FOR DESIGNERS

Managing a Successful Dealer Relationship

Pro-active Management Helps to Avoid Pitfalls

The business relationships between credit unions and automotive, boat and other dealerships can often be described as a “love/hate relationship.” There exists the potential to deliver substantial benefits to both business parties, but it can also present major challenges and adverse financial outcomes. This is especially true on the credit union side.

Since both sides benefit from a successful relationship, it makes good sense that both parties work to make sure the business partnership works smoothly. Since credit unions are taking the financial risks, it is vital that participating credit unions manage and monitor the relationship. Developing a sound business strategy will achieve this goal. Here are several key areas that should be addressed, along with some helpful tips in each.

Dealer Contact
The key element to maintaining strong dealer contact is frequency. Regular and routine visits by the dealer representative not only build positive relationships but also provide valuable feedback.
Personnel changes in a dealer’s finance department (Finance Managers) can affect the types of loans you are getting and the paper quality. Frequent contact will help you be aware of personnel relocation from one dealership to another, particularly helpful with those Finance Managers who have been difficult elsewhere.

These regular visits should include a review of production reports used for managing the dealer relationship and for holding the dealer accountable. Reports should address the following points; error/issues data, customer complaints/concerns and customer satisfaction feedback.

Thorough and on going training is a critical factor as well. The better the training, the cleaner and tighter your operations will run and the more likely the dealership will use the tools provided and produce according to expectations.

An integral element of the dealer/credit union relationships is the development of quality expectations. Setting clear expectations compels dealers to be accountable. A solid structure and foundation will be invaluable when the dealerships test you. Dealerships sometimes “go fishing to see what bites” with a new lender, to find the lender’s niche, and then only send that niche loan business. (do I have this right?)

Paper Quality Measurement
Paper quality will define the long term relationship between credit union and dealer, so it is important to closely monitor the performance of each dealer and be able to make timely corrective actions. Dealers want you to buy a range of tiers, and you will want to accommodate them when this is profitable. This means adjusting your buying habits accordingly. As you experience losses and charge-offs, it is critical to contact the dealership and define how you will buy from them in the future. It is advantageous to share your loss and charge off experience with each dealer, setting future expectations.

New Dealer Audits
Setting the right course of action from the very beginning in terms of audits will help you to establish your standards for the future. Closely monitor the quality of paper you receive in the first 30 to 90 days. Make sure the relationship is starting on the right path; that you are getting the paper you want, and that the dealer understands what paper you want and will buy, they should be clear as to what type of lender you are.

Inexperience and lack of education about dealerships within a credit union will sometime cause dealers to take advantage of a situation, so it is important to discuss expectations, strategies, and red flags immediately with any involved staff. Continually review and communicate your concerns.

It is also important to validate the quality of information provided by the dealer, for the purpose of detecting fraud or dishonest data. Check information integrity: How valid is the information provided on the applications? Have phone numbers been verified, etc.? Survey customers to see how satisfied they are with the service they have received. If you discover negative feedback, contact the dealership, monitor future results. There are many reasons for poor feedback. The results may help you to assess risk and can be used to determine who you should be working with in the future.

Be Alert to Volume Changes
When monitoring dealer audits and reviews, one should look for spikes in volume. Check to make sure that there are no conflicts of interest between a dealer and a loan officer. A volume spike may be a good trend, but it is wise to be aware of why the increased business has occurred. Is it the volume you want, or is there something happening that is not in your best interest? Example: Is a dealer buying thin paper (junk), not the kind of business your credit union wants in your portfolio? This is frequently noticed too late, so monitoring is crucial.

Write a Good Contract
All participating dealers should be contracting with the lender they intend to send consumer paper. The make-up of the contract is very important, it should clearly outline the requirements of each participating party, include all local and state regulations, as well as require the contracting party to provide required information that provides proof that the dealer will have the ability initially and ongoing to perform under the contract requirements.

Here are some important items that should be included in the contract that can protect the lender –
1. Clear contract terms, which define when the lender is obligated to fund a retail contract, including rights and remedies against the dealer, should a deal be funded under the pretense of fraud.
2. Clear representations, warranties and covenants, defining things about the dealer, actions they will take and that they will stand by what they say.
a. Examples of this include – Perfection of liens, compliance to all consumer laws, valid consumer paper, etc…
3. Indemnification against claims caused by third parties.
4. Right to offset any funds owed to the lender.

Dealing with Non-franchised Dealers
Managing a non-franchised dealer relationship is usually more sensitive than franchised dealers. Franchisors often have concerns that a dealer will reflect poorly on the brand and therefore closely monitor and measure dealer performance. With non-franchised dealerships, the manufacturer’s name is not in the title. It is also easier to get in and out of the business. This puts the lender at greater risk. Here are a few things that can be done to mitigate the risk.

1. Sign-up requirements: Maintain a copy of the dealer’s license. Perform a physical location exam, financial review, officer/owner review to determine if the dealer is financially sound and understands the business, and offers a product you are willing to stand behind and represent to your members. Requirements should reflect your credit union’s own business practices. Look at the average vehicle cost and the location. (Is it a trailer on a lot?) Request from new dealerships their financial plan, personal statements on principals, physical location, and basic information such as how many cars they plan to stock and sell.

2. Perform regular audits: In addition to routine visits, your credit union should perform a yearly audit of all non-franchise dealers. If you perceive that the financial position of the dealership has deteriorated or that the dealership appearance or product offered has become less than acceptable, the risk increases and action to remove the dealership should be considered. The time to react is before doors close and products are left unpaid for, then there is much higher risk.

Conclusion
To have a satisfactory and lasting relationship with dealerships, credit unions must have a thorough understanding of what goes on at the dealership they’re doing business with. They should share common values of integrity and philosophy. A good strategy is to partner with dealerships that share similar customer/member service cultures.

Properly managing a successful and rewarding dealer relationship is a demanding task. Outsourcing all or part of the management and maintenance tasks is a great option if this is beyond the scope and resources of your credit union. Whether managed within the organization or through a third party, the better the relationship is managed, the more profitable and satisfying it will be to you.
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