There is no more labor-intensive and duplicated task than evaluating the hundreds of aftermarket products submitted for lender approval. Counting all sources, there are an estimated 900 lenders funding a minimum of 1,200 dealership-consummated lease and installment sale agreements annually. It is a process set in motion when the aftermarket administrators shepherd each of their products through each lender’s vetting process—yet another duplication of effort and waste of profit.
An Innovative Solution
In response, the Association of Finance & Insurance Professionals (AFIP) is developing a single-source vetting service. It will act as a central clearing house for all aftermarket programs sold in the United States. The acceptance standards will be based on the specific approval requirements currently used by the lending community. To ensure the service is of the highest quality available, Hudson Cook will provide federal and state compliance information and legal advice. Insight into the mechanics of the programs submitted for review will be addressed by CreditRe, the long-established aftermarket industry actuarial and risk-transfer consulting firm.
The review process will be more thorough and conducted by seasoned industry professionals. For instance, the AFIP system would have detected the flaw in the National Warranty Insurance Co. programs. As a result, hundreds of general agents, dealers and customers had to pay—and the VSC industry took an avoidable credibility hit.
The problem was that no one identified the attachment point where the stop-loss coverage was obligated to pay the claims. It’s a common industry practice to establish a band between where the front-company’s funds are depleted and the stop-loss insurance starts paying the claims—again, no problem. Unfortunately, NWIC didn’t establish a reserve to fund the claims falling within that gap before the stop-loss providers were required to pay. Had NWIC’s underwriting losses stayed within its posted reserves, the flaw would have been academic. But they didn’t, and in the end, hundreds of general agents, dealers and customers lost money—and the VSC industry took an avoidable credibility hit.
As a neutral-ground evaluator, if AFIP detects potential technical or structural problems during its review process, rather than simply saying “sorry, your program doesn’t qualify,” it will return the package to the administrator for adjustments. Once the kinks are worked out, the package can be resubmitted for review. Another benefit: the rejection-resubmission cycle that would have entailed dealing with 15 individual lenders, all of which would kick it back (if they noticed the flaw), need only be handled once with AFIP.
Additionally, administrators will find the AFIP submission process to be a much more simplified process. As always, all pertinent agreements, forms, rate charts and other material must be submitted. However, online forms will collect the other key elements of the program—how it is underwritten and by whom, the existence of a cut through, etc. The systematic collection of data will enable AFIP to directly match a program’s components with each element of a lender’s approval criteria. If a lender requires proof that its standards have been met, AFIP can provide a fully annotated report.
An Inside Look
AFIP recognizes that no matter how bulletproof its evaluation system or how solid its 20-year reputation, we’re asking hundreds of lenders with billions of dollars at risk; hundreds of general agents, aftermarket administrators and insurance companies and car dealers; and consumers in the thousands to take a chance on our doing the job right. There is an element of risk. This will be addressed in two ways. First AFIP’s sister company, Member Benefits Services (the entity performing the work) will carry adequate E&O coverage. But more is still needed.
AFIP is in the process of securing a $10 million insurance policy to indemnify the selling dealers and their customers from loss should a program vetted by AFIP terminally fail. The insurance coverage applies when at the time of failure, the product and the administrator were operating within the parameters established when the program was approved for funding. It will not cover specific claim-related denials and disputes if the program is viable and active, nor will it cover a failure due to fraudulent acts by any party.
While the likelihood of AFIP issuing a non-qualifying alert (a notification that a previously qualified program no longer meets the established criteria of one or more lenders) to the affected general agents, dealers and the administrator will be rare, the insurance will not cover losses on any products sold after the issue date.
To ensure the continued viability of a particular product, administrators will be required to periodically affirm that no material component of the program has changed. In addition, AFIP will review the applicable federal and state law updates as provided by Hudson Cook, and CreditRe will monitor the insurance industry oversight services relative to the approved programs.
As someone who used to make a living selling aftermarket products, I wanted the service to provide an additional marketing component, as well. As a buyer inducement, I am searching for a practical means for participating administrators to use an AFIP funding qualified logo on the marketing materials associated with them. The word “qualified” is used rather than “approved” because the fact that a product meets our standards doesn’t necessarily guarantee that the deal will be approved with the aftermarket included in the funding package (for example, due to customer credit-worthiness or the amount financed).
It goes without saying that the confidentially of the information supplied by the aftermarket providers and the proprietary approval standards submitted by the lenders is assured. Because even the slightest breach would cause the entire program to collapse, AFIP will take the steps necessary to make the process leak-proof. Each participating company will receive a password-protected account that restricts access to their proprietary information. Lenders can use their account to view the specific products that have met their funding standards and an administrator can see which lenders have approved his or her specific products. AFIP will at no time provide any company access to another company’s proprietary data.
The sequence of this services development was to first determine whether the suppliers of the aftermarket material—the administrators—would allow AFIP to vet their programs. I also wanted to be certain that the dealers would be comfortable with programs vetted by someone other than the lenders. The responses to date have been nearly unanimously positive from both camps; although, the feedback from this article will help confirm that I am headed in the right direction. Once assured, I will approach the lenders. There isn’t any good reason to invite the lenders to the dance if there isn’t any band.
Stop Wasting Money
Now you’re asking yourself, “This sounds great, how much does it cost?” Before addressing that, I should note that AFIP will not launch the service without signed commitments from a vast majority of lenders and aftermarket administrators. The economies of scale dictate that the greater the number of players, the lower the cost to each player. But in every case, it will reduce the labor costs for the administrators preparing the products for review and the labor costs for lenders reviewing the products will be virtually eliminated.
To reduce the start-up time, participating lenders will secure the information provided by the administrators for those products that have already been approved. After this data has been transferred to AFIP’s database, AFIP will take over the approval and oversight responsibilities on an agreed-to date.
Over the past 35 years, I have viewed the aftermarket industry and its relation to the lending community from many perspectives. I’ve sold aftermarket products, serviced the dealers selling the products and designed and operated a TPA company. I have worked as an industry consultant, expert witness, lobbyist and advocate. And having just survived an IRS audit, I know something about operating a neutral nonprofit company. I certainly don’t know everything, but what I do know is that coupled with the accumulated knowledge of Hudson Cook and CreditRe, we collectively know enough to bring this program to fruition.
I can also unconditionally guarantee that I will give this endeavor my very best effort—a commitment of sweat and intellect that has served me well in the past. If you will share your thoughts on this project with me, the odds for success and the final product will be the better for it. Please contact me any time at (817) 428-2434 or [email protected].