Today's Trends in Credit Regulation

Are You Ready for the Money Man?
By Thomas B. Hudson

I hear two recurring themes at the finance conferences I attend.

The first involves liquidity - finance companies burn through a lot of money as they start doing business and ramp up to a size that permits them to fund themselves on an ongoing basis. Companies in this situation need to borrow money, find more equity, or sell assets, usually their retail installment or loan contracts.

The second involves what the business consultants refer to as an “exit strategy.” Most folks I know in this business enjoy what they do, but not many of them still want to be doing it when they are 120 years old. When the call of the golf course or the fishing hole becomes insistent, business owners start thinking about how to escape the daily grind.

Both of these situations lead business owners to the door of the Money Man.

We are presently going through another of those cycles in the consumer finance business when money is chasing investment opportunities. Compared with even the recent past, money is relatively easy to come by.

Funny thing about the Money Man, though. Even though he is easier to find and easier to deal with than he has been in the past, he’s still no pushover. And even though there’s a lot of new money coming into the sector, there also are a lot of potential businesses in need, so the Money Man can be careful about the companies he deals with.

“Careful,” in this case, is spelled “d-u-e d-i-l-i-g-e-n-c-e.” That’s what the investor and banker communities call the process of checking out a potential investment or purchase before doing the deal. It’s basically “kicking the tires,” looking for weaknesses and soft spots – and for reasons not to write that check.

We represent a number of Money Men. A typical assignment starts with a phone call identifying the company that is the potential investment target. Sometimes the Money Man wants to buy a portfolio of retail installment contracts. Sometimes the Money Man intends to lend money and take the contracts as collateral. And sometimes the Money Man is contemplating buying part or all of the company that holds the contracts.

You’ll quickly see that the common thread running through these three possibilities is those retail installment contracts. A lot of the due diligence process focuses on them.

First and foremost, are the contracts enforceable? Has the consumer granted the seller a security interest in the collateral identified in the contract? Is that security interest “perfected”? Do the contracts comply with state and federal law? Are the finance charge rates shown in the contract permitted by state law?

Does the consumer have any claims or defenses against the original creditor that can be asserted against a subsequent holder of the contract? The answer to this question will require an examination of other documents in the deal jacket to make sure that, for instance, there are no violations of the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Federal Trade Commission’s rules, and all of the other federal and state laws that govern consumer credit transactions.

Is the Money Man done yet? Nope.

He’ll ask what licenses the company holds and will want to know about the license renewal process and timing. He’ll want to know what the underwriting and collections manuals look like. He’ll want to see all of the collection letters and notices that the company sends to defaulting consumers. He’ll check the company’s internal customer complaint file and will go beyond the company’s own records to see if the company has had any difficulty of record with the regulatory agencies. He will check out the background of the company’s owners and top management.

If all of this sounds like the Money Man is picking the company up by its feet and shaking it to see what falls out of its pockets, that’s probably not far off the mark.

So, how do you get ready for the Money Man? I think the best strategy is to step back and pretend that you are the Money Man and that you are thinking of forking over some of your hard-earned money to your own company. Then, go through this kind of formal due diligence process, probing for every weakness and problem you can identify. When you’re done, fix every problem you’ve discovered.

Then, maybe you’ll be ready for the Money Man.

Thomas B. Hudson is a partner in the Hanover, MD office of Hudson Cook, LLP. Tom can be reached at 410-865-5411 or by email at

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