As the powersports industry continues to grow, so too will regulatory scrutiny, Kenneth Rojc, managing partner at Nisen & Elliott LLC told Powersports Finance.
“Because it’s growing, that growth generally attracts regulatory attention,” Rojc said. “And the same types of challenges that are in the motor vehicle domain are present in the powersports domain.”
However, despite the different industries, some compliance factors can come into play at a higher degree in powersports than in auto finance, added Andrew Kriz, a partner at Nisen & Elliott.
For example, “because there are so many powersports dealers, we do see on occasion that you single out certain dealers that may have ‘unacceptable’ marketing or selling practices,” he said. “So just because of the sheer number of powersports dealers, you see that to a higher degree. I think [auto] dealers also have those problems, but to a lesser degree, because there aren’t as many of them.”
Powersports Finance spoke with Rojc and Kriz about some of the specific areas that lenders in the powersports space should take note of, particularly in light of recent development in the auto finance industry.
The following are edited experts from the interview:
Powersports Finance: What should lenders be wary of, in terms of ancillary products?
Andrew Kriz: Value proposition: meaning is what you are selling the customer, of value. [It’s] is important to note, because the overall price of powersports ancillary products could be less than cars, so the value proposition is a little more important in that scenario. Some of these ancillary products can be several thousand dollars, and if you are buying them for a $7,000 motorcycle, is there really value in that? I think that’s very important, and it’s something that should be looked at seriously. You don’t want to see a $15,000 deal where $6,000 or more of it is ancillary products.
Kenneth Rojc: Lenders could have an LTV ratio capped at 110% or 120% to regulate the overselling of ancillary products. The cost of many of the products you see out there could be comparable to the auto domain, which could be $500 to $1,000. If you start adding those up, and you are financing a $15,000 motorcycle, it’s a more significant percentage.
PF: What are some best practices for working with third-party collectors?
KR: The two keywords are due diligence and monitoring. The Consumer Financial Protection Bureau has a very detailed guidance on the use of service providers. A lender cannot be exonerated from liability if they are engaging with a service provider that is breaching the law; they don’t have sophisticated mechanisms for complying with the law; or they don’t have sufficient training. There is a due diligence sequence that the CFPB and many states are expecting the lenders to take, as they manage that third-party process, in addition to managing their own collections. But the notion that you can hide behind the activity of a third-party collector and say, ‘It’s not my problem,’ is a false notion. A lender is going to be in the liability loop if they have chosen a service provider that is implementing noncompliant policies.
AK: You need to make sure your service providers are doing the right thing. You don’t want them breaching the peace. You want to make sure they are following the Fair Debt Collection Practices Act (FDCPA) rules. When you are looking at creating a relationship with any of these collectors or service providers, you need to look at the policies that they have in place. It’s extremely important.
KR: Do they have written policies? Are they properly licensed? Do they have sufficient training? Is that training ongoing? What’s their complaint history? There is a fairly detailed checklist that is laid out in the CFPB guidance.
PF: What is important for powersports lenders to note when it comes to fair lending risks in their portfolio, such as disparate impact?
AK: Usually, in powersports you deal with more dealers, so that’s an interesting aspect. So as a finance company or bank that is taking assignment of powersports contracts, they may only have an unsubstantial amount of contracts coming from a single dealer because they’ve got 20,000 dealers across the country. They may find themselves in a place where it is very difficult to do a meaningful analysis because you don’t have a representative sample size.