After listening to Jeff Foxworthy’s “You might be a redneck” routine, it occurred to me that an article along the same general lines might be a good way to convey a cautionary message to anyone thinking about going into the BHPH business regarding the ways state and federal law apply to selling cars on credit.
You shouldn’t be in the BHPH business if … you’ve done your pro forma and you have not included anything for legal compliance costs, both for startup and as an ongoing expense item.
You shouldn’t be in the BHPH business if … you don’t know the difference between promissory notes and retail installment contracts. I am floored by the number of times I review BHPH deal jackets and find dealers using nothing but a promissory note to reflect the buyer’s obligation. A dealer using nothing but a promissory note doesn’t have a security interest in the vehicle, cannot legally repossess the vehicle upon default, and has almost certainly violated state and federal law.
You shouldn’t be in the BHPH business if … your idea of obtaining documents that comply with state and federal law is to photocopy the deal jacket documents from the last place you worked. We’ve seen franchised dealers and substantial BHPH dealers using documents that are outdated, designed for use in other states, crafted by lawyers who don’t know what they are doing or are otherwise screwed up.
You shouldn’t be in the BHPH business if … you don’t know the difference between precomputed retail installment contracts and interest-bearing (so-called “simple interest”) retail installment contracts. We’ve seen dealers using precomputed contracts and servicing them as interest-bearing contracts, and vice-versa. That’s a no-no.
You shouldn’t be in the BHPH business if … all of your prior experience in the car business is with dealerships that sell their retail installment contracts to unrelated financing sources, and you haven’t learned how the activities of servicing, collection, repossession, and sale of repossessed vehicles are regulated (and they are heavily regulated). Without knowing those areas, you’ll be flying blind with regard to half of your business.
You shouldn’t be in the BHPH business if … your accountant and your lawyer are not well versed in the BHPH business. Missing critical tax advice because your accountant is inexperienced in BHPH is a shortcut to the poorhouse. Getting your BHPH legal advice from your lawyer brother-in-law whose practice is general corporate work, estates and trusts, or criminal work is, well, criminal.
You shouldn’t be in the BHPH business if … you don’t intend to spend the money necessary to learn what you are doing and to stay abreast of changes in the legal landscape that affect you. First, you have to learn the law regulating BHPH; then, because the law isn’t static, you have to stay on top of every change to that law. That means getting trained in the first place, subscribing to publications, attending conferences, joining dealer associations and 20 groups, and creating, implementing, updating and funding a credible compliance program for your dealership. If you aren’t going to do the compliance stuff right, open a bait shop instead. Worms are simple.
You shouldn’t be in the BHPH business if … you have never heard of the new Consumer Financial Protection Bureau. That’s the new, very powerful federal cop that has enforcement and rule-writing jurisdiction for BHPH dealers. The creation of the Bureau is a game-changer; this business will not be the same in a few short years. You need to get to know the Bureau as well as it is getting to know your business.
And before you email me complaining about me making fun of rednecks, you need to know that as a card-carrying Georgia redneck, I get a pass.
Vol. 9, Issue 6