September 27, 2020

DMV challenges add to fraud risks, slow sales

Coronavirus-related closures of state motor vehicle departments this spring put a wrench in vehicle title work and registration processing, producing a backlog of unverified documents key to finalizing car sales.

Without the ability to process vehicle registration and titling data under lockdown, state governments couldn’t perfect vehicle liens — legally verify that the lender owns a vehicle and has the ability to repossess it if a consumer doesn’t pay back their loan. For lenders that purchased vehicle installment contracts in those states, not knowing the reason behind a delay in processing a customer’s documentation could expose them to fraud.

Delays in processing title work and registrations also add liability to dealerships, which remain legally responsible for a customer’s vehicle if the registration isn’t transferred to the new owner.

It’s difficult to determine how many deals were disrupted, given the unexpected trajectory of COVID-19 and resulting state closures, titling experts say. Whether states required electronic methods to submit paperwork also played a role in how much could be processed under shelter-in-place orders. Many states have been working to sort through backlogs but still have titling delays, according to Cox Automotive.

More than 140,000 registration and title transactions are submitted daily to state DMVs, according to Sarah Hunsicker, Dealertrack director of government affairs. And more than 40 states’ DMVs limited operations in the early weeks of the coronavirus outbreak, she said, essentially closing public-facing operations and reducing staff to only those supporting critical business processes. For many states, processing vehicle titles was not considered essential.

Hunsicker said high-volume sales states that do not have software tools to digitally submit documents could become overwhelmed by the backlogs. One Northeastern state hard-hit by COVID-19 had a backlog of more than 80,000 transactions and an estimated 12-week turnaround time, Cox said.

Bottlenecks could prevent lenders from discovering problems with their portfolios for many months. Delays in processing liens historically signal potential fraud activity, but lenders understand the delays reflect the extraordinary times.

“In many states, Department of Motor Vehicle office closures have created backlogs of paperwork, preventing some dealers and lenders from processing titles in a timely manner,” Grant Helmer, senior vice president of dealer services at GM Financial, said in an email. “As DMV offices staff back up and reopen, we expect that these backlogs will clear.”

Mike Kane, Ally Financial Services’ vice president of consumer credit, said the risk is minimal to lenders as long as they’re proactive.

“The risk is that when a state opens up, they’re not going to process your title or put your lien on it,” Kane said. “The remedy is, you go back and unwind the deal with the dealer.”

Still, some dealerships held off on sales until they were assured the paperwork would be processed appropriately. Roy O’Brien Ford, of St. Clair Shores, Mich., delayed vehicle delivery on sold vehicles until it received assurances the titles were processed fully in the state’s capital.

“It is of paramount importance for us to relinquish titles to new owners, and hence, our legal ownership and liability” for the vehicles sold at the dealership, said Mark O’Brien, dealer principal of the suburban Detroit store.
Many states passed legislation to extend credentials slated to expire during shutdowns, granting registration renewals and temporary license plates at the height of closures.

Moving forward, states are doubling down on digital services.

From March to May, Idaho’s Department of Transportation accumulated an estimated 100,000 applications from people seeking a driver’s license, vehicle registration or title. Expanding online services allowed the state to shrink its backlog to about 43,000 applications, the agency said.

States with road maps in place for digital services aren’t having to dig their way out of backlogs.

Early in the crisis, California had more than 1 million appointments canceled by office closures, according to the Department of Motor Vehicles. It now has no backlog of vehicle title and registration documents, largely because of the augmentation of its digital programs, said Anita Gore, deputy director of the DMV’s Office of Public Affairs.

The department launched a virtual field office in March that has rapidly expanded. The first two transactions available were title transfer and complex vehicle registration renewals requiring additional documentation. If a dealer submits paperwork with a lien holder, the transaction is processed, Gore said. If the lien holder, typically the auto lender, is in the program, an electronic title is issued. If they are not in the program, a paper title is generated. To date, more than 500,000 cases have been opened through the virtual field office.

Computerized Vehicle Registration, a CDK Global and Reynolds and Reynolds venture that links auto dealerships and auto lenders to state DMVs, waived enrollment fees for Michigan dealerships to use its software from April through June — a cost of about $1,000 per dealership. The state also allowed dealerships to enroll in the service using Reynolds’ DocuSign.

“When the state of Michigan closed … a new or used dealership couldn’t sell a car unless they were using us,” said Christine Rooney, Computerized Vehicle Registration’s director of operations and compliance.

More than 70 dealerships in Michigan signed up within a one-month time frame, she said.

Jake Rollow, a spokesman for the Michigan Department of State, said the state’s electronic filing system enabled dealerships to continue processing transactions while the offices were closed.

“We handled many transactions for other dealers [the week of May 25] while staff were in the office, but before we were ready to open for in-person interactions,” he said in an email to Automotive News. “Additionally, we provided more than 3,000 emergency appointments during our closure to ensure that critical infrastructure workers were able to process necessary transactions with us.”

Much like the pressure to expedite digital retailing and remote services, the pandemic likely accelerated state adoption of electronic titling solutions and digital integration. Regulations that take effect Oct. 1 will mandate licensed financial institutions in California to join the electronic lien and titling program. Dealerships are not required to use the system, but several participate in the program. Colorado plans to digitize all of its DMV services by June 30. Currently, 35 percent of its services can be performed virtually.

“Our relationships have become very collaborative” with states, Rooney said. “It’s pushing them to figure out how to advance their technology.”