When Risk Management Becomes Risk Creation

Is the repossession industry protecting lenders, or driving away the agencies and insurers that protect them?

GUEST EDITORIAL

The repossession industry talks constantly about risk.

Insurance limits increase. Contracts get longer. Indemnification gets broader. Compliance requirements multiply. More responsibility gets pushed downstream.

Lender to forwarder.
Forwarder to repossession agency.
Repossession agency to insurance carrier.

But there is a question we rarely ask:

At what point does transferring more risk stop being risk management and start creating more risk?

Start With What We Are Actually Authorized to Do

Repossession is not an ordinary service industry.

We authorize people to arrive unannounced at someone’s residence, sometimes late at night, or at their workplace and take possession of an automobile worth tens of thousands of dollars.

Think about how extraordinary that is.

The consumer may be angry, frightened, embarrassed or completely unaware that a repossession order exists. Their spouse or children may be present. Within seconds, an agent must evaluate the law, the surroundings, the consumer’s behavior, the collateral and the potential for a breach of the peace.

One poor decision can affect the consumer, the agent, the lender and everyone else in the chain.

Shouldn’t an industry entrusted with that responsibility have an exceptionally high barrier to entry?

And shouldn’t lenders want repossession companies that have something meaningful to lose?

Which Agency Would You Rather Have Representing You?

Imagine two agencies.

The first has operated for decades. It has accumulated assets, equipment and infrastructure. It employs people. It carries substantial insurance. It uses attorneys, accountants and insurance professionals. Its owners have spent years building something worth protecting.

The second is thinly capitalized, has little accumulated value and will sign virtually anything necessary to receive assignments.

Both may technically satisfy the minimum vendor requirements.

Which one represents the lower risk to the lender and its customers?

The answer seems obvious.

Yet our contracting practices can create exactly the opposite incentive.

When an established agency questions unlimited indemnification, unusual chargebacks or liabilities extending beyond its own conduct, the response can be:

“Why won’t you sign it? Everyone else did.”

Maybe that is the wrong question.

Perhaps the more important question is why did everyone else signed it?

An agency that has significant assets and a business worth protecting should care about what it signs.

That isn’t a compliance weakness.

It may be one of the strongest indicators of responsible management.

Have Lenders Actually Seen These Contracts?

Here is a simple question for every lender using a forwarding company:

Have you read the agreement your forwarder requires the repossession agency handling your collateral to sign?

Not your agreement with the forwarder.

Their agreement with the repossession company.

Ask for it.

Then give it to your legal department, risk department and insurance professionals and ask:

“Are these obligations reasonable, related to the services being performed, and actually insurable?”

The answer may surprise you.

We have seen agreements in this industry that go far beyond standards for safe and compliant repossession.

Agencies can face broad indemnification, changing policies and procedures, pass-through charges, extensive claims obligations, waivers and financial responsibilities that reach well beyond the simple proposition that if the repossession company causes a loss, the repossession company should be responsible for that loss.

And then there are provisions that should make everyone stop.

In some circumstances, repossession agencies can even face demands involving deficiency balances or financial losses associated with the underlying loan.

Come on.

A repossession company is hired to locate and secure collateral.

It is not a guarantor of the consumer’s retail installment contract.

If an agency damages a vehicle, mishandles personal property, conducts a wrongful repossession or causes a loss through its negligence, hold it accountable.

Absolutely.

But if the industry’s answer to every possible loss is simply “put it in the agent agreement,” we have stopped asking the most important question:

Whose risk is it actually?

Signing a Contract Does Not Create Insurance Coverage

This is where the issue becomes even more dangerous.

A contract can create an obligation.

It cannot magically create insurance coverage for that obligation.

A repossession company can sign an agreement accepting liability for something its insurance carrier never agreed to insure.

Now everyone may have a problem.

The forwarder believes it transferred the risk.

The lender believes the forwarder handled the risk.

The agency is contractually obligated.

And when the loss occurs, everyone looks toward the insurance carrier, only to discover that the policy may not respond to the contractual obligation that was created.

That isn’t successful risk transfer. It may simply be uninsured risk wearing a contract.

And What Are We Doing to the Insurers?

This may be the most overlooked part of the entire discussion.

There are still insurance companies willing to underwrite professional repossession agencies.

At what point do we start protecting them?

Repossession is already a challenging class of business. If we continually expand the liabilities imposed upon agencies and expect their insurers to stand behind increasingly remote risks, what happens to the insurance market?

Premiums increase.

Underwriting tightens.

Carriers reconsider the class.

Eventually, some leave.

Then the industry responds by demanding higher limits from an increasingly smaller group of carriers.

How exactly does that end?

Instead of only asking how much insurance an agency carries, lenders should sit down with the insurance companies actually underwriting this industry and ask:

What is driving your losses?

What provisions in our contracts concern you?

What liabilities are agencies accepting that you never intended to insure?

And most importantly:

What do we need to change so that you still want to insure this industry ten years from now?

Those may be some of the most important risk-management questions lenders aren’t asking.

We May Be Selecting for the Wrong Companies

There is an unintended consequence to all of this.

If contracts become increasingly unreasonable while compensation remains compressed and insurance becomes increasingly expensive, who leaves first?

Possibly the companies with the most options.

The established agency with substantial assets doesn’t have to risk everything it built.

The experienced owner may decide the return no longer justifies the exposure.

The reputable insurance carrier can deploy its capital somewhere else.

But someone will still sign the contract.

And that should concern lenders.

An industry that continually rewards whoever is willing to accept the most risk for the least compensation may eventually select for participants who have the least to lose.

That is the exact opposite of what risk management is supposed to accomplish.

Raise the Bar, Don’t Just Raise the Insurance Limit

Maybe the conversation needs to change.

Instead of asking only:

“Does this agency meet our minimum insurance requirements?”

Ask:

Is it financially stable?

Is it professionally managed?

Does it have experienced employees?

Does it invest in training, technology, facilities and equipment?

Does it understand contractual risk?

Does it have a reputation and assets worth protecting?

In other words:

Does this company have something meaningful to lose if it gets this wrong?

Because when you authorize someone to appear at a consumer’s home or workplace and take their vehicle, the lowest possible barrier to entry should not be the objective.

The highest reasonable professional standard should be.

One Final Question for Lenders

There is nothing wrong with transferring legitimate risk to the party responsible for creating it.

There is nothing wrong with demanding accountability from repossession agencies.

There is everything right about protecting consumers.

But there must be a rational stopping point.

So before adding another indemnification provision, another insurance requirement or another financial obligation to an agent agreement, ask:

Does this risk legitimately belong to the repossession company?

And before rejecting an established agency because it refuses to sign something that others accepted, ask:

Are we sure the agency saying “no” is the one we should be worried about?

Because if our approach to risk management ultimately drives out the agencies with the most experience, the companies with the most assets, and the insurance carriers with the most knowledge of our industry, we haven’t eliminated risk.

We may have eliminated the very people and companies that were managing it responsibly.