Staying compliant with state-level repossession laws

Repossession is a vital part of automotive lending, allowing lenders to mitigate risks when extending credit, and ultimately expanding access to credit and to transportation for countless borrowers.

But at the same time, repossession laws can be a web of state and local regulations, meaning a creditor needs to proactively seek out information from multiple jurisdictions in order to stay compliant.

This post will go over the different areas where regulators commonly put consumer protections in place, giving you a shortlist of compliance areas to look into for each local jurisdiction where you operate.

For more information on specific states' regulations, we recommend reading the state requirements list from the American Recovery Association (ARA). And as always when discussing regulations, you should work with your compliance officer or legal team to make sure everything is above board.

How Repossession Works

Generally, a lender can begin the repossession process as soon as the account becomes delinquent. In some states, that means the borrower has missed just one payment, but others set higher thresholds, such as a certain amount or number of days past due before a lender can repossess the vehicle.

The lender's original loan or lease contract typically includes all the legal protections they need to repossess it, so they don't need an additional court order. However, the lender needs to make sure they don't "breach the peace" by making a scene or threatening force.

In most states, an automatic stay of repossession will go into effect when a borrower files either Chapter 7 or Chapter 13 bankruptcy. This automatic stay of repossession actually makes it illegal to repossess the collateral without a further court order.

Additionally, some states will only allow repossession of automobiles, but others allow lenders to repossess other collateral, like boats, ATVs, or motor homes.

Repossession agents

Once the decision has been made to repossess a vehicle, the lender will hire a repossession agent, who will collect it either with a tow truck or a copy of the vehicle's keys. The repossession agent does have rules they have to follow, though. They can't break into a locked garage or use physical force to remove a person from their car.

Some states have specific licensure requirements both for acting as a repossession agent as well as operating a tow truck. Other states require that you give advance notice to the police. We recommend notifying law enforcement even if your state doesn’t expressly require it, as it can prevent misunderstandings.

Repossession hold period

Many states require you to hold a repossessed vehicle for a certain number of days before selling it, and may also require you to send the borrower a notice of intent, telling them that you plan to auction the vehicle. This allows the borrower to either pay off or come current on the debt before the vehicle is sold.

It’s also your last real chance to work with the borrower and get them re-engaged with their payments. While some might see repossession as the point of no return, these hold periods exist precisely so that borrowers have a last chance to start making payments and get access to the vehicle again. Losing their transportation could significantly disrupt the borrower’s work and day-to-day life; they have a major incentive to resume payments. An adjusted payment schedule or hardship relief program might just be the help they need to get back on their feet, and in turn could build enough trust and loyalty to win you a lifelong customer.

And in most states that have an automatic stay of repossession, that stay of repossession will still go into effect if the borrower declares bankruptcy after the vehicle is recovered. In those cases, you would be restricted from reselling the vehicle without a further court order, and you may even be required to return the vehicle to the borrower.

Auction

If the repossession hold period ends and the borrower hasn't come current on their account , then the car is then sold at public auction. They'll have it cleaned out and sanitized, which usually costs between $20 and $50 dollars.

If the borrower had left any personal belongings in the vehicle when it was repossessed, you’ll need to provide them with a notice and opportunity to retrieve them. Best practices are to photograph all the contents while they’re still in the vehicle, and then have them removed during cleaning so that the former borrower does not need direct access to the vehicle when they retrieve their belongings.

The lender is required to inform the borrower when and where the auction will take place. From there, the money paid for the car in public auction goes toward the original principal balance, and anything left over becomes unsecured debt for the borrower.

LoanPro solutions

LoanPro has several tools that can help streamline repossessions and mitigate losses.

First and foremost, however, it's important to note that repossession is not a way that lenders can automatically recover all the money they lost as a result of the a defaulted loan. Typically, repossessing a car will only help the lender regain approximately 30% of the loan value. Long before repossessing collateral, you can help decrease delinquencies and prevent defaults through tools like personalized communication or hardship relief programs.

When an account does default and repossession is necessary, LoanPro has a direct integration with the Recovery Database Network (RDN), allowing you to automatically initiate repossessions and auctions, with accounts being updated with the appropriate statuses, portfolios, and processes within LoanPro.

To keep compliant with widely varying state laws, LoanPro's Compliance Guardrails can adapt your repossession processes to match the requirements for each borrower's state. Using automations, checklists, and walkthroughs that guide your agents through each step of the process, we can make sure that accounts smoothly go through your repossession process, and modify that process based on both local laws and your own business logic.

If you want to see how LoanPro can enhance your collateral recovery, reach out to our team and we can show you firsthand.