BHPH Report Jan/Feb2016 : Page 1

Time to readjust your radar: Lessons from recent CFPB actions Manheim reveals new market structure 6 12 J.D. Byrider honors 17 operators during annual awards program 16 A Publication of NABD and SubPrime Auto Finance News January/February 2016 | Volume 3 | No. 1 CFPB orders Colo. dealer to pay $700K in restitution By Nick Zulovich, Editor Solutions to 5 common accounting problems “Without a third party bid, IRS audi-tors may contend you are understating the value of your notes in order to claim a larger loss on sale of notes,” he contin-ued. “If the IRS can prove you understat-ed the value of your notes sold to the re-lated finance company, they may disal-low (or reduce) the deduction claimed on the return. “The IRS scrutinizes related par-ty transactions very closely,” Gold-berg added. “You can assume any transaction between two affiliates will be reviewed.” Problem: Charging off an account and restocking the repo into inventory at the balance owed on the charged off contract. How often have you heard of operators using this practice, and how much does the practice anger the IRS or other regulators? Goldberg indicated that he does not recommend dealers stock invento-ry at the balance owed on the charged off account. He pointed out this prac-tice creates a number of potential issues for dealers. “First, if the outstanding customer balance is higher than the true value of the repossessed vehicle, then the compa-ny is overstating their taxable net income by missing out on the full amount of the bad debt expense,” he said. “Second, the dealer will be unable to generate accurate static pool analysis on the portfolio because the books are hid-ing the losses of one account in another,” Goldberg continued. SOLUTIONS continued on page 22 GREELEY, Colo., and WASHINGTON, D.C. — For the second time in two months, the Consumer Fi-nancial Protection Bureau took out an enforcement action in the buy-here, pay-here industry. On Jan. 21, the enforce-ment came against Herbies Auto Sales, an operator in Greeley, Colo., for what the bureau deemed to be abu-sive financing schemes, hiding auto finance charges and mis-leading consumers. RICHARD CORDRAY The CFPB said Herbies will CFPB pay $700,000 in restitution to harmed consumers, with a suspended civil penalty of $100,000. “Buying a car is often one of the most important purchases a consumer makes, so the experience needs to be fair and above-board,” said CFPB director Rich-ard Cordray. “But concealing finance charges and the real cost of credit, as Herbies did here, is unlawful and unac-ceptable,” continued Cordray, whose agency penalized CarHop just before the holidays. Y King S Corp., which does business as Herbies Auto Sales, operates a dealership that both sells the ve-hicle and originates the contract without selling that deal to a third party. From at least 2012 through May 2014, the CFPB determined the BHPH operation of-fered financing to about 1,000 people each year. By Nick Zulovich, Editor Response from operator In a message to BHPH Report , Herbie’s Auto Sales owner Lee Yoder explained how the operation was in-tended to function. CFPB continued on page 20 HOUSTON — One of the few chal-lenges buy-here, pay-here operators face that rivals keeping their custom-ers current on their contracts is main-taining compliant accounting practic-es that keep them from getting into trou-ble with the Internal Revenue Service or state regulators. Steven Goldberg touched on sever-al major areas where BHPH dealers can sharpen their record keeping and other practices in order to make their IRS fil-ings and other materials compliant. Gold-berg is one of the partners with Shilson, Goldberg, Cheung & Associates, a Hous-ton-based accounting firm that specializ-es in handling the complex needs of keep-ing accurate compliant records in BHPH. BHPH Report reached out to Gold-berg as 2016 started to drill deeper down into some of the most common problems BHPH operators encounter. Problem: Being overly aggressive when selecting the discount rate for selling receivables to the related finance company. What measures are best for operators to use to avoid trouble with the IRS or state regulators? If a dealership chooses to sell notes to its related finance company, Goldberg pointed out the operation must sell the notes at fair market value. So how does a dealer determine what price is fair market value so as to avoid problems with the IRS on valuation of notes? “The best method to support pric-ing of notes sold to your related finance company is to obtain a written bid from a third party on the value of your notes,” Goldberg said. “I recommend dealers ob-tain a bid on their note portfolio at least once every other year so that you always have a current valuation to support the discount deducted on the return. YOU WOULDN’T DIVE INTO A TANK FULL OF HUNGRY SHARKS. SO, WHY RISK YOUR TAX SEASON PROFITS? Don’t put profits in danger. 1-877-318-8072 | Spireon.com/sharks

CFPB Orders Colo. Dealer To Pay $700K In Restitution

Nick Zulovich

GREELEY, Colo., and WASHINGTON, D.C. — For the second time in two months, the Consumer Financial Protection Bureau took out an enforcement action in the buy-here, payhere industry.

On Jan. 21, the enforcement came against Herbies Auto Sales, an operator in Greeley, Colo., for what the bureau deemed to be abusive financing schemes, hiding auto finance charges and misleading consumers.

The CFPB said Herbies will pay $700,000 in restitution to harmed consumers, with a suspended civil penalty of $100,000.

“Buying a car is often one of the most important purchases a consumer makes, so the experience needs to be fair and above-board,” said CFPB director Richard Cordray.

“But concealing finance charges and the real cost of credit, as Herbies did here, is unlawful and unacceptable,” continued Cordray, whose agency penalized CarHop just before the holidays.

Y King S Corp., which does business as Herbies Auto Sales, operates a dealership that both sells the vehicle and originates the contract without selling that deal to a third party. From at least 2012 through May 2014, the CFPB determined the BHPH operation offered financing to about 1,000 people each year.

Response from operator

In a message to BHPH Report, Herbie’s Auto Sales owner Lee Yoder explained how the operation was intended to function.

“If a vehicle purchased pursuant to the buy-here, pay-here plan had a mechanical problem, there was the possibility of the purchaser defaulting on the loan and losing their vehicle,” Yoder said. “Therefore, the company established a warranty program, for an additional cost, to cover many mechanical problems, protect the customer, and reduce purchaser defaults.

“Also, in the event of a default, in order to locate the vehicle for repossession, the company installed a GPS locator device, with the customer’s knowledge, that would also serve as a reminder that a payment was due,” Yoder continued. “Again, we believed this was in the customer’s best interest. There was an additional cost to the BHPH customer for the GPS device.” Yoder then touched on what happened with the CFPB investigated the operation.

Yoder indicated the CFPB advised the operator that, in its view, the costs of the warranty and GPS device are finance charges under the Truth in Lending Act that should have been disclosed as a cost of financing the purchase of the vehicle and included in the annual percentage rate calculations.

“They also claimed that our practice of negotiating prices with cash customers but not credit customers violated the Truth in Lending Act and were ‘abusive,’” Yoder said.

“We were not given any warning of the CFPB’s interpretation of the law or any chance to remedy their concerns,” Yoder continued. “It was certainly never our intention to deceive our customers. Nevertheless, the CFPB insisted that we sign a consent order or face a law enforcement action.”

As a result, Herbie’s Auto Sales faces the challenge of paying $700,000 in restitution.

“Although we disagree with the CFPB’s allegations that we violated the law, to avoid the costs and burdens of litigation we agreed to a settlement with the CFPB,” said Yoder, who no longer has a BHPH segment in the operation.

More details of wrongdoing

The bureau contended that Herbies unlawfully advertised a misleadingly low 9.99 percent annual percentage rate without disclosing a required warranty, a payment reminder device and other credit costs as finance charges. What officials described as a “ruse” helped Herbies convince consumers that they would get the 9.99 percent APR instead of the much higher rate actually charged..

The CFPB indicated Herbies violated the Truth in Lending Act and the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act. Specifically, the bureau said the BHPH operator: 

• Hid finance charges and advertised a far lower APR than consumers received: The CFPB insisted Herbies “lied” to consumers about finance charges and APRs in marketing materials, including on showroom window displays, and in Truth-in-Lending Act disclosures. What officials determined to be hidden finance charges included $1,650 for a required repair warranty and $100 for a required GPS payment reminder device.

• Hid finance charges that stemmed from a refusal to negotiate car prices: The bureau found that Herbies refused to negotiate prices with credit customers, but did negotiate with cash customers. Officials indicated the resulting finance charge should have been included in the disclosed cost of credit.

• Used abusive practices: The CFPB asserted Herbies’ financing scheme “lured” consumers with “misleading” advertising and then “kept them in the dark” about the true cost of financing the vehicles they were buying.

Additional parts of the enforcement action

Under the Consumer Financial Protection Act, the CFPB is authorized to take action against institutions engaged in unfair, deceptive or abusive acts or practices. Under the consent order, Herbies is required to:

• Provide $700,000 in redress to harmed consumers: The CFPB indicated Herbies must provide $700,000 in restitution for consumers who financed cars with Herbies after Jan. 1, 2012, except those whose accounts were charged off due to default. Herbies must submit a timeline to the bureau for making restitution to consumers. Herbies is also subject to a civil penalty of $100,000, which is suspended as long as redress is paid.

• Stop deceiving consumers during financing process: Herbies must not misrepresent interest rates, finance charges, or amounts financed, or any other fact material to consumers concerning the financing of any motor vehicle.

Read the full article at http://browndigital.bpc.com/article/CFPB+Orders+Colo.+Dealer+To+Pay+%24700K+In+Restitution/2385803/289312/article.html.

Solutions To 5 Common Accounting Problems

Nick Zulovich

HOUSTON — One of the few challenges buy-here, pay-here operators face that rivals keeping their customers current on their contracts is maintaining compliant accounting practices that keep them from getting into trouble with the Internal Revenue Service or state regulators.

Steven Goldberg touched on several major areas where BHPH dealers can sharpen their record keeping and other practices in order to make their IRS filings and other materials compliant. Goldberg is one of the partners with Shilson, Goldberg, Cheung & Associates, a Houston- based accounting firm that specializes in handling the complex needs of keeping accurate compliant records in BHPH.

BHPH Report reached out to Goldberg as 2016 started to drill deeper down into some of the most common problems BHPH operators encounter.

Problem: Being overly aggressive when selecting the discount rate for selling receivables to the related finance company. What measures are best for operators to use to avoid trouble with the IRS or state regulators?

If a dealership chooses to sell notes to its related finance company, Goldberg pointed out the operation must sell the notes at fair market value.

So how does a dealer determine what price is fair market value so as to avoid problems with the IRS on valuation of notes?

“The best method to support pricing of notes sold to your related finance company is to obtain a written bid from a third party on the value of your notes,” Goldberg said. “I recommend dealers obtain a bid on their note portfolio at least once every other year so that you always have a current valuation to support the discount deducted on the return.

“Without a third party bid, IRS auditors may contend you are understating the value of your notes in order to claim a larger loss on sale of notes,” he continued.“If the IRS can prove you understated the value of your notes sold to the related finance company, they may disallow (or reduce) the deduction claimed on the return.

“The IRS scrutinizes related party transactions very closely,” Goldberg added. “You can assume any transaction between two affiliates will be reviewed.”

Problem: Charging off an account and restocking the repo into inventory at the balance owed on the charged off contract. How often have you heard of operators using this practice, and how much does the practice anger the IRS or other regulators?

Goldberg indicated that he does not recommend dealers stock inventory at the balance owed on the charged off account. He pointed out this practice creates a number of potential issues for dealers.

“First, if the outstanding customer balance is higher than the true value of the repossessed vehicle, then the company is overstating their taxable net income by missing out on the full amount of the bad debt expense,” he said.

“Second, the dealer will be unable to generate accurate static pool analysis on the portfolio because the books are hiding the losses of one account in another,” Goldberg continued.

So how should operators handle these units?

“The proper procedure is to use a guide book to value the repossessed vehicle and claim a bad debt expense equal to the difference between the principal balance and the value of the repossessed vehicle,” Goldberg said.

Problem: Commingling funds between the dealership and the RFC. What are the easiest steps an operator can take to correct this situation?

Goldberg reiterated the related finance company is a separate legal entity apart from the dealership, and funds should never be comingled between the two entities.

“If the dealership collects money from a customer for down payment on a vehicle, it should be deposited into the dealership cash account,” Goldberg said. “Likewise, collections from customer accounts owned by the related finance company must be deposited in the finance company cash account.

“If a dealer is not depositing collections into correct cash account, the best thing to do is change your procedures to accomplish this objective,” he added.

Goldberg also mentioned some BHPH dealers utilize one credit card machine for both companies.

“If you take this approach to credit card collections, please be aware that credit card companies are required to issue Form 1099- K to both you and the IRS which reports total collections on the card,” he said.

“By combining the two companies on the same credit card machine, you may increase the chances of getting selected for IRS audit because the credit card receipts reported on Form 1099-K may have significant variance to revenue reported on the corporate return,” Goldberg went on to say.

Problem: Dealers jumping into leasing without fully understanding the impact on their financial statements or their banking relationship. Without naming specific operators, what anecdotes have you heard about this scenario unfolding badly? What lessons can other operators learn?

Goldberg acknowledged there are “pros and cons” to utilizing a leasing model for a dealership.

“For dealers jumping into the leasing model, it is important to fully understand the impact on their liquidity and financial statements,” he said.

“A large leasing operator got into a cash flow crunch and needed $500,000 of cash to get the business on track again,” Goldberg continued. “His portfolio was owned free and clear but because it was a lease portfolio he could not find a secondary buyer of leases to sell a chunk of the portfolio to generate cash.

“If he was using the buy-here, pay-here model, he would be in a position to sell the accounts to generate cash for liquidity,” Goldberg added.

Problem: Companies failing to issue Form 1099-C forms. Why does this issue continue to haunt the BHPH industry?

Over the past few years, Goldberg noted the IRS has gradually been increasing its focus on Form 1099-C forms.

“This is especially true for the 1099-C (Cancellation of Debt) forms,” Goldberg said. “Related finance companies are required to issue Form 1099-C to any customer where the debt of $600 or more is cancelled and an identifiable event occurs. The instructions to form 1099-C lists the nine identifiable events.

However, for related finance companies, the most common trigger of an identifiable event is strict foreclosure or a discharge of indebtedness due to a decision or defined policy to discontinue collection activity and cancel the debt,” he continued.

If a finance company fails to issue the required Form 1099-C forms, Goldberg indicated the penalties are “very steep.” The penalty for tax year 2015 is $250 for each incident.

“Failure to issue the required 1099s will continue to haunt the BHPH industry because compliance is not as high as it should be and the IRS knows it,” Goldberg said.

“IRS agents are trained to check on filing of these 1099s during any audit examination,” he added.

Read the full article at http://browndigital.bpc.com/article/Solutions+To+5+Common+Accounting+Problems/2385808/289312/article.html.

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