Avoid Wrongful Repossessions: 5 Steps to Protect Your Business

The High Cost of Wrongful Repossessions for Asset-Based Lenders

Wrongful repossessions are costly. They damage relationships and reputations. They trigger lawsuits and costly settlements. And depending on where you do business, they can even result in regulatory enforcement action – even criminal prosecution. Too often, lenders assume they’re indemnified; that their repossession partners and agencies meet all the appropriate licensing requirements thereby shielding themselves from liability. 

Unfortunately, these lenders are wrong. 

Why Wrongful Repossessions Happen (and How to Prevent Them)

Ask any asset-based lender or lease finance company professional about wrongful repossession claims and they’ll likely tell you one of two things. The first and most likely response is, “Those aren’t a problem for us.” But depending on who you ask, some will likely say… “Up until recently, wrongful repos were never a problem for us. Now, they’re a giant headache!” 

Like a lot of risks, wrongful repos are one of those things that aren’t a problem. Until they are. 

When that happens, the consequences can be more severe than you might imagine. First, of course, is the angry borrower or claimant whose equipment and living have been disrupted. Next in line are the regulators. More and more, agencies are taking a hard look at what they consider to be abusive lending practices. And when it comes to red flags, few things get their attention more than a wrongful repossession. In Florida, repos by an unlicensed agent can actually lead to criminal charges1. Finally, and most importantly, there’s the lender’s reputation. 

The Regulatory Landscape and the Importance of Reputation

Just last month the Alliance of Illinois Repossessors (AIR) issued a press release titled, AIR Fighting Back Against Unlicensed Repossession Activity. In it, the AIR lobbied for the use of licensed, skilled repossession agents to shield lenders from liability and to protect the reputation and high standards of their industry. This call-to-action and the activities of state houses across the U.S. are sounding the bell about a problem that’s only likely to get worse in the current market. 

In Asset Compliant Solutions’ more than 25 years of partnering with lenders, we’ve seen every repossession scenario you can imagine – and some you probably can’t. We know first-hand that successful, low-risk repossessions should be managed by skillful, licensed professionals. 

But apart from thoughtful partner and vendor selection, there are steps that that lenders can take to help reduce risk while keeping portfolio performance and reputation intact.  

5 Best Practices to Minimize Wrongful Repossession Risk

  1. Rigorous Borrower Qualification: Double check protocols to conduct thorough due diligence and credit checks on potential borrowers to assess their creditworthiness, financial stability, and ability to repay the loan.
  1. Airtight Documentation: Ensure that all loan agreements and collateral documentation are legally airtight, with clear terms and conditions that protect the lender’s interests in the event of default or non-payment, including provisions for using skilled repossession agents if necessary.
  1. Conduct Audits: Implement robust risk management practices, including regular monitoring of the borrower’s financial performance and the condition of the equipment being financed. If repossession is underway, make sure that internal or outsourced resources are observing strict asset-assurance workflows. 
  1. Document. Document. Document: Maintain detailed records and documentation of all communication and interactions with borrowers, as well as the condition and location of the financed equipment, to facilitate the involvement of licensed repossession professionals if needed. Remember, no detail is too small. 
  1. Dot the I’s and Cross the T’s: On your own or in collaboration with a trusted partner, establish a comprehensive collections and recovery process that complies with all relevant laws and regulations, while also prioritizing professional and ethical conduct to maintain a positive reputation with borrowers and regulators. This process should involve the use of skilled repossession agents to handle any necessary equipment recoveries in a lawful and responsible manner.

Proactive Steps Lead to Better Business

By acting now, asset-based lenders and lease finance companies can improve overall portfolio performance and shield themselves from the many risks a wrongful repo claim can trigger. In concert, these five best practices not only make for better business, but they also help burnish the lender’s hard-won brand and reputation.

1 493.6120 Violations; penalty (1)(a) Except as provided in paragraph (b), a person who engages in any activity for which this chapter requires a license and who does not hold the required license commits: 1. For a first violation, a misdemeanor of the first degree, punishable as provided in s. 775.082 or s. 775.083. 2. For a second or subsequent violation, a felony of the third degree, punishable as provided in s. 775.082, s. 775.083, or s. 775.084, and the department may seek the imposition of a civil penalty not to exceed $10,000.