Worms Are Simple

Entering the BHPH Industry is not

If you’re running a bait shop, life is pretty simple. You keep the frozen bait frozen, the fresh bait cold and the live bait alive. If you screw it up, you lose some bait.

Selling cars on credit isn’t simple. Every transaction you engage in has to comply with a double handful of state and federal laws and regulations. Those laws and regulations vary in their specificity and complexity. Some of them simply require you to have a particular warning in your credit document. Others permeate the entire transaction, from advertising through presentation, contracting, servicing, collection and repossession. If you screw it up, some attorney general or plaintiffs’ lawyer will hang you out to dry or, worse yet, you get to make license plates for a few years.

I thought about how tough a dealer’s life is as I hung up the phone from a call last week. A franchised dealer had gone to a 20 group meeting and heard that he could make some decent additional money by going into the buy here pay here business. He’d gone home and had started slowly, financing the occasional buyer whose credit was a bit too challenged to be attractive to a finance company or bank. Before long, he was holding and collecting on more than 100 contracts.

Then he got a visit from his state’s credit cops. It seems that his state is one of the few that requires a dealer who elects not to assign his contracts (a/k/a a buy here pay here dealer) to obtain a sales finance company license. Did our boy have such a license? Nope.

So, let me think this through. This dealer didn’t bother to check with his lawyer about whether his proposed new business model required a license. You have to wonder what else he didn’t bother to do.

For example, most states have pretty specific requirements that govern the activities of companies that hold and collect retail installment contracts. Sometimes states require a collection license for that activity. Most states impose strict requirements on notices that the holder of a retail installment contract must send to delinquent credit buyers – notices that may be required at specific times, such as pre-repossession, post-repossession and pre- or post-sale of the vehicle. The failure to precisely comply with the content and timing provisions of these notice requirements and with state laws that govern the repossession and sale of collateral (vehicles) can have dire consequences.

These aren’t the only new legal areas that the dealership will face with a BHPH operation. Examples of other laws the dealer needs to be on top of include those relating to collection calls, privacy and starter interrupt devices, just to mention a few. It’s an entirely new legal landscape in some ways.
Even the retail installment sale contract that the dealer uses needs to be looked at in a different way. When the dealer was creating deals and assigning the resulting retail installment contracts to banks and finance companies, the dealership really didn’t much care about the parts of those contracts that dealt with what happened after the assignment. That’s not so for dealers who hold their own contracts. Now the retail installment contract has to be consulted for a number of reasons - to see what sort of behavior on the buyer’s part constitutes a default, to determine what fees and charges (such as late charges) the dealer may impose, and to determine what obligations the dealership has that are over and above the obligations imposed by law.

The good news is that all this stuff isn’t exactly rocket science. The bad news is that the dealer going into BHPH needs to either hire someone who knows the additional businesses the dealer is getting into, or needs to do the skull work to learn the areas himself. We see too many dealers who don’t make the effort to master the new areas they are taking on, and who end up paying a heavy price for not learning what they need to learn.

If you’re thinking about BHPH, and if you aren’t ready to really go to school to learn the stuff you don’t know, now’s the time to consider an alternative. You might want to think about a bait shop. Worms are simple.

Vol. 7, Issue 6