AI and e-contracting tools can flag costly deal jacket errors

If your dealership sent four car deal jackets to lenders today, odds are one of them would have an error, according to a survey by artificial intelligence document reviewer Informed.IQ.

About one-third of auto finance professionals polled estimated errors existed on about 25 percent of deal jackets in 2022 — mistakes made by either a dealership or internally. Another third saw errors on half or more of their deal jackets.

The errors cost the lenders time and money — most respondents estimated at least a $1 million financial hit to their company in 2022 — according to Informed.IQ, which argued lenders could help mitigate these issues by checking deals with artificial intelligence such as its own.

Dealership contracting software also can reduce the problem by catching errors before a deal is submitted, according to dealership management system providers.

Informed.IQ CEO Justin Wickett told Automotive News in January that dealers can find themselves waiting days — the company has seen as long as a month — on the lender to vet the deal and send the funds. Sometimes, the process ends with the lender unwinding and returning deal jackets.

"That's very frustrating for the dealer," he said.

Wickett encouraged dealers to tell lenders they want to be paid faster and desire more transparency into whether a deal will be paid. Dealers have the right to know what errors would raise compliance issues or delay their payment, he said.

Informed.IQ polled more than 2,500 auto finance professionals during the first two weeks of March and received at least 200 responses. About 83 percent of the respondents worked for credit unions, captive finance companies or other lenders. The remainder worked for automakers or technology providers.

The most common error involved fraudulent or inaccurate pay stubs, which were encountered by 55 percent of respondents. That was followed closely by mismatches in the name of the borrower's employer, reported by 54 percent. Income mismatches were the third most common issue, reported by 41 percent.

About 43 percent of those surveyed estimated the collective errors they encountered cost their companies $1 million in 2022. For roughly 32 percent, the price tag exceeded $1 million.

"Errors in deal jackets can be very costly to auto lenders in terms of financial losses, damage to their reputation and regulatory compliance findings," Informed.IQ wrote.

More than a third of respondents said they were concerned about the increasing time their staff spent checking for accuracy and fixing issues.

Processing and fixing a deal jacket could easily take 10 minutes or longer for every deal, "precious time that adds up when considering thousands of loans in a portfolio," the company wrote. Forty-eight percent of respondents said they spent eight to 12 minutes managing each flawed jacket, and 25 percent said it took 15 minutes or more.

Errors in deals raise external worries for lenders as well. More than half of respondents listed regulator audits as a deal jacket concern in 2023, and 47 percent said they were interested in further automating or adding AI to deal jacket processing to head off compliance risks.

Some errors need not reach the lender. The leading DMS providers enable retailers to catch errors before sending a deal.

"We validate the contracts and the forms prior to the customer even signing them with the lender," Greg Uland, vice president of brand marketing at Reynolds and Reynolds Co., said in April. For example, when used for a contract, Reynolds' docuPad finance and insurance tablet won't allow a signature to be skipped.

Such a capability also exists for lenders and dealers using the end-to-end digital contracting product Reynolds is emphasizing this year. The system, which last month was integrated with about 150 lenders, notes the forms and signatures necessary and checks the contract at various stages of the transaction.

"We've been going down this e-contracting path, and as part of building it out, you have to have a valid contract," Uland said. "It's a core element of e-contracting."

CDK Global Inc., which also is making an e-contracting push this year, touted the ability to catch errors as one of its system's benefits. The software is already integrated with more than 70 lenders, and this year CDK is focusing on growing the pool of captive finance companies on the system, Jason Swiech, the company's product marketer said in March.

Swiech said the process starts with a contract validation, which would point out issues such as a mismatched name or an incorrect interest rate.

"It's really trying to help that user to cut down on the necessity of bringing that customer back in for a re-sign," Swiech said.

The primary benefit of CDK's e-contracting will be saving dealerships from using multiple pieces of software to arrange a deal, which might also prevent errors caused by juggling more than one portal, he said.

Dealers new to the system demonstrate a significant error rate at first, which he attributed to unfamiliarity with the process.

"We see a huge drop-off within a month of the workflow," Swiech said, with the error rate falling to less than 5 percent.