Tag Archive | "dealers"

Reinsurance and Loss Control


In a past issue of P&A magazine, we discussed the parties that agents represent and some key aspects of loss control. In this article, I would like to discuss the benefits and idiosyncrasies of reinsurance as well as how loss control fits in.

Our goal as agents is to sign a dealer and keep them forever. As farfetched as this may sound, it is entirely possible if you put the dealer on reinsurance. Once they start seeing the statements and receiving checks, they frequently will not even entertain seeing the competition, because they have their “own company.”

Vital Information

Your first responsibility is to ascertain whether the carrier you are using has the proper program for the dealer. In a panel I moderated Agent Summit 2014, we had a discussion among some of the sharpest minds in the industry. There was consensus on numerous items, including:

  1. Be sure your carrier has the support you need. The big box carriers have all the suits that can come in and put on a pretty good show, but this is frequently style over substance. You need a carrier that will not only supply you with sales support but is willing to have claims or accounting personnel come out and assist in the explanation of reports.
  2. Be sure that the carrier will supply timely reports and detailed loss data. I cannot stress this enough, especially having reports that drill down to great detail on where the claim was repaired and whether it included multiple components, among other details.
  3. Review the treaty. You should see an administrative fee, which includes your commission, as well as a reserve to pay claims and a ceding fee. Sometimes the carrier’s administrative fee and ceding fee are combined, so you have to look at them together as one expense. Under no circumstance should you have to pay a claim fee, and the structure should not change if the dealer were to quit writing with that carrier.

Expert Advice

The dealer is going to need accounting and legal support. Frequently, the dealer will say he wants to use his own accountant and lawyer. However, the dealers’ trusted advisers are not likely to be familiar with reinsurance transactions and thus are not qualified to advise the dealer on this transaction. In such cases, I would always just say “OK” and then call the dealer’s accountant and lawyer. I would explain to them that there are firms that specialize in these transactions and could prepare the tax return for less than $5,000. At this point, most advisers will be happy to have an “out” and will recommend the dealer use the specialist. The fact that the dealer’s trusted advisers are giving this advice, rather than the agent, is an important distinction.

To find these specialists, you can start by looking at some of the presenters and panelists at Agent Summit. You can also ask your carrier if they have any recommendations. Quality, fees, and service levels can vary, so be sure to get recommendations from other agents or industry professionals.

Proper Structure

The structure as to how to hold the shares and or equity of the reinsurance company can vary, but we have usually recommended an LLC be formed to hold the shares. This allows increased flexibility if you want to make ownership changes. It is highly recommended that minority ownership shares be issued to key personnel at the dealership and that it becomes part of their pay plan. The personnel should be selected based upon their ability to influence the operating results of the company and effect loss ratios. Recommendations include the service manager, new and used car managers, F&I managers and controller.

The operating agreement of the LLC should include “golden handcuff” provisions as well as an exit strategy in case one of the management personnel leaves or dies. Golden handcuff provisions include a vesting provision so that the shareholder may only be 100% vested after a given period of time (say five years) or a gradual vesting (such as 20% per year). The exit provision usually is at book value on a given date, perhaps at year-end of the exit or at the previous year-end book value if the exit is prior to June 30.

It is imperative that all relevant personnel, such as service writers, know that this is the dealer’s company that claims are coming out of. This will enforce good claim practices and further align the dealer with the fronting carrier in controlling loss ratios. We wish to avoid reconditioning used cars on a vehicle service contract, upselling multiple claims on the service drive or repairing a component that might break in the future but is currently operating within factory tolerances.

A dealer who truly understands reinsurance and is committed to the concept will reap significant financial rewards and be a great ally for the carrier and agent. We once had a dealer who did not want to pay any claims from his reinsurance company and wanted them all goodwilled. He understood that a goodwill claim is deductible at his ordinary income tax rate whereas as a claim paid from his reinsurance company is effectively deductible at his long-term capital gains rates, which is likely 20% or so less. The problem with this is the IRS would claim tax avoidance and there could have been serious repercussions. We had to explain to him that all legitimate claims have to be paid from the reinsurance company — but under no circumstances should he or his employees push to have a claim goodwilled out of his reinsurance company. Instead, it must be paid by the dealership, due to tax considerations.

Similarly, a dealer who understands reinsurance would push to have the highest reserves possible. This too moves income from ordinary to long-term capital gains. There is some wiggle room to increase reserves from some carriers, but they have to be justifiable increases. The IRS would again look at such increases as tax avoidance if they cannot be justified.

Such justifications could include a premium due to the dealer’s past experiences, the carrier’s history in the geographic area, the carrier’s history with a particular make or model, or simply the fact that the reinsurance company is starting out with a low capital base and there is need to build up reserves in case of a shock loss. In this case, the reserves would need to be revisited later and adjusted up or down accordingly. Most carriers file a rate with a variance acceptable to the state for these types of circumstances.

Reinsurance is a win-win-win situation. The dealer gets to participate in underwriting profits while enjoying the tax advantages of long-term capital gains. The agent wins because he now has a “sticky” client, who is looking to you, his trusted advisor, for guidance. You might make less per contract due to the exposure of fees, but you will sign larger dealerships and keep them longer. Finally, the carrier is a winner, because the dealer’s and agent’s goals are more likely aligned with theirs. So select your carriers, find the right accounting and legal firms, and enjoy increased success.

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Ohio AG Sues Used-Car Dealer for Title Violations


CINCINNATI — On Aug. 11, Ohio Attorney General Mike DeWine announced a lawsuit against a used-car dealership accused of violating state title law.

The lawsuit accuses AMG Auto Connection Inc. and its owner Eric Davis of violating Ohio’s Certificate of Motor Vehicle Title Act. It also seeks $3,000 in reimbursement to the Title Defect Rescission Fund, a state fund that helps consumers resolve title problems.

“My office regularly helps consumers with car title problems, and while most are resolved out of court, some require enforcement action,” Attorney General DeWine said. “In this case, we are seeking reimbursement from the dealership and a permanent end to any violations of state law.”

According to the Attorney General’s lawsuit, which was filed in the Hamilton County Common Pleas Court, the dealership failed to deliver a car title in the time frame required by law and failed to post a bond after the Attorney General’s Office made a payout from the Title Defect Rescission Fund.

In the lawsuit, the Attorney General seeks reimbursement to the fund, reimbursement for any consumers found to be harmed by the dealership, a permanent injunction to stop any violations of state consumer law and civil penalties.

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Texas DMV Halts Plan to Fine Dealers with CarGurus Listings


AUSTIN, Texas — After the Texas Department of Motor Vehicles Enforcement Division took a call from shopping site CarGurus on April 30, the department hit the brakes on its plan to fine dealers who have listings on the CarGurus website. As part of an agreement reached over the phone, CarGurus must submit suggested revisions to its advertising practices, which the department will consider no later than May 7.

The DMV’s Enforcement Division announced in a letter to CarGurus and the Texas Automotive Dealers Association April 23 that it would fine dealers with listings on the shopping site $10,000 in administrative penalties each day a violation occurs. The department claims that the way CarGurus lists the prices of used vehicles on its website — including projected savings below market value and price drops — is in violation of state law.

“… A savings claim or discount offer is prohibited except to advertise a new motor vehicle,” the department’s letter, obtained by F&I and Showroom, read, in part. “No person may advertise a savings claim or discount offer on used motor vehicles.”

Now, the department is actively working with CarGurus to ensure that its advertisements are in compliance with state law and has put possible enforcement actions on hold. It will issue a decision on the proposed changes by May 7.

“In the interim, the department will abate any enforcement action relating to used motor vehicle savings claim advertisements appearing on the CarGurus website,” the department’s Director of Enforcement William P. Harbeson told CarGurus in a letter following yesterday’s call. “Again, thank you for your cooperation in this matter and I am hoping we can quickly resolve this matter in an amicable manner.”

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CFPB Takes First Action Against BHPH Dealer


WASHINGTON — Today, the Consumer Financial Protection Bureau (CFPB) took its first action against a buy-here, pay-here (BHPH) dealer. DriveTime Automotive Group was ordered to pay an $8 million civil penalty as well as end its unfair debt collection tactics, fix its credit reporting practices, and arrange for harmed consumers to obtain free credit reports.

“Consumers who purchase a car at a buy-here, pay-here dealer deserve to be treated fairly,” said CFPB Director Richard Cordray in a statement. “DriveTime harassed and harmed countless consumers, many of whom were economically vulnerable. Our action today forces DriveTime to pay the price for its illegal debt collection tactics and for neglecting the accuracy of consumers’ credit information.”

Arizona-based DriveTime and its finance company, DT Acceptance Corporation, make up the largest BHPH dealer in the nation. DriveTime’s average customer has an annual income of $37,000 to $50,000 and has a FICO score between 461 and 554. It operates 117 dealerships in 20 states and, as of Dec. 31, 2013, held more than 150,000 outstanding auto installment contracts.

According to the CFPB, at least 45% of DriveTime’s auto installment contracts were delinquent at a given time. When a consumer fell behind on his or her installment payment, one of DriveTime’s 290 collection employees in two domestic call centers and 80 contractors in Barbados would begin calling the consumer — resulting in tens of thousands of collection calls being made each weekday. At the end of 2013, DriveTime had approximately 69,000 installment contracts past due that these employees would have been calling about.

The CFPB determined that several of DriveTime’s debt collection practices were unfair to consumers and violated the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). According to the bureau, DriveTime employees harassed borrowers at work, a practice that was encouraged by DriveTime management. In one case, a consumer was called 30 times at work, even after making a do-not-call request.

DriveTime also requires consumers to provide the names and phone numbers of at least four references when they applied for financing. When consumers fell behind on their payments, DriveTime called these references excessively. The dealer group also used third-party databases to find the phone number of consumers who fell behind in payments, often resulting in frequent phone calls to wrong numbers.

The CFPB also found that DriveTime gave credit reporting agencies information that inaccurately reflected the timing of repossessions and dates of first delinquencies — a practice which is prohibited by the Fair Credit Reporting Act (FRCA). .

The bureau also said DriveTime mishandled consumers’ complaints about the inaccurate information it had provided to the credit reporting agencies. In several instances, consumers disputed the same account information several times without the inaccurate information being corrected. In other cases, DriveTime informed consumers in writing that the information had been corrected, when it had not been — a violation of the FCRA.

Additionally, the bureau charged DriveTime with failing to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of the information it furnished to credit reporting agencies.

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TrueCar Dealers to Dislcose Doc Fees, Accessory Pricing


SANTA MONICA, Calif. — TrueCar’s “No Surprises” initiative requires TrueCar Certified Dealers to provide upfront information for all non-governmental fees as well as costs for dealership-added accessories alongside their stated MSRP. The company began the initiative to give customers a more transparent process when buying a new vehicle.

“For most people, a new vehicle is the second-largest purchase they’ll ever make,” said John Krafcik, president of TrueCar. “TrueCar Certified dealers have taken steps with the No Surprises initiative to make the process transparent, simple and stress-free.”

TrueCar is now committed to providing all pricing information and accessory costs upfront to give customers all the information they want before signing. The company believes that it will have a positive impact for buyers and sellers and comes closer to providing a hassle-free car buying experience.

“We’re narrowing the trust gap between dealers and consumers,” said Krafcik. “While the No Surprises initiative has just begun, we are already seeing it as a win-win for dealers and buyers.”

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eLEND Solutions Launches Credit Application Platform


MISSION VIEJO, Calif. — eLEND Solutions has launched CreditPlus, an interactive credit application platform that instantly preapproves shoppers based on dealer-defined credit criteria. For shoppers, the platform provides direct, upfront access to dealership financing sources and near-final terms of approval from multiple lenders, all of which are controlled by the auto dealer.

With CreditPlus, dealers are able to match a buyer’s credit profile with the right car and the right finance program before the customer test drive. This facilitates a more equal exchange of information between consumer and dealer and the structuring of a more profitable deal, official claim.

“Auto dealers are looking for ways to convert online shoppers to in-store buyers faster,” said Pete MacInnis, CEO of eLEND Solutions. “CreditPlus, powered by a patented rules-based loan decision engine, allows the customer to select from a menu of approved near-final finance terms, such as APR, term, monthly payment and down payment from multiple lenders, all controlled by the dealer.”

The new platform features an interactive application that can be completed on a mobile or tablet device. Applicants not only get approved for financing in seconds, they can also view their credit score and pick their payments, officials said.

For dealers, CreditPlpus offers numerous application configuration options, including videos, vehicle detail image selections, and lead management tools. It also provides dealers with complete control of credit criteria and payment terms displayed to the customer, including dealer markup, doc fees, service contracts and more.

The solution is powered by a rules-based loan decision engine that aggregates a limitless universe of lender programs based on credit, stability and ability. It also drives engagement via automated email and text communications, chat integrations, automated system escalations and alerts.

Officials noted that the platform is an industry neutral solution, which means it’s compatible with any dealer desk tool, website platform, inventory management and CRM solution, finance platform, and dealer management system.

“We’ve witnessed two decades of innovation in online car buying, but the financing process remains outdated and low-tech. This lack of innovation has not only cost dealers time and money, but it has also seriously alienated consumers, who increasingly demand online transparency in everything they do,” said MacInnis. “CreditPlus’ real, upfront loan terms are a missing piece of the car-buying revolution, bringing dealers more high-quality credit app leads, while slashing the current 3-4 hour sales process.”

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