In mid-2017, Nevada legislation passed SB 350, a law that significantly changed how companies could use GPS and starter-interrupt devices to mitigate the risk of financing subprime consumers for automotive loans. And while several of the law’s stipulations make sense in protecting the consumer, like getting written consumer disclosure for the use of the device and providing override commands to help the consumer when in need, other aspects of the law had major impacts to the dealers, banks, and finance companies using the technology. Perhaps the most impactful aspect of the law was the stipulation that a starter-interrupt device could not be activated until the contract holder is more than 30 days past due.
For dealers and finance companies utilizing GPS and/or starter-interrupt technology, the goal is to remind consumers to make their payments, and to active the starter-interrupt after they have been reminded and a grace period has passed, typically 3-5 days.
As for how SB 350’s impact has been felt in the industry, you could ask Milo Trevizo, director of operations and finance at CAG Acceptance. Trevizo, who has been with CAG Acceptance for over seven years, oversees financing, loan serving, loan origination, remarketing, and legal among other duties.
CAG Acceptance, which services 21 dealerships in Arizona and an additional four in Nevada, essentially stopped all loan originations in Nevada after the law passed.
CAG Acceptance has used GPS/starter-interrupt solutions from the provider PassTime for nearly a decade as part of its program to provide financing to subprime and deep subprime borrowers.
PassTime was chosen by CAG as its GPS/starter-interrupt provider because of the quality of the product, the reliability and starter-interrupt capability of the solution. CAG also identified PassTime’s service as a key differentiator for the company – one that Trevizo said is difficult to quantify, but often just as important as any other company attribute.
“CAG Acceptance was formed to help sell cars to and finance customers that no one else would finance. The PassTime device allowed us to pursue that mission, because it helped us lower the risk that comes with financing consumers with deep subprime credit.”
Unfortunately, SB 350 made that mission just about impossible in Nevada.
The Industry Predicated the Impact of SB 350
In a June 29, 2017 article by Nick Zulovich, Senior Editor for Auto Remarketing’s BHPH Report, written just before the Nevada SB 350 was to take effect, Milo Trevizo was interviewed about his thoughts on what the new law would mean to their business.
From that article:
Trevizo … emphasized that doing business without the device’s impact would be nearly impossible. The finance company began to use these devices in 2011, and during a five-year span, Trevizo indicated CAG was able to provide vehicle installment contracts to 3,200 customers, an increase of more than 1,000 percent compared to the time before the provider used the technology.
“From our experience, the starter interrupt technology has enabled customers to obtain loans who would otherwise be unable to obtain financing,” Trevizo said. “We had been seeing vehicle repossessions in Nevada double, delinquencies triple and our loan volume reduced in the absence of starter interrupt technology.
“If the proposed legislation passes, we envision a sharp decrease in loans, leading to severe reduction in profitability. This will force CAG to cease conducting business in Nevada,” he continued during that March hearing. “This will mean customers of CAG may be left without an avenue to purchase a vehicle.”
Turns out, he was right. CAG continues to service the existing portfolios in Nevada but has stopped loan originations in the state after the new law was implemented. Delinquency rates on CAG’s loans in Nevada jumped from an average of 9% for accounts that were 1-90 days past due while using the PassTime devices all the way up to an average of 33% for accounts that were 1-90 days past due after the changes, according to Trevizo.
So, the legislation that was supposed to help consumers be protected, has resulted in a major finance company serving this consumer population to stop new business in the state.
It is a Communication Device
The aspect of a device like this that many don’t realize is that it helps facilitate communication between the consumer with the vehicle and the finance company. When a consumer has a device installed on their vehicle and their payment is coming up, they are much more likely to contact the creditor if they cannot make their payment. Without the device, typically a consumer is going to go “radio silent” in that scenario.
Trevizo emphasized that they want the consumer to call in that situation and they can work out an arrangement including a payment deferral, change payment due dates, provide an extension, or even a full loan modification. But without contact and communication from the consumer, those options are very difficult.
“If a consumer gets too far behind in payments, the options become more difficult to implement – and unfortunately can result in losing the vehicle,” Trevizo said.
25 Days Makes All the Difference
CAG previously used PassTime payment reminders and start-interrupt devices on all loans in Nevada. The company policy was to activate the starter-interrupt feature of the device after device payment reminders were issued and the consumer was five days past their due date. CAG customers were informed about the device, its features and how it would be used.
“We’d get calls at the four or five days past due period because customers did not want their ability to drive their car interrupted. Often, they would make their payments, or we’d work out an extension or deferment, etc. But, because this happened so close to the actual due date, it was much easier to work out an arrangement,” explained Trevizo.
With the change in law, users of this technology could not activate a starter-interrupt feature of a device until the consumer was at least 30 days past due. While that sounds like a benefit for the consumer, it was actually a determent.
“While we used to get calls around the four or five days past due mark before the law, afterward, those calls wouldn’t come in until around 29 or 30 days past due. At that point, the consumer is about a full month behind and essentially owes two payments,” said Trevizo.
If that happens, it makes it much more difficult for the consumer to ever catch up on their payments or to work out solutions that are affordable to them for the long run.
“Many consumers treated the “disable date” as their payment due date. So, if that moved from five days from their actual due date to 30 days after, those consumers were perpetually behind on their payment and were rarely able to catch up,” Trevizo went on to say.
Whatever the intent of the law’s stipulation was, the reality, at least for CAG, was that using starter-interrupt technology only after the consumer had been 30 days late on their payment resulted in payments slipping past the due dates to the point that consumers could rarely, if ever get caught back up.
What about using only GPS instead of the starter-interrupt feature?
According to Milo Trevizo, CAG Acceptance views GPS/starter-interrupt technology as a communication tool and not as a repossession tool. Of course, with GPS you can find the vehicle - but by that point, the situation has gotten to a place that neither side wanted.
For the consumer, they have given up on the vehicle and their payments and are more-or-less waiting until it the vehicle gets repossessed. For the creditor, they have had several (at least) missed payments on the contract and have to go through the repossession process on the account. Then they need to hire or send employees to locate and recover the vehicle.
Trevizo mentioned that without the use of PassTime’s devices, repossessions for the company went through the roof.
For many finance companies, by the time an account gets to that repossession stage, it is a poor outcome for the creditor and a poor outcome for the consumer.
Another aspect that is often overlooked is the device’s impact on voluntary surrenders. A voluntary surrender is when a consumer turns in the vehicle in a situation where they no longer intend on making the payments on the loan. With the use of a device, consumers would often voluntarily surrender a vehicle as they knew that the vehicle will be disabled shortly after the due date, so there was no incentive to keep it. With GPS only, or under the new law requiring disablement only after 30 days, voluntary surrenders dropped off considerably as consumers continued to drive the vehicle well past the payment due date adding additional wear and tear without reducing the balance.
Effect vs. Effectiveness
The effect of the Nevada law to the business of CAG Acceptance is clear: the impeding restrictions on devices caused the company to stop loan originations in Nevada as it was no longer commercially viable.
However, these events also created a compelling view of the effectiveness of the devices themselves. When CAG discontinued the use of PassTime’s devices in Nevada, the result was a comparison of accounts that had devices associated with them and accounts that did not have devices associated with them. While using PassTime devices, CAG’s Nevada portfolio averaged a 9% delinquency rate on accounts that were between 1-90 days past due. The use of payment reminders and starter-interrupt 3-5 days after the due date kept delinquency numbers down on subprime accounts. Compare that to the delinquency numbers without the use of devices; they jumped to an average of 33% on accounts that were between 1-90 days past due. A 24% increase in delinquencies resulted in the accounts without PassTime devices.
Evaluating the Impact
As mentioned, CAG Acceptance made the business decision to stop new originations in Nevada as a direct result of the law.
Milo Trevizo stated, “When you are talking about financing people who have deep subprime credit, there is not a lot of wiggle room. Statistically, the risk of default is very high. Starter-interrupt devices helped reduce or mitigate some of that risk. The law in Nevada is so restrictive on the technology that it makes it virtually unusable. Without that additional protection against risk, it just doesn’t make sense to continue to do business in Nevada.”
So, for CAG, the result was to cease additional loan originations in Nevada and focus solely on Arizona.
While there are likely still some options for consumers with deep subprime credit to get vehicle financing, Trevizo stated, “I don’t see other finance companies rushing in to Nevada to finance people in that position. My guess is that a lot of these deep subprime consumers aren’t getting loans.”
For a law that was positioned as a way to help consumers, one impact may be that it is even more difficult to get vehicle financing in the first place.
For PassTime, the company continues to take the lead, along with industry partners, to proactively monitor legislation and meet with lawmakers about the technology they provide. The company’s hope is that with continued education about how devices work, how the help the industry, and the impact of restrictions around them, lawmakers can make informed decisions and hold a more comprehensive view when creating legislation.