These are very difficult times for the repossession industry. Most commercial lenders report assignment volume down 60%-80% from the 2008-2009 peak. Many fine recovery agencies are struggling to survive. When times are tough, the temptation to cut corners can be strong.
At the same time, regulators are putting more pressure on lenders to take a more active role and responsibility for the actions of their recovery vendors. This is particularly true if your institution falls under the purview of the Consumer Federal Protection Bureau (CFPB).
The combination of these two dynamics makes it more important than ever to take the issue of repossession vendor management seriously. The balance of this article will outline a “best practice” framework to this issue based on our own experience and what we see from major lenders.
When evaluating a prospective recovery vendor, we typically start the process with a fairly detailed questionnaire that allows us to make a quick determination as to whether or not the agency is likely to be able to stand up to our due diligence process. The questionnaire probes into issues regarding history, clients, facilities and training. It also serves a key piece of documentation when clients audit our diligence efforts. Reference checking is important as well.
Additional Checks & Documentation
Over the past few years, many states have enacted statutes requiring specific licensing to engage in repossession activities. These requirements apply to both voluntary and involuntary recoveries. Your compliance department should be familiar with these requirements to ensure that your vendors possess the necessary licenses where required.
You would also be well served to run periodic lien and judgment checks on your recovery agencies. In today’s environment of financial strain, liens are not uncommon. You don’t want your collateral on the lot when the IRS decides to padlock the place.
Every agency recovering collateral on your firm’s behalf should be under contract with your firm or your national repossession company. It often surprises me how many lenders simply send out repossession orders with no contractual framework that governs the agent’s activities, security, insurance coverage, etc.. The contract should also address other important issues such as no breach of the peace, handling of personal property, data security as well as standards regarding physical security (i.e. cameras, fencing, storage, etc..
This is a particularly important area in today’s environment. There are several basic issues to consider in order to avoid problems:
1. Coverage Amount – Most major lenders feel that the following minimum coverage levels are necessary:
- $5 million general liability
- $1 million liability per occurrence
- Wrongful repossession coverage
- Garage keepers liability to cover all vehicles in agency custody
- Appropriate workers compensation coverager
2. Coverage Validation – We are seeing more examples of altered insurance certificates as smaller agencies seek to reduce cost. It is important to validate that the policy is, in fact, legitimate by calling the insurance company. This process should be repeated with each policy renewal.
3. Named Additional Insured – Insist that the policy certificate provided names your firm as an additional insured. This will reduce the possibility of problems if there is a claim and the better companies will notify you if the policy lapses.
4. All Storage Lots Included – This is a particularly tricky area. Many agencies will have multiple locations/storage lots. To be properly protected by the agent’s insurance policy, all of their lots should be detailed on the policy. In an effort to reduce costs, we have seen some agencies drop some of their locations from the policy. If your collateral is damaged or stolen from a lot that it not covered, you likely have a big problem.
5. Continued Monitoring – It is not sufficient to simply check insurance one time at the beginning of the relationship. In many cases, the policies expire after six months ( 12 months at the most). The best practice is check insurance coverage every time you issue the assignment.
While not deployed very much in the past, more and more lenders are viewing site visits as a necessary part of the due diligence process. Such visits obviously allow for first hand verification of the key issues. While it is typically prohibitively expensive to make visits to all of your agencies, you should consider doing so with your main partners. Also, there are a number of field service firms that can make the visits/assessments very cost effectively. If you are not going to make visits, at minimum, you should obtain photographs of the lot(s) for your files.
Most states hold lenders responsible for the actions of their recovery vendors, regardless of what you contract might say. Follow this framework and your firm will likely avoid problems.