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Dealer Floor Plan Financing Program

On September 27, 2010, President Obama signed into law the Small Business Jobs Act which, among other things, established the SBA’s Dealer Floor Plan (DFP) Pilot Program. The DFP Pilot gives SBA the ability to issue 7(a) loan guaranties to revolving lines of credit made by qualified participating lenders that are provided to retail dealers of titleable inventory.

Key Features of the DFP Pilot:

• DFP is structured to encourage SBA lenders to extend lines of credit to eligible dealers of new and used automobiles, motorcycles, boats (including boat trailers), recreational vehicles and manufactured housing (mobile homes).
• Size Standards: The applicant can qualify for a DFP line of credit using either the traditional, industry-based size standards (set forth in 13 CFR 121.201) or the alternative size standard. Under the alternative size standard, SBA will classify a business as small if it, and its affiliates, have both a tangible net worth that does not exceed $15 million and an average net income after Federal income taxes (excluding any carry-over losses) for the preceding two completed fiscal years that does not exceed $5 million.
• Minimum Loan Size of $500,000 and Maximum Loan Size of $5,000,000
• Guarantee: SBA will guarantee 75% on floor plan lines of credit when the lender advances no more than 100% of the cost (invoiced) for new inventory and 100% of the cost or industry based wholesale book value, whichever is less, for used inventory.
• Use of Proceeds: Loan proceeds may be used for the acquisition of titleable inventory for retail sales, to refinance existing floor plan lines of credit with another lender, or to refinance/replace existing floor plan lines of credit with the participating lender. Proceeds may also be used to pay the SBA guaranty fee.
• Delegated Authority: A floor plan lender with at least $1 billion of floor plan lines of credit in its current portfolio may qualify for delegated authority under the DFP Pilot, which will expedite the loan approval process for small business owners and allows more autonomy for lenders.
• Documentation: Delegated floor plan lenders will make use of SBA Express forms and therefore, be able to utilize to the maximum extent practicable their own policies, procedures, internal controls and documentation. Non-delegated lenders will follow standard 7(a) procedures, including the documentation requirements.
• Guaranty Purchase: Lenders will be able to request purchase of the guaranty on a DFP line of credit in the event of a breach of a financial covenant, a sold out of trust (SOT) situation, or an unremedied adverse change.
• Liquidation of the titleable inventory securing the DFP line of credit will be required prior to making demand on SBA but the lender will not be required to liquidate all additional business personal property securing the line prior to making demand.
• Time Frame: The DFP Pilot will be implemented on or before February 7, 2011.

The Federal Trade Commission enacted new rules, effective January 1, 2011, that require creditors who use credit reports to deliver a Risk Based Pricing Notice to consumers to whom the creditor (dealer) will extend credit but on “material terms that are materially less favorable than most favorable terms available to a substantial portion available to consumers from or through that person.”

I have attached a copy of the Act and requirements for your review.  Please note that these requirements are intended to improve the accuracy of credit reporting by alerting consumers who are negatively impacted by a derogatory score.  They are meant to compliment the Adverse Acton Notices which are already required as part of the Fair Credit Reporting Act.

What this means to dealers:

• If you offer “non-prime” financing options to consumers and use a credit report to help you make decisions on the credit worthiness of your customer, you are required to provide a Risk Based Pricing Notice.  This requirement includes BHPH dealers, secondary finance dealers and even dealers who offer “near prime” financing options.
• This does NOT include dealers who offer leasing options; this does not include commercial lending.
• If you use a credit report to determine financing options for any customer who has a credit history other than “A-Tier,” and you have agreements with lenders who can finance them, you are required to provide a notice.
• If you do NOT use a credit report and only offer one-tier of financing, you are skirting the issue and are “technically” not required to deliver a notice.  However, I strongly urge you to take the little time required and comply with the new requirements.

If you have questions, please email me.  For more information, click on the links below.

Risk Based Pricing Notice Requirements

Summary of the Risk Based Pricing Notice Requirements

Last month Experian launched a new program called “RentBureau” whereby they can now report a consumer’s rental payment history. This was an inevitable expectation during the information age and regardless what people think about it, rental payment histories will be a highly valuable tool for creditors and collectors.

If you are a sub-prime creditor you most definitely should consider incorporating this data into your underwriting, credit and collections procedures. You should also expect for TransUnion and Equifax to follow with similar products. However, this is only additional data. It is your ability to interpret this data that will determine if you can gain a competitive advantage in the market today.

Consumer Rental Payment Data

Experian Launches Rental Payment Data for Credit Reports CLICK HERE TO REVIEW THE PROGRAM

Ten Questions Top Sales Managers Can Answer

By Tom Herald

For Auto Dealer Monthly, Volume 6, Issue 4

Every high-performing sales organization is led by a manager who has the answers to 10 common performance questions that separate the strong from the weak. Your answers to these questions will be your compass for action and execution. They are your roadmap for improving sales.

1. Which lead source generates the most gross profit?
Every sales organization uses leads to generate sales. Whether it’s door-to-door knocking, sitting at your desk waiting for the next up bus or launching a large, multimedia ad campaign, salespeople need prospective customers to sell their product or service to.

Top-performing sales managers know which lead source is generating the most leads. They know what their cost per lead (CPL) is for every source, but more importantly, they know what their cost per sale (CPS) is. CPS matters most because it is this cost that represents your true investment. Top managers maximize their ROI instead of dickering over the CPL. If you want the good leads, they’re going to cost more. It’s up to you to decide if they are worth the investment.

2. How well does your Web site convert unique visitors into actual sales leads? The Internet is replacing the yellow pages and newspaper for today’s consumer. To remain competitive, you need a strong presence on the Web, and prospective customers need to be able to find you among the clutter. However, that can be very costly, especially if you’re just learning about SEO. What’s even costlier is driving traffic to your site that does not convert to leads. You have to know what your conversion rate is to continue improving your sales process. You can have the fanciest site in the world, but its sole purpose is to generate sales leads.

3. Are you eliminating good lead sources because you lack the tools to convert them? Just like visitors to your Web site, at the end of the day the only thing that matters is your ability to convert these visitors into leads and the leads into sales. If you don’t have the right balance between process and product, your sales conversion is going to be low, or if you lack the ability to effectively capture prospects’ attention and inspire them to buy, you’ve just wasted a lot of time and money.

Top-performing sales managers know the importance of converting prospects into leads and leads into sales. They also know what tools they need to make the sale once the customer arrives at the store. Does your inventory match what your customers can afford to finance? Is it what they want? Are you partnered with the top finance companies in your market that will finance those customers sitting in front of you?

4. What process is your best salesperson using?
Every sales team has top performers. They also have wannabes who probably won’t make it in sales. Top-performing managers know the secret sauce their aces are using and set the bar for performance based on their results. These managers inspire the rest of the team to pay attention to and mimic the work ethic and processes of top-performing salespeople. Most importantly, they understand the processes that work and train their team on best practices from which the rest of the team can benefit.

5. When they are away from the dealership, do your salespeople have the ability to respond to prospective customers?
We live in the information age where virtually everyone has a cell phone with the capability of e-mail and text messaging. Every good salesperson knows the importance of constant customer contact and uses the latest technology to achieve top-of-mind awareness. Have you seen Facebook and MySpace lately? These social networking sites are loaded with prospecting sales teams and businesses promoting their livelihood.

6. Where is your sales team stalling in the sales process? Is there a common theme to address?
Total quality management is built on the principles of Kaizen – continuous improvement – and the strongest business leaders are constantly looking to reinforce the weakest link in their sales chain.

7. Is every lead being followed up on in a timely manner?
It costs money to generate and purchase sales leads, and it absolutely kills me to see dealerships have 40 or 50 percent of their investment fall through the cracks due to a lack of process or accountability. Top-performing sales teams treat every lead like a potential sale and understand that other dealers can beat them to the punch. They manage every lead with 100-percent accountability.

8. Does your sales team have immediate access to up-to-date brochures, product information and competitive data?
Point-of-sale material and testimonials are critical keys for success in sales because they give the less impulsive prospects something to read and think about outside of the sales environment. They turn shoppers into “be-backs.” Top-performing sales teams are proud and want to tell people why they should buy from them. They also want to share success stories and understand testimonials are great tools to help build trust.

9. Which competitors are you losing business to and why?
Top-performing managers and their teams know the score in the game. They know what down it is and they know what they have to do to win. They don’t assume anything or ever chalk up a competitor’s success to factors that are beyond their control.

10. How do you know when to hire more salespeople?
Top-performing sales managers are business leaders. They know when their team is underperforming and when they’re overstressed. They live by the one-third rule—they let the top third run with the ball, focus training on the shortfalls of the middle third, and are constantly looking to replace the bottom third.

Vol. 6, Issue 4

The Future of Special Finance

Has Anything Been Learned From the Past?

By Tom Herald

For Auto Dealer Monthly 2009 - Volume 6, Issue 9

In order to gain a more clear vision of the future, we must first have a solid understanding of our past. During the mid-1950s, a car loan was only available to qualified applicants with near-perfect credit, and even then, the maximum term was only 30 months with one-third down. If a consumer lacked the ability to obtain financing, they only had three choices: walk, save up enough cash to buy the car or search around for a used car dealer willing to tote the note.

By the early 1970s, buy here pay here dealers found they were competing with large, regional finance companies that were willing to take a chance on people without credit. Mercury Finance, Jayhawk, Credit Acceptance, Household and several others stormed onto the scene; carving out the distinctive niche we now call subprime, or special finance. Ironically, in those days, the term “subprime” was actually used for customers with strong credit histories. It meant they were worthy of a below-prime interest rate.

As the industry continued to evolve and the ability to distinguish a consumer’s creditworthiness improved, special financing became more and more lucrative, and the need for it increased. Even some of the largest banks were lured into the mix due to the high-yielding interest rates and huge discount fees being generated. Large and small finance companies alike began providing indirect finance options for people with bad credit. Creative financing was making it possible for people without credit to buy a more expensive vehicle and these consumers suddenly had more options than ever before.

Over the next several years, the price of automobiles inflated much faster than the average wage across the country, mainly because of the demands from Washington for improved safety, efficiency and pollution standards. As the price of vehicles increased and competition intensified, the only remaining variable that could make more expensive loans possible to finance was increasing the term. Terms for automobile loans quickly advanced from 36 months to 42, to 48, to 60, and so on until 72- and 84-month terms were offered, even to non-prime borrowers.

Competition among finance companies was fierce, and for several years dealers reaped the rewards. I remember several of us joking at one of my first 20-group meetings, we didn’t want too many members to join our group for fear that the secret of special finance profitability would leak out. To us, it was like shooting fish in a barrel and we didn’t want to share. If you weren’t averaging over $3,000 per deal on non-prime financed used cars, you were at the bottom of the class.

However, the secret did leak out, and dealers throughout the country jumped onboard and started offering their version of guaranteed financing. The special finance segment quickly became the fastest growing in the industry, but there were definitely some cracks in its foundation.

Underwriting guidelines became too lax. Several underwriting exceptions were made by companies in order to compete for originations. Some of the largest would even waive income proof requirements just to get the loan. There was also an element of fraud by a few dealers who knew how to work the system.

Repossessions and credit defaults were no longer as significant to the approval process. Even with a fresh repo, a buyer could get into a new car with as little as $500 down. Dealers were able to sell more vehicles by absorbing the negative equity in customers’ trades and/or put a customer into a vehicle that was more expensive than they could actually afford. Sales volume increased, as did the size of the loans, but gross per vehicle retailed decreased.

Prudent non-prime lenders earned huge profits, but the earnings for those companies that took chances and were willing to overlook key underwriting elements were even larger, initially. The focus was more on short-term profits than on originating collectable loans because cash from asset-backed securities was plentiful. Just like in the mortgage industry, this was the ultimate version of OPM (other people’s money).

So, where does that leave us today? Although automotive special finance had its own version of a credit bubble, it is still a major segment of the industry that will continue to expand as consumer credit scoring and technology improves. However, instead of just being a secret profit center for knowledgeable car dealers, it has become a necessity to survive for many.

The future is still unwritten, but it’s waiting for entrepreneurs with a vision of what people want and need. It belongs to dealers and finance companies that understand the history and can improve upon best practices, but more importantly, learn from the mistakes made by others throughout the years. As George Santayana, American philosopher, said, “Those who cannot learn from history are doomed to repeat it.”

Vol. 6, Issue 9

The Massachusetts Independent Automobile Dealers Association has just launched their new website.  It is designed to promote dealers and vendors in a unique forum that allows the exchange of information and ideas while providing the latest industry information.

Please check it out!  www.miada.com