phone bills, etc. While this data shows payment history on the necessities consumers may need to survive, it does not reflect their performance or consistency when paying off debts.

Alternative credit data allows lenders to dig deeper and gather more predictive at-tributes on a consumer. The basic require-ments to evaluate a subprime consumer loan application won’t be found on a tradi-tional credit report. A lender must analyze overall consumer stability, including how well they have fared in repaying past debt, as well as intent, willingness and ability to repay the loan.

The primary benefit of alternative credit data is more precise risk assessment. Sub-prime consumers tend to get lumped to-gether; but this group is comprised of cat-egories that include near prime, subprime and deep subprime. Alternative credit data provides significant incremental

value to help distinguish between them, allowing lenders to approve more credit-worthy applicants.

Avoiding First Payment DefaultDelinquencies are on the rise, especially in the subprime market. One of the most common causes is fraud – an applicant taking out a loan that they never intend to repay – and the first indicator is first pay-ment default.

Another common cause is when a cus-tomer takes out a short-term loan in order to make the down payment on a vehicle. A month later, both the short-term loan and the first car payment are due, leaving the customer with a choice that begins a cycle of delinquency.

Both of these scenarios can be avoided with the right underwriting tools and the additional insight that comes from alter-native credit data. Real-time reports with recent loan activity can identify applicants who may have borrowed their down pay-

ment, and a pattern of delinquent loans can quickly indicate fraud. Eliminating these applicants from consideration can have a significant impact on a lender’s ability to manage risk.

The additional visibility can also help streamline verification efforts, allowing lenders to quickly confirm an applicant’s identity and income history.

Approving More LoansLenders must make decisions based on the information available at the time of un-derwriting. The problem with traditional credit data is that it often leaves informa-tion gaps, especially in the case of subprime consumers. These consumers often turn to alternative financial service providers for access to credit, and that activity is not re-ported to traditional bureaus.

Alternative credit data can open the door to a new market by helping lenders iden-tify creditworthy consumers with little to

The Right Tools to Navigate the Road Ahead

CLARITY’SPROPRIETARYDATABASEcontains over55 millionsubprime consumer

identities

Risk Management Paid Advertorial


Here we go, again. The sky is falling, and the sub-prime auto finance marketisgoingtoimplode–atleast

if you believe the tabloid financial press. I feel compelled to quote Mark Twain, who is credited with the adage, “it is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt.” Unfortunately, many pundits are determined to leave informed people with no doubt whatsoever.

January bond reports concerning the early stage delinquency of several sub-prime auto issuers has spawned a flurry of news pieces declaring the 2008 crisis has returned. A recent article in Institutional InvestorbyDanWeil warns, “Auto lending is a much smaller market than mortgages, but it mirrors many of their problems, particularly in sub-prime. Beware a recession.” The article was titled TheLittleShortthatMight:SubprimeAutoLoans.”Hmm,ifIremembercorrectly,amovie recently came out about the mortgage crisis called The Big Short. I get it… how cute.

Mr. Weil quotes Boston University pro-fessor Mark Williams, who says, “Weak underwriting standards, predatory lending practices, and fraud have created a bubble in the sub-prime auto-loan market… Once the bubble bursts, there will be consequences.” My father was a Boston University gradu-ate, and if he were alive today, I’m certain he would demand a refund of his tuition.

Investopedia defines a bubble as follows:•Aneconomiccyclecharacterizedbyrapid

expansion followed by a contraction

•Asurgeinequityprices,oftenmorethanwarranted by the fundamentals and usually in a particular sector, followed by a drastic drop in prices as a massive selloff occurs

•Atheorythatsecuritypricesriseabove

their true value and will continue to do so until prices go into a freefall and the bubble bursts.

Auto loans, prime and sub-prime, have been largely unchanged for the last 25 years (withtheexceptionoflongerterms).Theassets are short lived, with the average dura-tion of a portfolio lasting about 24 months. Vehiclevaluesarenotinflated,andcontraryto the bubble talk, investors are not over-valuing sub-prime bonds. Just the opposite is true, as double-b tranches have reached 8 percent on recent deals as perceived risk is baked into the price.

Prior to the recession, auto finance totaled $600-$700billiononanannualbasis,withgenerally a third being considered sub-prime. Of the $200-$250 billion in sub-prime, only about $20 billion is securitized on an annual basis.Duringthelastdownturn,sub-primevolume fell by more than 80 percent. Only in the last few years has it returned to its pre-crisis levels. Most of the growth since the

downturn has been in prime, not sub-prime.

Undeterred by the facts, journalists have measured the dramatic growth only from the complete contraction in the market until now, in order to paint a picture of impend-ing doom. Forget the fact that the credit bureaus have reported reasonably stable sub-prime performance, and the fact that more consumers, in all credit ranges, are choosing financing as an option in a market thatisgrowingby7percentannually(refertoTransUnion’sIndustryInsightsReport).The canned assumption is that any growth in sub-prime auto can only come through loose standards and fraud. But this impulsive diagnosis of the source of credit losses dem-onstrates little understanding of how the auto finance market actually works.

Sources of credit deteriorationEvenwell-runlenderscanhavemissesin

credit performance. These misses come from very predictable sources, and in most cases do not signal the collapse of the auto finance marketingeneral.Rather,theytendtosup-port the idea that credit is a moving target and lenders must actively manage credit based on where things are headed, not where they have been. The major performance misses come from the following sources:

False alarmsThe first category of performance miss is

fairly benign. It is usually the result of optimis-tic modeling assumptions, and is what I call a false alarm. Both warehouse debt providers and rating agencies want to ensure that there is sufficient protection built into the structure of the deals they underwrite. This is analogous to an auto lender wanting the customer to make a down-payment to mitigate a portion of the risk of a default.

This protection shows up in two ways. When lenders have a lower advance rate, it means they have to put up more of their own

The Credit Process

No Doubt!Targets, recession and reality

Daniel Parry

Unfortunately,

many pundits

are determined

to leave

informed people

with no doubt

whatsoever.


equity capital into the deal, thus limiting the debt provider’s exposure. The second is related to performance triggers, where if credit dete-riorates beyond a certain point the lender cannot get any more debt. In my career, I have always pushed for more equity in the deal as opposed to triggers when negotiating with debt providers. That move is typically unpopular with investors, as it lowers their return on equity, but that is a far preferable scenario to tripping a poorly conceived trigger and funding everything out of equity capital.

When lenders seek debt, they often attempt to paint the rosiest picture of historical per-formance in order to secure the best deal. If great care is not taken, the lender may end up with performance triggers that are too aggres-sive, resulting in artificially creating an event of default when there is no real problem in credit. For example, a February article in Asset Backed Alert suggested one sub-prime lender

might break a bond performance trigger right out of the gates on their first rated transaction. This was highlighted both by Asset Backed Alert and others as evidence of industry-wide woes in sub-prime finance.

Most unscrupulous lenders know how to push off defaults, through deferments or dragging out the repo process, but none of them trip triggers three months into a secu-ritization. When I looked at the bond presale report for the deal in question, I was surprised by the graphs detailing historical credit per-formance, which showed zero net losses until about seven months out. Never in the history of sub-prime auto finance has a lender had zero defaults seven months out, and I dare say, neither has a prime lender.

Initially, this particular lender utilized a collections outsourcing firm. When dealing with third parties, there is usually a substantial

lag between when the repossession is assigned and when the loss is posted. If a lender brings that process in house, it will become dramati-cally more efficient, thus causing the normal course of losses to be recognized earlier. In my humble opinion, this has more to do with an analytic miss by those setting triggers than it does an astonishing change in credit under-writing by the lender. I have evaluated a lot of auto paper in my time, and there is nothing coming in the next 90 days that shouldn’t be apparent in the data today.

Market shiftsLastSeptember,welostbelovedbaseball

legendYogiBerra.Mostofthenewsreportsrecounted the seemingly crazy quotes he made over the years. One of my favorites was, “the future ain’t what it used be.” While Berra was often ridiculed for his witticisms, most

The Credit Process

continued to P-19

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regular people understood what he meant to say. In the latter case, he was trying to convey that what we thought the future would hold doesn’t seem realistic anymore. The sub-prime auto finance market has bounced back from theseverecontractionoftheGreatRecession,with competition and pricing pressure at peak levels.Lendersthathavenotadjustedtheirbuying practices as the market shifted will soon learn that their future ain’t what it used to be.

In 2009, capital was scarce. With limited capacity, lenders cherry-picked credit and only the best consumers could get auto loans. As the market returned, consumers who were formerly sidelined returned, making general credit quality relatively worse. Note that I said relatively worse and not bad. Credit is only bad when the pricing and loan structures fail to fit the credit risk.

Barring an economic setback, the market will continue to expand until there are no more additional autos, consumers seeking financing, or capital for lenders to put to work. The market peak, while highly com-petitive, does not produce poor credit perfor-mance; lenders who fail to respond proactively to market changes do.

With every consumer that is brought back into the market, the baseline level of losses increases. For example, at the bottom of thelastcreditcycle(2009)sub-primebondissuance had contracted by more than 90 percent from pre-crisis levels. Annualized net creditlosses(ANL)averaged4to6percentfor originations in that period. As the market expanded,sub-primeANLreturnedtotypi-cal levels of between 6 and 8 percent. As we arelikelyatthepeakofthemarket,ANLmay tick up to between 8 and 10 percent for sub-prime auto bonds. Again, this is not bad in and of itself, provided lenders anticipate the deterioration in credit and make appropriate adjustments.

When worsening credit performance becomes apparent, the go-to diagnosis for market analysts is that lenders have all coor-dinated to throw underwriting standards

out the window in the name of growth. While there are always a few players who over-reach, that is really not the primary cause of deteriorating performance. As consumer confidence rebounds following a downturn, people tend to take on an increasing amount debt. At all levels, from super-prime down to deep sub-prime, con-sumers with greater debt loads are increas-inglylessabletohandlesetbacks(divorce,jobloss,catastrophicmedicalissues).

In addition, lenders upstream tend to dig deeper in search of yield. When this hap-pens, sub-prime lenders are often left with a picked over selection of loans in their historic niche. This is evidenced by the recent State of the Auto Finance Market reports from Experian,wherebanksandcaptivefinancecompanies have increased their market share of sub-prime loans, while finance companies havedecreased(asapercentageofallsub-primeloans).Thisislikelytoresultinworseperformance at every score-level for sub-prime lenders. Credit performance is a target that is constantlymoving.Lenderswhofailtomakeadjustments to their forecasts ahead of time will likely miss the mark.

Operational disruptionWith all the recent focus on innovation in

the auto finance industry, some view the word disruption as a positive thing. When it comes to business operations, it is definitely not. Change must be managed and deployed in a very measured way. I have consulted with sev-eral companies over the last few years regard-ing analytics, scorecards, and automation. The key factor I always warn against is not to do too much too fast, or the company may reap consequences that outweigh the anticipated benefits of change.

When lenders sign up new dealers, there is always a learning period where the dealer tests the program to see what the com-pany really buys. This process can reset every time the lender makes a significant strategy move, which can mean a change in the through-the-door credit profile a lender receives. The same is true in servic-ing, where technology and staffing issues

can diminish servicing efforts to the point where a consumer gets so far behind that they can’t catch up.

A few lenders that have been criticized recently have undergone substantial change toward the goal of making long-term improve-ments in performance. A few have completely switched out collection servicers, while others have both centralized operations and entirely replaced their executive management teams. Whenever rapid change occurs, there is always the risk of credit deterioration. Some change may be poorly conceived and executed, while other changes are necessary for the company to move forward. In either case, performance blips that come from operational disruption are not signs that the broader auto finance market is melting down.

So, what’s the punchline?The sub-prime auto finance market has

been very robust across multiple economic cycles. Credit performance has proven to be stable within a predictable range, and inves-tors have been well protected within the structures of the bonds. In a very competi-tive market, there will be some who sacrifice credit for volume, but by and large, lenders are rational.

There are a variety of reasons why lend-ers experience deterioration in credit quality, most of which are not the result of fraud or a disregard for underwriting standards. Many companies will make needed corrections, and will thrive in spite of the pundits’ predic-tions. The lenders who have shown a modest deterioration in performance represent only a few billion of more than a trillion dollars in auto loans outstanding. The idea that this will throw the greater U.S. economy into a recession is simply irresponsible.

Daniel Parry is co-founder and CEO of Praxis Finance, an auto finance company based out of the Dallas/Fort Worth area. He was formerly chief credit officer at Exeter Finance Corp, a company he co-founded in 2006, and senior vice president of Risk Management at AmeriCredit Corp. Please direct comments or questions to [email protected].

The Credit Process

The Credit Process, Parry, continued from P-17

Registertodayfortheconferenceplannedbyandforthoseworkinginnon-primeautofinance. Come early for golf on the morning of Wednesday, June 1, and return in time for the afternoon events.

Withthetheme“ReimaginingNon-PrimeAutoFinancing”theconferenceprogramprovides insight into the future by intelligently building on what is known today. Timely topics including industry metrics, ABS market, alternative data, technology, political insights, collections, employment issues and vehicle valuation will be explored in the program. The Non-Prime Auto Financing Conference is where the industry meets.

Enjoynetworkingwithleadersintheindustry.Visitexhibitsofthelatestproductsandservices.Youwillleavetheconferencewithideas,solutionsandnewcontactsthatwillbenefit your business.

Non-Prime Auto Financing ConferenceJune 1-3, 2016 • Plano, TX

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Who should attend? • Finance company executives

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personnel• Industry suppliers

The Alternative Credit Bureau

SCHEDULE OF EVENTS Schedule is subject to change WEDNESDAY, JUNE 1 8:00AM-2:00PM Golf Event 11:00AM-3:00PM Exhibitor Set Up 2:00-3:30PM NAF Association Board Meeting 3:00-7:00PM Registration 3:45-5:30PM Session Presentations 5:30-7:00PM Reception

THURSDAY, JUNE 2 7:00AM-7:00PM Registration 7:00-8:00AM Breakfast 8:00-9:15AM Opening Remarks & Keynote 9:15AM-12:45PM Session Presentations12:45-2:00PM Luncheon 2:00-4:45PM The Future of Non-Prime and Today’s Legal Enviroment Tracks 4:45-5:30PM Session Presentation 5:30-7:00PM Reception

FRIDAY, JUNE 3 7:30-11:00AM Registration 7:30-8:15AM Breakfast 8:15-8:30AM NAF Association Membership Meeting 8:30-12:00PM Session Presentations

HERE IS A SAMPLING OF THE SCHEDULED SESSIONS:

Representative Jeb Hensarling (R-TX), Chairman, Committee on Financial Services(Availability subject to last minute House of Delegates commitments)Hensarling will address the conference on House Financial Services Committee activity including committee interaction with the CFPB.

NAF/AFSA Non-Prime Auto Financing SurveyDwayne Furmidge, Director Americas, Benchmark Consulting InternationalAttend this overview of the NAF Association’s 20th Annual Non-Prime Automotive Financing Survey. This session will provide insights that are not available anywhere else, so don’t miss the opportunity to hear about the latest non-prime auto financing marketplace trends.

Investing in the Auto Finance SpaceMilun Patel, Managing Director, Overbrook Management Corporation; John Rowan, Director, Janney Montgomery ScottThis session provides a unique opportunity to learn how analysts and hedge funds value the non-prime industry. The key factors that are used in evaluating the industry and industry players will be discussed.

The Future of Auto FinanceCharlie Vogelheim, Vogelheim VenturesThe pace at which the auto industry is rapidly changing with the meaning of “mobility” at the core of the change. Hear from an industry expert his observations on recent vehicle purchasing trends and what the industry might look like going forward.

Economic Forecast – Used Car MarketTom Webb, Chief Economist, Cox AutomotiveThe auctions’ trends in pricing, volume, and buyer and seller behavior indicate about the overall automotive marketplace – from manufacturers, to dealers, to lenders, and to retail customers. This session will translate market data on used vehicle into information you can use.

Insights on Team EffectivenessAdam Leonard, Author and Executive Development, GoogleThis presentation will expand on research insights from a recent NY Times article, “What Google Learned from its Quest to Build the Perfect Team.” Five elements of team effectiveness will be examined – and why they matter and how to develop each element within any team.

Credit Data – Definition, Utilization and RegulationBecky Kuehn, Partner, Hudson Cook, LLP; Scott Brackin, Vice President Auto Finance, FactorTrust; Daniel Parry, CEO, Praxis Finance CorporationThere are many new sources of credit data in the non-prime arena for retail installment contract acquisitions and collections. Learn how to understand the data types, how the data is being used, and most importantly, how the data can be used given the regulatory environment.

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Google Doesn’t Know Everything

The Credit Process

I recently attended the National AutomobileDealerAssociation(NADA)Convention&ExpoinLasVegaswhere

comedian Jeff Foxworthy delivered a keynote comedyroutinehecalled“WhatYouCan’tLearnfromGoogle.”

Not only was Foxworthy hilarious, but he made a key point that hit home for me when he said, “My kids think you can Google any-thing.Youdon’treallyhavetostudy.YoujustGoogle it. I tell them there are some things you just can’t Google, you can only learn by livinglife.Likeyoucanhaveawifewithlong,beautifulhair,oryoucanbeontime.Youcan’thave both. That’s not stuff you can Google.”

This got me thinking about the many facets of running a business that you simply can’t Google.YoucanGoogleaboutjobs,butyoucan’tGooglejobreferences.YoucanGoogletelephone numbers, but you can’t Google who will answer or if it’s still an accurate number. YoucanGooglegeneralinformationoncreditscores, collateral values, employment, income and bank account information, as well as viewFacebookandLinkedInprofilesorsocialmedia activity. Google can tell you a lot, but it can’t tell you about a consumer’s ability and willingness to pay.

Since Google isn’t the answer to everything in the auto financing business, we have to use our data, tools and analytical methods effec-tively to accurately score a credit applicant. We use our knowledge and experience to make sense of a variety of data points we now have at our fingertips. So, Google might be a good place to start when looking for answers, but relying on it alone wouldn’t come close to giving us a more complete view of our customers.

That being said, there are many ways to

seek a greater understanding of non-prime and underbanked customers. One key area in need of understanding is around stabil-ity, I will share other areas that lenders are deriving value in a future article. A Google search of the term “stable” offers a defini-tion of “not likely to change or fail; firmly establish.” Google “stable relationship” and you get hundreds of thousands of pages, all of which have nothing to do with financing. In my own life experience, I consider a “stable relationship” as one in where commitment has been demonstrated. The people involved have been reliable over a period of time. When I reach out to my stable relationships, I know I can count on them.

Whether it’s a person or a company, a huge indicator for success often boils down to sta-bility. And, we’re learning that when assessing the ability of an underbanked or sub-prime customer’s capability of paying back a loan, stability plays a significant role.

Focus on the sub-prime auto market continues to be keen

In 2015, we saw a record amount of auto loans reported to be in excess of $1 trillion for the first time. Just this spring, again the auto finance industry has come under scrutiny with the media, rating agencies and consumer groups with some claiming the sky is falling in the auto finance industry.

Most analysts have shrugged off talk of a sub-prime auto-loan bubble. They say the economy isn’t in recession, unemploy-ment rates are fairly stable and low gasoline prices are putting more money in people’s pockets1. That said, there isn’t an industry player that is not carefully evaluating all the macro and micro economic trends as well as key industry indicators and perfor-mance metrics, including stability. More

specifically, all non-prime auto financing sources understand that they must originate only what they can collect to create a clear value proposition for dealers and consumers, building a viable and sustainable business model. We just don’t see lenders putting consumersintoaMcLaren,whentheycanonly afford a Honda. There is no bubble, there is, however, a growing inventory of used automobiles, all of which the industry is aware of and is self-regulating.

Stability is an indicator for paymentUnderstanding the profile of the under-

banked consumer is critical given the grow-ing significance of their buying power. In some cases, these consumers have thin or non-existent credit files. In other instances, there are credit records, but additional credit tradeline data can help deliver a more compre-hensiveviewofthecustomer.Eitherway,itisvery important to look at other factors when scoring a sub-prime, or near-prime customer’s ability to make their payments.

One of these key indicators that we have been tracking and measuring at FactorTrust is stability. Several interesting indicators were revealed in our most recent Consumer Stability Index of sub-prime borrowers of financial services.

Bank account stability: We have learned that the more distinct bank account numbers a sub-prime borrower has actually increases their default risk. There is a similar corre-lation between sub-prime borrowers with three or more phone numbers. An under-banked borrower that applied with one or two distinct mobile phone numbers within a 90-day period were a better than average default risk. However, the presence of three distinct numbers on applications led to a 52 percent higher defaults than a borrower

Scott Brackin


The Credit Process

with two, while four distinct phone numbers leadstoa77percenthigherdefaultratethana borrower with two.

Address stability: We see the same trends when sub-prime borrowers apply for loans with addresses in different area codes. A bor-rower that has applied with two different zip codesovera90-dayperiodhasa17percenthigher default risk than a borrower with one zip code. A borrower applying with three or more different zip codes during a 90-day period has a 63 percent higher default risk than a borrower with one.

Employment stability: Another key indi-cator in this segment is the number of times an underbanked applicant applies for a job with a different employer. A job application within the past 30 days reveals a 16 percent

higher propensity for default. When job appli-cations are made over 60, 90 days or even a full year, it leads to default rates of 20, 23 and 34 percent accordingly.

Stable customers are good customersIn the sub-prime market, it should be no

surprise that the people who are the most stable in terms of where they live, work, com-municate or bank have the higher propensity to repay their sub-prime loans. Borrowing again from a Jeff Foxworthy show, even a fifth grader should know that. But beyond what common sense tells us, now we have the hard data of tens of millions of active underbanked credit files that back up the universal truth.

If you need to know the countries of Africa for your fifth grader’s geography project, Google has the answer. If you need to know

whether a 26-year-old car loan applicant with a thin credit file will pay off a loan, Google doesn’t have an answer for that. The challenge for all sub-prime financing sources today is to understand what your customer base and portfoliolooklikefromallangles.Lenderswho know their customers’ stability are defi-nitely“SmarterthanaFifthGrader!”

Scott Brackin is vice president, Auto Finance, for FactorTrust. Scott has more than 20 years of experience in the consumer credit industry. He is currently focused on providing innovative infor-mation solutions to automotive finance service providers to drive growth while managing risks.

1. Subprime Flashback: Early Defaults Are a Warning Sign for Auto Sales http://www.wsj.com/articles/subprime-flashback-early-defaults-are-a-warning-sign-for-auto-sales-1457862187



Is There Such a Thing as too Configurable?

When I started in the technology industry, customization was all the rage. After all, everyone was

special. Sadly, not everyone has an unlim-ited amount of time and money. And in an ever-changing environment, no one I knew could see into the future. So if this article was titled Is There Such a Thing as Too Much Customization?, I could probably answer yes and end there.

But now the buzz is configuration. And while many vendors use the word, but don’t actually practice it, some of us fully embrace it. Salesforce has taken configuration to an extreme and blazed the trail for the rest of us who adamantly believe in it.

So is there such thing as too configurable? It’s a fair question to explore. In real estate, realtors and appraisers look at the value of the home in three ways, then average them

or pick the one that makes the most sense for the situation. While we’re answering a ques-tionhere–notassessingavalue,Ithoughtwe could take the same approach.

Since there’s no governance determining what three methods we should use to evaluate the question, I will take some liberties and come up with my own:

1. The gut feel methodIs there such thing as too configurable? No.

2. The logic methodIs there such thing as too configurable?

Let’suseadecisiontreetodecide.

Doesconfigurationgiveoptions?Yes. Areoptionsgood?Yes. Thus, is configuration a good thing?

Yes. Can you have too much of a good thing?

If no, stop reading. There’s no such thing as too configurable.

If yes, who should moderate the amount of the good thing? The pro-vider of the good thing or the user of it?

If the user, then there’s really no such thing as too much of a good thing, just using too much of a good thing.

If the provider, how would they determine the line? Based on your needs? If so, other users will have a different opinion. Based on the most complicated user? That would make the majority feel it was too configurable.

In conclusion, there’s no such thing as a system that is too configurable, only a vendor who doesn’t help you know how to use it or howmuchtouse–oralenderwhodoesn’tknow.Noneofuswouldsay,“Yes,limitmeplease!”Unlessyoucan’tlimityourself,butthat is a different issue. And a limiting system won’t fix those issues.

If that line of logic doesn’t resonate with you, you should do the next logical thing and turn to the source of all great life advice –countrymusic.InanAlanJacksonsong,he puts the final nail in the coffin when he says, “Too much of a good thing…Cause, too muchofagoodthing…isaGOODthing!

3. The analogy methodLet’ssayyou’reonanewrealitygameshow.

The host tells you that starting tomorrow night you’re going to have guests move into yourhome.Youdon’tknowhowmany.Itmay be anywhere from 1 to 100.

Yourchallengeisthis:Youhavetomakesure all your guests are satisfied with their

Stephanie Alsbrooks

Technology

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meals.Youdon’tknowhowmanyarecomingor what their dietary needs are. Of course you know basic things, like in the general popula-tion there are vegetarians, vegans, gluten free, nut allergies and so on.

In order to win the challenge, you have to satisfy everyone.

Sowhatdoyoudo?Youcoulddecideto just make the foods you like and know how to cook. Keep it simple. Ten foods. And hope the people who show up also like those 10 foods. If one of your guests can’t eat those 10 foods, you could try to adjust yourmealtofitthem–pickouttheonions,feed them only bread, etc. But will they be satisfied? Will you win the gameshow? Likelynot.

Youcoulddecidetojusthaveabunchof ingredients on hand with a few base items pre-made and as people come in

ask them what they want. But people could be waiting forever to eat as you make each person’s meal one by one. While they’re waiting for you to make the food, they may change their minds because breakfast time has passed and it’s time for dinner now. And they may only get to eat once a day when they really desire to eat three times a day. Will they be satisfied? Will you win the gameshow? Likelynot.

Now let’s say you prep a huge room of food–foodofeverykind.Foodsthatcanbeputtogethertomakeotherfoods.Youorganize the foods by most commonly eaten foodsorbytypesofeaters.Youmakeitaseasy as possible for your guests to see and know where to go and what to eat. What atonofupfrontworkforyou!But,you’recreating the extreme in “configuration.” And because it was all prepped upfront, if someone comes in with a special request,

you’re able to spend your time making it for him/her quickly.

Will some people that come to the table say,“Whoa!That’smorefoodthanIneed.”?Sure. Will others say, “I wish you had made itthiswayinsteadofthatway.”Yes.Isitalsopossible a guest would try a new food that opens their world, one they would have never tried under different circumstances, because it wouldn’t have been part of the 10-foods option, and they wouldn’t have known to ask for it in the custom meal option? Absolutely.

Now you’re the dinner guest. Which option would satisfy you? All of them could have benefits for one meal. But what if you had to eat like that for every meal for the next five years?

Stephanie Alsbrooks is chief configurator and CEO of defi SOLUTIONS, a leader in lending technology.

Technology


Micro-Moments in TimeJames Mayfield

Today’s Consumer

Truestory–theothermorning,permystandard weekday routine, I walked into the garage to start the car before

heading out for my commute. But when I opened the door to the garage, I was struck by the strong scent of natural gas.

I know, not good. So living in this modern world we do, I immediately got on the smart-phone, looked up our energy provider, called them and was subsequently notified via text message that a representative was en route to the house to check things out. This all hap-pened in a matter of minutes.

Not only was I relieved to have my situa-tion addressed so quickly, I was reminded of how easy it is to locate the correct point of contact and have them heading to the scene, all from the device in the palm of my hand.

Turns out there’s a name for what I expe-rienced–amicro-moment.It’sbeendefinedby Josh Bernoff in an article for the American Marketing Association as, “a mobile moment that requires only a glance to identify and delivers quick information that you can either consume, or act on immediately.”

Users of mobile devices have micro-moments all the time. Think about how often you check your smartphone for a weather update, traffic report, game score, or to locate the closest restaurant. All of these are micro-moments.

Micro-moments can be a plus for auto finance providers as well, with a chance at making the customer service experience that much better as consumers research funding for their next vehicle.

A recent study released by Google, “Micro-Moments:YourGuidetoWinningtheShiftto Mobile,” dives deeper into these blips in time and how smartphone users are expecting

brands to “address their needs with real-time relevance.”

According to the study, “82 percent of smartphone users say they consult their phones on purchases they’re about to make in a store.” This is where auto finance provid-ers with a good mobile presence and user-friendly site can assist the customer in making an informed decision.

WiththereleaseoftheSamsungGalaxyS7andtheiPhoneSEearlierthisyear,it’sasafebet the number of those using smartphones to search for auto financing, among a bunch of other things, will increase.

We personally saw micro-moments put into practice during a recent national sales meeting when our mobile team created an app for those attending. Conference-goers could download the app and use it to upload photos throughout the week, locate meeting rooms in the hotel, check their schedules and keep up with important events happening during the event.

“Our mobile app philosophy states: ‘The app is for the present’ and ‘The app enriches the moment,’” says Brad Koehn, director mobile strategy at Santander Consumer USA, who worked on the app. “Keeping this in mind as we designed the app, we cameupwiththe‘UpNext’feature–tohelpattendees easily know in the moment what was happening next. The app was a huge hit at the sales meeting and many of the attendees thanked us personally for that particular feature.”

Apps are a great way to communicate with your auto finance customers and ensure they are having micro-moments with your com-pany.Youcanalso enhance a customer’sexperience via your website or Facebook page. By making sure you have an updated

phone number and other contact information prominently displayed on these sites, when someone is looking for auto financing on their mobile device and having a micro-moment, you can establish your business is as helpful and accessible during this time as possible.

If you can provide the information some-one is looking for on their smartphones, they are more likely to choose you as their next auto finance provider. Of course the opposite can be true as well. The Google study puts it like this: “When someone picks up their mobile device, chances are they want to learn, do, find, or buy something right now. Whether in the form of searches, app interactions, mobile site visits, or even YouTubevideoviews,thesemicro-momentshappenconstantly.Youneedtobetherefor them.”

For those of you attending this year’s 20th Annual Non-Prime Auto Financing Conference, be conscious of the micro-moments you are having. From looking up information at the airport, contacting a car service and perusing a menu to learning more information about a speaker and tex-ting a colleague. As the Google study found, micro-moments are everywhere, and we as auto finance providers have an opportunity to make the moments for those looking for their next vehicle that much better.

Which brings me back to the natural gas story. Because I was able to locate the informa-tion I needed in a micro-moment, I was able to get the help I was looking for. Turns out mine was a common homeowner call whereby the outside meter needed a little adjustment. Still, a micro-moment I won’t soon forget.

James Mayfield is a senior communications man-ager at Santander Consumer USA and author of FromSocialtoSales:TheAutoDealer’sGuide to New Media.

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Find what’s Trending in Complaints

Tracking consumer complaints is one of the best ways to detect poten-tial compliance issues in their early

stages. With so many forums available to consumers to voice their grievances, the auto finance industry has seen a signifi-cant increase in complaints in recent years. A single creditor can receive complaints via the Consumer Financial Protection Bureau, the Federal Trade Commission, state regulatory agencies, attorneys general offices, the Better Business Bureau, and other less formal avenues, such as online complaint boards. And what creditors do with the information collected from the various complaint sources is just as impor-tant as responding to the complaints.

The purpose of tracking complaint data is to look beyond the individual account and identify trends that signify big-picture problems with dealers, employees, systems, or processes. Capturing relevant complaint data is vital to operational and compli-ance performance. Simply categorizing the complaints and summarizing the allega-tion and resolution is no longer enough. Regulatorswanttoseehowcreditorsareusing complaints to make improvements to their operations. Here are some ways that complaint data capture can help a complaint management program become more effective.

Identify system errors: Systemic errors appear quickly in com-

plaints. If the hard-coded logic in a ser-vicing system becomes flawed, resulting in account errors such as excessive fees or double payments, the immediate result is an influx of complaints. Any sudden increase in complaints within a short period of time usually indicates a systemic error. By identifying and tracking commonalities

in these complaints, the underlying sys-temic error will become exposed and can be resolved quickly.

Identify process gaps: Complaints can uncover gaps or flaws in

processes.Employeesaretrainedtofollowpolicies and procedures, but sometimes the execution can fail for many reasons. For example, employees may try to take shortcuts, a department may lack a plan for transferring responsibilities if an employee leaves, or a process change may not be implemented correctly. Complaints related to process gaps may be gradual at first, but a steady increase in these types of complaints is a good indication that process review and improvement is needed.

Identify employee training opportunities:

Whether a creditor has 20 employees or 2,000, multiple complaints about a single employee point toward a need for additional training or disciplinary action.

Also, general complaints against several employees for rudeness, harassment, or deception may indicate a case of poor man-agement in a particular department. Using complaint feedback as a coaching tool can help to improve employee performance, and it shows employees that any careless behavior will come to light.

Identify problem dealers: Customers often contact the creditor

first when complaining about a dealer’s misrepresentation or a problem with the vehicle. Traditionally, the creditor refers the customer to the dealer to resolve these types of issue. But now the regulators want to see that creditors are monitoring their dealers for compliance with regula-tions, which includes checking for pos-sible discrimination, fraud, and unfair or deceptive practices. The first indication of a problematic dealer will be found in thecomplaints.Evenifthecustomerisreferred to the dealer to resolve the matter, keeping tabs on the number and types of complaints against each dealer can help a creditor determine if a dealer relationship is worth keeping.

Creditors must go above and beyond to show that complaints are taken seriously. By using complaints as a means to moni-tor internal and external performance, a creditor can improve its operations and customer service level while also earning a few points with the regulators.

Jonna Boyle, CRCM, is a director at NewOak Credit Services LLC, a consultancy that spe-cializes in credit and regulatory compliance for all asset classes. Jonna has over 14 years of compliance experience in financial ser-vices at bank-owned and non-bank finance companies.

Jonna Boyle

Compliance Corner

What creditors do

with the information

collected from the

various complaint

sources is just

as important as

responding to the

complaints.

FRONT LINE STAFF COMPLIANCE CERTIFICATE PROGRAMSThe NAF Association offers five online compliance training programs to help member companies with the compliance training of their front line staff.

Content for the five online sessions comes from the Association’s Consumer Credit Compliance Certification Program used to create the targeted online learning modules that address the laws and regulations that most closely apply to each functional area. Each certificate program includes two case studies specific to the subject material of the course and tests the knowledge of the laws and regulations as they apply to real world situations.

The Compliance Certificate Programs cover five line functions: 1. Collector2. Underwriter3. Sales/Dealer Relations4. Contract Auditing and Funding5. Customer Service Representative

BEST COMPLIANCE PRACTICES GROUPSAssociation member graduates of the 4-Module Certification Program can continue their compliance training with the following:

• Meetings held quarterly

• Moderated by a Hudson Cook attorney

• Open to Certified Consumer Credit Compliance Professionals only

• NAF Association membership required

• Attendance at the meeting will be included as part of the Certified Consumer Credit Compliance Professional recertification process

• Members will have access to a private email communication service (List Serve) where communication on compliance issues can occur among members between meetings.

Conquer ComplianCe!CONSUMER CREDIT COMPLIANCE CERTIFICATION PROGRAMCurriculum developed by Hudson Cook, LLPModule 1:Two days of classroom style learning covering the basics; including how “indirect” auto finance works. Identifying the federal and state laws that apply to both indirect and direct auto financing, and the typical documents used in these transactions.

Module 2 & 3: 29 web-based sessions covering the applicable federal and state laws and regulations with testing throughout the modules.

Module 4:Day and a half covering the enforcement and regulatory actions taken by the Consumer Financial Protection Bureau (CFPB) and the necessary components of Compliance Management Systems (CMS).

Module 1 Registration Open - September 22-23, 2016 in Plano,Texas This program is open to both member and non-member companies.

Registration and further details available at nafassociation.com or call 410-865-4531.

ComplianceCertificate Program

Begin your online training at any time at nafassociation.com.Programs available to NAF Association members only.


Preparing for a CFPB Exam

Legal

The CFPB has begun to notify larger participants in the auto finance market they are to be the subject of

an exam. Many have been carefully preparing for this day, but many have not, and com-panies that have never experienced a federal regulatory examination may find the prospect daunting.Dauntingornot,it’sapartofthereality of today’s business environment that has to be addressed. Preparation is critical to a successful examination outcome.

The exam will focus on two key aspects of your business. First, whether you have satis-fied your compliance obligations, including, whether you are adequately safeguarding con-sumers from harm or potential harm, and second, whether you have sufficient policies, procedures, systems, and controls in place (i.e.,acompliancemanagementsystem)toensure you keep satisfying those obligations. In our new compliance-conscious world, it is no longer sufficient to just do the right thing, you need to document how you did it and how you will keep doing it.

Who are you?Earlyintheexaminationprocess,examin-

ers will ask you to explain to them how you do business. Knowing your business model will help them assess potential risks and identify the key areas of your business on which to focus. A company whose portfolio consists of contracts all written at the same rate is unlikely to see its pricing get much scrutiny from a fair lending perspective. Conversely, the CFPB may tag a company that purchases installment paper at a variety of rates for a more robust fair lending exam. In order to clearly and effectively present your business model, consider creating the type of pre-sentation you might prepare for investors looking to understand your business model. Makesuretheperson(s)selectedtomakethepresentation are compelling speakers who know the business model well and rehearse

thepresentationsinfrontofanobjective(butsafe)audience.

A culture of complianceThe CFPB is interested in whether you

operate in a culture of compliance. This includes the degree to which your board of directors and senior management are involved in setting the tone for compliance. A dis-engaged board whose minutes show little or no discussion of, or direction relating to, compliance will be a red flag. The same is true where compliance has been delegated to senior management, but there is no evidence of sufficient discussion and oversight. The CFPB believes a culture of compliance origi-nates at the top of the organizational chart and permeatesthroughouttheenterprise.Ensurethat your board and senior management are fully invested in the company’s compliance obligations and that minutes and manage-ment activities reflect it.

Create the roadmapOnce the CFPB understands your busi-

ness model, its examination will begin. The primary focus will be determining how well you comply with applicable federal laws over which the CFPB has jurisdiction and the degree to which consumers face potential harm.

One of the most effective ways to com-municate your compliance culture is through your policies and procedures. In addition to accurately documenting them, your policies and procedures should provide a compli-ance roadmap for anyone who reads them. This may require statements that particu-lar laws require or prohibit certain actions and detailed procedures that describe the specific steps your business takes to address the requirement or prohibition. In a perfect world, your policies and procedures should be able to serve as training materials for new hires or recent transfers to a given department.

In thinking about how to organize your poli-cies and procedures, remember that you have a new audience- your CFPB examiner. The easier you make it for the examiner to see you understand your compliance obligations and have processes and controls in place to ensure you satisfy them, the more likely you are to have a successful outcome.

In addition, the CFPB is interested in your policies and procedures as they were in effect at any time during the examination period (usuallyayearortwo).Haveeffectiveversioncontrols for your policies and procedures, and documentation evidencing how policies and procedures are kept current, the means for determining whether changes are necessary, how such changes are operationalized and implemented, and how they are monitored or audited to ensure ongoing compliance.

Staying on the pathHaving done a number of mock exams for

clients, we’ve seen policies and procedures that clearly and effectively take the reader down the compliance path, and others that more resemble a maze with little direction on how to navigate it. When we see the latter, rarely is the client violating the law; often their actual practices do quite a good job of meeting their compliance obligations. Unfortunately, their policies and procedures bear little or no rela-tion to their actual practices. That will be a red flag for the examiners and give the impres-sion you are not paying sufficient attention to compliance.

Clients with clear, accurate and well-for-mulated policies and procedures that identify compliance obligations and the means for addressing them create a much better impres-sion. The CFPB will investigate whether your actual practices in this case adhere to the poli-cies and procedures. If they don’t that will raise red flags with respect to your training and monitoring protocols.

Michael Benoit and Tom Buiteweg


Statements & E-StatementsSecure, Technology Driven Customer Communications

Dear CONSUMER SAMPLE,

Thank you for your recent application for a loan to purchase a new or used vehicle. We regret that we are unable toapprove your request. Your application was processed by a credit scoring system that assigns a numerical value to thevarious items of information we consider in evaluating an application. These numerical values are based upon theresults of analyses of repayment histories of large numbers of customers. The information you provided in yourapplication did not score a sufficient number of points for approval of the application. The reasons you did not scorewell compared with other applicants were:

Limited credit experienceDelinquent past or present credit obligations with others

In evaluating your application the consumer reporting agency listed below provided us with information that in wholeor in part influenced our decision. The consumer reporting agency played no part in our decision and is unable tosupply specific reasons why we have denied credit to you. You have a right under the Fair Credit Reporting Act toknow the information contained in your credit file at the consumer reporting agency. It can be obtained by contactingthe bureau(s) listed below. You also have a right to a free copy of your report from the reporting agency, if yourequest it no later than 60 days after you receive this notice. In addition, if you find that any information contained inthe report you receive is inaccurate or incomplete, you have the right to dispute the matter with the reporting agency.

TransUnionTransUnion Consumer Solutions L2C, Inc.P.O. Box 2000 P.O. Box 550089Chester, PA 19022-2000 Atlanta, GA 30355

If you have any questions regarding this letter, you should contact us at

Focus1, Inc12801 Prospect StDearborn, MI 48126-3651

Notice:The federal Equal Credit Opportunity Act prohibits creditors for discriminating against credit applicants on the basis ofrace, color, religion, national origin, sex, marital status, age (with certain limited exceptions), because all or part of theapplicant's income derives from any public assistance program, or because the applicant has in good faith exercised anyright under the Consumer Credit Protection Act. The federal agency that administers compliance with this lawconcerning this creditor is the Federal Trade Commission, Equal Credit Opportunity, Washington D.C. 20580.

October 27, 2015

12801 Prospect StDearborn MI 48126-3651

(313) 624-3360

1--FC1-01/11/13

Focus1, Inc12801 Prospect StDearborn MI 48126-3651

XTY8A993E8

12801 Prospect StDearborn MI 48126-3651RETURN SERVICE REQUESTED

FC1 - 1CONSUMER SAMPLE123 MAIN STHOMETOWN US 12345

0026020024001178718112345---XTY8A993E8 1

1234

5678

-000

001-

01-1

-AA

123 Main St.Your Town, MI 41234F I N A N C E

Monthly Billing Statement

Date: 10/2/2015

Account Summary

Account Number: 80833Payment Due Date: 03/25/2015Current Amount Due: $383.38Late Fees: $0.00Other Fees: $0.00Total Amount Due: $383.38Account Balance*: $8,260.15

* Your Account Balance contains all account activityup to the time this statement was generated.

In order to obtain an exact payoff amount andinstructions for payoff, please call us toll free at 1-313-123-1234

Please write your account number on your check ormoney order. Make your checks payable to AutoFinance and mail it in the enclosed envelope.

Payments and Payoffs To: Send Inquiries To:Auto Finance Auto FinancePO Box 123456 PO Box 123456Dallas, TX 75320 Dallas, TX 75380

If you have any questions about your account, contactCustomer Service at 1-313-123-1234 , Mondaythrough Friday, from 8:00 am to 8:00 pm and andSaturday from 8:00 am to 5:00 pm Eastern Time.You will need your account number shown at the topof this statement.

Recent Activity03/06/15 Payment Received $383.38

Introducing the new mobile app for Android or iPhone! Now youcan manage your account, your payment history, and makepayments on the go, 24/7. Our new app is available for freedownload in the AppStore for iPhone devices or on Google playfor Android devices.

Account Number: 80833

Total Amount Due: $383.38

Please Pay By: 03/25/2015

Total Enclosed $___________

Check here if you have updated your address on back.

032515 80833 4 000038338 0

SAMPLE A BORROWER123 MAIN STPISCATAWAY NJ 08854

12345678-000001-01-1-AA


0026020024001631877108854---XTYCCEDF77 1

Auto FinancePO Box 123456Dallas TX 75320-4048

1-SFSRRA20-ST1

*** PLEASE RETURN PORTION BELOW WITH PAYMENT ***

� Adverse Action Letters

� Custom Monthly Statements

� Document Management/Storage

� No Set-up Fees

� No Letter Change Fees

� Software Integration

� Multi-Channel Payment Processing

Dear CONSUMER SAMPLE,

Thank you for your recent application for a loan to purchase a new or used vehicle. We regret that we are unable toapprove your request. Your application was processed by a credit scoring system that assigns a numerical value to thevarious items of information we consider in evaluating an application. These numerical values are based upon theresults of analyses of repayment histories of large numbers of customers. The information you provided in yourapplication did not score a sufficient number of points for approval of the application. The reasons you did not scorewell compared with other applicants were:

Limited credit experienceDelinquent past or present credit obligations with others

In evaluating your application the consumer reporting agency listed below provided us with information that in wholeor in part influenced our decision. The consumer reporting agency played no part in our decision and is unable tosupply specific reasons why we have denied credit to you. You have a right under the Fair Credit Reporting Act toknow the information contained in your credit file at the consumer reporting agency. It can be obtained by contactingthe bureau(s) listed below. You also have a right to a free copy of your report from the reporting agency, if yourequest it no later than 60 days after you receive this notice. In addition, if you find that any information contained inthe report you receive is inaccurate or incomplete, you have the right to dispute the matter with the reporting agency.

TransUnionTransUnion Consumer Solutions L2C, Inc.P.O. Box 2000 P.O. Box 550089Chester, PA 19022-2000 Atlanta, GA 30355

If you have any questions regarding this letter, you should contact us at

Focus1, Inc12801 Prospect StDearborn, MI 48126-3651

Notice:The federal Equal Credit Opportunity Act prohibits creditors for discriminating against credit applicants on the basis ofrace, color, religion, national origin, sex, marital status, age (with certain limited exceptions), because all or part of theapplicant's income derives from any public assistance program, or because the applicant has in good faith exercised anyright under the Consumer Credit Protection Act. The federal agency that administers compliance with this lawconcerning this creditor is the Federal Trade Commission, Equal Credit Opportunity, Washington D.C. 20580.

October 27, 2015

12801 Prospect StDearborn MI 48126-3651

(313) 624-3360

1--FC1-01/11/13

Focus1, Inc12801 Prospect StDearborn MI 48126-3651

XTY8A993E8

12801 Prospect StDearborn MI 48126-3651RETURN SERVICE REQUESTED

FC1 - 1CONSUMER SAMPLE123 MAIN STHOMETOWN US 12345

0026020024001178718112345---XTY8A993E8 1

1234

5678

-000

001-

01-1

-AA

123 Main St.Your Town, MI 41234F I N A N C E

Monthly Billing Statement

Date: 10/2/2015

Account Summary

Account Number: 80833Payment Due Date: 03/25/2015Current Amount Due: $383.38Late Fees: $0.00Other Fees: $0.00Total Amount Due: $383.38Account Balance*: $8,260.15

* Your Account Balance contains all account activityup to the time this statement was generated.

In order to obtain an exact payoff amount andinstructions for payoff, please call us toll free at 1-313-123-1234

Please write your account number on your check ormoney order. Make your checks payable to AutoFinance and mail it in the enclosed envelope.

Payments and Payoffs To: Send Inquiries To:Auto Finance Auto FinancePO Box 123456 PO Box 123456Dallas, TX 75320 Dallas, TX 75380

If you have any questions about your account, contactCustomer Service at 1-313-123-1234 , Mondaythrough Friday, from 8:00 am to 8:00 pm and andSaturday from 8:00 am to 5:00 pm Eastern Time.You will need your account number shown at the topof this statement.

Recent Activity03/06/15 Payment Received $383.38

Introducing the new mobile app for Android or iPhone! Now youcan manage your account, your payment history, and makepayments on the go, 24/7. Our new app is available for freedownload in the AppStore for iPhone devices or on Google playfor Android devices.

Account Number: 80833

Total Amount Due: $383.38

Please Pay By: 03/25/2015

Total Enclosed $___________

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0026020024001631877108854---XTYCCEDF77 1

Auto FinancePO Box 123456Dallas TX 75320-4048

1-SFSRRA20-ST1

*** PLEASE RETURN PORTION BELOW WITH PAYMENT ***

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Inc.

Checking the GPSHaving policies and procedures that address

complianceobligationsarenotenough.Youalso need to monitor adherence to policies and procedures, and have systems in place to identify and address inadequacies and the relatedrisksthatresult.Yourpoliciesandpro-cedures should be subject to quality assur-ance reviews and audits, with action plans for addressing compliance risks and failures. The board of directors and/or senior management should get periodic compliance updates that detail the risks identified, the action plan for correction, and your progress in implement-ing those plans.

Learning how to driveGood training involves clear direction and

follow up. We’d not put someone behind the wheel, point to the accelerator and brake and say,“Goforit!”Yourtrainingmaterialsshouldclearly detail your procedures and practices and the compliance reasons behind them, and be paired with mentoring and monitoring to

ensure they are adequately implemented. It is not unusual for companies to rely on senior staff to train junior staff, then fail to monitor for consistency in the training. Jack may do a task one way, but Sue may do it another. While that may not result in a compliance violation, it creates the risk of a compliance violation, which may be enough for the CFPB to determine that your training and monitor-ing protocols are inadequate. If your policies and procedures meet your compliance obli-gations, make sure that’s the textbook from which new staff is being trained.

ConclusionA CFPB examination doesn’t need to be

the cause of great angst. While a lot goes into effective compliance management, the basics require that the compliance tone be set at the top, policies and procedures be in order, staff be adequately trained to adhere to them, and quality control and audit procedures be effective in identifying risks and managing corrections and progress. Preparation on all

these fronts is the key. Today’s modest invest-ment in compliance resources will help you avoid tomorrow’s negative and expensive exam outcomes.

Documentit.Doit.Policeit.

© Copyright 2016 Hudson Cook LLP. All rights reserved. Single print publication rights NAF Association.

Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. He is a fre-quent speaker and writer on a variety of con-sumer credit topics. Michael can be reached at 202-327-9705 or [email protected].

In 2013, Tom Buiteweg rejoined Hudson Cook as a partner in its Ann Arbor, Michigan Office. His practice focuses on helping finan-cial institutions, sales finance companies, motor vehicle dealers and manufacturers to establish and maintain automobile financing and leasing programs.

Legal


An Auto Finance Fairy Tale – Part 3Welcome back to the story, boys and girls

Marketing Strategies

As you may remember from the original story,MaryhadhelpedTom(thepresi-dentofGeneralIndirectLending)learn

to compete with the national players by creating a message that which dealers could identify. She also showed him how to use this message to gain more market share for his company. But one of the things that Mary had not explained was how to identify one’s true audience. For this shecalledonRumpelstiltskin,whoactuallythrived on the fact that no one knew his true identity. Sometimes I think that lenders feel the same way.

When you do not understand your different audiences, you send them messages and infor-mation that they don’t think is relevant. Many times lenders have a “one size fits all” message and marketing strategy. This causes your custom-ers to ignore or dismiss you and your product because it doesn’t speak to them directly.

Rumpelgrumbledthatifthedealersreallyunderstood the lenders, they might not use those lenders.ButasMaryremindedRumpel,inthiscase, that would be a positive. Having the right business is cost effective, as you would spend less time on unqualified applications.

So how can a lender segment and understand the uniqueness of the audience? First of all, we need to understand the different business models and compensation structures. While all dealers are concerned with the advance, that is not the only important factor. Many are also concerned with the speed of funding, quick callbacks, in-house back end products and customer service. Once you understand the dealers’ true “hot buttons,” you can design a message that truly speaks to them.

But each dealer is unique and attracts a cus-tomer that is specific to that dealers’ advertising andmarketing.Eachonehasaprocessforselect-ing finance sources and developing compensa-tion based on what its objectives are. While there may be some similar traits, you can’t assume that they are all motivated by the same things.

Another misconception about your audi-ence is how it receives its information. Mary wastellingRumpel,“Manyfinancecompaniesthink that placing a generic ad in a magazine and sending reps in the field will get their message and company image out. And while that may have worked 10 years ago, it takes more than that now to reach all the dealers that you will need. Before you spend money to market, you should understand how different segments get their information. To an inde-pendent dealer, his only awareness of lenders may be the ones that stop by or ones he hears about or sees at the auction. Other larger deal-ers that have finance managers may belong to Facebook or specialized chat groups to share information. With today’s many marketing channels, a finance company can vary their message to fit smaller segments of dealers.”

A long time ago, Mary was helping another finance company increase its app-to-fund ratios. It seemed as though that company thought that if the dealer received the callback through the application portal they would make their selection based on the specific figures given. But in actuality, some dealers could be swayed into choosing a lender that called them immediately afterward and asked for the deal or offered additional terms not statedonthecallback.Eitherway,under-standing the dealer’s process and motivations helped to improve the app-to-fund ratios. Knowing how your audience processes the information you are giving them can make all the difference.

For example, a smaller franchise dealer might send the credit application to the finance manager while a larger one might select the lender at the desk. In the case of a smaller dealership, the owner may also be directing a loan’s placement based on ease of funding and if the rep is helping him through the funding process. As you can see that would change your advertising message and whom you want to direct it to.

“So where does any finance company start to understand its different audiences,?” asked Rumpel.Maryrecommendedagoodplacetostart would be to segment the audiences into size of dealership, region and products.By size•Largeautomotivegroups•Onepointfranchiseorasmallergroup•Largeindependent(50-plusunitsamonth)•Midsizeindependent(20-40unitsamonth)•Smallindependent(lessthan20unitsamonth)By market/region•Majormetro•Secondarymetro•Submetro•RuralBy products•Franchisedomestic•Franchiseimport•Independent(1-5yearinventory)•Independent(5-10yearinventory)

Within each group you can determine what are the top motivators for choosing lenders of yourspecifictype(non-primeorsub-prime).Then you can start to develop the method that eachreceivesitsinformationthrough(e-mail,fax, reading blogs or trade magazines, word of mouth,dealers’associations,etc.).Today’smar-keting channels are as varied as the dealers, so conducting a survey or asking them occasionally will yield great insight and possibly new avenues to “get the word out.”

Getting back to our fairy tale character, Rumpelagreedthatknowingone’saudiencewas a good thing only for the purpose of exploit-ing or tricking people. And while Mary thought that it was a good idea for a lender to know its audience, it might not fit a personality such as Rumpelstiltskin.Butreally,whowantstobeRumpelstiltskin?

Lisa Bundy is the founder of CarGirl, Inc., a mar-keting and consulting company for the automotive finance industry. She has 20-plus years actively working with auto finance companies and dealer-ships to sell more cars and make more loans.

Lisa Bundy

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Four Tips to Maximize Portfolio Sale Prices‘The dog ate my homework.’

Collections & Recovery

Theexcuse–theoriginsofwhichdatebacknearly1,500years–hasbeena go-to staple for children the world

over whenever an assignment has not been completed on time. While the origins of the phrase largely date back to a pastor, who said his dog had eaten the last several pages of a sermon he had prepared, it has been co-opted by delinquent students in the hopes of staving off additional punishment for not completing their homework.

While the digital age has largely rendered the phrase obsolete, the importance of having paperwork in order has never been more important. This is especially true in the world

of auto finance, specifically when looking to sell portfolios of defaulted loans. Having the proper documentation can make all the difference in the world between reaping the rewards and obtaining a competitive market price versus being discouraged with a sub-par offer.

For auto lenders that are looking to sell port-folios of defaulted auto loans, or portfolios of deficiency balances, proper documentation is essential. Seasoned buyers will not only review that the proper paperwork is in order from the inception of the loan before default, but also the complete documentation of what happened after the vehicle was repossessed. This would include but not be limited to, copies of all the

notifications to the consumer after reposses-sion, a condition report on the vehicle, the manner in which the collateral was disposed, expenses incurred to repossess and dispose of the collateral, and notification to the consumer of any balance due after the sale. In the case of an insurance loss, the paper trail relating to the claim filed and application of the insur-ance proceeds. There are a number of factors seasoned buyers will consider when examining a purchase to determine what to offer the lender for their accounts.

Collection agency model v. Legal agency model: Auto finance companies can expect the market value of their deficiency balance portfolios to be significantly less if the only avenue for a buyer to pursue the balance is by using a collection agency, instead of suing the borrower for the balance owed. In other words, if the dog ate your homework, the debt likely can be validated, but lacks the strength to defend the validity of the debt in a court-room; post-repossession paperwork that is not complete may eliminate the ability to pursue a legal resolution.

Courts across the country are getting more and more stringent in the documentation requirements to substantiate the consumer’s responsibility under the terms of the loan and look to see if the lender followed the proper statutory requirements when taking back the collateral. While the circumstances and docu-mentation for each account are unique to each individual loan, the procedures in establishing the deficiency balance need to be consistent across all the accounts.

Auto finance companies can expect a higher value for their deficiency balance portfolios if the post-repossession documentation is in as good a shape as the pre-repossession paper-work; if done correctly, buyers will see the added value. It is fundamental that the teeth of the law maximizes the liquidation of auto

Jorge Gonzalez

FOUND IT.Improve Customer Payment Performance and Reduce Repossession Risks.

If It Runs on PassTime, It Doesn’t Run Away.


Collections & Recoverydeficiency accounts. Although there will be an understood initial investment by the buyer in court cost and legal fees, the legal model, on an account per account basis, is potentially much more lucrative than the collection agency model. Buyers that have patience understand that legal collections is a marathon not a sprint.

Front-end focus/Back-end foolish: Following a procedure through the entire process is critically important. I have reviewed manyportfolioswheretheon-boarding(front-end)paperworkisinorderwhilethe(back-end)post-repossession paperwork is sloppy. The primary reason can be traced back to lend-ers having checklists set up to keep the front-end paperwork consistent, but they do not maintain the same types of checklists during the repossession process and therefore copies of the post-repossession paperwork is missing from the files. If lenders took the time to make sure that each file had copies of the documents mentioned earlier as the account went through the repossession process, it would not become the most common obstacle that lenders struggle with when deciding if they want to sell; going back and looking for it. This hurdle alone dis-courages lenders because of the time involved to revisit old accounts; portfolios taken to market with inconsistent documentation usually result

in such low offers that lenders feel it’s not worth the headache.

Poor documentation v. Good documenta-tion: Poor post-repossession documentation lowers the value of the portfolio, which results in a weak purchase price and ultimately a low offer. Good post-repossession documentation adds value to the portfolio, which results in an strong purchase price and a competitive offer.Word spreads quickly in this space. A lender that provides thorough paperwork will likely be in great demand. Great demand affords the lender the opportunity to be more selective on who the files will be sold to, the offers for that will be acceptable, both which translate into more money, which filters directly to the financial bottom line of the organization.

Compliance buyers – Good news/bad news: Companies and individuals that have completed certification programs such as those offeredbyDBAInternationalaregoodnewsfor lenders as they can rest assured that they are dealing with a reputable organization. The bad news is that these are the same buyers that will look to devalue your portfolios because your documentation is not in order. The question then becomes, which buyers will work with your organization to add value and increase

your sale price instead of trying to devalue your accounts which results in a discouraged seller?

With article after article on the state of the sub-prime auto finance market, and whether the conditions mirror those in the sub-prime mortgage market nearly a decade ago, which leadtotheGreatRecession,therearemanyeco-nomicfactorstoconsider.Lendersarebuyingdeeper down the credit spectrum, consumers are on the “car debt” treadmill, deficiency bal-ances continue to rise as the sale of the collateral is usually not enough to cover outstanding balances, the cost and time associated with trying to recover these losses internally, which is usually prohibitive. Where are lenders going to place the focus of their human and capital resources, on active receivables issues or chasing past lending mistakes?

Now is the time to put your business partners inplace.Relationshipsmatterasthenon-primeauto industry reinvents itself. “The dog ate my homework,” is not going to work in auto finance, the only thing that is going to get eaten is lenders’ potential profits.

Jorge Gonzalez is the founder and CEO of PG Debt Acquisitions Group. Learn more at http://pgdebtacquisitionsgroup.com.

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Debt Sales Enhance Non-Prime Auto Recovery Strategy


Credit is a simple idea that has become a part of our national fabric, from the loans that make purchasing a home

possible to the revolving credit that makes smaller purchases convenient. Credit allows consumers to spread out the cost of buying largeticketitemssuchasautomobiles.Debtbuyers and the collection industry play an integral and necessary role within the complex credit-based economy.

When a debt buying company purchases an account from a creditor, it essentially pur-chases the contract and all rights, benefits, and liabilities that were held by the creditor

thatareassociatedwiththecontract–whichincludes the right to collect on non-perform-ing accounts. Many debt buyers specialize in specific asset classes of accounts, such as auto loans, while others handle the entire spectrum of asset classes.

The ability of debt buyers to purchase dis-tressed accounts from originating creditors provides benefits not only to the originating creditors, but to all consumers and businesses that rely on the availability of credit at reason-able rates for their purchasing needs.

Debt buyers help consumers

Because the debt buyer is not subject to the National Bank Act or other laws regulating minimum payments on accounts, the debt buyer has the ability to work with the con-sumer to set up personalized payment plans designed to meet the consumer’s situation. Extendedplanswithlowmonthlypaymentsare common. In many situations, debt buyers, although legally able to do so, do not continue adding interest to the account.

Since the debt was purchased at a discount, debt buyers frequently offer consumers set-tlements for less than the principle balance. Once the consumer pays the agreed upon, reduced principal balance, credit reports indi-cate the account is settled. The consumer can get back on his feet and regain his financial footing. In today’s world it is difficult to live without access to credit. Whether a credit card is needed for a deposit, or a consumer seeks a car loan, the need and availability of credit is critical to consumers.

Businesses benefit by working with debt buyers

While the economic benefits to consum-ers are important, the debt buying industry returns real money to creditors’ bottom lines. Many indirect auto finance companies and auto dealers mistakenly believe that charge-offs are deemed a sinkhole and unrecover-able loss. Charged-off consumer debt is a tangible asset with real economic value that provides a clear benefit to the creditors who sell it. Selling secured/unsecured debt to a debt buyer can create much-needed liquid-ity through a cash infusion from the sale, strengthen your bottom line now compared to waiting months or years for collection efforts and reduce ongoing costs.

Creditors are able to factor this value into their business model, knowing that they can collect a percentage on what might otherwise be a lost asset. In turn, creditors are able to keep the cost of credit for consumers lower

MaryAnne Kelly

FOR ADVERTISING OPPORTUNITIES: [email protected]

810-309-8345



and make credit more accessible to lower-income consumers.

How debt sales are conductedThe dealer or creditor first selects the

accounts to be sold and compiles the docu-mentation needed for a debt sale transac-tion.Documentationisthemostimportantfactor and drives the value of the account. The accounts are then evaluated by complex scor-ing models and stratifications. The Purchase and Sale Agreement negotiated between the seller and the purchaser will list parameters by which accounts are deemed to be eligible or ineligible and will define the types of accounts which can be returned to the seller. The seller makes specific “representations and warran-tees” on the accounts as does the purchaser (suchasthepurchaser’sperformancestan-dards, compliance with all federal and state lawsandthattheyareproperlylicensed).

The data and documentation that accom-panies each account will not only identify the debt and the debtor, but will also download to the purchaser the actual creditor’s account notes,accountspecificdocumentation(appli-cationsandstatementsasavailable),andothercredit and collection related information held by the seller.

After the debt is purchased, the buyer, before collecting on the accounts, will again run additional analytics to remove ineligible accounts, determine collectability, and at that point, if they seek to collect on the debt, the debt buyer or its agent will send what is knownasan“InitialNoticeLetter”pursuantto § 15 U.S.C. 1692g giving the consumer theirlegalrightspursuanttotheFairDebtCollection Practice Act, including the right to ask for validation of the debt. The debt buyer then employs the appropriate strategy to com-municate with the consumer and resolve the account. If the consumer communicates with the debt buyer, the debt buyer will take into account the consumer’s financial situation and more than likely work out a payment planoradiscountedsettlement.Eventuallythe debt buyer must decide which accounts are appropriate for suit based upon not only the balance, but locating the correct consumer

and weighing the cost of suit with probability of payment.

A complex regulatory environmentDebtbuyinganddebtcollectionisahighly

regulated industry. The CFPB is the primary regulator of debt buyers and collectors at the national level. Its primary regulatory tool is theFairDebtCollectionPracticesAct(FDCPA),whichprovidesover45prohibi-tions and mandates to ensure that consumers are treated in a fair and ethical manner, includ-ing provisions to eliminate abusive practices in the collection of consumer debt, promote fair debt collection, provide consumers with an avenue for disputing collection attempts, and prescribe penalties and remedies for violations oftheact.However,anotherstated(albeitinfrequentlycited)purposeoftheFDCPAis “to insure those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged” and can collect on legitimately owed obligations.

While the FDCPA governs collectionactivity at the national level, debt buyers are also subject to state and local statutes. These statutes are oftentimes even more stringent than the federal statutes and, in states where licensing is required, debt buyers may be sub-ject to on-site audits and any other enforce-ment powers given to state licensing bodies. Whenever state and federal laws conflict, collectors must follow the more restrictive standard.

Receivables management certification programIn March 2013, DBA International

launchedanationalDebtBuyerCertificationProgram that consists of both company and individual certification. The goal of the pro-gram is to provide additional consumer pro-tections through the adoption of uniform industry standards and best practices.

Company certifications are granted to those debt buyers who comply with 20 uni-form certification standards based on recog-nized industry best practices. These standards address core principles including account documentation, chain of title, consumer

complaint and dispute resolution, posting of contact information for the chief compli-ance officer, establishing a CFPB portal for the receipt of consumer complaints, statute of limitation compliance, representations and warranties, vendor management, credit bureau reporting, resale, as well as other rel-evant operational procedures. Certification is arequirementofDBAmembershipforactivedebt buying companies.

Individual certifications are required for each certified company’s chief compliance officer and are a voluntary designation for others within the industry. Certification is granted to those who complete 24 credit hours of relevant industry education require-ments every two years. Additionally, indi-viduals who hold the individual certification must pass a criminal background screening conductedbyDBAInternational.

Turn charge-offs into cashIf you’re looking for a new approach to turn

your charge-offs into cash, selling your debt portfolio can be a fast and efficient way to recover lost dollars. Whether you are new to the debt selling arena or an experienced seller, responsibly selling debt involves understand-ing data and documentation requirements, selecting when and which accounts to sell, determining the price of a portfolio, ensuring the purchase and sale agreements meet today’s standards, selecting a professional and ethi-cal debt buyer and making sure your vendor management policies are well established. Visitwww.dbainternational.orgforinforma-tion on the industry and to view a list of certified debt buying companies.

MaryAnne Kelly, MBA, CRCP is the associate director for DBA International – the trade asso-ciation that represents more than 550 companies that purchase performing and non-performing receivables on the secondary market. DBA’s Receivables Management Certification Program and its Code of Ethics set the “gold standard” within the receivables industry due to its rigor-ous uniform industry standards of best practice which focus on the protection of the consumer. Contact [email protected] or visit www.dbainternational.org.


Tough Interview Questions

Hiring & Recruiting

We do not ask tough questions while interviewing just for the sake of asking tough ques-

tions. Trying to “stump a candidate” is amateur hour. The purpose of an interview is to determine which candidate would most likely excel in the position and the com-pany. We focus on determining a candidate’s past job performance with the philosophy of “past performance is the best indicator of future performance.” Over the years I have seen some specific questions be very helpful in learning more about a candidate and how he or she may think.

Tough questions can give an added dimen-sion to your interviewing and give a candidate an opportunity to hit a home run or strike out.Youneedtoputthemuptobatandallowthemtoswing(ormiss).

Dependingonthepositionanditsneeds,following are some very good questions that may help you learn more about your can-didate’s determination, career focus, and creativity.

Determination•Weallrunintoobstacles.Obstaclesre-

route a lot of people who lack determina-tion. Tell me about obstacles you had to overcome in your career.

•IfIsaid,“Youmaynotbereadyforthisjob,” help me to understand why I would be wrong.

•IfIaskedyouifyouwouldworkforlessmoneyherethaninacurrent(orother)posi-tion, what would you tell me and why?

•Tellmeaboutthebiggestmistakeyou’vemade in your career and how you prospered from it.

•Whatdoyoudobeyondwhatthecom-pany requires you to do, to further your skills/abilities/knowledge?

•Thebestindicatoroffutureperformanceis often past performance. If I said your work performance/career success doesn’t seem to match the talent and ability you talked about in this interview, what would you tell me to help me understand that?

•Tellmeaboutthelasttimeyourmanagercriticized your work.

•Nooneisperfect.Tellmeaboutyourweaknesses and what coping strategies you use to overcome them.

Career-focused•Ireadaboutanexecutivewhowouldsay,

“First you make your habits, then your habits make you.” Tell me about some successful habitsyouhaveformed(suchasreadingabook each month about your field, or reflect-ing each night on your day and considering lessonslearnedfromthatday).

•Gooddecisionmakingisveryimpor-tant to this position. Tell me your strategy whenmakinganimportantdecision(suchasseparating major factors, minor factors, and unimportant factors to bring clarity when makingthedecision).

•Wheredoyouseeyourselfinfiveyears?

•Whatareyoudoing–outsideofyourworkplace-–togetthere?(Onlineclasses,readingbooks,Toastmasters,etc.)

•Isthatenough?

•Whatindustryrelatedperiodicalsdoyou read?

Creative thinking•Ifyoucouldchangeanythingaboutyour

current position to significantly improve it, whatwouldthatbe?(lookfordepthhere)

•Nooneisperfect,whatdoyouhavetochange about yourself to reach your goals ?

•WhatwillIdislikeaboutyouduringyourfirst six months here?

•Nojobisperfect,whatpartofthisjobdo you think you will like the least?

•Ifyouwerebroughtintotheboardroomto meet the board of directors and asked to give a three-minute impromptu speech, what are you qualified to talk about? What are some points you would cover?

•Whatshouldweexpectyoutoaccom-plish in your first 90 days here?

Donald Jasensky is CEO of Automotive Personnel, LLC. He can be reached at [email protected].

Don Jasensky

Over the years I have

seen some specific

questions be very

helpful in learning

more about a candidate

and how he or she

may think.

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