10 Fundamentals of BHPH Collections

The number-one key to success for a finance company is its ability to collect on loans. You can be mediocre (or outstanding) at all other elements of the business, but if you cannot effectively recoup your investment, you will quickly run out of cash to lend. This one common factor is the same for all financiers regardless of the size of the operation.

Several years ago, we were both new dealers, knee-deep in special finance, when we signed up as dealer/partners with Credit Acceptance. We were each growing our businesses and managing our finance portfolios, learning every step of the way. We soon found ourselves among the top-performing dealers for the company, which afforded us the opportunity to meet frequently with its founder, Mr. Don Foss. I will never forget one of those meetings when I learned the most valuable lesson in finance – the power of collections.

I asked Foss about one of his competitors, Jayhawk Acceptance, which seemed to be mirroring Credit Acceptance and was aggressively chasing my dealership for business. Credit Acceptance would come out with a program and Jayhawk would shortly follow with one that was similar, but would give the dealer more money up front. Foss smiled and told us a short and brief story about competition in subprime auto finance.

A couple of years earlier Foss was talking with Jayhawk’s chief executive, who announced that they had their sights set on Credit Acceptance and would beat them in this tier of automobile finance as they were signing dealers across the country. His rationale was simple – Jayhawk had deeper pockets and was better at sales and marketing than Credit Acceptance. Foss replied “That may be true, but I can collect better,” and he did.

For about a year, Credit Acceptance initiated a series of aggressive loan programs as the other heavy-hitting finance companies followed their lead. One of those programs was a “$99 Down” plan which was unbelievable, especially back then. Foss was relying on his team of collectors and their experience rooted on the streets of South Detroit as the competitive edge to keep Credit Acceptance on top.

After several months of aggressive and competitive loan originations, Jayhawk filed for Chapter 11 bankruptcy protection and lost millions of dollars. Illinois-based Mercury Finance Corp., another competitor, saw its stock plummet 86 percent in one day, following the report of accounting irregularities, a poorly-performing portfolio and a missing accountant, and the “Ugly Duckling Corporation” (Reliance Acceptance Corp.) closed all third-party dealer financing operations. Foss proved that the ability to collect is the ultimate key to successful lending.

Throughout the years, we have taken this lesson and developed what we call The 10 Fundamentals of BHPH Collections. If you master these 10 fundamentals, the rest of the business will seem simple. If not, BHPH can quickly become a nightmare.

The 10 Fundamentals of BHPH Collections:

1. Constant Customer Contact and Communications – This is measured by “recency.” The organization must stay in constant contact with all accounts and keep the two-way lines of communication open, so the collections managers always know what is going on with the customer’s ability to pay, as well as the status of the collateral. Face-to-face communication is best and keeps the relationship with the customer fresh.

2. Situational Awareness and “Tactical Management” – Collectors must maintain a high level of situational awareness with each account and react tactically to any adverse event that may have an impact the customer’s ability to pay. When these events occur, the collector can react quickly and with common sense to manage the account in the best interest of the company.

3. Set the Tone (Close the Sale Strong; Set the Expectations) – A strong collection counseling interview must be conducted with every customer prior to  delivery of the financed vehicle. The customer must be made aware of payment procedures, expectations and consequences, so there are no doubts about the transaction and agreement into which they are entering. This is a partnership between the collector and the customer, and if you set the tone early, you will reap the benefits later.

4. Say What You Mean and Mean What You Say – There is absolutely no room for weak appearances to delinquent customers. Stick to the agreements made with customers and never hesitate to take adverse actions, especially when the customer breaks a promise or commitment.

5. Realistic Flexibility – The goal is to keep the customers in their cars and paying. However, life situations can impact their ability to pay. A collector must maintain situational awareness and use professional judgment and flexibility to keep a customer in their vehicle and paying, even at a lesser payment amount than was contracted. Repossession is only a last resort. If something expensive breaks on the car, fix it and add a portion of the bill to the loan. Whatever you do, make your best effort to keep the customer in the car and paying.

6. Negotiation Skills – Subprime customers are expert negotiators, particularly when there is more money going out than coming in. Collectors must possess shrewd negotiating skills to aggressively collect payments.

7. Ten References – There must be at least 10 verifiable personal references for every contracted customer. This simple little rule will help you find your collateral more often than not. There are competing collectors in line for your customer’s money. You want to have your hand out first and as soon as the customer is paid. If you are at the back of the line, the money is gone.

8. Compliance – Collectors must be experts on all federal and state lending and collection laws and procedures, and they must work diligently to ensure 100-percent compliance with all directives. If not, even the most effective operations are exposed to liabilities that can and will shut them down and cost a lot of money to rectify.

9. Underwriting Guidelines – Underwriting guidelines are devised to ensure the performance of an entire loan portfolio. There is absolutely no room for “gut check” calls and exceptions. Stick to your guidelines, and your portfolio will perform as expected.

10. Payday Payments – Customer payments must correlate with their paydays. If a customer is paid weekly, their car payment must be made weekly. A BHPH dealer is competing with other collectors, so you want the payments to be made as frequently as possible and be first in line for the money. Otherwise, you will find that the customer will run out of money before you are paid.

Vol. 3, Issue 4