The Buy-Here-Pay-Here Market is Maturing and “Payment Device” Practices are Under Siege

By Randy Field

The National Alliance of Buy Here, Pay Here Dealers (NABD) held their 18th Annual Conference in Las Vegas last month. There, several major themes that took center stage centered on current challenges that are deeply affecting the BHPH space. Over the last 24 months, for instance, BHPH dealers have lost 33% of their market due to encroachment from other financial institutions and the effects of their buyers’ shrinking discretionary income. At the same time, BHPH dealers having increasingly come under attack by regulatory agencies for their financing and “payment device” (more commonly known as a GPS-based aftermarket telematics device) practices.

Subprime and Deep Subprime Lending

According to the Federal Deposit Insurance Corporation (FDIC), nearly one-third of the U.S. population is either underbanked or unbanked. This has led regulatory agencies to fear that the BHPH market has been taking advantage of their buyers.

The BHPH market has grown on the backs of the unbanked and buyers with low credit scores. Experian Automotive's Scorex Plus scale breaks consumer credit scores into the following ranges: Superprime (740 and above), Prime (680-739), Nonprime (620-679), Subprime (550-619) – and, Deep subprime (Below 550). BHPH customers are generally have credit scores in the Subprime and Deep Subprime range.

As the U.S. national interest rate continues to linger in low single digits, banks are looking to the subprime market for higher returns. Credit unions and franchise dealers are moving into the deep subprime market. Wall Street has been providing subprime auto bonds to the market and selling them to investors to reduce risk.

Rise of the TSPA

Due to the low credit scores of BHPH’s traditional clientele, it has been necessary for many sellers to protect their interests by installing GPS-enabled aftermarket telematics devices in their vehicles. In the event of non-payment, these devices allow a seller to disable the vehicle’s starter and identify the vehicle’s last known location for recovery. Delays can greatly risk recovery of the vehicle or, at a minimum, recovery of the vehicle while it is still in good condition. Over the last 5 years, delinquencies have almost doubled.

In 2015, the Federal Trade Commission (FTC), Consumer Financial Protection Bureau (CPFB) and many State Attorney General offices scrutinized and investigated BHPH compliance for operating practices and collection practices. Some dealers were fined heavily. In response to the increasing agency and regulatory attacks on BHPH practices, the Payment Assurance Technology Association (PATA) expanded their mission. PATA was created in 2008 to unify, standardize and support the activities of our members who are engaged in the manufacture, sale and use of GPS tracking systems for auto financing.

In 2015, PATA monitored 70 state bills, 1 federal bill, actively engaged with 26 states and hired 12 active lobbyists at a cost of $700,000. PATA met with the FTC, CFPB and federal and state regulators to offer education about the GPS Device Industry Best Practices (including the end of charging buyers any fees related to payment devices) and the positive impact the technology and services can have on consumers. PATA successfully modified or halted the legislation that would have banned or drastically changed the way dealers and lenders could use GPS systems for credit sales and consumer services.

To better describe the industry and services that PATA provides, they renamed the organization as the Telematics Solution Providers Association (TSPA). The charter members are CalAmp, Spireon and PassTime GPS.

The Other Shoe Drops: Disappearing Tax Refunds

One of the BHPH market’s busiest times is tax season when buyers use their tax refunds for down payments on vehicles. Due to the Affordable Care Act, individuals and families were required to make a shared responsibility payment on their 2014 Federal Income Tax return for the months that they did not have coverage or an exemption. In the case that a buyer defaulted on payments, funds were then deducted from the taxpayer’s refund. This requirement led to buyers receiving less discretionary money in 2015 to purchase vehicles.

What is Next?

To reverse the tide of the last 24 months, some dealers are improving their own financial flexibility through bolstering equity and credit lines, implementing good underwriting, putting best practices in place for regulatory compliance - and, focusing on long term customers by matching them to vehicles that they can afford as opposed to short term repos and resale. Telematics Service Providers (TSPs) are expanding their portfolios to include dealer lot management, small fleets and connected vehicles.

 At the NABD conference, the overall perception is that the BHPH industry is banding together with an us-against-them mentality. Competitors are working jointly to create a better environment for their buyers. Performance this year will determine if progress is being made to get back on the path of growth. The barriers to entry by new players is daunting, but the NABD and TSPA appear to be very well-organized and prepared to help their members with the challenges ahead.