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.