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Pay Now or Pay Later

At Ken Shilson’s recent Buy Here Pay Here Collections Conference in Houston, Texas, Ingram Walters was playing his usual role as emcee, while I was doing the legal presentation. Ingram was gathering questions from the audience and lobbing them to me for answers.    

One of the questions seemed like a real stumper. Ingram asked, “What legal mistakes have you seen dealers make that have put their businesses at risk?”

For a moment, I couldn’t think of an apt response. Then I recalled an event a couple of weeks earlier that fit the question pretty well.

A fellow had called me from a sales finance company that we represent. It seems that his company was interested in buying a substantial part of a Georgia dealer’s buy here pay here portfolio of retail installment sales contracts. My contact wanted me to look over a few deal files and tell him if the documentation looked good.

He faxed the sample deals to me, and with a quick glance, I saw what I would characterize as a fatal problem with the retail installment sales form the dealer was using. Federal law requires that certain Truth in Lending Act (TILA) disclosures that usually are included in retail installment sales contracts be segregated from other TILA disclosures. The Federal Reserve Board staff says that segregation can be accomplished by outlining the disclosures in a box, by bold print dividing lines, by using a different color background or using a different font. Whoever had designed this dealer’s forms (they looked like a small business printing company had printed them) hadn’t taken any of the staff’s suggestions, but had decided to surround the disclosures with lines of asterisks.

That was troublesome enough, but one of the required federal disclosures that is supposed to be contained in the segregated area was simply missing.

I called my client, and explained that although I’d only spent about three minutes on the forms, I thought the TILA violations were serious enough to be fatal. He agreed.

So, here’s a BHPH dealer, at the point in the growth of his business when it’s time to liquidate to free up cash for new deals, and he can’t do it because his documents have obvious and serious legal problems.

A week or so after the Houston conference, I was presented with another example of a potentially fatal dealer mistake. The same finance company called with a similar assignment, only this time the BHPH dealer was in North Carolina. Again, the dealer needed some cash and my client was considering a bulk purchase of contracts.

When the documents from this deal were faxed to me, I couldn’t believe my eyes. This dealer wasn’t using a retail installment sales contract to evidence his credit sales of vehicles. Instead, he had found some business forms company and had bought documents titled “Note and Security Agreement.” He was using loan documents for his credit sale transactions. That’s about as elementary a no-no as you will ever see in this business. Again, here’s another dealer stuck with a portfolio that he won’t be able to unload because anyone thinking about buying it will have someone like me look at it and the portfolio’s documentation won’t pass muster.

In both of these instances, the dealer could have had an experienced auto finance lawyer review the forms for a few hundred dollars. If the forms had been found wanting, the dealer could have easily switched to one of the forms providers like LAW or Bankers Systems or could have used a form from his state dealer association. Any of those solutions probably would have resulted in a salable portfolio. To save a few hundred dollars, these two dealers omitted a critical compliance step that you can bet any sales finance company in the market for the dealers’ contracts will be sure to take.

Pay now in the form of a few greenbacks, or pay later with an illiquid business. It’s your call.

Vol 5, Issue 1


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