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Hot Topics from National Alliance of Buy Here, Pay Here Dealers’ 2017 National Conference

Posted 5:07 PM by

Note: This article originally appeared in The Showroom.

Members of Katz, Sapper & Miller’s Buy Here - Pay Here (BHPH) Services Group recently attended the National Alliance of Buy Here, Pay Here Dealers' (NABD) 2017 National Conference in Las Vegas, NV – one of the largest industry conferences in the U.S. The 19th annual event addressed the following developments and trends affecting BHPH dealers.

Industry Trends and Outlook

2016 continued to strain the BHPH dealer. Outstanding automotive loan balances surged to record highs driven by traditional lending sources seeking higher profits in the subprime market as well as continued interest in loan securitizations. While there has been high volume in lending to subprime and deep subprime, the BHPH operators’ market share of these originations continued to suffer in 2016.

High delinquency and increasing charge-offs have resulted in many lenders starting to cut back on subprime auto loan originations or exiting the subprime market altogether. As such, most subprime indicators seem to be pointing in the right direction as customers are expected to return to BHPH lots as traditional credit tightens. Recovery in the BHPH market may be a slow process. Dealers will need to continue to tighten the belt by controlling overhead, focusing on sound underwriting practices, and bettering deal structures to reduce the risk of loan defaults. Some operators are utilizing tax refunds in years after the sale in order to reduce loan terms to more manageable periods, while others are opening up their recon facilities for non-customer repair work to take advantage of excess shop capacity. As the recovery continues over the next few years, there was plenty of discussion on how to get the best customers back into BHPH lots and finding ways to enhance the customer experience as a differentiator to competitors (i.e., free oil changes, warranty programs, and engaging customers via social media).

Due to the recent buzz surrounding the new administration’s apparent stance on the role of the Consumer Financial Protection Bureau (CFPB), compliance was also a hot topic. While some believe that the current administration may take measures to weaken the CFPB, other agencies such as the Federal Trade Commission and Department of Justice, as well as state attorneys general, will be emboldened to step in and continue CFPB policies amidst political pressure from consumer advocacy groups and opposing politicians.

Update on ASU No. 2016-13, Financial Instruments – Credit Losses

The new Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses, continues to be a discussion topic, which dramatically changes the methodology on how to record credit losses. This ASU will require a change from recognizing losses on an incurred loss model to a current expected credit loss model. 

Under the incurred loss model, a loss is not recorded until it is probable that it will be incurred. This approach generally delays the recognition of the full amount of a credit loss until the loss was probable of occurring. Under the current guidance, the concept of a “probable loss” has had a wide diversity in practice, ranging from 1) recognizing losses based on delinquent accounts only, 2) recognizing losses estimated to be incurred over the next 12 months, or 3) estimating losses over the life of the loan (which would be consistent with the new ASU). The new guidance is intended to create more consistency in the financial reporting by finance companies.   

Under the current expected loss model, the allowance for credit losses should represent losses expected to occur over the life of the loan portfolio. Some BHPH dealers will have a more difficult time implementing this change when it becomes effective in 2021 (for nonpublic entities) and may have a significant impact on profitability and covenant compliance with loan agreements.      

Lease Here - Pay Here

Lease Here - Pay Here (LHPH) was a hot topic again at this year’s NABD conference as many BHPH dealers are exploring other business models in search of potential profits. There are many pros and cons involved with this model. If exploring LHPH, dealers should be aware of the operational challenges, tax advantages and the differences in financial statement reporting. 

Zee Malik

About the Author
Zeeshan Malik is a director in Katz, Sapper & Miller’s Audit and Assurance Services Group. Zee audits and reviews financial statements and advises BHPH clients in accounting, reporting, compliance, and internal control matters. Connect with him on LinkedIn.

 

About the Author
Bryan Burns is a manager Katz, Sapper & Miller’s Audit and Assurance Services Group. Bryan provides financial, audit and consulting services to clients in a variety of industries, including BHPH. Connect with him on LinkedIn.

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