Repo Forwarding – the road to nowhere

GUEST EDITORIAL

“The road to nowhere is paved with good intentions.” While it’s source is disputable, it is a proverb intended to illustrate the lack of value of intentions in the absence of action. Inaction in the face of wrong well-defines the current state of affairs between the repossession agencies and lenders as they have allowed the repossession forwarding industry to cloud the judgment of all. Whether or not it is too late to be spared the calamity at the end of this road is still in question.

Over the course of the evolution of the repossession industry, lenders and the repossession agencies had developed close bonds. After all, many of the agency owners began as in-house repossessors for the lenders and the agencies picked up on the collection and recovery process like a hand in glove. Unfortunately, in the past decade, newcomers came along and dived into the process creating a division between the lenders and the agencies. These newcomers had adopted a practice that the agencies had been doing as a service for the lenders for a nominal fee and that was the service of “Forwarding.”

Their early involvement in the industry was believed at first to be a nuisance and at very least tolerable. While most thought the “Forwarders”, whose recovery rates to agencies were lower and rates to lenders were higher, would burn out like a flash in the pan, but that proved all too wrong. These Johnny-come-lately carpetbaggers who’d never gotten grease under their nails had burrowed into the industry like a tick on a dog’s behind.

Once they’d discovered the lenders desire to reduce workforce and the associated expenses, they capitalized on their expanded gap between lender and agency and promised the lenders the pot of gold at the end of the rainbow. But of course, this came at the expense of the repossession agencies in the form of reduced recovery fees and contingent assignments.

The Sucking

Fast forward ten years and much has changed since then: fuel prices are skyrocketing, insurance is always on the rise, trucks, equipment, software, repairs and on top of that a massive 7.5% inflation rate. Ancillary fees have become a thing of the past and now the forwarders even go as far as penalizing agencies by withholding fees over missed service level agreements. While that is a lot of change in a short period of time, there is at least one thing that hasn’t changed, the low contingent fees of ten years ago.

Even to an untrained eye, it has become abundantly clear that the forwarders have been sucking the repossession industry dry. Their underbidding against each other to lenders for assignment volume has been holding repo fees in place for well over a decade. The forwarding model has created an unsustainable fee income situation for repossessors that, under our current economic environment, could bring the industry to a screeching halt resulting in massive agency closures.

With the combined effects of the forwarders and the pandemic, as much as twenty percent of all repo companies have already closed in the past three years and this could get far worse. These are small businesses whose owners and employees depend upon sustainable incomes to buy homes and feed their families. This was once an industry where the owners and employee could afford to send their kids to college, but no more. Year after year, these family-owned businesses are closing their doors and opting for employment elsewhere.

In the meanwhile, the forwarding companies have been stuffing their pockets with the lifeblood of the industry. Their management and directors are offered lucrative incentives to keep the parasitic practice alive by maintaining ridiculously low fees and outrageous contractual demands designed to rob the agencies of their earned income when they happen to fail to meet their absurd service level agreements. You know the ones, like when they need at least one picture of the oil dip stick or the cigarette lighter and for failing to provide such a pic they deny paying the invoice.

The UDAAP Trap

To the lender, with whom the agencies once held close bonds, all of this is invisible except for when it takes two weeks to recover a voluntary repossession or when their recovery rates drop from 70% through direct assignment to 35% through the forwarders. But this invisibility will not shield them from the risks to which the forwarders practices have been exposing them.

As previously mentioned, forwarders have become more and more punitive in their refusal to pay invoices to the repossession agencies for perceived or feigned failures to perform up to their service levels. Most lenders are probably not even aware of this and have been billing the consumers as normal. You don’t need a law degree to see that charging a consumer for services rendered for which the service provider is not paid is a deceptive business practice. Unknowingly, lenders across the nation have been playing part in this.

Lenders are charging consumers anywhere from $450 to $700 for a repossession that only pays the agency $275 to $350 without disclosing the built-in fees charged by the forwarders. And that is when they pay the agency. How can anyone charge a consumer that fee with a straight face when the fee owed is never even paid to the agency?

While for now the CFPB has been silent on this, it is just a matter of time until the class action lawyers come sniffing around. And while as a lender you may think that your ignorance of this fact will get you off the hook, your lawyers will make your bank or credit union settle. And as is often the case, someone will have to fall on the proverbial sword over this and it could be you.

“You have nothing to worry about.”, “Our legal counsel has reviewed this and it is all completely legal,” will say the forwarders and even the credit union CPI carriers who have so actively endorsed forwarding in recent years when approached on this issue. What would you expect them to say and what will they ever do for you when you get fired and your bank or credit union makes the headlines settling for millions in UDAAP violations?

That’s right, it’s all spit and giggles until someone gets sued.

Right Versus Wrong

“But they told me it was legal,” someone will eventually say to themselves as they do the walk of shame across the office with their desk belongings in hand on their way out the door. Perhaps if someone quit listening to people who were lining their pockets on the labor of others and stopped to think, they could be spared this fate.

Charging consumers for services that weren’t paid for is wrong. Not paying agencies for services rendered is wrong. Putting small repossession agencies who have labored for years at risk of their own lives out of business is wrong. Helping others profit on all of this is wrong.

It is time to come face to face with reality. Participating in the predatory and parasitic business model of the repossession forwarding industry is counterproductive to the well being of financial institutions and the scores of small business owners who have for decades served the financial services industries. You are not getting a superior service when you compare recovery rates and times. You are paying more for them and, worse, exposing your companies to future liability of litigation.

I urge the lenders of this nation to turn away from the forwarding model and their proponents. Reengage with the agency owners and reinvigorate the direct assignment model. You will see dramatic improvements in your recovery rates, reduce UDAAP risk and help American small business survive.

Like the road to hell, intentions matter little in this. You are on one side or you are on the other. And the side you choose will define your final destination. As a lender or a repossession agency owner, the choice is yours, and a simple one: right versus wrong.

Wade S. Argo