Our National Bank is starting to offer dealer floor plan financing. Does anyone know where I can find some guidance regarding the appropriate auditing requirements?

I can't offer any place for guidance but I will offer the following:

An independent person should audit the inventory, do not let anyone that is associated with the floor plan or that are "friends" with the dealer do the audits. Audits should be randomly scheduled and the dealership should never know when you're going to show up for the audit.

If you allow the dealer to hold the titles or COs, make sure they are audited, if the dealer cannot produce the title collect your payoff for that unit before you leave the dealership (especially if the unit itself is not there).

Curtailments should be required monthly no later than after 90 days and paid in full after 180.

If administered correctly floor planning can be profitable, if not hold on to your arse.

All I have to say is GOOD LUCK! This is a high risk area. We have been doing it for awhile and are trying to get out of it.

The OCC has a Dealer Floor Plan handbook.

Dot your i's and cross your t's. When I was a regulator, we had a $100 million bank lose in excess of $1 million (about a year's earnings) on a floor plan deal. The customer kept the titles and sold out of trust. Monitoring and control are the key words when it comes to floor plan lending.

For audit procedures, check your regulator (the OCC's handbook was mentioned above), I know the Texas Dept of Banking has floor plan procedures at http://www.banking.state.tx.us/podes/examproced/examprocedures.htm, and I know there are procedures and ICQ's in Sheshunoff's manuals.

Just one more thought, when you do your physical inspections of floor plan inventory, randomly lift the hoods to ensure that there are motors in the cars. No joke! I know of a bank that had a floor plan - cars were always there at inspections. Only problem - they didn't have motors! They lost a bunch.

Been there, seen that.

The inventory should include seeing each auto, and randomly starting them, either a sample or all of them. Mark which were started, which didn't start and which were not checked. The next inspection, perhaps 90 days out, should include starting autos not successfully tested the last time.

Thank for all of your assistance. I have been able to locate the Texas Department of banking information but I have had no luck locating anything from the OCC, let alone a specific Dealer Floor Plan Handbook. If anyone has a specific location or link I would appreciate it.

Thanka again for all of your insights. It has been very helpful.

The loan department does not like the fact that I review floor plans so much. I always tell them that it too bad! There is room for significant exposure if not monitored. Here are a few suggestions I have:

1. Always remember that car dealers can be the most dishonest people on the planet! Do NOT trust what they tell you.

2. Watch the floor plan activity in between floor plan checks as well.

3. Watch their checking account to make sure they are not flooring items to obtain money to pay something else.

4. If you think the account officer is too close to the dealer, notify your supervisor ASAP. If nothing gets done go to the BOD.

5. Track billings sent out and payments being made. Take no one's word for it.

6. Audit for floor plans is an on going process. Don't let it go for very long without looking at it.

7. If at the time of the floor plan check a vehicle is not on the premisis confirm where it is. For example, if the dealer tells you a car went to an auction to be sold, call them when you return to your office. Don't let the dealer know you'll confirm.

To ALM's comments I'll add, be very careful about cars not being on the lot because they were given as loaners or to test drive. If its a loaner the dealer will have the name and address of who they gave the car to. Go back to the office and call to verify they actually have the car and that it is a loaner and not a purchase.

Get a check for every car thats missing at the time the floor check is made. Don't leave a billing and wait several days for it to be paid. Its payable before you leave the lot.

Get your dealer in the habit of selling the older inventory first. If a car is about to come off the factory 90 day interest payment, and the dealer will start paying interest every 30 days. Put a sticker in the window that tells the sales people to sell this red super duper, instead of the red super duper that just came in on the floor plan.

I understand your comments but you failed to mention one very important guideline. KNOW YOUR CAR DEALER! I am a car dealer, used at that, and have been in business since 1954. I have a honest reputation and consider myself professional. Bankers too often look at all car dealers through a filter of distrust instead of taking the time to understand the industry and get to know the dealer. Losses do happen but please do not paint the entire canvas of car dealers with the color of distrust(or worse).

I agree with Cardealer that there are a few honest and legitimate dealers out there. Coming from a background in indirect lending I feel that I have seen it all. On the other hand though, when you have found applications that have been altered, supporting documents that have been altered, contracts forged, adds been claimed that were not on the cars, etc..then sometimes it becomes difficult not to be weary of the industry as a whole. It truly is not just a "large dealership" problem. I have seen this type of deception come from small county dealerships as well.

My husband is a Finance Manger at a car dealership and has been in the business for over 10 years now. I have met some of the greatest people in the field and I have met some of the sleaziest people in the field.

As a bank, we do what we have to do to ensure that our loans are fully secured. If we have to take excessive steps to ensure this, so be it. I have seen more than one bank take a substantial loss based on floorplan relationships. I don't think that banks should shy away from floorplanning, they just have to ensure proper controls are in place and evaluations are performed routinely. It can be profitable to the bank when done right.

Some of the hazards of dealing with auto dealers.

bank fraud

Car Dealers Cause Losses

Restitution?

Another story about a fraud involving an auto dealer.

Auto Dealer Fraud

One more reason to check floor plans, and to do it without advance notice.

RV Dealer

Yet another reason to check floor plans.

Bank Fraud Charged

As President Reagan used to say: "Trust but verify". Of course he was talking about the Russians, but it applies to car dealers as well.

Post deleted by Andy Z

Since there is some good info in this thread, I'm wondering, Andy if you can delete the garbage posts?

I found this at the OCC's site http://www.occ.gov/handbook/floorplan1.pdf

I am developing an audit from scratch, would anyone be willing to share? Or do most of you go off of the handbook?

Hi, MPN. The handbook is pretty complete but doesn't consider the physical audits, title safekeeping tests and title counts, etc. It really just assesses the bank's procedures, it doesn't really test them.

If the lending area has a periodic (frequent) floor plan audit process, you might want to participate in a random check (there should be some surprise dealer visits so they don't have time to move cars around) in addition to testing their procedures.

Check VINs!

Thanks Kaybee.

Management is concerned about my presence at a physical audit, thiking it may cause customer concern. Any thoughts on this?

Do others shaddow during a physical review? Does the audit dept in your bank do this? (For anyone that wants to answer)

Just my 2 cents. But, if they do not allow you to shadow during a physical audit to verify the bank is following their own guidelines there could be some concern about your ability to do your own job. Could you give an opinion on the audit if you were not able to verify the process? Maybe you need to indicate that you did not verify the physical inventory due to the management's concern in your audit report, let the audit committee take it from there. If you end up not reviewing the information, make sure you document it.

Don't get me wrong, I understand where management is coming from but they also need to understand that this is part of your job as well.

Sorry for late reply.

Management needs to be equally concerned about their own concern when the customer goes out of trust. You want dealers to know they are being checked. It is movable collateral. The audit requirements should be part of the dealer loan agreement. It is standard in the dealer lending world.

The way that we're working now is lenders (not the lender on the loan) are doing independent tests at the dealers.

Audit, here, will not be doing the physical review, instead reviewing that it was done by a review of documentation and shaddow reviews. That's what we worked out for now.