Developing and Adopting Industry Standards: The Path Forward

At the 23rd Annual Non-Prime Conference recently held in Plano, TX, the topic of developing industry standards was further moved along by the NAF Association Board. I presented the background and rationale behind this effort to the well-attended session. Engagement by the board members was high and they were not shy to provide feedback on the topic and comment on what a successful future state could look like, and what they need to get there. For those unfamiliar with the topic, my prior article provides information and links to articles outlining the need for standards and the NAF Association’s role in leading the way for our lender members, forwarders, and recovery professionals represented by the American Recovery Association (ARA). See

We are following a template for excellence that was borne out of the American Industrial Revolution, and the subsequent Total Quality Management programs that not only worked to make supplier-based value-chain outsourcing a success, but also demonstrated American innovation at its best. In the 18th century, Thomas Jefferson and Eli Whitney are credited with standardizing rifle parts making them interchangeable.

And in a more close-to-home example, Henry Ford’s Model T utilized standard parts making it more affordable and therefore opening up the doors to mass-adoption. As our country evolved, our challenges in terms of producing at higher levels of quality and integrating parts across multiple suppliers led to the mainstreaming of total quality management (TQM) or Six Sigma; which helped entire value-chains to be managed to exacting qualifications that resulted in higher quality, less waste, and reduced production times.

As lenders, we are in a position to set the standard for the entire value-chain with respect to third-party management of recovery agents. It is also our job to bring along all other main constituents on the path forward; and demonstrate the value and benefits of compliance with these standards to all parties involved. The focus of this article is to layout the plan for that path going forward.

The road forward
The first step in completing an effort of this magnitude is to educate people on the need for change, set a course for the future and focus on individual benefits. (See Figure 1)

Figure 1. Standard setting and implementation – Maturity model

I. Establish and publish NAF Association standards
a. Build out a full set of standards
b. Invite feedback and input from lenders
c. Publish standards

II. Adoption and ongoing feedback/lender input
a. Banks, finance companies, credit unions adoption and implementation phase
i. NAF Association will provide support
b. Forwarder adoption of the NAF Association standards
c. Recovery Agent (ARA) adoption of the NAF Association standards
d. Education and communication of the NAF Association standards to capital/leverage providers
e. Education and communication of the NAF Association standards to independent compliance/auditors

III. Integration and efficiency gain
a. Create lender consortium, sharing results of recovery agent site audits
b. Qualify and manage a list of conforming/compliant forwarders and lenders
c. Certification for lenders, forwarders, and recovery agents
d. Roll out shared information platform

Figure 2. Lender, Forwarder, Recovery Agent Network Model – Current State

In my prior article I went into some detail outlining the entry of forwarders into the market and its impact to the network of service delivery. Our plan for introducing standards is aimed at improving some of the gaps and inefficiencies that exist and deliver benefits to all parties. This next section goes over the benefits we will see in undertaking this initiative.

Broader value-chain benefits – A demonstration of our vision
Current state
To demonstrate what the current world looks like, let’s take the case of 12 unique lenders, nine of which operate through forwarders, and three lenders that operate in a direct fashion. As you can see from the diagram below, there are a number of touch-points involved to get an audit conducted. The blue lines represent a single unique interaction. Since a Forwarder 1 will need to audit Recovery Agent 1 individually for Lenders 1 through 3, the red lines represent 3 distinct interactions. (See Figure 2.)

I peeled back the interaction model into a table that displays the statistics (see Figure 3) and the big take-away is that you have 45 total touch points and 36 unique site audits required.

Figure 3. Lender, Forwarder, Recovery Agent Network Model – Current State

Desired state
In a scenario where lenders and forwarders would be willing to participate in a shared auditing platform where a single audit of a recovery agent performed according to the NAF Association standard will yield drastically different results and deliver much more speed and efficiency to all parties. Upon initial glance, you can see that the required number of touch points has reduced drastically. (See Figure 4)

Figure 4. Lender, Forwarder, Recovery Agent Network Model – Desired State

In peeling back the “desired state” interaction model into a table that displays the statistics (shown below) and the big impact is that you have reduced the 45 total touch points down to 24 (a 47% reduction). Even more compelling is the fact that we have reduced the number of unique site audits down from a total of 36 down to 3 (a 92% reduction) while satisfying lender and forwarder requirements. (See Figure 5)

Figure 5. Lender, Forwarder, Recovery Agent Network Model – Desired State

An examination of lender, forwarder, and recovery agent benefits
Lender benefits
Efficiency gain and cost savings: Take the scenario of three recovery agents, each with direct relationships with three different lenders. At present, each recovery agent is audited by each lender, would yield a total of nine audits performed. That number could be reduced by 2/3, and the resulting three audit reports could be utilized across multiple lenders.

Staffing and operating expense (OpEx) reduction: An average lender would save on staff required to manage growing volumes of recovery agents by doing more with less. For growing lenders this helps control the back-end OpEx which tends to make up the bulk of OpEx (probably 60-80 percent of the total). How far each lender intends to adopt the model and make internal changes will vary by case, but I believe that in general the impacts could be 50 percent or greater to any function whose role is to directly manage third-party recovery vendors.

Auditing expense reduction: Many of the larger banks and finance companies employ third-party management professionals that perform routine site audits of their recovery agents. So, for each site audit, there are expenses related to T&E. While the auditor may know all of the details of the audit, they will not be focused on analyzing and looking for grander patterns at the individual or group-level that they could more easily assemble by tapping into a broader set of audit result data, and performing spot-check audits.

Level-up on improved compliance and third-party oversight: Not all smaller lenders or lenders with thinner resources are even performing routine audits of their recovery agents. Forwarders claim to have this handled, but how many lenders are reviewing the forwarders’ audit plans and results? At a bare minimum, there should be some auditing of forwarder audit scope and procedures and sampling of their recovery agent audit results. By adopting a standard, a lot of the heavy lifting for many of our smaller lenders is simplified.

Benefit from the most comprehensive program backed by the weight of the NAF Association: Finally, there are lender benefits from aligning behind a well-designed, comprehensive set of standards that is essentially a “best practice”. In this fashion, should a regulator have questions about the standard, the NAF Association could speak on behalf of our members – something we do quite often already.

Forwarder benefits
Streamlining the voice of multiple customers down to a single voice: Forwarders sit at the nexus of an array of lenders and recovery agents. It is their job to manage the needs of the lenders through to execution on the part of the recovery agents, and perform some measure of oversight on behalf of the lenders. By implementing standard lender requirements, the forwarder benefits by streamlining those unique needs down to a single format.

Streamlining third-party vendor auditing standards applied to recovery agents: Similar to the situation with their relationship with multiple lenders, with standards forwarders can deploy the simplicity of a single standard through to their recovery agents. So, for the forwarders this eliminates the need to perform multiple audits on the same recovery agent on behalf of their lender clients.

Leading: Plain and simple, by getting behind the standards and leading by implementing them broadly, forwarders secure a seat at the table and help to lead our industry into the future.

Recovery agent benefits
Efficiency gain and cost savings: In our current state, recovery agents are subject to a moving target of standards for compliance with lender requirements. Take the case of a recovery agent that is serving 10 lenders – eight of those lenders are managed via their forwarders, and two are direct to lender relationships. Under the proposed model, where lenders establish a single set of standards for recovery agents, and lenders are willing to either share audit results or subscribe to a service that performs audits and makes them available to all, the number of audits performed and time spent conducting them drops from a multitude down to one.

Reduction in variation: By narrowing the targets from many to one, recovery agents can devote more time to meeting a singular standard of excellence, versus modulating towards a certain lender standard (i.e. the standard of our largest or most important client). I believe this to result in better overall compliance that benefits the lender and consumer.

It’s the industry, stupid!
Many of our readers may recall James Carville (a.k.a. the Ragin Cajun) coining the phrase, “It’s the economy, stupid!” back in the 1992 successful Presidential run by Bill Clinton. Well, this time around it’s the industry we’re talking about. The NAF Association has outlined standards, a strategy and a maturity model for widespread adoption that will be rolled out in the coming months. I invite any feedback or input from all members on how best to whip up support. Together we can do something great that will ensure the relevance and longevity of our industry. This is the power of the association, and I invite you all to play an active role in delivering the result.

Joel Kennedy
Joel Kennedy is chief operating officer of TruDecision. As NAF Association board member, Joel is passionate about growing and improving auto finance ecosystem. Joel has over 23 years’ experience helping big banks down to start-up finance companies to build, grow, improve, and repeat. Joel can be reached at 240-308-2169 or [email protected]