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2016 Buy Here-Pay Here Outlook

Posted 4:00 AM by

Note: This article originally appeared in The Showroom.

As we settle into 2016, now is a good time to review your current practices and look for ways to add value to your business. Buy Here-Pay Here (BHPH) operators should consider sales tax refunds, captive insurance programs, static pool and charge offs, and the industry’s current condition.

Sales Tax Refunds

For starters, review your state’s sales tax laws to determine if your business might be eligible to claim a refund related to bad debt charge offs. Indiana, for example, is one of only a few states where refunds are possible after installment loans are assigned from a retail merchant to a related finance company. Many businesses can receive substantial refunds every year, though it is common for the state to review these claims and ask for supporting documentation. 

Captive Insurance Companies

Captive insurance companies continue to be a significant tax planning opportunity for many dealerships. In fact, we have helped many BHPH operators apply this structure to their operations. The recently signed PATH Act of 2015 includes a significant change affecting small insurance companies. Beginning in 2017, an insurance company with gross premium of $2.2 million or less will be able to avoid tax on underwriting income. (The current limit is set at $1.2 million of gross premium.) While the planning and formation of a captive insurance company are complex endeavors, establishing a captive insurance company, when appropriate, could provide significant tax savings to the owner. 

Static Pool and Charge Offs

Increased charge off activity presented many BHPH operators with a significant challenge in 2015. It is important to actively review static pool reports and manage delinquency. A static pool analysis is a critical tool that BHPH operators use to review the performance of their loan portfolio.

Operators can also use the static pool analysis to identify unusual trends and implement changes to improve underwriting and collections. The static pool will help set an accurate reserve for future charge offs based on past charge off experience. Any adjustments to reserves should be made prior to year end and be based on a static pool analysis.  

Delinquency reports should also be reviewed, with uncollectable accounts charged off prior to year end. It is important to have a consistent charge off policy in place each year. While reviewing delinquency reports, it is also a good time to review loan edit policies. Loan edits are an easy way to manipulate delinquency reports to make loans look current. A review of who is editing loans, as well as the number of loan edits, can help mitigate potential fraud risks.  

Industry Outlook

The BHPH industry has faced increased competition from subprime lenders during recent years. 2015 was a particularly challenging year, with many BHPH operators realizing a significant increase in charge offs. As subprime lenders encroached upon the top tier BHPH customers, many operators made adjustments to their underwriting standards in order to meet sales volume goals, thus resulting in unusually high charge offs in 2015.      

Many agree that it is a matter of time before the subprime lenders withdraw from this arena and BHPH operators will see a return of higher quality customers. Until then, it is critical to be diligent with underwriting policies and collection efforts. Operators need to continue to be patient and also be willing to accept lower sales volumes while sharing the market with the subprime lenders.

On a positive note, overall economic trends look positive for 2016, and the improving job market will help BHPH customers in making their payments.

About Katz, Sapper & Miller
KSM is a nationally recognized consulting, tax, and audit firm. Through our deep experience across multiple disciplines and industries, we leverage emerging technologies, combined with our people’s differing perspectives, ingenuity, and creativity, to help our clients solve their most difficult challenges.

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