Submit Article

Gary Schwartz

CEO | President

A Better Framework for Dealer Risk in Auto Finance

The op-ed argues that dealer financial health should be addressed through a prudent lender-control framework, not through shared dealer blacklists or informal market rumours. Gary Schwartz positions the issue as a governance, consumer protection, and operational resilience challenge for auto finance lenders. The article emphasizes that lenders should independently strengthen their own practices around dealer onboarding, periodic reviews, scorecards, funding controls, proof of delivery, trade-in lien payoffs, and internal escalation. The CLA’s role should be to convene neutral best-practice discussions, develop non-binding tools, and support anonymized benchmarking, while avoiding dealer-specific allegations, coordinated commercial decisions, or competitively sensitive information.

Canada’s automotive finance market is built on a complex but important partnership between consumers, dealers, lenders, technology providers, insurers, and service partners. When that ecosystem works well, consumers get access to vehicles, dealers are able to serve their communities, and lenders can provide efficient, responsible financing.

That partnership depends on trust. It also depends on sound controls.

In a more complex economic environment, it is reasonable for lenders to continue reviewing how they manage dealer relationships. This should not be understood as a criticism of dealerships. Dealers are essential partners in the automotive finance system, and the overwhelming majority work hard to serve customers professionally and responsibly.

At the same time, lenders have a responsibility to ensure that their own controls remain current. That includes how they onboard dealers, review relationships over time, confirm documentation, verify delivery, manage trade-in lien payoffs, and respond when operational issues arise.

The best-practice answer is a shared lender-control framework.

What a lender-control framework means

A lender-control framework is a set of practical standards that help each lender manage its own dealer relationships. It is not about suspicion. It is about governance.

The framework should include six core elements.

1. Dealer onboarding as structured due diligence

A dealer is not simply a source of loan applications. In an indirect auto finance transaction, the dealer may play a role in customer interaction, vehicle delivery, trade-in processing, documentation, and transaction submission.

For that reason, lender onboarding should include appropriate due diligence. Depending on the nature of the relationship, this may include review of:

  1. Ownership and licensing information
  2. Applicable regulatory status
  3. Business history and operating model
  4. Documentation and funding processes
  5. Vehicle delivery process
  6. Trade-in lien payoff process
  7. Complaint handling process
  8. References or other reasonable business information
  9. Any relevant public information, where appropriate

The objective is not to create unnecessary burden for dealers. The objective is to ensure that lenders understand the businesses they work with and have confidence in the controls supporting financed transactions.

2. Periodic reviews of dealer relationships

Dealer relationships should not be treated as static. A relationship that was onboarded years ago may evolve as market conditions, ownership, staffing, systems, product mix, or business volumes change.

Periodic review is a normal part of good governance.

For some dealer relationships, an annual review may be sufficient. For others, lenders may reasonably choose more frequent review based on objective indicators such as documentation quality, customer complaints, transaction volumes, funding exceptions, title delays, or other operational measures.

The important point is that reviews should be structured, consistent, and based on evidence available to the lender.

3. Dealer scorecards based on objective operational indicators

A useful framework should rely on measurable indicators rather than informal impressions.

Lenders may consider tracking indicators such as:

  1. Documentation error rates
  2. Contract cancellation or unwind rates
  3. First-payment default rates
  4. Early delinquency rates
  5. Customer complaints
  6. Delivery confirmation issues
  7. Title or registration delays
  8. Trade-in lien payoff timing
  9. Funding exception requests
  10. Repurchase or indemnity requests
  11. Fraud or misrepresentation flags, where substantiated
  12. Dealer responsiveness to information requests

These indicators should not be treated as automatic proof of a problem. They are signals that may justify further review. A single documentation issue, late file, or customer complaint should not be overread. The purpose of a scorecard is to identify patterns, support proportional responses, and ensure that decisions are grounded in data.

4. Funding controls that are proportionate to risk

Funding is one of the most important control points in auto finance. A lender-control framework should allow funding requirements to adjust based on objective risk indicators.

For most dealer relationships, standard documentation and funding processes may be appropriate. Where a lender identifies elevated operational concerns, it may choose to apply additional controls, such as:

  1. Enhanced document review
  2. Customer confirmation
  3. Proof of insurance
  4. VIN confirmation
  5. Delivery acknowledgment
  6. Trade-in lien payoff confirmation
  7. Senior review before funding
  8. Temporary manual review of transactions

These controls should be applied independently by each lender, based on its own risk assessment and policies. They should not be the result of industry coordination around specific dealers.

The goal is balance. Lenders need efficient funding processes, and dealers need predictable financing partners. Controls should be proportionate, transparent, and connected to legitimate risk-management objectives.

5. Trade-in lien payoff discipline

Trade-in lien payoff is an area where clear process protects everyone.

When a customer trades in a vehicle with an existing loan, proper handling of the lien payout helps avoid confusion, consumer harm, title issues, and downstream disputes. Lenders may wish to review whether their processes adequately address:

  1. Current payout statements
  2. Confirmation of lienholder information
  3. VIN and customer-name matching
  4. Timing expectations for payout confirmation
  5. Escalation when confirmation is delayed
  6. Treatment of negative equity
  7. Consumer communication where issues arise

This is not about assuming wrongdoing. It is about ensuring that a common operational step in automotive finance is handled consistently and carefully.

6. Internal escalation across lender teams

Dealer relationship management should not sit in a silo.

Different teams may see different parts of the same relationship. Funding teams may see documentation issues. Servicing teams may see early payment patterns. Complaint teams may see customer concerns. Fraud teams may see application anomalies. Legal teams may see disputes. Commercial or floorplan teams, where applicable, may have a different view of the same business relationship.

A lender-control framework should include an internal escalation process so that relevant information can be reviewed in context. This could take the form of a dealer-risk committee, periodic internal review, or a formal escalation pathway.

The purpose is not to overreact. It is to ensure that a lender has a complete internal view before making decisions.

How the sector can get there

The CLA can help support this work in a careful and constructive way.

The appropriate role for an industry association is not to collect allegations about specific dealers. It is not to facilitate shared judgments about individual businesses. It is not to coordinate business decisions.

The appropriate role is to support education, best-practice development, and neutral discussion of risk-management processes.

A practical path forward could include the following.

Step 1: Develop a common risk vocabulary

The sector can benefit from using common language around dealer relationship risk. For example:

  1. Documentation risk
  2. Delivery-confirmation risk
  3. Trade-in lien payoff risk
  4. Title and registration risk
  5. Customer complaint risk
  6. Early-performance risk
  7. Operational-control risk
  8. Fraud-prevention risk
  9. Third-party relationship risk
  10. Consumer protection risk

These categories allow lenders to discuss governance without discussing specific dealers.

Step 2: Create a best-practices checklist

The CLA could develop a non-binding checklist that members can adapt to their own institutions.

The checklist could cover:

  1. Dealer onboarding
  2. Dealer agreement provisions
  3. Periodic review
  4. Objective monitoring indicators
  5. Funding-control options
  6. Proof-of-delivery practices
  7. Trade-in lien payoff practices
  8. Escalation procedures
  9. Suspension or exit considerations
  10. Consumer remediation planning

This would not prescribe lender decisions. It would simply provide a practical framework for members to consider.

Step 3: Use anonymized benchmarking

The CLA could survey members on process, not counterparties.

For example:

  1. Do lenders conduct periodic dealer reviews?
  2. Do lenders use dealer scorecards?
  3. Do lenders track trade-in lien payoff timing?
  4. Do lenders require proof of delivery in some circumstances?
  5. Do lenders have escalation procedures for dealer-related operational issues?
  6. Do lenders have internal committees or cross-functional reviews?

The results should be aggregated and anonymized. No dealer names. No lender-specific positions. No competitively sensitive information.

This type of benchmarking can help identify where the sector may improve its controls without creating inappropriate information-sharing risk.

Step 4: Provide education and model controls

The CLA can host educational sessions on topics such as:

  1. Dealer onboarding practices
  2. Documentation and funding controls
  3. Trade-in lien payoff procedures
  4. Proof-of-delivery practices
  5. Consumer remediation protocols
  6. Dealer agreement provisions
  7. Internal escalation models
  8. Competition-law and privacy guardrails

These sessions should be designed around anonymized scenarios and general risk-management principles.

Step 5: Maintain clear discussion guardrails

Any sector discussion should begin with clear boundaries:

  1. No naming specific dealers
  2. No sharing allegations about specific dealers
  3. No sharing dealer-specific commercial terms
  4. No coordinated refusal to deal
  5. No discussion of pricing, commissions, reserve arrangements, or market allocation
  6. No sharing confidential borrower or dealer information
  7. No rumour-sharing
  8. Focus on process, controls, and general risk-management practices

These guardrails are not obstacles to useful discussion. They are what make useful discussion possible.

What is sustainable?

A sustainable framework must be risk-based, proportionate, and practical.

The sector should avoid two extremes. One extreme is doing nothing and relying on informal relationship management. The other extreme is creating unnecessary friction that slows responsible transactions without improving outcomes.

The right approach is targeted control.

Low-risk, well-performing dealer relationships should not be burdened with excessive process. Where objective indicators suggest that more review is appropriate, lenders should have the ability to apply enhanced controls. If concerns are resolved, the dealer relationship should be capable of returning to standard treatment.

A sustainable framework should be:

  1. Evidence-based
  2. Proportionate
  3. Consistently applied
  4. Internally documented
  5. Consumer-focused
  6. Respectful of dealer relationships
  7. Independent for each lender
  8. Compliant with competition, privacy, and commercial law obligations

Good governance should support strong dealer relationships. It should not undermine them.

The concerns that must be managed

There are legitimate concerns in this area, and they should be acknowledged.

  • Competition and information-sharing concerns: Lenders should not use an industry forum to exchange dealer-specific risk assessments or coordinate commercial decisions. The CLA’s role should be limited to best practices, education, and anonymized benchmarking.
  • Reputational concerns: A dealer’s reputation is commercially important. Unverified information can be harmful. That is why any discussion should avoid names, allegations, or informal reports about individual businesses.
  • Incomplete information: A lender may only see part of a dealer’s operations. A single data point may not tell the full story. That is why decisions should be made independently, based on each lender’s own information and policies.
  • Operational burden: Additional controls can slow funding. That matters to consumers and dealers. Controls should therefore be applied based on risk, not as a blanket requirement in all circumstances.
  • Dealer relationship concerns: Dealers may reasonably ask why additional review is necessary. Lenders should be transparent that periodic review and control discipline are normal features of responsible financing relationships.
  • Consumer impact: When operational issues arise in a transaction, consumers can be affected quickly. Lenders should have clear processes for communication, remediation, and resolution where appropriate.

Each lender should then apply those standards independently. This approach protects consumers, supports responsible lenders, respects dealers, and strengthens the automotive finance market. Dealer relationship risk does not require alarmism. It requires disciplined governance. The Canadian auto finance ecosystem is too important to rely only on informal signals or legacy assumptions. As the market evolves, so should the controls that support it.

Not a blacklist.

A framework.

5 key points

  1. No shared blacklist: The sector should not name, label, or coordinate action against specific dealers. The focus should be on shared standards and independent lender controls.
  2. Dealer risk is a governance issue: Dealers play a critical role in documentation, delivery, trade-ins, and transaction integrity, so lender oversight should be treated as structured third-party risk management.
  3. Controls should be risk-based: Lenders should use objective indicators such as documentation issues, delivery concerns, early payment performance, complaints, title delays, and trade-in lien payoff timing to determine when enhanced review is needed.
  4. Consumer protection is central: Stronger proof-of-delivery and trade-in lien payoff controls help prevent customer harm, especially where vehicle delivery, title, or existing loan payouts become complicated.
  5. CLA can provide the framework: The CLA can support the sector by developing best-practice checklists, anonymized benchmarking, education sessions, and discussion guardrails without facilitating dealer-specific information-sharing.

 

Sign up for the CLA Finance Summit Series


 

All Op-Eds