The Oregon Senate recently introduced a bill that has BHPH dealers in that state up in arms, and for good reason. The bill would drastically change the way some Buy Here Pay Here dealers do business. I am not going to try to debate the merits of this bill, or the lack there of. As BHPH dealers, we have all been discussing and fearing the changing landscape of compliance for many years.
Let's focus on a couple of the provisions in the bill and ask ourselves, “Doesn’t this just make good business sense?” Keep in mind the old saying “Pigs get fat; hogs get slaughtered” and ask yourself if you are running your dealership as a fat, happy pig or as a hog headed for slaughter.
Here’s a quick rundown of the highlights of the bill:
- Obtain the same type of license from Oregon’s Department of Consumer and Business Services (DCBS) as payday or auto title lenders.
- Reduce interest rates to account for the amount of the consumer’s down payment.
- Stop accruing interest once a vehicle has been repossessed.
- Cap repossession fees at 7.5 percent of the purchase price.
- Stop using GPS or starter-interrupt devices.
- Wait to repossess a vehicle until after 30 days from when nonpayment has occurred.
- Cap interest rates at no more than 20 percent or the federal funds rate plus 17 percent, whichever is lower.
- Form a good faith belief that the consumer has the ability to perform on the contract by using underwriting standards passed by DCBS.
I want to focus on the last two bullet points of this bill and ask you, as a dealer, to think about how you are handling these two issues in your state?
Cap interest rates at no more than 20 percent or the federal funds rate plus 17 percent, whichever is lower.
Full disclosure here, I used the state max of 21% for nearly every car deal I ever financed and would have probably charged more if the state would have allowed. My question to you though is this: Is it good business to charge our customers more than 20% interest? Every 20 Group meeting I have ever been a part of has included conversation on how we reduce the term of our loans and retain our good customers.
Another big conversation is about the cars not lasting the term of the note. Are we sacrificing a few thousand dollars of gross for a few hundred dollars of interest? Interest income is a big part of this business and I have always been on the side of maximizing the interest dollars collected. Although, when do we hit a point of diminishing returns?
Form a good faith belief that the consumer has the ability to perform on the contract by using underwriting standards passed by DCBS.
I have no idea what the DCBS will determine are underwriting standards if this bill passes, but let’s look closely at the rest of that statement and change it slightly.
What if the motto of our underwriting department were something similar to this? “Form a good faith belief that our customer has the ability to perform on the contract based on our underwriting and verification practices.” Nearly all BHPH dealers want to reduce charge-off losses, and regulators on the state and federal level want to make sure you are not setting your customers up for failure. Having a written underwriting policy in place that is based on industry analytics and your own loss ratios will go a long way towards achieving those goals.
Don’t forget the verification part of the process. An application is only as good as the verification to support it. There is little doubt that there are serious changes on the horizon for the BHPH industry and some that may change the way we do business forever. However, some of these items just make good business sense. Is your business a “fat, happy pig” or a “hog headed for slaughter”?