The recovery industry was up against the ropes prior to COVID-19. Price/competitive pressure from lenders coupled with a disorganized and fragmented recovery industry created the ideal situation for disintermediation by forwarders. Enter COVID-19, and since March of this year, both recovery agents and forwarders were dealt a serious blow. The federal government provided stimulus to both consumers and businesses, and that support has translated into controlled delinquency. Lenders are doing their part by providing forbearance to consumers en masse. Assignments and repossessions are down due to this, but also being held back to avoid headline risk. Recovery agents and forwarders were left out of the picture, and assistance to them has been insufficient at best.
CA 2501 and its true consequences to consumers
At the state-level, all focus has been on the citizens/consumers with legislation and executive orders banning repossessions and even collections. The big focus now is California, where the state legislature is set to vote on a bill AB 2501 that would eliminate repossessions through January 1, 2023.¹ To those with a good handle on the overall economy that surrounds non-prime auto lending, they know that a disruption of this magnitude and duration will obviously hurt the recovery industry, but ultimately be devastating to the consumer. Here is how this plays out:
1) Just the mere mention of legislation such as CA AB 2501 has resulted in non-prime lenders making plans to restrict CA lending to only prime+ credits, or eliminating CA lending altogether.
2) With the passage of legislation such as this, more lenders will follow suit by leaving or limiting their program to prime+ programs.
3) Other states follow suit, and lenders exit/limit availability of credit to non-prime borrowers.
4) Borrowers, knowing that lenders are not repossessing, prioritize other payments over their auto. Delinquencies rise.
5) Lenders respond to the overall situation rationally, and price in the added risk, resulting in higher rates/fees to consumers.
The need for a voice
This profound, negative consumer impact is the message that needs to get to the legislators, so they have a full understanding of the consequences of their actions. Consumer groups have already pounced on this opportunity, and from all indications, they are winning. The fact is that at the national level, there is no representation for the recovery industry. The largest auto lending trade group that has a lobby has deemed this issue not worth their time and effort, leaving the recovery industry out to dry. For lenders, recovery agents enable the recovery of generally 40-60 percent of the remaining principal balance. Let’s look at the numbers:²
• 2019 repos were 2.4MM units (up from 1.7MM in 2017), resulting in over $800MM recouped for lenders
• In 2019, auto loans totaling over $568 BN went into default
• Approximately 6 MM Americans with an active loan are 90 days or more behind on their car payments
Enter Repo Alliance, a PAC established by the American Recovery Association (ARA), the California Association of Licensed Repossessors (CALR), Texas Accredited Repossession Professionals (Texas ARP), and Harding Brooks Insurance. To date, the PAC has raised over $70K to provide a voice at the national level, and they have retained a well-established government affairs firm with a reputation for results with bipartisan support. Beyond funding the PAC and the lobbyist, Repo Alliance is working to bring more transparency and truth to what professional recovery agents do, and ensure that the perception of repo agents is accurate and not built on some phony television narrative. I myself have made a donation to this PAC, and have routinely reached out to my legislators in CA to oppose AB 2501, but there is more that needs to be done by all of us in the lending community.
The perception issue begins with us
Years ago, the National Automotive Finance Association was formed as the only trade group exclusively representing the interests of non-prime lenders. At that time, we were not highly regarded, and treated as such. Today, the recovery industry as a whole is regarded the same by automotive lenders. No love from the national trade’s lobby. No support from the government. Consumer groups are focusing on recovery agents as the enemy, and yet they are simply doing the work of lenders as their legal agents. Lenders have been quick to react to pending legislation and make changes to their lending programs as a result. The hypocrisy is simply too much to stomach.
A lack of transparency exists across the entire value chain between lenders and recovery agents is a problem that has a big potential to create even more pain for lenders. At the national level, consumer protection groups are digging into the value-chain to find areas of consumer harm. They are looking into fees charged directly to consumers, and the pockets where those fees are ending up. When the class action lawsuits hit, discovery will expose the value-chain (follow the money) and where the orders were coming from. But, at the end of the day, Dodd-Frank ensures that the lender is ultimately on the hook.
One step in the right direction of late has been establishing a set of standards for lenders and repossessors to comply with. This has been something that the ARA and the National Automotive Finance Association (NAF) have been working on for several years. By working together, we developed industry standards by which lenders can manage recovery agents that supports the Dodd-Frank requirements of third-party vendor management. The ARA has taken this even further by proposing more specific requirements for their members. But, this will only be powerful and protective if lenders adopt the standards, and up their game when it comes to auditing the entire process to be the place where “the buck stops”.
What lenders can do
At the risk of sounding optimistic, I do believe that if lenders get on board and we all work together, we can affect real change that protects consumers and their access to credit. Consumers are ultimately being harmed – the underlying message is clear, and we are best prepared to provide remedies in the form of real solutions. So, here is what we must do to turn the tides:
• Get informed
◊ ARA (repo.org) for standards, resources
◊ CU Collector for updates on CA legislation (http://blog.cucollector.com/)
• Get involved
◊ Contribute to RepoAlliance (repoalliance.com) – I challenge every lender to make a donation of $5K or greater
• Get vocal
◊ Contact your state representative to voice your opposition to legislation that will ultimately harm consumers
◊ Wake up at every trade level – automotive lender trade groups need to step up and allocate lobbying efforts to support the recovery industry, contact your trade groups (with lobbying) and insist that they face the reality
• Get active
◊ Enforcement and transparency – implement industry standards within their organizations, and require that any assignment, whether direct or through a forwarder is transparent and auditable, and then audit the results