The Key To BHPH
Underwriting and Stips
Most small used car dealers with good common sense, and a reasonable judge of character, can operate a successful Buy Here Pay Here ( BHPH ) operation without using underwriting criteria, or a specific stipulation ( stip ) list. “However”, with out underwriting rules and a stip list, if you want to pass some of the decision responsibility over to another person, OR, you want to handle more volume, you’ll get in “EXPENSIVE” trouble “REAL” fast! Here’s how successful BHPH dealers and BHPH paper buyers know what to buy, and how much to pay.
Underwriting can be the trickiest because it is so subjective. Here are some guidelines. We’ll call your investment in the customer “Cash in Deal” or “CID”. There are five basic areas to which you want to attach value, time in area, time at residence, time on job, income, and down payment commitment. Attach a value to each of these and you will get a chart that rewards the, long time in area, more resident stable, long term job, high income, large down payment commitment customer with more CID. There are scoring systems available that can facilitate this process, or, you could use a well known BHPH paper buyer’s on line scoring system and skip trying to invent your own. That might be the best guide considering that the time may come when you wish to sell off a portion of your portfolio. The qualification structure could make your contracts more valuable. If you collect them to term you can expect results in line with industry standards, pending your collection skills of course.
Stips are more important than ever because of, you guessed it, identity theft, not to mention deception. Your typical list of stips includes a valid drivers license, valid insurance, pay stub verifying their job (showing YTD income is best), copy of phone or cell phone bill (verifying a phone where the customer can be reached), proof of address (proving they live where they say they live), and of course, references (people who might be able to tell you where they are if they skip). You have “two” choices, collect the stips, hoping they will verify, while “your” car drives around. “Or”, verifying in advance (recommended).
Drivers license is usually easy, your state has a web site or phone number you can call to verify that the license is not suspended or revoked. Insurance is easy, just call the agent, make sure they actually paid for the policy and you are listed as the lien holder.
Read the pay stub, verify it’s the most recent and the income matches the application. Call the employer, verify they are still employed, job time, and if possible, income. This typically can be your biggest deal buster!
Verify the home phone bill is for the address listed on the customer’s application even if it’s in a different persons name. Cell phones should be in the customer’s name.
Proof of address needs to be a utility bill, or some other mail delivered by the postman, in the customer’s name, to the address the customer put on his application.
For references, get family first, with addresses, and phone numbers, be persistent! Get 10 or make sure 7 numbers work.
Profit margins are tighter than ever! Cash flow is equally as important! It just makes smart business sense to have underwriting guidelines and do verifications before delivery, it “always” costs more later, in time, and money!!
Michael Kinnear is the executive manager for People’s Credit Co. and www.peoplescredit.com, which specializes in purchasing high-risk auto contracts from dealers. For more information, he can be reached at 800-531-4420 option#1, ext17, or, firstname.lastname@example.org
Dealer Principal Magazine
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