BHPH dealers and subprime auto finance companies who have been around for awhile are all too familiar with the typical process of trying to collect weekly, bi weekly or monthly payments from their subprime customers.
When a payment due date approaches, collectors analyze the accounts they are responsible for to see who has paid and who has not, and then begin making phone calls. Of course, these phone calls and attempts to communicate are often met with declined calls, disconnected numbers or other methods to avoid the collection agent. In worse cases, consumers may have left town or moved without notifying the creditor.
Significant resources are often required on the part of the collection agent to attempt to track down and retrieve payment from consumers who were late.
Due to the significant amount of time and effort that each collector spent trying to track down late payments, the number of accounts they could manage at once was limited. Historically, the average number of accounts per collection agent was about 300. Of course, that number varies widely depending upon business models, lending criteria, collection structure, etc. With the average number of 300 account per collector, naturally as the portfolio grew, so did the need for additional collection agent resources.
In addition to the overhead cost of the employees, cash flow is impacted. It doesn’t take an advanced degree to understand that late payments hinder cash flow for the dealership or finance company. While many are able to predict the percentage of payments that may come in late or not at all, cash flow for the business suffers.
While the cash flow, overhead resources and effort on the staff are all enormous challenges for dealers and lenders in the subprime market, perhaps the biggest underlying challenge is communication. In this traditional scenario, the consumer is typically on the receiving end of communication attempts from the dealer or lender. The general response on the part of the consumer is to avoid that communication attempt altogether. The communication is usually one-sided, met with resistance, and widely ineffective.
GPS has been around in the used car industry for decades. But, how exactly does the technology help with collections?
It works like this:
Without the use of technology, and specifically, collection tools, a collection agent who has 300 accounts, may on average have 90 to 100 of those accounts delinquent at a given time. Depending on the situation, the collector may or may not have a good idea of which 90 consumers out of the 300 won’t make their payment. So, the collector spends his or her time calling most, or all of accounts to get payments in each payment cycle.
With the use of GPS technology and collection tools, the collector can quickly identify which of their 300 accounts may be a problem. By looking at which accounts have not made a payment and have not called in, the collector now knows who to contact. The collector can focus on the small percentage of consumers who haven’t paid or made contact, instead of the entire portfolio, or trying to guess which accounts to call. By needing to focus only on a small subsection of an account, collection agents can now handle a larger number of accounts overall, helping reduce overhead and the company grows.
Ready to see how technology can impact your collections?
If your dealership is like most franchise and independent auto dealers in the US, the majority of your gross profit doesn’t come from the cars that are sold, but from the service and parts department. According to the National Automobile Dealers Association (NADA) 2018 , new vehicle sales represented about 58% of total sales, and only 26% of gross profit. In comparison, the service and parts department made up over 46% of gross profit for the majority of auto dealerships. So, while car sales keep people coming in the door, the service department is actually keeping the businesses afloat. This is why automotive service customer retention is so important and why using a solution like InTouch can help dealers generate more revenue.
The easiest way to maintain strong profits in the service department is to keep customers who bought cars coming back for oil changes, tire rotations and to replace belts, hoses and other parts when they wear out. But with so many choices out there, providing enough incentive for customers to continue coming back to the dealership for service can be challenging.
One way to incentivize people who bought cars from a dealership to come back for service is to provide relevant offers and discounts around the time that the service is needed. Getting the offer into customers’ hands at the right time is the key factor here. A deep discount on an oil change means little to a consumer who is still months away from needing one. Most dealerships have systems in place to reach out or mail customers service coupons after a specific period of time. However, most vehicle service needs are mileage based, so these discount offers are delivered according to how much time has passed and are based on guesses.
Getting A Coupon Into A Customers Hands Exactly When They Need Service is the Key to Improving Service Retention
Most modern GPS tracking systems offer the ability to accurately track vehicle mileage and report this back to the auto dealership. This feature allows dealers to reach out via phone, email or send service discount coupons to customers exactly when they need them. This timely communication increases the chances that customers will respond or schedule service.
PassTime’s InTouch is a GPS-powered connected car and theft recovery solution that gives dealers 3X ROI on their investment through lot management, F&I resale. InTouch is also a highly effective service retention tool.
InTouch can be pre-loaded on lot inventory or installed at point-of-sale and resold to consumers as a connected car and theft recovery system. One of InTouch’s features is that it can track mileage driven on the vehicle and be programmed to send alerts back to a dealership when a mileage threshold is met. Once a vehicle reaches the mileage threshold, an alert can be sent to the dealer and integrated into the dealer’s CRM system. The dealership CRM system can then trigger a coupon to be sent, an email or call to the consumer with a relevant service offer based upon the mileage driven.
In addition to GPS-powered lot management and an opportunity for resale through F&I, InTouch can also increase automotive service retention. With InTouch’s service tracking feature, dealers can contact customers for service reminders based upon actual calculated mileage, instead of simply guessing miles driven based upon a time period. Providing service offers at relevant times can increase a dealership’s customer retention rate and generate more revenue for the service department.
For PassTime, compliance has always been an important part of our business. From its early days to today, the company has worked diligently to educate national and local government regulators, consumer advocates, dealers, finance companies and consumers on the functionality and consumer benefits of GPS and Payment Assurance devices.
PassTime, an industry leader in GPS Tracking and Automated Technology Solutions, began marketing the first industry Payment Assurance technology in 1997. At that time, 70-80% of the market was held by two payment assurance device companies, PassTime and On-Time. Within a year, PassTime began working on the industry’s first Payment Assurance consumer disclosures, in late 1998.
PassTime, an industry leader in device compliance and device disclosure, has teamed with Hudson Cook, one of the nation’s most highly regarded law practices in the area of consumer financial services law, to create the first available training in payment assurance and GPS device compliance.
PassTime has a full time compliance officer and CFPB Service Provider documentation. The April 2013 CFPB bulletin reiterated the Bureau’s expectation that supervised financial institutions have an effective process for managing the risks of service provider relationships.
PassTime strives to ensure corporate wide compliance with new and emerging State, Federal Laws and Regulations. IT compliance is also an integral part of PassTime’s implementation of best computing and management practices.
GPS Device Best Practices: The Do’s & Don’t’s
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.
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.
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.
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.
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.
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.
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.
We’ve all heard the horror stories about repossessions. The latest “repo gone bad” story we read concerned a mother in Maryland who tried to drive her Cadillac Escalade, carrying her three children, onto a lawn and into other vehicles, in an attempt to throw off a tow truck that had attached itself to her vehicle. Her SUV was “jerking violently” and pulled the tow truck toward an occupied vehicle. She did this in broad daylight, in front of a state office building, with lots of witnesses, including a Sheriff’s deputy. The Sheriff’s deputy drew his gun and ordered her to stop. She was arrested and handcuffed. One of the children in the vehicle, her eight year old daughter, suffered a neck injury as well.
Now, contrast this “repo gone bad” story with how the use of a GPS/Starter Interrupt Device (SID) might have occurred in the situation above. After missing the payment due date, the device would provide an audible tone signaling a payment has been missed and if it is not made the device will prevent her from starting the vehicle. After this warning period, when she turned off her vehicle, an activated SID would have prevented her from starting the vehicle. If she had an emergency, most reputable systems would permit her to phone for a code or for a signal to the device that would allowed her to start the vehicle. Using a SID in this scenario would have been helpful to her: no humiliation or reputational damage, no breach of the peace, no towing to an impound lot, no costly towing and storage charges to pay, and no damage to her credit rating for the repossession.
The GPS and SID landscape affects many or most members of the National Automotive Finance Association and the industry as a whole. One quarter of all new retail installment contracts issued are to consumers with subprime credit. Subprime credit scores do not just affect people impacted by the financial downturn and those in the lower economic tiers. We are talking about people from all walks of life, all economic statuses. GPS/SID devices help creditors mitigate risk on subprime credit, allowing them to offer credit to consumers who otherwise might not qualify. There was a time when a subprime credit history would nearly automatically disqualify a consumer for automotive credit. By using devices, automotive creditors have more options when it comes to who may be approved for credit. When evaluating a credit application, an automatic “no” can be turned into an “I think we can make this work”. While it is an unfortunate event that consumers fall behind in their payments to the extent that the vehicle is rendered unable to start, it is very likely that without the device, that consumer may not have qualified for the credit in the first place.
It is more important than ever to use these devices correctly.
How GPS Devices Work:
A GPS device is typically installed at the point of sale or at post repossession reinstatement. Not all GPS devices have payment assurance capabilities. Many are geolocation-only devices. A GPS device provides operational maintenance reporting. Manual locations are available as needed. A GPS best practice is to track with a purpose. Alternative available features may include: payment reminder (e.g. device tones or email), low power notification, anti-theft, starter-interrupt, and tow-detection notification.
How SID Devices Work:
Starter Interrupt Devices (SID) are typically installed at origination or as a condition of post repossession reinstatement. Devices can provide payment reminders (e.g., a series of tones) as scheduled by the creditor and disclosed to the consumer. Not all SIDs have payment reminders. If a payment is not received on its scheduled due date, the SID will send a command to prevent the vehicle from starting. (Note – the Payment Assurance Technology Association (PATA), the Association that serves the SID/GPS industry, recommends compliance with state right to cure notice and waiting periods prior to disablement.) Assuming proper installation, the device will not shut off the vehicle while driving. Emergency backup systems are also in place (based on the provider). Some examples are 1-800 numbers, emergency codes, etc.
The NAF Legal Committee will continue to keep you informed about legal and regulatory changes of interest to the subprime auto finance industry.
Eric L. Johnson is a partner in the Oklahoma City, OK office of Hudson Cook, LLP. He is a frequent speaker and writer on a variety of consumer credit topics. Prior to pursing his legal career, he spent many years working in various departments for his family’s car dealership. Eric can be reached at (405) 602-3812 or email@example.com.
Corinne Kirkendall is the Vice President of Compliance and Public Relations at PassTime. PassTime has developed a robust GPS and payment assurance technology compliance training for dealers, lenders and credit unions. As a supplier to those industries we see the need to ensure accurate and consistent information about state and federal laws surrounding GPS and payment assurance devices. For more information Corinne can be reached at (303) 962-4102 firstname.lastname@example.org.
This article is provided for informational purposes and is not intended nor should it be taken as legal advice.
© Copyright 2015 Eric L. Johnson and Corinne Kirkendall. All rights reserved. Single print publication rights National Automotive Finance Association.