THE ENCYCLOPEDIA OF FINANCE AND INSURANCE MANAGEMENT

Transcription

1 THE ENCYCLOPEDIA OF FINANCE AND INSURANCE MANAGEMENT First Edition THE AUTOMOTIVE DEALERSHIP INSTITUTE, INC. Arzu Algan, CFO/Dean of Education Alan Algan, CEO/Executive Director Keith Tuber, President/Director of Corporate Affairs

2 The Encyclopedia of Finance and Insurance Management is designed to provide authoritative information about the subject covered. Information contained herein has been carefully compiled from the sources believed to be reliable, but the accuracy of the information cannot be guaranteed. The authors are not engaged in rendering legal, accounting and/or other professional services; if such expert service is required the services of an appropriate professional should be sought. The Automotive Dealership Institute, its staff and all the contributors to this work specifically disclaim any corporate or personal liability, loss or risk incurred as a consequence of the use either directly or indirectly, of any information or advice given in this publication. The regulations presented in The Encyclopedia of Finance and Insurance Management represent the current information available at the time of publication.the authors have made a good faith effort to compile federal and some state regulations applicable to automotive dealership Finance and Insurance departments. The Automotive Dealership Institute, the authors and contributing authors of this publication make no representation or warranty that the regulations excerpted or summarized herein constitute all of the state and federal regulations applicable to the in-dealership finance and insurance process. Reference should always be made to the full text of all applicable regulations. Please visit and click on Code of Federal Regulations under Executive Resources for the most up-to-date version. Actual resolution of legal issues depends upon many factors, including variations of facts and applicable laws. It should be duly noted that some federal and state regulations may change and such changes may render a prior practice unacceptable, or may require ongoing alterations in methods of conducting business or in the forms required to document the transaction.

3 CONTRIBUTORS THE AUTOMOTIVE DEALERSHIP INSTITUTE Global leader in educating the next generation of Finance and Insurance Managers. The Encyclopedia of Finance and Insurance Management is published with the editorial advice of the faculty and the administration of the Automotive Dealership Institute. Educational content: Content co-ordination: Executive Editor: Copy Editor: Research Supervisor: Arzu Algan, CFO/Dean of Education Alan Algan, CEO/Executive Director Keith Tuber, President/Director of Corporate Affairs Kristen Force Amber Grunwald,Vice President/Director of Operations Additional advice is given by distinguished members of Northwood University, AFIP, Institute for Ethical Behavior, professional trade organizations, associations and other professionals. Special thanks to the following people for their editorial contribution to this publication: Prof. Robert W. Serum, Ph.D. Vice President, Academics and International Programs Northwood University David N. Robertson Executive Director The Association of Finance & Insurance Professionals John Walsh President/CEO Institute for Ethical Behavior Gary Thomas Fagg, FSA, MAAA President CreditRe Corporation Thomas B. Hudson Senior Partner Hudson Cook, LLP Timothy J. Gill CFO/Director of Operations Advent Resources, Inc. Bob Conners President/CEO Saturn Auto Consultants Ltd., Canada Patrick Colbert Senior Vice President First Advantage CREDCO Marguerite Watanabe Auto Finance Practice Manager Benchmark Consulting International Terrence J. O Loughlin Director of Compliance The Reynolds and Reynolds Company Corporate contributors: Reynolds & Reynolds Dealer Track F&I Management & Technology Magazine CARLAW Counselor Library.com, LLC Northwood University Institute for Ethical Behavior Association of Finance & Insurance Professionals CreditRe Corporation Advent Resources, Inc. First Advantage CREDCO Benchmark Consulting International Arizona Independent Auto Dealers Association

4 By The Automotive Dealership Institute, Inc. Copyright under International Copyright Union All rights reserved under Pan American and and Universal Copyright Conventions by The Automotive Dealership Institute, Inc. No part of this work may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, scanning or any information storage and retrieval system, without permission in writing from the publisher. Graphic design and page layout: Debra Thrash,Thrash Design, Costa Mesa, California Printing coordination and bookbinding: Roswell Book Binders, Phoenix,Arizona Printed in U.S.A. U.S. Library of Congress Catalog Number:TXU International Standard Book Number (ISBN): ISBN-13: International SAN Number

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6 TABLE OF CONTENTS

7 Table of Contents AUTOMOTIVE RETAIL OPERATING SYSTEM DEALERSHIP ORGANIZATION AND DEVELOPMENT Running a Dealership...36 Facilities and Services...36 Dealership Products...36 DEALERSHIP TRENDS Straight Sales System...36 The T.O. Sales System...36 One-Price Sales System...37 DEALERSHIP MANAGEMENT STRUCTURE Dealer Principal...37 General Manager...37 General Sales Manager...37 Business Manager...38 Finance Director...38 Finance and Insurance Manager...38 Special Finance Manager...39 Sales Manager...39 Desk Manager...39 Internet Sales Consultant...39 Closer...39 Salesperson...40 Greeter...40 DEALERSHIP TERMINOLOGY Definitions...41 DEALERSHIP SALES METHODOLOGY Introduction to Sales...43 Setting the Proper Sales Image...44 Attitude in Sales...45 Customer Interaction...46 Organization/Self Discipline...47 Who is the Boss? The Customer...47 VEHICLE SALES TRANSACTION SALES PROCESS The Greeting/Welcome...49 Understanding Customer Needs...50 Vehicle Presentation...52 Vehicle Demonstration/Trial Close...54 Vehicle Appraisal...56 Purchase Consultation/Negotiations...57

8 Table of Contents Finance and Insurance Department/Proper Introduction...59 Delivery...60 Follow-Up...63 NEW BUSINESS DEVELOPMENT Prospecting...64 LEASING INTRODUCTION TO LEASING Introduction...65 Benefits of Leasing...65 LEASING GLOSSARY Lease Terminology...66 HOW LEASING WORKS Lease Breakdown...67 Basic Lease Calculations...68 Dealer Installed Options...69 Mileage...70 Drive Offs...70 Advance Guidelines...70 Lessee s Obligations...71 FINANCE PRODUCTS VEHICLE SERVICE CONTRACT Background...71 Warranties...72 Factory Warranties...72 Mechanical Breakdown Insurance...72 Vehicle Service Contracts (VSCs)...73 Vehicle Service Contract Coverage...77 Common Vehicle Service Contract Provisions...79 Transferability...81 Owner Responsibilities and Requirements...81 Vehicle Service Contract Cancellation...81 Loss Management Field Underwriting...82 Extended Service Contract Benefits...82 VEHICLE MAINTENANCE CARE Overview...83 Vehicle Maintenance Care Benefits...83

9 Table of Contents CREDIT INSURANCE & RELATED PRODUCTS AN INTRODUCTION TO CREDIT-RELATED INSURANCE Overview...83 A Brief History...85 SINGLE PREMIUM CREDIT LIFE INSURANCE ON INSTALLMENT CREDIT Important Definitions...89 Installment Credit...89 Insurance Coverage on Installment Credit...90 Group or Individual Policies...91 Single and Joint Coverage...91 Conditions of Eligibility...91 Exclusions...92 Contributory and Noncontributory Premiums...92 Premium Calculations...92 Prima Facie Rates...92 SINGLE PREMIUM CREDIT DISABILITY INSURANCE ON INSTALLMENT CREDIT Important Definition...92 Insurance Coverage on Installment Credit...92 Conditions of Eligibility...93 Determination of Disability...93 Benefits Provided...93 Elimination Period...94 Pre-Existing Condition Exclusion...94 Premium Rates...95 Claim Filing...95 INVOLUNTARY UNEMPLOYMENT INSURANCE ON INSTALLMENT CREDIT Definition...95 Overview...96 Policy Structure...96 Eligibility for Insurance...96 The Insured Event...96 The Underlying Credit...97 Markets and Marketing...97 The Insurers...98 Underwriting Criteria...98 Term of Insurance...98 Benefit Conditions...98 Premium Rates...99 Premium Refunds Agent Licensing Available States Advantages to the Producer Reserves...101

10 Table of Contents GAP Definitions Overview Policy/Contractual Structure Eligibility for Gap Waiver and Gap Waiver Insurance The Insured Event The Underlying Credit Markets and Marketing The Insurers Underwriting Criteria Term of Coverage Benefit Conditions of Gap Waiver and Gap Waiver Insurance Rates Financing of the Cost and Regulation Z Refunds Licensing Available States Advantages to the Producer Reserves PRODUCERS OF CREDIT-RELATED INSURANCE Banks Credit Unions Finance Companies Acceptance Corporations Automobile, Mobile Home, and Recreational Vehicle Dealers The Insurer-Producer Relationship Abbreviations THE CASE FOR CREDIT-RELATED INSURANCE The Need for Credit-Related Insurance The Convenience of Credit-Related Insurance The Cost of Credit-Related Insurance Advantages to the Producer Consumer Attitudes OTHER CREDIT-RELATED INSURANCE PRODUCTS FOR INSTALLMENT CREDIT Net Payoff Life Insurance Level Life Gross and Net Payoff Coverage Combination Products Truncated Life and Disability Insurance Critical Period Disability Insurance Creditor-Placed Programs PREMIUM RATES Prima Facie Rates Life Insurance Premium Formulas...116

11 Table of Contents Disability Insurance Premium Formulas Involuntary Unemployment Insurance Premium Formulas Premium Refunds OPERATIONS Home Office Operations Sales Sales Administration Agent Licensing Premium Processing Claim Administration Investments Policy Form Filing AUTOMOBILE INSURANCE The Insurance Policy Insurance Terminology Types of Insurance Lender s Insurance Interest Summary GPS SECURITY AND TRACKING SYSTEM Satellite Tracking/Location Benefits VEHICLE TRACKING/RECOVERY SYSTEM LOJACK Lojack Company History The Stolen Vehicle Recovery System Lojack Full-Featured Alarm System Lojack Security Enhancement System Lojack Guarantee Lojack Guarantee Plus $5, Lojack Benefits Frequently Asked Questions SECURITY CODE MARKING SYSTEM General Information Benefits INTERIOR AND EXTERIOR PROTECTION Overview Paint Sealent Fabric Sealent Leather/Vinyl Sealent Interior and Exterior Protection Benefits...131

12 Table of Contents FINANCE SOFTWARE THE REYNOLDS AND REYNOLDS COMPANY Company Profile Reynoldsystem ADVENT RESOURCES, INC Company Profile Advent System Transactions Menu Creating a Retail Deal Creating a Lease Deal Profit Builder Menu System FINANCE AND INSURANCE PRIME THE F&I DEPARTMENT: A DEALERSHIP PROFIT CENTER The F&I Department as a Profit Center BASIC FINANCE DEFINITIONS Finance Definitions F&I DEPARTMENT / F&I MANAGER F&I Department The Profit Center F&I Manager Finance Office Protocol F&I Manager and the Sales Department Business Office FINANCE AND DEALERSHIP TERMS Finance Terms and Dealer Policies INTEREST AND FINANCE CHARGE CALCULATIONS Interest Types of Finance Charges on Contracts Simple Interest Rule of 78 s Finance Reserve CREDIT AND PRIME LENDING CREDIT APPLICATIONS The Credit Application...181

13 Table of Contents CREDIT BUREAUS Overview Credit Report PRIME LENDING AND THE LOAN PROCESS Prime Lending Lending Guidelines and Criteria The Loan Process Funding Documentation Checklist Getting Deals Approved Dealing with Lenders CREDIT UNIONS Overview Credit Union Direct Lending CUDL LOAN STRUCTURING Four C s of Credit Structuring and Placing the Loan FINANCE AND INSURANCE NON-PRIME INTRODUCTION AND BENEFITS OF NON-PRIME FINANCE Introduction Benefits of Non-prime Finance NON-PRIME FINANCE TERMINOLOGY Definitions NON-PRIME FINANCE GUIDELINES Non-Prime Deal Structure Advance Amount Financed Loan to Value Ratio (LTV) Down Payment Interest Rate and Dealer Participation Acquisition Fee/Discount Vehicle Requirements Loan Term and Mileage Income Budget Stability Credit Vehicle Insurance Ineligible Applications Borrower...198

14 Table of Contents LOAN PROCESS AND FUNDING Loan Process Required Documents Funding Documentation Checklist SPECIAL FINANCE Special Finance Department How to Set-Up A Successful Special Finance Department CREDIT BUREAUS OVERVIEW Experian, Equifax,Trans Union and First Advantage CREDCO EXPERIAN Credit Profile Report EQUIFAX Credit Profile Report TRANS UNION Credit Profile Report FIRST ADVANTAGE CREDCO Credit Profile Report F&I MENU SELLING PROCESS F&I INTRODUCTION Custody of the Customer CUSTOMER INTERVIEW PROCESS The Interview Process Meet & Greet Review and Confirm the Figures Review Purchaser s Statement and Credit Report F&I MENU PRESENTATION The Menu F&I Menu Presentation Steps CONTRACT DISCLOSURES Disclosures Retail Installment Sales Contract Disclosures...245

15 Table of Contents OVERCOMING CUSTOMERS OBJECTIONS HANDLING OBJECTIONS I m Not Interested in Hearing About any Products I Can t Afford Additional Protection Putting the Cost in Perspective ESC vs. Manufacturer s Warranty ESC Value vs. Insurance Coverage ESC vs. My Personal Mechanic % Close ESC: A No-Lose Option ESC: Cost vs. Coverage I Already Have Life Insurance I am Not Interested in Disability Insurance GAP vs.vehicle Replacement Costs GPS Security Systems vs. Alarms Anti-Theft System vs.vehicle Replacement Costs Appearance Package vs.vehicle Trade-In Value CREDIT UNION CONVERSIONS Convenience and Confidentiality Keep Your Line of Credit Available Rate Difference Right to Offset ESC vs. Mechanical Breakdown Insurance LAWS, RULES, REGULATIONS AND ETHICS AN OVERVIEW OF TRUTH IN LENDING ACT Regulation Z Advertising Truth in Lending - Regulation Z Published by the Board of Governors of the Federal Reserve System Official Staff Commentary on Regulation Z How to Advertise Consumer Credit & Lease Terms FINANCE CONTRACT Retail Installment Sales Contract CONSUMER LEASING ACT Regulation M Advertising Consumer Leases Truth in Lending - Regulation M Published by the Board of Governors of the Federal Reserve System Official Staff Commentary on Regulation M FTC Manual Advertising Consumer Leases FRB Manual Keys to Vehicle Leasing...341

16 Table of Contents LEASE CONTRACT Closed-End Motor Vehicle Lease Contract EQUAL CREDIT OPPORTUNITY ACT Regulation B Equal Credit Opportunity Act - Regulation B Published by the Board of Governors of the Federal Reserve System Official Staff Commentary on Regulation B FAIR CREDIT REPORTING ACT The Fair Credit Reporting Act Rules for Running Credit Reports THE CREDIT PRACTICES RULE FTC Manual Complying with the Credit Practices Rule FTC Manual Cosigning a Loan HOLDER IN DUE COURSE RULE Preservation of Consumers' Claims and Defenses MAGNUSON-MOSS WARRANTY ACT Overview of the Magnuson-Moss Warranty Act FTC Manual A Businessperson s Guide to Federal Warranty Law USED CAR RULE / BUYERS GUIDE FTC Manual A Dealer s Guide to the Used Car Rule CASH PURCHASES Reporting Cash Payments of Over $10,000 - IRS FinCen USA PATRIOT ACT What is the USA Patriot Act? OFAC The Office of Foreign Assets Control Patriot Act - Summary GRAMM LEACH BLILEY ACT Disclosure of Nonpublic Personal Information The Privacy Rule The Safeguards Rule PAYMENT PACKING Quoting Monthly Payments UNFAIR AND DECEPTIVE ACTS, PRACTICES AND FRAUD Sample Cases from CARLAW...482

17 Table of Contents THE CALIFORNIA CAR BUYER'S BILL OF RIGHTS The Car Buyer's Bill of Rights Association of Finance & Insurance Professionals Supplement to California Car Buyers Bill of Rights STATE LEMON LAWS Alabama State Lemon Law Alaska State Lemon Law Arizona State Lemon Law Arkansas State Lemon Law California State Lemon Law Colorado State Lemon Law Connecticut State Lemon Law Delaware State Lemon Laws Florida State Lemon Law Georgia State Lemon Law Hawaii State Lemon Law Idaho State Lemon Law Illinois State Lemon Law Indiana State Lemon Law Iowa State Lemon Law Kansas State Lemon Law Kentucky State Lemon Law Louisiana State Lemon Law Maine State Lemon Law Maryland State Lemon Law Massachusetts State Lemon Law Michigan State Lemon Law Minnesota State Lemon Law Mississippi State Lemon Law Missouri State Lemon Law Montana State Lemon Law Nebraska State Lemon Law Nevada State Lemon Law New Hampshire State Lemon Law New Jersey State Lemon Law New Mexico State Lemon Law New York State Lemon Law North Carolina State Lemon Law North Dakota State Lemon Law Ohio State Lemon Law Oklahoma State Lemon Law Oregon State Lemon Law Pennsylvania State Lemon Law Rhode Island State Lemon Law South Carolina State Lemon Law South Dakota State Lemon Law Tennessee State Lemon Law...649

18 Table of Contents Texas State Lemon Law Utah State Lemon Law Vermont State Lemon Law Virginia State Lemon Law Washington State Lemon Law Washington D.C. State Lemon Law West Virginia State Lemon Law Wisconsin State Lemon Law Wyoming State Lemon Law ETHICS Protect your Dealership Disclosure is Critically Important Deception in the F&I office Ethical Leasing INTRODUCTION TO INTERNET AUTOMOTIVE COMMERCE INTERNET AUTO BUYING PROCESS Automotive Internet Sites Effective Selling and Closing INTERNET SALES AND ELECTRONIC COMMERCE Sample Cases from CARLAW econtracting Approaches to Quantifying econtracting Benefits econtracting s Mass Appeal: Not a Matter of If, Only When AUTOMOTIVE FINANCIAL SERVICES INDUSTRY Auto Finance The Competitive Landscape and Opportunities for Adaptation Partnerships in Auto Finance Originations: The Options, Opportunities and Outlook Indirect Auto Financing Source s Value Proposition:The Foundation of Strategy Indirect Auto Lenders Need Equal Focus on Dual Client Groups Dealers and Customers Impact of Auto Financing Incentives on Financial Services Aligning New Technologies with Operational Improvement Goals Auto Finance Perspectives on Fraud in Indirect Auto Finance Auto Finance Collection Strategies...755

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20 EXCERPT From the Encyclopedia of Finance and Insurance Management Excerpt includes 20 pages taken from sections: Credit and Prime Lending and Finance and Insurance Non-Prime

21 Credit and Prime Lending potential sources of funds through trade-in and customer s potential preferences. Relatives Full names, addresses and phone numbers of nearest relatives not living with the applicant for both signing parties. Could be helpful if the applicant needs a co-buyer. Personal References Full names, addresses, and phone numbers of personal references for both signing parties. Some finance sources may require more than listed on the credit application and they won t fund the deal without this information. Insurance Information Name, address, and phone number of the physical damage insurance agent/company. Buyer and Co-Buyers Signature This signature verifies that all information is correct and customer is given a copy of the credit application.this signature also gives the dealer and the finance sources permission to pull credit reports. CREDIT BUREAUS OVERVIEW A Credit Bureau is an agency that gathers information about consumers credit relationships and provides creditors with credit reports and scores on consumers. The sources for this information are court records, legal notices, local businesses, banks and financial institutions, credit card companies, department stores and collection agencies. A Credit Report is a report containing information about a consumer s identity, credit relationships, court actions, consumers statements and previous inquiries. Dealerships make use of credit reports for every deal transaction. But it should be kept in mind that all credit reports don t contain the same information or report all of the consumer s credit history. When determining a consumer s credit worthiness, dealers may order two different types single agency reports or merged credit reports. Merged credit reports are offered by third-party credit reporting agencies that blend the data from multiple bureaus and repackage it into one standard format. There are three major national credit bureaus and one that offers merged credit reports: Experian Equifax TransUnion First Advantage CREDCO Experian Experian is an information solutions company that provides data services, consumer and commercial credit information and other information services to clients in over 60 countries. Experian has headquarters in Nottingham, UK and Costa Mesa, California, USA, and annual sales of over $3.0 billion, and employs more than 12,500 people. Equifax Equifax global operations include consumer and commercial credit information services, payment services, software, modeling, analytics, consulting and direct-to-consumer services and they are based in Atlanta. TransUnion TransUnion provides accurate credit and fraud-prevention data, and information-based solutions for business and consumers. First Advantage CREDCO CREDCO is the nation s leading provider of specialty credit reporting and information management products. They provide access to all three credit bureaus from one source with the ability to merge any bureaus into one easy to read and consistent format. CREDIT REPORT Credit Reports are an overview of a person s entire history of spending and payment habits and are used to help determine creditworthiness. There are numerous formats available to present the data. While each credit reporting agency presents a consumer s credit history in its own proprietary format, all credit reports contain the following common elements of information that are vital when evaluating the customer s credit history. CONSUMER IDENTIFYING INFORMATION This data helps verify consumer identification by providing: Consumer s name. Social security number. Date of birth. Current and previous address. Current and previous employers. Alternate names. 182 Encyclopedia of Finance and Insurance Management

22 Credit and Prime Lending DEMOGRAPHIC INFORMATION Demographics contains the consumer s telephone number and helps verify consumer identification. It is available as an optional feature. FRAUD ALERT This contains information related to fraud prevention services. Each credit bureau service offers search mechanisms that verify social security numbers and addresses in order to prevent fraudulent use of credit information. Such as, flagging a social security number that has not been issued by the Social Security Administration or is invalid. Other optional services include: Experian: Equifax: TransUnion: FACS+ / Fraud Shield Summary SAFESCAN HAWK-ALERT CREDIT SCORE A credit score is a scientific way of assessing how likely a borrower is to pay back a loan. These scores measure the relative degree of risk a potential applicant represents to the finance source. Credit scores are now used as the primary means of measuring a consumer s credit worthiness and to help lenders make a decision about approving applications. Experian: Equifax: TransUnion: FICO BEACON EMPIRICA Fair Isaac Credit Scoring Model Founded in 1956 by mathematician Bill Fair and engineer Earl Isaac, Fair Isaac sparked a revolution in the financial services industry with the introduction of credit scoring, which helps lenders improve business performance, customer service and consumer access to credit. The Fair Isaac Credit Bureau Score (FICO) is calculated from credit data contained in repository files. The score does not include income, assets, or any demographic data in its calculation. The following information determines the score: Payment History Credit History Public Records Inquiries and New Credit Types of Credit in Use Number of Trade Lines Outstanding Debt Average Balance of Trade Lines A Fair Isaac Credit Bureau Score ranges from approximately 375 to 900. A higher score indicates that the borrower is a better credit risk, meaning they are less likely to default on a loan. The Fair Isaac score models at each credit bureau is of similar design and the scores are scaled to indicate a similar level of risk across all three repositories. A credit report may be requested with or without a credit score, which is optional. Each report with a credit score is accompanied by the top four reasons the score is not higher. PROFILE SUMMARY Provides a summary of all activity on the consumer s credit report and is available as an optional feature. PUBLIC RECORDS Public record information is maintained on a consumer s file in compliance with the Fair Credit Reporting Act (FCRA). This information is obtained from county, state and federal courts and consists of bankruptcies, liens and civil actions against a consumer. The length of time each record is held on the database varies by the type of record. All bankruptcies stay on the record for 10 years from the filing date and other derogatory credit stays seven years, except unpaid tax liens, which can stay on the record indefinitely. In most instances, public record information is considered a negative mark against a consumer. Bankruptcy Federal laws governing the conditions and procedures under which persons and businesses that are unable to repay their debts can seek relief. Filing for bankruptcy may seem a reasonable way to relieve individuals or businesses from overwhelming debt. But filing for bankruptcy does not wipe out all debt obligations. Child support, government loans like student loans, and tax liens are still due and payable even after a bankruptcy is filed. After a bankruptcy is filed in the courts, it becomes a public record. On a credit report, bankruptcy usually appears as a public record.a bankruptcy may also be referenced by a trade line on a credit report if the trade line is listed in the bankruptcy filing.there are different plans under bankruptcy and the court s ruling determines the extent of the debtor s liability. Lien A lien is a contract or mortgage which holds financed collateral as security against default of payment for such collateral.a lien can also be placed against a consumer for failure to pay the city, county, state or federal government money that is owed, like tax liens. Judgment A judgment is a decision by a court of law recognizing the validity of an argument presented. Judgments in civil suits may involve monetary awards or forfeiture of property from one party to another. Encyclopedia of Finance and Insurance Management 183

23 Credit and Prime Lending CREDIT HISTORY/TRADE LINES Trade lines provide an on-going record of the consumer s buying and payment activities. Current Account Current accounts are accounts in which no amount is past due. Delinquent Account The state of an account that indicates it is 30, 60, 90 days past due at the time of the loan. Collection Account An account that is in default and has been turned over to an agency or department in an attempt to collect money that is owed. Typically, an account is placed with a collection service when other reasonable attempts to settle the account have failed. Charge off An account on which there is a loss and the amounts have been transferred to loss and charged off as uncollectible. Repossession Reclaiming of a vehicle using legal procedures by finance source. Generally results from a default in payment of the finance contract. Foreclosure Legal repossession of a mortgaged property resulting from a borrower s failure to meet the terms of the loan agreement. INQUIRIES An entry on a credit report indicating that a previous report has been ordered. The entry identifies the subscriber and the date the report was ordered. There are two types of inquiries. A hard inquiry is when consumers have applied for credit, which gives the lender permission to pull their credit report.these are for all credit grantors to review. A soft inquiry is only available for consumers to see. It does not influence consumer s credit score. This type of inquiry includes consumer s request for a credit report or pre-screen/pre-approved inquiries for credit grantors. MESSAGES/CONSUMER STATEMENTS This section may include general consumer statements, informational or other special messages of facts or conditions affecting the credit file. PRIME LENDING AND THE LOAN PROCESS PRIME LENDING Completing the finance process with customers whose credit ratings fall within the category of prime lending is typically a simple process.the criteria regarding credit history, residence and employment history, and budget are clearly defined and typically easy to meet by the customer. These customers are always very sensitive to interest rates and the terms of the loan.your F&I skills and knowing the lending guidelines of your finance sources will often make the difference between a dealer finance and outsource finance transaction. LENDING GUIDELINES AND CRITERIA Each applicant must qualify for approval under the lender guidelines of a specific finance source. Finance sources will often have a variety of programs available to make themselves more affordable and competitive. Continuous modifications are typically being incorporated and new promotions are created. Finance Managers should keep abreast with new programs and promotions at all times to serve the customers better. CREDIT SCORE Prime lenders rely heavily on credit scores to qualify the buyers.the Credit Bureau score ranks potential applicants based on the likelihood that they will pay their credit obligations as agreed.a higher score indicates a better credit risk. Generally any buyer with a credit score less than 600 to 650 will not qualify for prime lending. DOWN PAYMENT Prime buyers have a proven track record of paying their bills and obligations in a timely manner so the down 184 Encyclopedia of Finance and Insurance Management

24 Credit and Prime Lending payment requirement is characteristically lower. Some prime lenders may not require a down payment RESIDENCE/ EMPLOYMENT A complete credit application should suffice for resident and employment history, unless directed otherwise by the finance source. Typically a twoyear residence and employment history is needed and 5 years information on the credit application. To establish stability, one-year continuous employment history is preferred. INCOME The customer must have adequate income to cover the repayment of their loan. Before the approval can be obtained, the stability of income and the verification of income must be established. Stability of income is usually derived from the employment history on the credit application.verification and documentation of income must be provided by the Finance Manager. BUDGET/DEBT-TO-INCOME Customer s monthly payment must be within the ratio of budget guidelines which means that the monthly payment must not exceed a certain percentage of their gross monthly income. Each lender may have a specific percentage allowance that they have determined to minimize the default risk on their loan programs. Debt-to-Income percentage for prime lending is typically between 40% to 45%. Payment-to-Income percentage is typically between 18% to 20%. Gross Monthly Income X Debt-to- Income Percentage = Monthly Payment CREDIT CRITERIA In addition to the ability to pay for a vehicle, lenders will look at the buyer s willingness to repay as indicated by the credit report that is, how well the buyer has paid their loans and other debts in the past. Prime lenders will look mostly at the two years of credit history and they will allow for minor, past credit issues, as long as there is a reasonable explanation. If there are some credit issues, they may be overcome with sufficient explanations and supporting documents. THE LOAN PROCESS For dealerships and lenders to make a profit, time is money. Quick approvals and funding enable everyone to get paid sooner, and improve the dealership s cash flow. Such technological enhancements as the electronic purchaser s statement and econtracting greatly reduce the time it takes to process a loan and get it funded. Regardless of the delivery method, careful attention to detail is essential to avoid problems down the line. PLACING THE APPLICATION WITH THE LENDER The lender needs the following information for each loan it will consider. A cover letter from the dealership should include the dealership s contact information, any statement of facts pertaining to the specific loan application, and the list of items that are being faxed or sent electronically: A Detailed, Signed Purchaser s Statement Invoice with Due Bill/Kelley Wholesale Blue Book Sales Contract or Loan Structure If Applicable: Credit Report Copy Proof of Income Proof of Insurance Notice to Co-Signer Product Certificates Once the lender receives the package, it is either electronically scored or reviewed by an underwriter to determine if it meets the institution s lending guidelines. The following criteria are used in making the decision to extend credit: Credit/Credit Score Advance Ratio/Loan to Value Ratio Down Payment Residence/Employment Income/Budget Should the criteria meet the lender s guidelines, the deal will most likely be approved. With electronic submission and qualification of the loan application, the decision process is streamlined, and fast. FUNDING Once a loan is approved, the dealership must compile and send a complete loan package to the lender for funding.traditionally, this package was transported to the lender by a runner, if the lender was in the same area, or by FedEx or other means of quick delivery.these days, dealers who practice econtracting speed the process immensely because there is no more waiting for approvals to arrive by fax and no more overnight FedEx packages leaving the dealership. Once the lender verifies that all the documents are in order, the funding is wired to the dealership s account. Another advantage to econtracting is that the system doesn t allow incomplete applications to be processed.this saves time, and cuts down on credit denials for such things as missing phone numbers or other information. Other reasons for loans to be denied include the inability to verify income, residency or employment; insufficient time on the job, in the same industry Encyclopedia of Finance and Insurance Management 185

25 Credit and Prime Lending or at the same address; poor or insufficient credit history, over-budget in terms of income to debt; and an inadequate number of references. DOCUMENTATION CHECKLIST Lender s Approval Notification Complete and signed Purchaser s Statement Sales Contract with all Dealer and Customer signatures Purchase Order New Vehicle: Factory Invoice and all Due Bills Used Vehicle: Kelley Wholesale Blue Book Trade-In: Kelley Wholesale Blue Book Co-Buyer Agreement signed by Buyer and Co-Buyer Agreement to Provide Insurance signed by Buyer Odometer Statement Copy of Valid Driver s License Proof of Insurance Proof of Income, Current pay stub with YTD earnings (if applicable) Other Stipulations required for Approval IF APPLICABLE Copy of Extended Service Contract Copy of Credit Insurance Policy Copy of GAP Protection Program Copy of any other Products Sold GETTING DEALS APPROVED The dealership s cash flow, and indeed, the entire operation, is dependent upon the lender approving the loans and funding the deals. The following should be considered when engaging in this process: Compile a Complete Package A loan application that contains information that is inaccurate or is missing will delay the approval process, or even sabotage it.verify with the customer that all the information regarding employment, residence and credit history is accurate before sending it on to the lender. If stipulations are required, include them in the deal package. Watch for Approval Patterns Keep track of lender approvals and rejections.this should provide a clearcut idea of exactly what the lender is looking for in a loan qualification. When submitting a deal that is marginal, take the time to let the lender know the reasons for any credit problems. Providing the reasons, and subsequent solutions, to these credit issues can mean the difference between approval and denial. Establish a Lender Portfolio As the saying goes, don t put all your eggs in one basket. Utilize a variety of lenders, but don t go overboard, either. Establish a small stable of lenders, and keep track of your repossession rate with them. Obviously, the smaller that rate, the more pull you will have. DEALING WITH LENDERS DEVELOPING RAPPORT, ESTABLISHING TRUST An integral part of a finance manager s success is developing relationships. Because, no matter how hard you work or how proficient you become, you won t be successful unless you have a strong support network with your service providers. This includes anyone who must complete their tasks in a timely, professional manner in order for you to accomplish your goal: final approval and funding. As an F&I manager, financial underwriters are your bread and butter. Cultivate and maintain a good relationship with them. Keep it honest and professional. If an underwriter discovers inaccuracies in your deals, it will hamper your ability to do your job. Avoid the shotgun approach of sending the same deal to multiple lenders, and don t play one lender against another in an effort to obtain approval for a single loan. Look at the big picture, and count on working with your lending counterparts for a long time. For this to occur, it is imperative you treat each other with the utmost respect.trust is of extreme importance. Many finance managers choose to see this group as both unimportant and secondary to the overall process, or as simple service providers. The truth is, unless you have the assistance of these essential people, you cannot accomplish your goals.their attitude toward you significantly affects their attitude toward your loan packages. By treating these providers in a respectful, friendly and considerate manner, you will establish a positive relationship, build rapport and create an overall spirit of cooperation. 186 Encyclopedia of Finance and Insurance Management

26 Credit and Prime Lending CREDIT UNIONS OVERVIEW Credit unions are often a tough form of competition that appear unbeatable. But, while they offer valuable customer services, they are not always the only game in town at the best rate. The mere words, Credit Union, can create a negative attitude even in the best Finance Manager. Because it is frequently assumed that the credit union has a lower rate and that the customer is already pre-approved. Sometimes they do not have the best rate, and sometimes customer is not pre-approved. Credit unions inspire loyalty in their customers. Customers are usually prepared for you to negate what their credit union has to offer and frankly, resent it. If Finance Managers are to avoid the problems associated with the loss of finance control to credit unions, it would be useful to understand what credit unions are, how they operate, and the limitations and weaknesses of their service. The knowledge clarifies many popular misconceptions that exist concerning these organizations. A credit union is a member-owned cooperative financial institution that is not-for-profit. Since credit unions exist solely to serve their memberowners, they are able to offer competitive rates on investments and loans. Each year members have the ability to select candidates for the Board of Directors among their peers, to represent them in setting the credit union s policies. Over the past decades, credit unions have become the most rapidly growing consumer installment credit lenders in the United States. They have far out-distanced the growth rates of commercial banks and financial institutions. Almost anyone can join a credit union. It s just a matter of finding what credit union you are eligible to join. Criteria for joining a credit union can include where you live, where you work, religious affiliation, ethnic group or associations to which you belong. Residential for anyone living within a certain geographical area. Industrial or occupational the company-type credit union. Association or fraternal parish and club credit unions. Governmental federal, state, county or local government employees. Most common reasons why customers use credit unions are: 1. Loyalty to the Credit Union 2. Confidential 3. Superior Service/Convenience 4. Habit 5. Lower Cost/Interest Rate 6. Better Down Payment and Terms 7. Easy Approvals 8. Job Security 9. Payroll Deduction 10. Free Disability Insurance Several of these reasons are in fact misleading. The approvals are not that easy, same loan process is involved and there is no such thing as free disability insurance. It usually is an advancement on payments that have to be paid back at the end of the loan. Job security is not driven by whether an employee is a credit union member or not, that would be illegal. In fact, being with an employee credit union could have quite the opposite effect. If a customer were to go on strike or leave the company, the credit union might have the right to call in the loan at any time. But on the other hand, credit unions offer customer a lot of amenities and sometimes you cannot beat them, so best solution than would be to join them. Many credit unions are now allowing dealerships to use their programs Credit Union Direct Lending on premises and do the loan.they generally pay some sort of reserve to the dealership and they agree to let you sell your finance products and are a lot less likely to battle you for position in the sale of a service agreement. CREDIT UNION DIRECT LENDING CUDL CU Direct was created in 1994 to provide a fast and easy method of credit union financing at local dealerships. Today the program spans 14 states, representing more than 10.2 million credit union members, 300 credit unions and 3,000 dealerships. Credit Union Direct Lending is the system developed by CU Direct to facilitate access to credit union financing at local dealers. CUDL Dealer can provide credit union financing right at the dealership without customer having to return to the branch. It takes only minutes to have a financing decision. Once the financing is approved, the dealer reviews the credit union s terms and conditions, completes the sales contract. All documents are signed at the dealership and the paperwork with CUDL is all taken care of electronically. Encyclopedia of Finance and Insurance Management 187

27 Credit and Prime Lending However, all automatic payments and their discounts must be set up with the credit union after the loan is finalized as the dealership has no access to customer s personal accounts. If customer is currently not a credit union member they may be eligible to sign up on the spot. This makes financing fast and convenient for customer and the Finance Manager. THE ROBERTS REPORT The Roberts Report is a publication founded in 1983 that offers a wealth of useful information on banks and credit unions. Included in the monthly updates is retail payoff information for all lenders, leasing payoff information, check verification phone numbers, loan info, complete address/ phone/fax information and finance rates to help customers make immediate buying decisions. Additional resource material includes nonprime and secondary lenders, manufacturer customer service numbers, credit reporting agencies, computer systems/technical support numbers, Manufacturer Warranties, service contract customer in-service numbers, insurance companies and 50- state license and lien info. LANE GUIDE LENDER DIRECTORY The Lane Guide is a directory that offers a complete reference on all banks, savings banks, finance companies, mortgage lenders, loan servicers, credit unions and other major creditors. The Lane Guide provides instant access to loan service centers, main offices, loan departments, specialized departments and branch offices. Established in 1957, the Lane Guide has been widely used by the industry to locate information concerning payoffs, demands, ratings, verifications, returned check disposition, bank/ lender mergers, acquisition references, mortgage discharges and other types of financial information. The Lane Guide lists more than 140,000 open and closed lenders, creditors and banks nationwide. Listings include complete mailing address, phone and fax numbers, tollfree information lines, credit rating policies, bureaus reported to, rating hours and more. The Lane Guide maintains cross-references on all closed institutions the current location of loan records can be found. All the information is available in regional print editions or nationwide on CD-ROM and Internet. Each printed edition includes lenders nationwide which lend or service in that region. 188 Encyclopedia of Finance and Insurance Management

28 Credit and Prime Lending LOAN STRUCTURING FOUR C S OF CREDIT Lenders are primarily looking for four things when they are analyzing an application and their credit file.the first thing lenders want to know whether or not you are someone who acts responsibly, takes their debts seriously and pays their bills on time Character. Secondly, a lender will look at capacity to pay your bills on time. This is based upon your income, or the job, and how that corresponds to your total debt. Finally, a lender will look at the possessions you currently have, your capital, and your collateral the item pledged for security. Character is all the features, traits, and peculiarities of an individual which distinguishes one person from another. The lender is looking for an applicant s character to have the moral qualities to act responsibly, take their debts seriously and pay their bills on time. Credit is years of credit history, credit score, number of tradelines, individual and cumulative high credit, present and prior auto loans/mortgage accounts and their status, current accounts and derogatory items. Capacity is the ability of the borrower to procure enough income on a steady basis to pay his debt (can he afford the monthly payment). Lender will look at customer s capacity to pay his bills on time. This is based upon his income, or the joint income of his and his spouse, and how that corresponds to their total debt. Collateral is an item of value pledged by the borrower to the lender as additional security for the loan. If the loan is for durable goods (ex. House or car), the durable goods itself is pledged. If the customer were to default, the item would be repossessed and sold by the lender. If the amount brought in by sale is not enough, the customer is still responsible for the difference. For this reason, banks require a down payment on durable goods they finance. All these factors help provide lenders with needed information which is then used to determine whether or not they think the applicant is creditworthy. Before credit scores, lenders physically looked over each applicant s credit report to determine whether to grant credit derived from four C s of credit. Not only was this time consuming, but also human judgment was prone to mistakes and bias.this is why in recent times, many lenders have started to standardize credit analysis by using an established credit scoring system. Credit scores help lenders assess risk more fairly because they are consistent and objective.they reflect customer s likelihood to repay debt responsibly, based on his past credit history and current credit status. STRUCTURING AND PLACING THE LOAN Today, there is an immense selection of different lenders for Finance Managers to choose from. Each lender will have different tiers of loan programs available and each will come with it s own set of guidelines which must be met in order to secure an approval. Learning these guidelines is imperative to the deal structuring and for continued success of approvals. Following exercise is for example purposes only. Each lender will have specific guidelines and program levels. EXAMPLE Customer: John Smith Purchase Write-Up / 4 Square Vehicle: 2005 Honda Accord Invoice: $17,800 Selling Price: $19,900 Down Payment: $1,600 Payment: $ 60 months No Trade Credit Score: 678 Gross Income: $4,200 Rent: $1,200 Insurance: $100 Total Credit Debt: $195 Credit: No Bankruptcy, Foreclosure, Repossession,Tax Lien, Judgment, Charge Off or Collection Accounts. Established on Credit Bureau for 7 years with 12 satisfactory trade lines. Encyclopedia of Finance and Insurance Management 189

29 Credit and Prime Lending 190 Encyclopedia of Finance and Insurance Management

30 Credit and Prime Lending Encyclopedia of Finance and Insurance Management 191

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32 Finance and Insurance Nonprime If the dealership treats these nonprime customers with respect, and accommodates their needs, they will breed intense customer loyalty. These customers will often travel beyond the dealership s normal geographical boundaries, and tell their inner circles how the dealership was able to assist them when they needed it the most. They ll also come back themselves when they are in a better position to upgrade their vehicles. GENERAL CHARACTERISTICS OF A NONPRIME CUSTOMER Following are some of the general characteristics of a nonprime customer. Lower credit score Marginal credi History of delinquent payments Recent Bankruptcy Foreclosure in history Repossession in history Tax Liens and Judgments Collections and Charge offs High Debt to Income Ratio High Payment to Income Ratio NONPRIME FINANCE TERMINOLOGY DEFINITIONS SELLING PRICE Cash price of the vehicle including accessories. AMOUNT FINANCED The price of the vehicle (including cash price, accessories, documentation fee, tax, license, DMV fees, products and credit insurance if sold) less the sum of the down payment (including trade-in value). INTEREST RATE It is the charge for borrowed money, usually figured as a percentage of the principal and computed annually. FINANCE CHARGE The amount of money charged and added to the principal balance by a financial institution for the service of providing credit. MAXIMUM ADVANCE Percentage of Invoice or Wholesale Book that the lender will approve for the deal PLUS tax, license, smog, registration, documentation fee, lender approved products and credit insurance. INVOICE Manufacturer s cost of the vehicle to the Dealer. This includes factory installed accessories and shipping charges. WHOLESALE BOOK Wholesale value of a vehicle by Kelly Blue Book or NADA.It is determined by adding to or subtracting from the base wholesale book, the equipment and mileage. ACQUISITION FEE / DISCOUNT A fee charged by the Lender to Dealer for funding a nonprime credit loan. SELF EMPLOYED/INDEPENDED CONTRACTOR Anyone who does not have income taxes and social security contributions withheld by an employer. FIRST TIME BUYER Anyone without prior auto credit history. CREDIT The manner in which a subject fulfills his or her financial obligations. MARGINAL CREDIT A credit history that has prior credit problems including delinquent accounts, collections, charge-offs, bankruptcies and repossessions. CURRENT ACCOUNT An account where no amount is past due. CURRENTLY DELINQUENT ACCOUNT Accounts that are currently 30, 60, 90 days past due. DEROGATORY CREDIT Accounts that are showing unsatisfactory payment history, including Collection Accounts, Charge Offs, Liens, Judgments, Bankruptcies, Repossessions etc,. COLLECTION ACCOUNT Accounts that are in default and has been turned over to a collection agency to collect the money that is owed. CHARGE OFF An account on which there is a loss and the amounts have been transferred to loss and charged off as uncollectible. PUBLIC RECORDS Public record information is maintained on a consumer s file in compliance with the Fair Credit Reporting Act (FCRA). This information is obtained from county, state and federal courts and consists of bankruptcies, liens and civil actions against a consumer. LIEN Lien is a contract or mortgage which holds financed collateral as security against default of payment for such collateral JUDGMENT A decision by a court of law recognizing the validity of an argument presented and demands monies paid. FORECLOSURE Legal repossession of a mortgaged property resulting from a borrower s failure to meet the terms of the loan agreement. Encyclopedia of Finance and Insurance Management 193

33 Finance and Insurance Nonprime BANKRUPTCY A collection of federal legislation which permits a debtor to seek legal relief from overwhelming debt by distributing the debtor s available assets among the various creditors. The remaining obligations are declared non-binding, and the debtor is legally absolved of the debts. There are various plans under bankruptcy, but generally, the debtor-creditor relationship is administered by a U.S. Bankruptcy Court. Subsequent court rulings determine the extent of the debtor s liability. After a bankruptcy is filed in the courts, it becomes a public record. On a credit report, bankruptcy usually appears as a public record. It is reported to credit reporting agencies and stays on the individual s credit record for a period of 10 years. Chapter 7 Bankruptcy Discharged A collection of federal legislation which permits a debtor to seek legal relief from overwhelming debt by distributing the debtor s available assets among various creditors. The remaining obligations are declared non-binding, and the debtor is legally absolved of the debts. Chapter 13 Bankruptcy Discharged A bankruptcy of an individual whereby the individual is allowed to retain his/her assets and pay creditors on a reduced payment schedule.the total debt of the individual may be partially absolved by the U.S. Bankruptcy Courts. Chapter 7 or 13 Bankruptcy Dismissed A Chapter 7 or 13 BK where the debtor, the court or the trustee has dismissed the case without relieving the debtor s debts. Chapter 11 Bankruptcy A bankruptcy of a business, whereby the business is allowed to continue to operate and pay its creditors on a reduced payment schedule. The total debt of the business may be partially absolved by the U.S. Bankruptcy Court. REPOSSESSION Property which a lender has taken from a customer under rights granted by a security agreement. Normally, repossessions result from a customer s default in payments Involuntary Repossession The retaking of a vehicle using unilateral or legal procedures. Voluntary Repossession A repossession when the customer and finance source mutually agree that repossessing the vehicle is the only remaining collection remedy. The customer willingly relinquishes the vehicle. Redeemed/Reinstated Repossession Full payment or a satisfactory update of an account which allows the return of a repossessed vehicle to the customer. Deficiency Any amount owed to the lender by the customer following the sale of a repossession, after deducting from the outstanding account balance the selling price of the vehicle, rebates, return premiums and other amounts received, and after adding late charges due and allowable expenses. NONPRIME FINANCE GUIDELINES NONPRIME DEAL STRUCTURE Finance guidelines details the qualifications of the following for the deal structure. Maximum Advance Percentage Amount Financed Maximum Loan to Value Ratio Down Payment Interest Rate Dealer Participation Acquisition Fee / Discount Term Model Year Mileag Income Maximum Debt to Income Ratio Maximum Payment to Income Ratio Residence Requirements Employment Requirements Credit Criteria Documents ADVANCE Maximum Advance Percentage of Invoice or Wholesale Book that the lender will approve for the deal PLUS tax, license, smog, registration, documentation fee, lender approved products (ESC, GAP) and credit insurance. Example: MSRP: $21,000 Invoice: $15,000 Down Pymt.: $2,000 Max Advance Ratio: 115% Deal Structure: Invoice/wholesale book multiplied by the maximum advance equals the money from the lender. $15,000 X 115% = $17, Encyclopedia of Finance and Insurance Management

34 Finance and Insurance Nonprime Money from the lender plus the down payment from the customer equals the maximum selling price in guidelines. $17,250 + $2,000 = $19,250 or Example: MSRP: $21,000 Selling Price: $18,500 Invoice: $15,000 Down Pymt.: $2,000 Max Advance Ratio: 115% Selling price minus the down payment divided by the invoice/wholesale book equals the advance ratio deal was structured at. $18,500 - $2,000 = $16,500 $16,500 / $15,000 = 110% Maximum advance ratio is 115%, deal was structured at 110%, it is in guidelines. AMOUNT FINANCED Selling Price Taxes + License/Reg/Smog Fees + Documentation Fee + ESC + (approved amount from lender) Approved Products/ Credit Insurance Total Amount Total Down Payment Amount Financed + = - = Maximum and Minimum Amount Financed qualifications are stated in the each lender s finance guidelines. LOAN-TO-VALUE RATIO (LTV) Amount Financed divided by the invoice/wholesale book equals the loan to value ratio. Max Loan to Value Ratio: 120% to 140% Example: MSRP: $21,000 Selling Price: $18,500 Invoice: $15,000 Down Pymt.: $2,000 Amount Financed: $18,350 Max Loan to Value Ratio: 140% Amount Financed divided by the invoice/wholesale book equals the loan to value ratio. $18,350 / $15,000 = $122.33% Maximum loan to value ratio is 140%, deal was structured at %, it is in guidelines. Credit Insurance Credit Insurance is generally financed by the lender and advanced as a plus as listed in their guidelines. Service Contracts Service contracts are generally financed by the lender and advanced as a plus up to the listed price in their guidelines.the Service Contract must be equal to the term of the contract and at least 2 years on used vehicles. GAP GAP is generally financed by the lender and advanced as a plus up to the listed price in their guidelines. Other Finance Products Other Finance Products are sold by the dealer and can be financed within the advance ratio limits by the lender. DOWN PAYMENT Minimum Down Payment Generally, it is 10% of selling price or 1,000 whichever is greater. First time buyers, may go up to 20 % of selling price. Trade- In Net trade-in value based on Wholesale Book may be used as the down payment. Over allowance on trade-in are not accepted towards the down payment. Manufacturer s Rebates / Factory Incentives A Manufacturer s Rebate may be as partial down payment, refer to lender s guidelines. Incentives or rebates that are given directly to the Dealer cannot be used as down payment. Deferred Down Payments Deferred down payments are acceptable as long as lender s minimum down payment requirements have been satisfied prior to funding. Any deferred payments must be scheduled prior to the first payment due date. Third Party or Seller Assisted Down Payments The buyer may not borrow the down payment from a different source including credit cards. Encyclopedia of Finance and Insurance Management 195

35 Finance and Insurance Nonprime INTEREST RATE and DEALER PARTICIPATION Interest Rate Base APR/Buy Rates range from 12% to 23% based on the qualified tier or program. Lenders reserve the right to adjust rates based on the credit risk of applicants. Contract APR s cannot exceed State usury limitations. Rates in excess of 12% add-on must be written as simple interest contracts. Most lenders will accept both simple interest contracts and pre-computed contracts. Dealer Participation Dealer may receive participation up to 2% to 3%, but may be lower based on the overall deal structure and credit tier. Most lenders will pay $100 flat, if contract is written at buy rate. Refer to lender s guidelines. Participations are paid based on one of the following: Participation is paid on a 70/30 split, without chargebacks. Participation is paid on a 70/30 split, and fully earned after 3 payments. In the event of early payoff or repossession prior to 3 contractual payments being received, dealer agrees to pay the lender full refund of participation. Participation is paid 100%, and fully earned after 6 payments. In the event of early payoff or repossession prior to 3 contractual payments being received, dealer agrees to pay the lender full refund of participation. ACQUISITION FEE / DISCOUNT Acquisition fee will be assessed for each loan based on the credit quality of the applicant and may NOT be passed on directly or indirectly to the customer. It must be absorbed by the dealer. Acquisition fees varies based on the qualified tier/program and lenders. Please refer to lenders guidelines. VEHICLE REQUIREMENTS Eligible Vehicles Private passenger vehicles, vans, and light trucks. Current plus 8 prior model year vehicles with less than 90,000 miles Ineligible Vehicles Limousines Salvage Vehicles Alpha Romeo Commercial Vehicles Van Conversions Peugeot Lemon Law Vehicles Conversion Packages Sterling Vehicles for Hire Gray Market Vehicles Daewoo LOAN TERM and MILEAGE Loan Terms are based upon mileage. Following is an example. MILEAGE MAXIMUM TERM 0-50, months 50,000 60, months 60,000 70, months 70,000 80, months Maximum Term For most nonprime lenders standard maximum term is 60 months subject to vehicle eligibility. Extended terms, such as 66 or 72 months will be considered with a surcharge per the lender s guidelines. Maximum Mileage Maximum mileage is 90,000 miles. INCOME Minimum Income Minimum $1,400 to $1,900 verifiable gross monthly income from the Buyer. Part-time income will be considered if applicant has been employed a minimum of 1 year with the same part time employer. SSI, Pension, Retirement income, child support, self employed and military acceptable if required documentation is provided. Ineligible Income Short term employment, temporary disability, unverifiable cash income, education loan/grant income, worker s compensation and inconsistent income. BUDGET All budget calculations use the Gross Monthly Income of Buyer. Rent/House Payment: Minimum amount defined in the lender s guidelines will be used in budget calculations in the event that the actual rent or house payment is less or the buyer is living rent free. Military Buyers are exceptions to the minimum rent factor used in budget calculations. Auto Insurance: Minimum amount defined in the lender s guidelines will be used in all budget calculations. Open Obligations (Installment and Revolving Accounts): As reported on credit bureaus, using the scheduled monthly payments. 196 Encyclopedia of Finance and Insurance Management

36 Finance and Insurance Nonprime Collections, Charge-Offs: They are budgeted 3% of the outstanding balance if derogatory credit is less than 2 years from the application date. The two-year period is calculated from the time the account was charged off, sent to collection. Judgments,Tax Liens: 3% of the outstanding balance. Child Support/Alimony: As reported on credit bureaus, using the scheduled payment, or listed within court order. Student Loans: They are budgeted using the student loan table unless they are deferred. DEBT-TO-INCOME RATIO Customer s monthly payment must be within the ratio of budget guidelines which means that the monthly payment must not exceed a certain percentage of their gross monthly income. Rent/mortgage plus auto insurance plus total credit payments from the credit reports, (including installment accounts, revolving accounts, collection accounts, charge-offs, judgments, tax liens, etc,) and the auto payment divided by the gross monthly income equals the debt-to-income ratio. Each lender have a specific percentage allowances for maximum debt-toincome ratio, but average is between 45% to 50%. PAYMENT-TO-INCOME Auto payment divided by the gross monthly income equals the paymentto-income ratio. Each lender have a specific percentage allowances for maximum payment-toincome ratio, but average is between 15% to 20%. STABILITY Nonprime lenders require documented proof of residence, employment, and income for stability. Residence Generally buyer must have a minimum of one year at current residence or three years in the same area/state. Relocation by the same employer or homeowners are acceptable. Employment Buyer must have a minimum of one year of continuous, regular, permanent employment with three years documented employment history without gaps. CREDIT Delinquent Accounts Nonprime lenders are flexible with previous delinquencies, but will not accept an applicant with currently delinquent accounts. Collections/Charge-Offs/ Judgments/Tax Liens Nonprime lenders are flexible if the derogatory credit is older than 2 years from the application date. The two-year period is calculated from the time the account was charged off, sent to collection. If less than 2 years, they are considered based on the amount defined in the lender s guidelines. Bankruptcy Lenders are unable to consider open Bankruptcies. Bankruptcy must be discharged. Dismissed Bankruptcies are not acceptable, but some lenders will consider it case by case bases. Generally multiple bankruptcies will disqualify the applicant, except a Chapter 13 bankruptcy converted directly to a Chapter 7 bankruptcy and discharged will not be treated as multiple bankruptcies. Repossession Repossessions are acceptable if the date of the repossession is more than 12 months of the date of the application or it was the result of a discharged bankruptcy. Redeemed or reinstated repossessions are not considered repossessions. Generally multiple repossessions will disqualify the applicant, unless they are the result of a discharged bankruptcy. They may be considered case by case bases. Foreclosure Foreclosures will be considered case by case bases. Student Loans Student Loans that are delinquent, in a collection or charge-off status are acceptable, but can not be used as high credit to qualify for a program. VEHICLE INSURANCE Full documented coverage. Maximum $500 collision Maximum $500 comprehensive Agreement to Provide Insurance form completed and signed by dealer and buyer(s) Encyclopedia of Finance and Insurance Management 197

37 Finance and Insurance Nonprime INELIGIBLE APPLICATIONS The following items fall into ineligible applications criteria for nonprime lenders. Open Bankruptcy Dismissed BK within the last 12 months or Multiple Dismisses Bankruptcies Repossessions in the last 12 months (unless included in a discharged Bankruptcy) Current Auto/Rent/Mortgage delinquency (60+days) Delinquent Child Support Consumer Credit Counseling Income less than required Debt-to-Income Ratio exceeding the maximum Payment-to-Income Ratio exceeding the maximum Residence and Employment history less than required Fraud/Skip previously reported as SCNL BORROWER TYPE OF BUYER Individuals only. No corporations or partnerships. CO-BUYER A co-buyer may be considered for a Buyer who does not comply with all of the credit requirements or does not comply with the minimum residence or employment requirements. Co-Buyers cannot substitute for the Buyer s ability to pay the obligation, the gross verifiable income of Buyer must meet all income and budget guidelines on their own. FIRST TIME BUYER Refer to Lender s guidelines for First Time Buyer credit criteria and budget qualifications. STRAW PURCHASE Lenders will not consider any buyer who is purchasing a vehicle for another individual. MILITARY BUYER A Military Buyer ranking E-4 and above is eligible for consideration. Mandatory allotment for the payments. Lender will provide the Dealer with the necessary allotment form for the Military Buyer. Lender s require the military ID and the most recent leave and earnings statement (LES) up front at the time the credit application is initially submitted for consideration. ETS date must continue through 50% of loan term. The following must be included in the package, in addition to the normal stips: 1. A completed allotment form, all the pages, less the page military retains. 2.The first monthly payment. (The first monthly payment is required because it usually takes about 45 days for the allotment deductions to begin.the Buyer s check for the first payment may be post-dated) 3. Military ID 4. Leave and earnings statement (LES) 198 Encyclopedia of Finance and Insurance Management

38 Finance and Insurance Nonprime LOAN PROCESS AND FUNDING LOAN PROCESS SUBMITTING APPLICATIONS When submitting a loan application to the lender following items must be faxed or electronically transmitted: Cover Letter Complete and signed Credit Application Retail Installment Sale Contract or Deal Structure New Car Invoice with Due Bill, or Complete Book Out Sheet (Kelly Wholesale Blue Book) Trade-in Book Out Sheet (if applicable) Credit Report Copy Copy of the Pay Stub(s) Agreement to Furnish Insurance Notice to Co-Signer (if applicable) Upon receipt of application, Lender will run credit reports and consider the application based on the following to determine the credit worthiness and loan structure. Credit Score/Credit History Advance Ratio Down Payment Residence/Employment Income Debt Ratio / Payment to Gross Ratio If the loan structure and the buyer comply with the Lender s buying guidelines, in general the lender will approve the application for structure and start the verification process. LENDER VERIFICATIONS Lender will verify; Down Payment Income Employment Residence Insurance Credit References Prior to funding, Lenders also conduct a Pre-funding interview with the Buyer to verify the information contained in the application and the contract.this verification process must be satisfactory to get an approval. REQUIRED DOCUMENTS The required documents stipulations for nonprime lenders to be included in the package: Drivers License Copy of a valid driver s license for each buyer. Driver license from a different state is acceptable, as long as insurance is verified. Proof of Vehicle Insurance - Insurance policy or binder as evidence and signed Agreement to Provide Insurance Form. Proof of Income All income must be verified and requires specific proof based on the following categories:w-2 Employees (Current pay stub with YTD earnings), Military Personnel (LES) and Self Employed/Unearned Income (1099). Proof of Residence Mail addressed to buyer, such as a current household bill (phone, electric, gas, water), or statement (bank statement). Proof of Rent/Mortgage payment amount Mortgage statement or rental agreement with landlord s name and phone number. Telephone Bill Current and complete telephone bill. Personal References List of personal references including full name, home address, city, state, zip code, and home telephone number. Co-Signer Acknowledgment Form - If co-buyer is other than spouse, signed Co-Signer Acknowledgment Form. Lenders may require additional documentation. FUNDING For dealerships and lenders to make a profit, time is money. Quick approvals and funding enable everyone to get paid sooner, and improve the dealership s cash flow. Because nonprime lenders purchase marginal credit applications, they rely on the verification of documents to balance derogatory credit. FUNDING PROCESS Once a loan is approved, the dealership must compile and send a complete loan package to the lender for funding. Once the lender verifies that all the documents are in order, the funding is wired to the dealership s account. During this process, careful attention to detail is essential to avoid problems down the line. Approvals expire after 30 days and all applicants must be employed at the time of funding. Step 1 Upon receipt of approval, Dealer will package and send in complete loan documents. Encyclopedia of Finance and Insurance Management 199

39 Finance and Insurance Nonprime Step 2 Lender receives, inputs the information into its origination system and assigns it to an auditor. Step 3 Auditor makes sure all documents are present and completes the process. Step 4 Funding is wired to the dealership s account. Common reasons for loans to be denied and not funded include the inability to verify income because of missing or incorrect proof-of-income documentation; residency or employment not verifying as stated or inability to reach the employer or landlord for verification; missing documents requested at the time of approval; inability to verify insurance and an inadequate number of references. DOCUMENTATION CHECKLIST Lender s Approval Notification Complete and signed Purchaser s Statement Sales Contract with all Dealer and Customer signatures Purchase Order New Vehicle: Factory Invoice and all Due Bills Used Vehicle: Kelley Wholesale Blue Book Trade-In: Kelley Wholesale Blue Co-Buyer Agreement signed by Buyer and Co-Buyer Agreement to Provide Insurance signed by Buyer Odometer Statement Copy of Valid Driver s License Proof of Insurance Proof of Income, Current pay stub with YTD earnings Military Buyer Military ID Signed Allotment form Current LES First Payment Proof of Allotment set-up Proof of Residence showing customer s name and current address Mortgage Statement or Rental Agreement and Landlord information Complete Telephone Bill Valid Driver s License Complete Reference List Other Stipulations required for Approval IF APPLICABLE Copy of Extended Service Contract Copy of Credit Insurance Policy Copy of GAP Protection Program Copy of any other Products Sold SPECIAL FINANCE SPECIAL FINANCE DEPARTMENT As profit margins thin as the automotive business becomes more competitive and complex dealers are scurrying for anything that will enable them to sell more cars, minimize costs, develop additional profit centers and offer finance options that will meet consumer demands today and in the coming years. Change is a precursor of advancement and growth. That s particularly true in the automobile industry, which is evolving at a tremendous pace. The advent of such new technologies as econtracting and other paperless processing systems cuts down on contracts in transit, improving dealership cash flow and, ultimately, the bottom line. For the consumer, this is the golden age of choices not only in the myriad of products that have flooded the market and there are more to come, but in financing options, and the companies that offer them. These choices have trickled down to the nonprime market in a major way. Dealers are aware of the new consumer trends, and have taken action by becoming more accommodating and flexible to their customer base. The days of the stereotypical high-pressure sales approach is becoming a dinosaur and is being replaced by CSI, which has become a catalyst for change anything to give one dealership an edge over another. To maintain a competitive advantage, dealers are searching for creative ways to establish new profit centers. In today s aggressive economy, the need for special finance departments is glaringly apparent. This shows that today, Special Finance is alive and well and the number of nonprime consumers continuing to increase at record levels. 200 Encyclopedia of Finance and Insurance Management

40 Finance and Insurance Nonprime Finance companies want good dealers who are willing to structure loans that will perform to their guidelines and have good quality vehicles that meet the finance company criteria. Dealers know that excellent credit gives the consumer a negotiating advantage. A car buyer with outstanding credit can command better interest rates, and in general drive a harder bargain. It s all about the power of money. The balance of power shifts dramatically to the dealership when dealing with a customer possessing nonprime credit. That customer s credit options are limited, but not his choice of dealerships. Dealers with poor past histories are finding it difficult to sign up new lenders and today dealers insist that special finance customers be treated properly and have gone to great lengths to make special finance departments more user-friendly. Fraud and misrepresentation is an area dealers are monitoring closely. It is a very exciting time for Special Finance. As long as deals are structured properly, stipulations are collected and the paperwork process is in order, dealerships and lenders can prosper beyond prime in both gross profit and retail sales. HOW TO SET-UP A SUCCESSFUL SPECIAL FINANCE DEPARTMENT There are 5 leading principles necessary for success in setting-up a Special Finance Department. Putting it all together will set the dealership apart from it s competition. 1. Qualified Special Finance Personnel 2. Advertising/Marketing 3. Inventory 4. Lender Relationships 5. Organization/Effective Sales Procedures 1. QUALIFIED SPECIAL FINANCE PERSONNEL Essential to success is the quality of the management and sales staff within the dealership. First step to ensure a successful Special Finance Department would be to find and hire a dedicated and qualified staff. Special Finance Department should consist of the following: Special Finance Director Special Finance Director is the key to the whole operation. Start out the department with the best qualified person for this position. Special Finance Director s primary responsibilities would be lender relations, securing approvals and ensuring timely funding.they would also train and supervise the staff and help with deal structuring. Special Finance Manager Special finance Manager would oversee the sales staff, help select the vehicles, structure deals to obtain approvals and contract the customer. They would be responsible from closing the deals by maximizing both front and back end profit. Special Finance Sales Representative(s) Special Finance Sales Representatives are responsible for taking care of phone/ direct mail/ walk-in leads, setting-up appointments, knowing the inventory and advertising, going on a test drive, collecting stipulations and following-up with customers. There should be enough Sales Representatives in the department to handle all the leads efficiently, one sales representative for every 100 monthly leads would be good rule. Compensation of the sales representatives goes a long way in becoming a successful department.they should be given the same bonuses as any other salesperson in the dealership, however, the best compensation plans are the ones where the same commission is given to both the front and back end profits of a completed deal. Dealership s sales management, finance management and the sales staff should be familiar with the entire special finance operation. Cross training to some extent must occur in almost every aspect.this opens up the dealership to internal promotions within Special Finance Departments with no downtime lost due to the fact that there was someone qualified immediately available to fill that open position. 2.ADVERTISING / MARKETING Marketing includes different activities to promote the dealership through continued advertising, promotions and sales. Good marketing and an adequately budgeted advertising campaign is necessary to attract customers to a dealership. The advertising campaign should consistently generate and capture a high quality of leads and measure results. Based on measuring different advertising results three to six hundred dollars per deal for special finance advertising seems to be the most effective amount to budget. By distributing advertising costs to each deal, the dealership would have an advertising budget built in without incurring out-of-pocket expenses. There are various sources of advertising and getting leads for the Special Finance Department; such as, direct mail, Internet, billboards, print media, radio, TV commercials and infomercials. Through any one of these sources, special finance department can be advertised and promoted enough to get the message across that people with credit challenges can be helped, but the majority of Encyclopedia of Finance and Insurance Management 201

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