CARY, N.C. — When gathered amongst themselves, sometimes
dealers and finance company executives who specialize in working with customers
with checkered credit pasts say they're not in the car business — they're in
the collections business.

"If you have a weak leg in collections, you're dead. I don't
care if your ACV is $1,000," said Michelle Groover, chief executive officer of
Members Choice Auto, which helps credit union members in Georgia find a vehicle
that fits their budget while assisting a half dozen institutions with
collecting on those contracts after the sale.

"The reality is some people are going to have bad credit for
the rest of their life because they don't care," Groover added.

While those customers might not be too concerned about the
contract, dealers and finance companies sure are, especially during current
times when contract terms are lengthening, down payments are shrinking and the
wholesale cost of inventory isn't softening much. As if those factors didn't
make collections vitally important, regulators are intensifying their look at
collection practices, making the vetting of third-party service providers all
the more vital.

"If you think about it in collections, it includes outside
third-party collectors, collection attorneys, repossessors and forwarding
companies, anybody who is involved in the process on the collection side in
communicating with the customer," said Mark Edelman who is based at the
Cleveland office of McGlinchey Staford, a law firm that services the auto
industry with offices in six states.

"There is a much greater emphasis on entities that are
subject to the supervision or oversight of the Consumer Financial Protection
Bureau and by extension its analogous agency, the Federal Trade Commission, to
be very mindful of the vendors they're doing business with," Edelman continued.

More on Due Diligence
of Service Providers

Edelman surmised that heightened investigation of
third-party vendors first started about a dozen years ago. That's when the
Office of the Comptroller of the Currency issued guidance to commercial banks
about third-party vendors and third-party outsourced providers and the level of
diligence.

"I think what the CFPB did was kind of leverage off of that,"
Edelman said. "It was always out there, but obviously the OCC didn't have any
supervisory or precedential guidance over any non-federally chartered depository
institution.

"If you were an independent finance company, it's certainly
something that wasn't on your radar," he continued.

Now that collections compliance is very much a point dealers
and lenders must consider when evaluating their providers, Edelman shared a
recommendation he's been giving to clients for years.

"The best standard to take is looking at it from the
perspective of if you were buying the company you were about to do business
with," Edelman said. "What level of diligence would you do on that company if
it wasn't just going to be a business partner that you outsourcing, but
actually a company that you were going to acquire and in doing so acquire all
of their warts, faults or anything that was hanging out there? You would
obviously have a high level of scrutiny if you were looking to buy them.

"To a certain extent, this is obviously unprecedented
because it's creating a greater emphasis on knowing the people you're doing
business with beyond just are they performing as you've contracted with them.
It's certainly a different perspective," he continued.

Tools to Boost
Collections

Back in Atlanta, Groover pointed to two elements that have
helped her company's collections and losses improve.

First, starter-interrupt/GPS devices are installed on all
vehicles that have a contract facilitated through Members Choice Auto. Groover
indicated she received discounted repossession rates because of the technology
and customers respond much quicker when a 45-second alarm is triggered because
a delinquency arises.

"I tell them, ‘If you communicate with us and tell us what's
going on we're human beings, too, and we're going to be helpful. If you run,
you're not going to have to worry about the payment anymore because we're going
to come pick the car up from you,'" she said.

Groover highlighted that the combination of a lengthy
underwriting process – that includes an in-depth interview and the opportunity
to have the APR reduced after a year of consecutive payments, no lapses in
insurance coverage and the completion of credit education courses – along with
the payment devices has resulted in the need for only about 25 repossessions
since the Fresh Start Program for subprime customers started in October 2009.
Since the launch, Members Choice Auto has facilitated more than 1,000 contracts
for financing worth more than $12 million.

"It's all about communication," Groover said.

Best Collection
Practices

Teresa Fransen is a consultant and trainer for Houston-based
RecoveryMaxx. Fransen began as director of collections for a law firm in Grand
Rapids, Mich., collecting medical, credit card, commercial and subprime
accounts.

After five years, Fransen transitioned from a third-party
collection environment to a buy-here, pay-here finance company and specialized
in developing a successful in-house recovery department. When talking with
clients, she said the primary question remains the same.

"The No. 1 thing that people always ask is, ‘How do I find
this person? What's the one button I can hit and magically, their current
address and phone number, job location appear?' My response is I wish it were
that easy. Typically, there are a number of sites you have to hit and it may
take hours to find that exact address," Fransen said.

"It's a timing issue and how much you're willing to invest
in the right collectors and skip-tracers, the right systems to be able to
efficiently work through your recovery portfolio," she continued.

Fransen then offered a recommendation that might help any
size dealer or finance company.

"My No. 1 advice is to put the right systems in place to
where your computer system is generating the documents for you and you're not
spending your time doing the administrative part of it," Fransen said.

"If you want to maximize your recoveries, you've got to be
banging on the phone. Collections is all about phones. A letter series works if
you can't get them on the phone. It's important to develop a first step, second
step, third step in a letter series. But most of it is spending as much of your
time on the phones as possible," she continued. "Free up all of the
administrative and clerical duties to get back on the phones."

Nick Zulovich can be reached at nzulovich@subprimenews.com. Continue the conversation with SubPrime Auto Finance News on LinkedIn and Twitter.


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