Dealing With Dealer Problems

The indirect lending market for car loans is heating up, but unfortunately problems with dealers are inevitably part of the equation. A credit union’s decision to end an indirect lending contract may be influenced by one or more of the following dealer actions:

• failure to timely record a security interest for the credit union;
• falsifying loan documentation;
• failure to provide a reasonably efficient business environment (too many applications that do not result in loans);
• failure to pay the appropriate fees to the credit union in a timely fashion;
• making radical changes in its business model or financial statement;
• trying to get the credit union to approve applications not up to the institution’s underwriting standards; and
• repeated or frequent complaints from credit union members about the dealer’s sales practices.

What’s a credit union to do? Here are two proactive steps that hopefully you took before you started working with the dealership, and one reactive step you can take.

1. Set yourself up for success. Best case scenario, your credit union started the relationship with a contract and you’ve reviewed it at least annually, preferably quarterly. The credit union has also performed ongoing, detailed due diligence on the dealership. A credit union should never hesitate to ask questions and get documentation from the dealership. For example, dealership reserves (the amount given as a commission or payment to a dealer as compensation for generating the loan) should be established, kept and maintained at the credit union. Financial statements from the dealership should regularly be reviewed.
2. Maintain a strong, but flexible relationship with all your partner dealerships. A positive relationship will assist in resolving any disputes.
3. Be prepared to stand strong in your position. A dealer may not be very motivated to seek to cure the problems that a “rogue” employee may have caused, for example. After all, that employee is often making the dealership a lot of money. The credit union you should be prepared to tell the dealership that the situation must be rectified or the CU will declare a breach under the contract and/or take money from the reserve account. Though the dealer may threaten to stop referring any business to the credit union, the best course of action for the CU is often to stand its ground.
4. When you declare a breach, consider giving dual notice. Many times a contract will specify giving notice of a problem to the sales or general manager. But often talking to the sales manager won’t generate a lot of action because he or she is more interested in deals than problems. The general manager is probably out of town, and might not have a relationship with the credit union. So many times the best person to contact is the comptroller. He or she understands the money issues and has the proper mindset to address the problem at hand. Consider giving proper notice as specified under the contract and also giving notice to the comptroller.

To exit or otherwise terminate the dealer relationship, a credit union should always look first to the contract provisions. However, it’s possible the contract may not provide for the specific situation at hand. Consulting an attorney is always an option, but even if a credit union manages the problem on its own, the best course of action is typically for the credit union to stand firm and demand that the credit union’s rights be addressed—or make it crystal clear that the contract is terminated.

Andy Keeney is co-chair of the Kaufman & Canoles Credit Union Team and can be reached at 757.624.3153. The K&C Credit Union Team serves as general counsel to credit unions, large and small, regularly advising clients on consumer compliance issues, NCUA requirements, and the rules governing credit union service organizations. For more information about the K&C team, view this client testimonial video on Kaufman & Canoles YouTube channel.