STRUGGLING TO ATTRACT LENDERS? OFFERING BUY HERE-PAY HERE
FINANCING MAY BE THE ANSWER!
By: Keith E. Whann
Your dealership has a good reputation, well prepared tax returns,
stable relationships with other creditors and you’ve taken steps
to demonstrate your ability to minimize a lender’s risk of lending
to your customers, but you still can’t attract new lenders. What
do you do now? It may be time to consider doing it yourself!
The continued decline of the average consumer’s creditworthiness,
steady increase of bankruptcy rates and the uncertainty of our
economy now that we are at war in the Middle East have lead many
dealerships to consider offering buy here-pay here financing.
The phrase buy here-pay here is a term of art that is commonly
used to refer to a consumer’s ability to purchase a vehicle and
obtain financing for the purchase directly from the dealership.
As with other areas within the dealership, there have been numerous
changes to the laws and regulations impacting buy here-pay here
transactions over past two years. In order to develop a successful
buy here-pay here financing program that effectively protects
your dealership from legal exposure, it is important to understand
the differences between a traditional financed transaction and
a buy here-pay here financed transaction.
In a motor vehicle
transaction that is financed through traditional means, the dealer
will enter into an agreement with the lender
authorizing the dealership to offer the lender’s financing program
to the dealership’s retail customers. When the dealership sells
a vehicle to a customer, it enters into a retail purchase agreement
with the customer and assists the customer in obtaining financing
for the transaction from an outside lending source. In this scenario,
the finance agreement is commonly referred to as two-party paper
because it is an agreement between the customer and the lender.
In a buy here-pay here financed transaction, the financing portion
of the transaction is very different because the dealership is
entering into the finance agreement with the customer.
The fact
that the dealership is financing the transaction itself will
impact everything the dealership does from the types of
vehicles it acquires and how it prepares and advertises them
for sale to
the actual sale and financing of the vehicle. For example,
the dealership must have its own credit application, notices related
to the extension of credit, a retail installment sales agreement,
and paperwork related to the debt collection process. Additionally,
the dealership probably needs to modify its spot delivery agreement,
delivery confirmation form and existing retail purchase agreement.
These forms are impacted by a number of areas of law with which
the dealership may not be familiar, including provisions of
the
Fair Credit Reporting Act, Equal Credit Opportunity Act, Federal
Truth in Lending Act, State Retail Installment Sales Acts,
the Uniform Commercial Code, Federal and State Debt Collection
Acts
and the new Federal Privacy and Anti-Terrorism Laws and their
implementing Regulations, to name a few. In addition to the
challenge of keeping
paperwork up-to-date and legally compliant, sales and collection
procedures take on a more significant role within the dealership.
Keep in mind also that while financing transactions and collection
activities between financial institutions and their customers
are often exempt under most state unfair and deceptive acts
and practices
(UDAP) statutes, virtually every facet of the dealership’s
relationship with the customer is covered.
Many dealers have found
that if they take the time to understand the various legal and
regulatory issues impacting buy here-pay
here transactions prior to offering buy here-pay here financing,
this can not only be an effective financing tool, but a significant
profit center for the dealership. As the size of a dealer’s
buy here-pay here portfolio grows, however, one of the obstacles
dealers face is the negative tax consequences caused by the
dealership
having to pay tax on the profit from the sale of the vehicle
prior
to having received payment. For dealers who find themselves
facing this challenge, it may be an opportune time to consider
forming
a related finance company. In the fall of 2002, the IRS issued
an updated Audit Technique Guide for the used motor vehicle
industry that contains an entire Chapter dealing with related
finance
companies, including information on how to form, structure
and operate a related
finance company. In addition, the Guide covers a wide variety
of accounting issues that will impact used motor vehicle
dealerships. It was developed with input from the used motor vehicle
industry
and can be used not only as a valuable resource tool, but
also to prevent accounting and tax problems before they occur.
With everything that is going on, there will be no shortage of
challenges or, depending upon your perspective, opportunities
for the motor vehicle industry and your dealership in the
upcoming year. Legal and regulatory compliance issues will
likely remain
on the forefront of the minds of all dealers, as will the
lack of financing sources. Dealers have the ability to
control their
own destiny on legal compliance by updating their forms,
conducting compliance audits and attending training seminars,
but have
fewer
options available to resolve their struggle to find additional
financing sources. If you are struggling to attract new
financing sources, offering buy here-pay here financing may be
the answer. |
