The Equation for Successful BHPH Collections

A number of factors figure into the equation for successful collections, and the equation can vary from dealer to dealer. The success of different BHPH dealers’ collections can be a result of many varying factors, not unlike simple math.

Just as 2 + 3 and 4 + 1 both equal 5, good collectors + starter interrupt/GPS devices might equal a successful operation for one BHPH dealer, while another dealer’s equation for success is good collectors + payment options.

The Constant = Collectors
Let’s start with the basic component of a collections department and probably the only constant in the collections equation—the collectors themselves. Write all the deals you want, but without a competent collections staff to oversee your portfolio, the paper you write remains just that – paper – and never becomes money in the bank.

According to Brent Carmichael, an executive conference moderator for NCM Associates with 17 years’ experience in subprime finance and collections, dealers today are not talking as much about core numbers as they are about finding, hiring and training the right people for their collections departments. “They’re assuming that if they hire and train the right people, offer the customer any way to make a payment and work with them … the numbers will kind of take care of themselves,” he explained.

What Makes Someone a Good Collector?
When it comes to what BHPH dealers look for in potential collectors, “organized,” “even-tempered,” “confident,” “multi-tasker,” and “critical thinker” are terms that frequently pop up on the wish list of desirable traits.

“We’re looking for somebody who’s capable of being an excellent communicator … [and] somebody who has some confidence in their decisions,” said Ray Lloyd, customer service director for Mike Carlson Motor Company in Burleson, Texas. He also noted, “If they’re looking for an hourly [or] straight salary job, that gives me a little bit of an idea … they may not want to do the amount of work necessary to achieve the success we need.”

Ryan Linnehan of Linnehan’s Right Way Auto in Ellsworth, Maine, said good collectors share many of the same skills dealers look for in their salespeople. “Collections are really just sales done over and over again,” he explained. “Building rapport, overcoming objections, controlling conversations, etc., will all come in handy for the ideal collections team. They are selling the customer every week on why they need to make their payment on time.”

Fran Cavenaugh, CFO of Cavenaugh Auto Group, which has Car Today BHPH lots in Jonesboro, Batesville and Hot Springs, Ark., looks for someone who can handle their own personal financial matters. In fact, along with the more customary background check and drug testing, Cavenaugh asks for a credit check on all new hires. “I have found that if they can’t handle their own finances, it’s hard to get them to help somebody else handle theirs, and really that’s what we’re doing. Many times we turn out to be financial advisors,” she explained. “I need somebody that can handle their business, or they can’t really handle mine.” She said she has discovered over the years that collectors who are adept at managing their own money tend to be more efficient collectors and collect more money than people who have ongoing personal financial difficulties.

Russ Larson, owner of four J.D. Byrider franchise stores in Iowa, Missouri and Alabama, and partner in two more Byrider stores in Iowa, stated that while he wants someone who “is organized and can be firm yet compassionate,” he also wants the collectors he hires to be “very, very competitive people.” J.D. Byrider puts out a list of the top 50 collectors across all their stores, and Larson expects his collectors to make the list. If not, he said, “we have a problem.”

Larson has found gifted collectors from a number of backgrounds. One of his top performers was hired from a check-cashing business, another came from the office of a local auto auction and one was a personnel manager for a janitorial service used by one of his stores. While he has had success hiring personnel from a number of different fields, he did note having some difficulty acclimating new hires who have prior experience in the rent-to-own business.

“Historically, the three or four rent-to-own people I’ve had were a little too aggressive on their repossessions for me … They seem to want to pick up the vehicle instead of working with the people and keeping them in the car,” he said. He pointed out that in the rent-to-own field they can pick up a television due to non-payment, re-rent the television to another customer and simply move on—no harm, no foul. “We don’t do that. A repo’s the worst thing for us; we take it to the auction and sell it and that’s our big loss, so we want to work with the people but still keep delinquency down.”

How Do You Train Your Collectors?
Larson has new hires sit in with experienced portfolio managers for three to four weeks, making supervised calls; however, it will be at least a month before new portfolio managers get their own portfolios. Larson also has some additional training support in the form of Byrider University in Carmel, Ind., where all his portfolio managers must go at least once every 12 to 18 months to brush up on their skills. He said J.D. Byrider’s related finance company, CarNow Acceptance Company (CNAC), is also very helpful when it comes to training and can send out a consultant for several days if needed.

Collectors at Mike Carlson Motor Company follow a specific call model which Lloyd said typically takes about two days to go through with new hires. The next step is to let them sit side-by-side with a successful account manager and listen in for a day; later they’ll swap places and make calls while the experienced employee listens in. Calls will be recorded to determine the new hire’s baseline performance and the areas to focus on in training.

“We take them one step at a time,” he stated. “We’ll focus on one area [such as the call introduction] until they master it, and then we’ll move into the next part.” The ultimate goal, he explained, is to train each collector to “acknowledge the customer, reassure them we’re here to work with them, and then work through to a successful conclusion.”

Training thereafter is ongoing. Lloyd continuously watches for areas where collectors might be straying from their training. “Every week we get together as a group and we focus on one specific area,” he stated. In addition to the weekly group training, he said, “Each rep has a minimum of one hour of one-on-one time per week with their supervisor so they can get some individual coaching on a specific area they may need to focus on.”

Cavenaugh said new hires at the Car Today stores shadow experienced collectors for a week without making a single phone call. If it seems the new hire has picked up enough in the first week, they will be assigned a few of the easier accounts (e.g., those that are one to five days past due) and will spend their time calling those customers with reminders and making payment arrangements. As they progress, they will gradually be assigned more accounts.

Cavenaugh helped develop a Web-based training program, Collection Pros, based on years of training collectors in-house, and which new hires at Car Today must complete. Additionally, weekly meetings are held to discuss any problem accounts and brainstorm as a group to troubleshoot those accounts.

How Do You Pay Your Collectors?
Competitive compensation plans help keep collections on track by offering specific incentives for performance. Cavenaugh said she experimented with both straight hourly and straight salary pay plans before settling on her current system. She found that with a straight hourly rate, collectors were simply working the clock; with a straight salary, accounts were being worked but some collectors were leaving too much money on the table. The other problem with such systems, she said, was “my good collectors weren’t getting rewarded as much as I felt they should be.”

With Car Today’s present compensation method, the collectors are paid a base salary determined by the number of accounts they handle. On top of that, each collector is paid a weekly bonus based on the performance of their portfolio, looking at delinquency only and broken into sections of one to 10 days delinquent, 11 to 29 days, 30 to 59 days, and 60 and above. They can also earn a monthly bonus based on a low repossession rate; if it stays within a certain tolerance level they get a percentage of the dollars they’ve collected. Additionally, various distinctions such as being the collector with the lowest delinquency rate or the one who’s collected the most money earn employees opportunities to spin a wheel to win money, days off or nights out on the company.

Cavenaugh said this method of compensation, along with flexible hours, has resulted in better collections and lower employee turnover. “They control how much they make,” she stated. “It turned their whole mentality around from where they were thinking, ‘Fran’s not paying me enough,’ to, ‘I need to work harder if I want to make this amount of money.’” She also noted the entire group shares a bonus if they reach a certain level on collections, making it advantageous for everyone to chip in and make sure problem accounts are handled.

Larson keeps his portfolio managers competitive with each other and with other J.D. Byrider/CNAC collectors around the country with a bonus program based on multiple performance markers, including one-day delinquency, 30-day delinquency and charge-offs.

Collectors at Mike Carlson Motor Company are paid a base salary plus a bonus based on four main objectives: the total cash they collect, the number of repossessions and charge-offs in a month, the delinquency number (one day, $1), and recency (customers making payments in the last 30 days).

“They’re all team-driven goals. They’re not individual goals, but within those we have individual expectations that are set up,” Lloyd explained. Individual expectations such as the total number of calls made in a month, the kept-promise percentage and the total dollars collected are all measured. Call quality is also very important. They record all calls and monitor a minimum of 20 accounts per representative per month, assessing individual performance using scorecards for inbound calls, outbound calls and leaving messages. Each representative is ranked and at the end of the month; the most highly-ranked reps get the highest percentage of the bonus money available that month. “It drives people to want to work together as a team as well as make sure their individual numbers are where they’re supposed to be.”

Variables = Other Factors
The beauty – and the challenge – of the collections equation is that it isn’t a set equation. It can include a number of variables, and dealers can apply them in ways best suited to their own preferences and situations. A few of these variables include starter interrupt and GPS devices, offering customers a number of pay-plan options and having a related finance company (RFC) handle collections.

Payment Options
Many dealers have found offering customers a number of payment options to be extremely beneficial to collections. According to Carmichael, the issue of electronic payment – whether through the dealership’s Web site, automatic debit or automated clearing house (ACH) – is a hot one with BHPH dealers of all sizes. He estimated approximately 60 percent of the dealers he works with are actively using ACH. In a sense, technology is moving dealers away from the “pay here” aspect of BHPH; the change, however, is better for the dealer.

Carmichael commented, “You need to give customers every opportunity to pay  – cash, check, cashing payroll checks, taking credit cards, debits cards, online payments—whatever it’s going to take to get the money.” He stated that many employers now use direct deposit for payroll, which has caused more BHPH customers than ever to have checking accounts or pre-loaded debit cards. This makes electronic payments a viable option.

At Mike Carlson Motor Company, they have been allowing customers to make payments online for at least two years and started doing automatic payments a little over a year ago. “One of the things many [BHPH customers] don’t have is financial discipline,” Lloyd stated. He said setting customers up on automatic payments provides some structure and keeps them from spending their car payment funds on something else.

“I don’t want to put any roadblocks up for a customer to pay me,” Cavenaugh stated. The Car Today stores have been doing automatic debit and ACH payments for about two years, and it has really helped collections. “I would say in our portfolio of about 1,300 accounts … 60 percent of them are either automatic debit or ACH.” One benefit of having so many accounts set up on automatic payments is it allows her collectors to be more efficient and spend time working on the “problem” accounts.

While it would stand to reason the typical BHPH customer might not be comfortable with the idea of automatic payments, Cavenaugh said many customers who are initially wary of the idea eventually warm up to it. “Once you take the time to set it up for when they get paid, then it’s easy; they know the money’s there. [After the first couple of payments] they see that it doesn’t screw them up, we don’t take out more money than we’re supposed to, we don’t overdraw their account, then they’re comfortable with it.”

“Getting customers set up on automatic payment has been one of the best things we ever did,” agreed Linnehan. “It has allowed us to handle more accounts per collector and helped our delinquency numbers reach levels we never thought we’d ever see.”

Cavenaugh noted one area of concern regarding automatic payments—losing regular contact with the customer. “The downside with automatic payments is a lot of time you don’t see the customers to resell them, so on the dealership side you do have to come up with a different way to stay in touch with the customer.” In addition to sending monthly direct mail pieces to customers in the database, the dealership’s business development center calls each customer whose account has reached a specific balance to set up an appointment to look at a different vehicle.

While Mike Carlson Motor Company has a similar practice – calling customers when their balance falls below $3,000 – Lloyd said this measure might not be entirely necessary. Why not? “Ease of doing business,” he explained. “If you make it easy for me [to buy and make payments on a car], why would I want to go somewhere else?”

Cavenaugh said Car Today has seen good results using a loyalty program to bring customers back into the dealership and has been doing so for the past five years. Customers are credited points on their loyalty card for their down payment and for each payment made, with on-time payments meriting the greatest number of points. Loyalty points can be used to pay for repairs or maintenance at one of the dealership’s repair facilities or can be applied toward the down payment on a customer’s next vehicle purchase.

Starter Interrupt/GPS Devices
One of the things many people think of when they think of collection aids is the use of starter interrupt and/or GPS devices. Carmichael said roughly 70 percent of the dealers he works with use some kind of device, whether that means starter interrupt, GPS or a dual device. However, the use of such devices in many cases seems to be a matter of personal preference.

“It’s more of what I call a ‘head-on-the-pillow’ choice; if it helps you sleep at night, put starter interrupt and/or GPS devices on vehicles,” he said. Looking at the dealers he’s worked with for the last two to three years, Carmichael noted he has not seen a drastic increase in overall collections attributable to the use of payment devices; most dealers are still collecting an average of six to eight percent of their portfolio in a typical month, regardless of whether they’re using any type of device. “What I do see with the dealers who are on them is the aging of their receivables is prettier. They don’t have accounts that are 30 to 59 days past due or 60 to 89 or 90 days and above; they’re pretty clean.” Also noteworthy, the use of payment devices does not seem to ultimately affect repossession rates.

Cavenaugh observed, “In the long run, does it help you with your charge-off rate? Probably not.” However, based on observations she’s made while consulting other dealers through Collection Pros, she said payment devices might help by reducing the amount a dealer ultimately has to write off. “A bad underwriting decision is not going to be corrected by a starter interrupt device; it’s still a bad underwriting decision,” she stated. “But what they do allow you to do is collect more and control your delinquencies better, and I do believe the GPS/starter interrupt device together seems to work better.”

Car Today, however, has never used starter interrupt or GPS on its vehicles, partly because such devices weren’t prevalent when they started in BHPH. She added, “Our delinquency has never really been an issue. We generally run at close of month 10 percent and under past-due one day, $1.” The cost of the technology is the biggest issue. “When you’re selling 100-plus cars a month … if I have to spend $125 extra on each vehicle I sell, in a month that’s a lot of dollars,” she said. “It’s at the point now I wouldn’t see that much of a drop in my delinquencies to justify the cost.”

Currently, they use a wheel lock as a sort of payment protection device. “If it’s a customer we can’t get a hold of, they just won’t communicate with us, broken promise after broken promise, I’ll send my field guys out and we boot the car,” she said. The advantage with this is it’s used only when needed and is not something that must be installed on every vehicle on the mere chance it may be needed. “Let’s face it … if I knew which [vehicles] to put [starter interrupt devices] on I would, or I might not even sell that customer.”

She said as the technology becomes cheaper, it may make sense to use the devices. She did note that someone just starting out in BHPH should indeed consider them; the expense might be easier to bear for someone starting slowly and easing into the business. Additionally, for those new to underwriting deals, it can serve as a little extra assurance.

Larson said there are no requirements by J.D. Byrider or its related finance company, CNAC, to install GPS or starter interrupt devices on vehicles. He uses GPS devices, but only at one location, an existing store he purchased and is not able to visit often. The measure was taken simply as a precaution for underwriting, “since I’m not down there looking at deals and I’m not in close contact with them.” At the rest of his stores, he said, “I can’t justify the cost versus the number of cars we lose.”

Lloyd said Mike Carlson Motor Company does not use starter interrupt but does employ GPS devices. He said that GPS devices have no effect on collections, of course, but “it’s good to know at the end, when we’ve attempted to do everything we possibly can, we’re able to locate our collateral a lot quicker than we were in the past,” he said. This has lifted some of the burden off his collections staff in trying to locate customers whose vehicles must be repossessed, and he’s able to get the vehicles back much more quickly.

Lloyd said cost is not the determining factor when deciding whether or not to use starter interrupt devices; it’s simply a matter of philosophy. “If we turned off every car that was past due 20 days, it would probably get a lot of people to call back in, but I think that’s a short-term fix. In the long run, if the customer can successfully get through the loan with you, are they really going to want to come back and get into a car with a starter interrupt again or do they think they’ve achieved something a little bit better than that?”

Separation of Sales and Collections
Keeping collections isolated from sales likely won’t have an immediate effect on the dollars collected by a dealer today. However, it can insulate the dealership’s image, thereby protecting business in the long run.

Cavenaugh said Car Today’s related finance company, Auto Credit Corporation of Jonesboro, Inc., is treated as if it were any other third-party finance source. “We take it one step further than most buy here pay here operators,” said Cavenaugh. “We don’t accept payments at any of our dealerships. We have a payment center.” Customers regard the RFC much like they would a third-party finance company.

One benefit of such an arrangement is that even if the RFC repossesses a customer’s vehicle, that customer associates that negative experience with the finance company, not with the dealership. Repossessed customers will still refer friends and family to the dealership if their sales experience was a positive one.

Dealers can keep collections physically separated from the showroom even without an RFC.  Lloyd said that although Mike Carlson Motor Company does not have an RFC, “We do like to keep [collections] separate … If you have your customer service or your collections department at the lot, you’re going to have customers coming in and some of them aren’t going to be having a good experience and you don’t want somebody who’s in there looking at a car or just about to sign papers for a new car to see some issue erupt right there in your showroom.”

“We have always found more success by keeping sales and collections separate, said Linnehan.  “I think one of the main benefits is that this approach allows our sales team to always stay on the side of the customer, so that contacts made by the salesperson will always be received positively.”

Vol. 7, Issue 10