Focus On the ‘Pay Here’ of Buy Here-Pay Here

Running a compliant shop is a difficult task for any dealer. I’d strongly argue that it’s even more difficult for buy here-pay here dealers. That’s because the buy here-pay here dealership is a hybrid, of sorts: part dealer, part finance company (quite literally so, if the dealership has a related finance company). The “pay here” part of buy here-pay here creates special compliance challenges that dealers who sell all their paper don’t have to deal with.

Buy here-pay here dealers know that they are, at times, subject to different sets of laws than other types of dealers. Some of these laws include state collection laws or sales finance licensing laws. But, often, obligations imposed on buy here, pay here dealers are different not because the laws are different, but because the undertakings of the buy here, pay here dealers require a different response to the same laws that are applicable to all dealers. In other words, the “pay here,” or financing arm, triggers different sorts of obligations from, and responses to, the same ol’ laws that apply to all types of dealers.

What do I mean?

Take, for example, your dealership’s obligation to check the “bad guy” list from the Office of Foreign Assets Control. By now, you know that under federal law, you are prohibited from doing business with anyone on the list. For most dealers, this means that, among other things, you must check the OFAC list prior to selling or leasing a vehicle to a customer.

For buy here-pay here dealers, however, the sale or lease of the vehicle signals the beginning of the OFAC obligation. Because the buy here-pay here dealership (or its related finance company) will be accepting payments and thus “doing business” with customers until their obligations are satisfied, it must screen the OFAC “bad guy” list regularly to make sure that none of its customers have been added to the list. (After all, you never know when one of your customers might go out and join a terrorist organization).

Another example is a dealer’s obligations under the federal Safeguards Rule. If you’ve been keeping up with your compliance duties (or, if you just read Tom Hudson’s article in this edition of DBJ) you know that the federal Safeguards Rule requires dealerships to have, among other things, a written safeguards policy.

But, what about buy here-pay here dealers with related finance companies? After all, a related finance company would certainly be a “financial institution” for purposes of the Safeguards Rule, wouldn’t it? If your dealership has a related finance company, it too, must be Safeguards Rule compliant. In most cases, this means that the related finance company must have, among other things, a written policy and a designated safeguards coordinator.

Failure to comply with the federal Safeguards Rule can amount to an $11,000 per violation penalty. If the Federal Trade Commission pays you a visit and neither your dealership nor your related finance company is Safeguards Rule compliant, you could be facing a $22,000 hit.

In addition, although the laws governing credit discrimination apply to all dealers, the “pay here” financing arm can arguably put dealers at a higher risk or claims of credit discrimination. Buy here-pay here dealers are often able to set their own creative underwriting criteria that best serve the types of customers they work with, and which allow dealers to finance customers that would otherwise be off-limits. However, this flexibility can put buy here-pay here dealers at risk of inadvertently running afoul of state and federal law.

Specifically, federal and some state laws, restrict the types of information creditors can request or consider in connection with a credit transaction.

For example, the Equal Credit Opportunity Act places certain restrictions on when and how a creditor can ask about an applicant’s marital status, and restricts the situations in which a creditor can request information about a spouse. Perhaps more important for the buy here-pay here dealer, is that federal law limits situations in which a creditor can require a spouse to co-sign a credit obligation. Some state laws have similar restrictions.

Most often, these types of violations show up in credit applications and underwriting criteria that were developed by the buy here-pay here dealership.

This is certainly not an exhaustive treatise on unique challenges for buy here-pay here dealers. Many federal laws effectively impose requirements on buy here-pay here dealers and/or their related finance companies that differ from those requirements imposed on other types of dealers.

Consider the Fair Credit Reporting Act, the federal Privacy Rule, the Truth in Lending Act, federal cash reporting requirements, and state and federal collection requirements, for starters. And, that’s not mentioning the complex tax and accounting rules that only the most knowledgeable accountants and tax lawyers should handle (one of which I am not). So, for all the buy here-pay here folks out there, take heed and educate yourselves on the steps you need to take to make sure the finance arm of your dealership complies with applicable state and federal laws. If you don’t know what you don’t know, a compliance review would be a great place to start.