Western Funding has been in business since 1962 and our method of doing business has evolved by trial and error. It is difficult for people who are not familiar with our terminology to really understand what we are saying. We have a dealer agreement with every dealer we do business with, but very few take the time to read and understand it. Western Funding buys marginally good or hard to sell contracts or security agreements on all types of merchandise. The contracts can be marginal for many reasons, some of which are:
- The purchaser has no credit history.
- The merchandise sold is old or used.
- The terms are too short or too long.
- There are services to be performed in the future.
- The purchaser has had bad paying habits.
- The purchaser has been bankrupt.
- The purchaser is enlisted military.
In order to buy this type of contract, Western Funding has developed this method of buying contracts.
We plan on paying the dealer approximately his cost at the time we buy the contract. Both the dealer and Western Funding are betting on the 'if' that the customer is going to pay, which means that Western Funding can make some money.
The other part of the contract is divided into two parts to be earned as the people pay. One part of the contract is credited to a bookkeeping account called Unearned Discount for Western Funding to earn if and when the customer pays. The other part is credited to a bookkeeping account called Loss Reserve Index. The dealer may earn the loss reserve if the customer pays and if it is not used to pay the losses on any and all of the contracts purchased by Western Funding from the dealer. The dealer does not have any right, title or interest in the loss reserve; it is solely for Western Funding's use to pay the losses. If Western Funding does not use it to pay losses, then Western Funding is obligated to pay any excesses to the dealer.
As you can see, when we buy a contract and set up a portion of that contract in a Loss Reserve Index, it is not money; it only becomes money if and when all of the people pay.
Most of the contracts which Western Funding purchases are with varying forms of recourse. The loss reserve index is not to be used for recourse contracts. The dealer should return the money that was paid when the contract is in recourse. The credit that was credited to the loss reserve index is reversed and everyone is back where we started before we purchased the contract from the dealer. The dealer had a free loan on the amount they were paid. The purpose of any partial recourse is to sort out those contracts that are not going to pay. Our experience has proved that if a customer pays us at least two full monthly payments, the odds are that they will continue to pay the rest of the payments in a timely manner.
Reserve Adjustment, in our agreement, means we agree to start paying the reserve to the dealer before we have collected all of the money out of the contracts. This is an inducement to the dealer to give us good business and to continue to sell Western Funding contracts. If the dealer does not give us good accounts that pay or stops doing business with us, the earning reserve will not build.
Western Funding's purchase agreement is quite simple and is very complete. As I have said, it evolved over the years; it is written to protect both the dealer and Western Funding. We want to pay the reserves to the dealers.