The independent auto market is comprised of approximately 55,000 independent auto dealerships across the United States (roughly two-thirds of all dealerships). Because of its size, the independent market would appear be a prime target for banks. Traditionally, many bankers are reluctant to venture into this market, because in the past they have been unable to effectively manage the combination of risk, compliance challenges, atypical financial situations and limited access to the dealer.
The end result is that today, many bankers simply surrender the potential revenue of working with independent auto dealers to their competition - falsely assuming there is no way to manage these relationships profitably. Often, their more aggressive competitors have learned how to manage and mitigate these risks so they can capitalize on these opportunities and generate significant profits through the underserved independent auto marketplace.
Challenges
Banks typically prefer working with franchised dealers because these dealers follow more standardized business practices and predictable guidelines. But, these dealers only make up one-third of the auto marketplace.
By definition, independent dealers are just that - independent - and not usually subject to anyone's existing business practices but their own. Each dealer operates uniquely; some dealers run a tight ship, while others are much more informal in how they function. This can create a host of potential problems for banks operating in this marketplace because many bankers are not knowledgeable enough about the individual dealers to tell the two styles apart.
While many bankers are unfamiliar with the specifics of the independent auto marketplace, they are all aware of the potential risk associated with this space. Trudifully, most of the risks result from lack of knowledge or training on the part of the dealers. Regulatory compliance is one of the biggest challenges faced by bankers. Many independent auto dealers are too focused on their core competency - selling cars - to devote the time to training staff or implementing compliance procedures. Most dealers do not realize that simply reducing the number of operational errors would simultaneously reduce the level of risk for bankers to do business with them.
Some of the most common, and problematic mistakes made by independent auto dealers include, but are not limited to: not properly conducting identity screening in accordance with the Office of Foreign Assets Control as required by the USA Patriot Act; failing to make all of the proper disclosures to the buyer, as they are required by law; not remitting the warranty and gap premium when a buyer finances an automobile; failing to pay out trade-in loans; and using inaccurate loan-to-value ratios. This happens when dealers do not accurately describe all features and equipment on a particular automobile that is being financed.
The issue of fraud is also of great concern for bankers. Many bankers have previously lost money at the hands of dishonest independent dealers, and these bankers are unaware of the technologies that now exist to mitigate the risk of fraud in the marketplace.
Some of the most common examples of fraud occur when an unscrupulous dealer does not secure a lien on a vehicle and spends the money elsewhere, causing an accounting shortfall. Other dealers encourage what is known as a "straw purchase." In this example, a car buyer with bad credit does not qualify for a loan. The dealer persuades an associate, significant other, family member or friend to purchase the car in his or her name instead, while the car remains in possession of the person with undesirable credit. Occasionally, these relationships go sour and the associate refuses to continue to pay the loan, leaving the bank with limited means to collect the rest of the loan or repossess the car.
Solutions
With all of these factors in play, it is no wonder that many bankers are reluctant to do business with independent auto dealers. However, mere are now tools available to mitigate the risks of working with these dealers and enable banks to profitably and safely make these loans.
The first thing a bank can do when entering the independent auto marketplace is identify a vendor who can provide a complete risk mitigation service that incorporates both technology and face-to-face representation to the dealers. The best vendors conduct a comprehensive review of each dealer, which includes regular onsite visits to each dealership. These visits help assess inventories and conduct a critical analysis of the methods used to train salesmen, screen applicants and ensure compliance.
Reputable vendors also establish a rating on each independent auto dealer using statistical and financial data on both the business and its management staff. The scoring model is traditionally derived from business and personal credit histories, historical performance and geographical information and is updated frequently to reflect the most current level of risk associated with each dealer. These ratings are then available to banks dirough a completely automated system that links the dealers with the banks and facilitates the underwriting of the auto loan.
Smart independent auto dealers are eager to work with banks so that they can offer a wider variety of financial options to their customers. When working with a vendor, dealers can get wider access to lenders; an automated loan system that enables them to be fully compliant with local and federal regulations, reducing the threat of fines and penalties; and faster financing, which enables dealers to maintain their focus on selling more cars, services and products.
Utilizing a vendor to properly assess individual risks, supervise, conduct onsite visits and employ an electronic system of uniform loan documentation enables banks to profitably conduct business in the independent dealer market. With so many buyers looking for cars through independent auto dealers throughout the country, and a viable set of solutions for mitigating the associated risks, this is an underserved marketplace that a growing number of banks should be targeting to generate revenues.
[Sidebar]
Smart independent auto dealers are eager to work with banks."
[Author Affiliation]
Lee Domingue founder and CEO of Baton Rouge-based AppOne, a provider of risk management software and services to lenders underwriting loans through independent auto dealers. For more information, mtwww.appone.net.
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