How to Avoid Funding Roadblocks

In the last month or so, I began training for the Baltimore Running Festival – not the whole marathon, just 7 miles of it. My initial training schedule had me running four days a week, cross-training two days a week, and resting one day. My first training week went great.

The second week I hit a roadblock or two, but I still managed to run four days, without cross-training. During the third week, I hit a pothole, an unfinished bridge, and road construction—metaphorically, of course.

Needless to say, I am off-track for the race. I’ll finish the seven miles, but it won’t be pretty.

You can look at contract funding like training for a race. If you have the proper training and you’ve done what you are supposed to do, things will run smoothly. If you cut corners or skip steps, you may still get your contract funded, but you’re likely to stumble a few times before reaching the finish line.

Funding training can be broken down into a few steps. Let’s assume that you’ve spoken to a good lawyer and a good accountant and set up a related finance company. You may also have contacts with third-party finance companies with which you plan to do business. Let’s also assume you have a dealer agreement (again, reviewed by your lawyer) with your RFC and any third-party finance company that sets forth the terms and conditions of the finance company’s purchase of contracts from the dealership. Let’s assume the dealership and finance company are properly licensed to originate and purchase retail installment sale contracts. Finally, let’s assume that the dealership and the sales finance company have the policies (such as privacy and safeguarding) and manuals (such as underwriting, record-keeping, and collections) important to operate those businesses under the law.

So, we’re not talking about training on the basics (e.g., signing up for the marathon relay, getting the team together, or planning the training). Here, we are talking about training on where to begin the relay, how you get from one mile to the next, and how you make that baton transfer. (I note that relays of today don’t use batons, but electronic timing chips, so again I am speaking metaphorically.)

Most finance companies will provide a dealer with a funding checklist containing the transaction requirements that must be satisfied. Items that usually appear on a funding checklist include an original completed retail installment contract assigned by an authorized signer, a copy of a completed credit application, a copy of a completed buyer’s order, and a buyer’s insurance verification. A finance company might request a copy of a customer’s valid driver’s license or other identification, proof of residence for all buyers, a copy of the customer’s current pay stub or other proof of income, and proof of receipt of down payment. The finance company will request a copy of the state’s application for vehicle title and registration naming the finance company as the lienholder to ensure that its interest is properly perfected.

Under certain circumstances, and if a payment protection device is attached to the vehicle, the finance company might require the dealer to submit a payment protection device consent agreement. If a contract has a co-signer, the finance company would likely request a copy of the co-signers driver’s license or other identification, proof of income, and a copy of the co-signer notice required by federal law. If the finance company will finance optional insurance or other ancillary products like GAP or vehicle protection products, the company will want copies of any agreements covering such products.

Incomplete or unsigned contracts are the biggest roadblocks to funding. Dealers often fail to check the “primary use for which purchased” box. The error is likely a speed bump, which may slow down approval if it is even noticed at all.

Of much greater importance is a contract without a signature, the omission of a disclosure of an important term, or the incorrect disclosure of a term of the contract. The details in the contract matter.

A contract that is not completed as to all essential terms likely violates a state law’s contract completion requirement. If the blank is located in a place where a required federal Truth in Lending disclosure should be, or the incorrect disclosure of a TILA term is provided, the contract will also violate Truth in Lending. A Truth in Lending violation will probably constitute a full-fledged roadblock to funding.

We note that an assignee is responsible for a Truth in Lending violation apparent on the face of the contract, which could lead to statutory penalties up to $1,000 for individual action. In July 2011, when certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act become effective, the statutory maximum for an individual action will be $2,000.

So train your employees to pay attention to details. Repeat that training regularly, and definitely repeat it when a new law takes effect. Both dealers and sales finance companies should implement processes by which the dealer ensures that contracts comply with the law when originated and sales finance companies check compliance and completion issues when the baton, er, contract, is passed from the dealer, and before the finance company begins to run with it.

Ladies and gentlemen, this is not a sprint – it’s a marathon. With proper training and focus on details, you can make the contract assignment as smooth and easy as a baton handoff at the next mile marker.

[ps2id id=’page-intro’ target=”/]