Dealers Have a New Cop on the Beat to Worry About

As if dealers don’t have enough regulators and lawyers targeting them for real or imagined compliance issues, it appears that there may be a new player on the field – their lenders.

Here’s why: a major automotive finance company, Santander Consumer USA, recently agreed to a $26 million settlement with the attorneys general of Massachusetts and Delaware for allegedly working with car dealerships that falsified or inflated borrowers’ incomes. According the complaint, “Santander knew which dealers had high rates of borrower defaults, which exaggerated the value of cars, and even identified a group of ‘fraud dealers’ who inflated borrowers’ incomes to get buyers into larger loans than they could afford. Yet Santander continued to do business with those dealers and failed to rein in their practices”. 

In addition to the settlement, the Massachusetts AG announced that her office is conducting an ongoing investigation of other lenders and auto dealers.

As a result, more and more finance companies will likely be taking a proactive approach to detecting and preventing fraud perpetrated by dealer employees. This includes more information sharing of dealer risk and fraud patterns among lenders and enhanced pattern recognition technology that flags high-risk dealers.

Up until now, often the worst-case scenario for dealers caught falsifying credit information by their lenders has typically been having to repurchase the contracts in question – basically a slap on the wrist. Although there have been instances where finance companies have reported dealer fraud to law enforcement, that has been a relatively rare occurrence. With the Santander settlement, it seems likely that lenders will be far more motivated to report dealer misdeeds if for no other reason than to protect their own interests.

Some in the industry have opined that with the new administration, dealer regulation will be reduced. Perhaps the federal agencies will be reined in but it’s certainly conceivable that state and local agencies will pick up the slack. For instance, last month the NYC Department of Consumer Affairs announced that it is seeking more than $2 million dollars in consumer restitution and fines from an auto group. Among the allegations – you guessed it – falsifying consumer credit applications.

For those who feel that taking the risk is worth it since “we’ve always done it this way”, keep in mind that these practices may constitute bank fraud. So, you may want to ask yourself a simple question while assessing the downside of getting caught: is my job worth going to prison for?

The FTC Strikes Again – and This Time it’s a Game-Changer

Back in January of 2014, I wrote in my article The FTC Strikes Again – You Ain’t Seen Nothing Yet that “although it may seem that the FTC is only the ‘dealer advertising cop’, they are expanding their reach in several other areas”. Well, that prediction has come home to roost in a big way.

This week, the FTC charged nine California auto dealerships and their owners with using a wide range of deceptive and unfair sales and financing practices.

In addition to deceptive advertising (among the worst of which was advertising $38 down/$38 month when the actual deal was $2695 due at signing and payments of $179 after the first 6 months), the dealers were accused of the following:

• • Subjecting non-English speaking consumers and individuals with poor credit, to deceptive, misleading, and unfair practices when offering add-on products and services or when arranging financing
  • Packing additional charges for add-on products and service into the amount financed without consumers’ informed consent
  • Deceptively claiming that such add-on products are required as a condition of the purchase or financing of the vehicle or will improve consumers’ chances of obtaining financing
  • Deceptive and unfair tactics to pressure consumers to agree to different financing terms or have otherwise refused to honor the contract (“yo-yo practices.”)
  • Dealership employees and their families posting positive, five-star reviews of the dealerships on websites that deceptively purport to be objective or independent
  • Selecting and pre-printing add-on products on the sales and financing forms, such as the F&I product menus, pre-contract disclosures, and the contract, before discussing or presenting them to the consumer
  • Rushing consumers through the closing process and simply indicating to consumers where to sign
  • Having consumers sign blank documents
  • Telling consumers that they would not be charged the cost of the add-on products when in fact they were
  • Telling consumers that they could cancel the add-on products within a specified time for a refund and failing to process the paperwork or have claiming to have lost the paperwork, resulting in delayed cancellations or lower refund payments
  • Approving deals to customers with risky credit before bank financing had been secured in order to increase their sales numbers knowing that the dealership was not going to be able to secure bank financing on the offered terms
  • Representing to consumers that they must sign the new contract when dealers failed to assign financing
  • Refusing to return the consumer’s down payment or trade-in vehicle
  • Having consumers’ vehicles repossessed where consumers had valid, binding contracts

  
  It appears that the FTC obtained information about the dealers’ practices from both consumers and former dealership employees.
  
  Here’s the ultimate game-changer: unlike earlier FTC actions where there have been no initial monetary penalties, it looks like this one is going to be very, very expensive. The FTC is requesting that the court assess both injunctive relief and relief to redress injury to consumers including but not limited to, rescission or reformation of contracts, restitution, the refund of monies paid, and the disgorgement of ill-gotten monies; and the FTC’s costs and legal fees.
  
  The stakes have gone up – way up. Dealers nationwide need to get serious about compliance. Today.

  
  

Compliance vs. Ethics: The Lines are Getting Blurry in the Car Business

Ethics and compliance are different from each other, but both are vitally important to the long-term success of dealerships and automotive professionals. Often the terms “unethical” and “illegal” are used interchangeably. Ethics is personal - it means the process of discerning what the correct action is. Law is impersonal and requires no discernment, just compliance. Ethics refers to moral principles and values that guide a person or an organization, and ethical conduct refers to knowing the difference between right and wrong and choosing to do what is right. A company or person can be unethical without breaking laws.

For instance, it’s not illegal per se to charge different prices for the same F&I products – and many finance practitioners do so on a regular basis. They’ll charge one customer $795 for GAP and another $1500 for the same coverage because “X Bank allows that much”. Another example I recently read about is that some dealers charge a “certified pre-owned” fee to customers on CPO vehicles they sell. Although that practice may be against OEM guidelines, it’s not necessarily unlawful from a strict legal standpoint.

One more illustration of dubious ethics in my opinion is vehicles that are marketed as a “CarFax One Owner”, even when the “one owner” was a rental car company. Even though the “one owner” statement may be technically true, the descriptions I’ve seen for some of these vehicles are questionable at best: “With just one previous owner, who treated this vehicle like a member of the family, you'll really hit the jackpot when you drive home with this terrific car”; “This 2010 Elantra is for Hyundai fans that are searching for that babied, one-owner creampuff” and “From the looks of it, I'd say this car has been garage kept and babied regularly. If only my wife treated me as nice!!!”

Now some will argue that these statements are just harmless puffery that is intended to make the vehicles stand out, but isn’t it safe to assume that most consumers place more value in a true one-owner car than a prior rental? Even if the dealership discloses the vehicles’ previous histories at some point, is it OK for the first contact with a consumer to be secured by misleading claims? Even if it’s legal, is it truly ethical?

The reality of the car business is that pay plans and sales quotas can sometimes make acting ethically a challenge. Dealership personnel may be under continuous pressure to abandon their personal standards to achieve sales goals. The actions of salespeople mirror the behavior and expectations of their managers. The words and actions of sales and F&I managers often reflects the moral and ethical considerations of top management’s philosophy.

Ethics can be a very personal decision and different people will have different opinions about the above scenarios, but here’s where the lines have gotten blurry: While I agree that “profit is not a dirty word”, it appears that regulators and consumer attorneys have been redefining what is “legal” by applying their own interpretations of “ethical” standards.

In the last few years we’re seeing more and more enforcement actions and lawsuits against dealers for a number of seemingly “legal” activities. Recent cases have charged dealerships with assessing dealer fees that were deemed excessive even though they aren’t regulated by state laws. Another target for regulators is pricing of add-on products. For instance, NY Attorney General Schneiderman said in a statement announcing a $14 million settlement “New York consumers must beware: Car dealerships sometimes pad their pockets by charging for worthless after-sale items, which inflate the price of their car. These items are often ones that consumers don’t need, did not ask for and often are not even told about. Businesses need to make a profit to survive, but it’s illegal to do so by duping consumers.” Whether or not these products are “worthless” is a matter of opinion, but these consumer watchdogs seem to think so.

Another notable case is where a dealer group agreed to pay $1.6 million to settle a class-action lawsuit that claimed the dealerships sold car buyers an over-priced window etch package (and they were only charging $295!)

Former CFPB official Rick Hackett had this to say at an industry event: “If I found out that Walmart set the price of their products at different levels, and they were all the same product, and they were just hoping I would buy one for $20.95 because I was a particularly gullible consumer, I’d be grumpy. That’s the bureau’s perspective of variable pricing of ancillary products.”

We can complain all we want that it’s not fair for the government to limit our profits but it’s clear that they’ve drawn a line in the sand and there’s no relief in sight.

But here’s the good news. Taking an ethical approach has several benefits beyond just avoiding legal issues:

Increased Closing Ratios and Higher Product Penetrations - Higher levels of satisfaction with the selling process result in higher closing rates and higher sales. The more people trust you, the more likely they will buy from you.

Lower Cancellations and Chargebacks – How many times do your customers read the contract after the sale and realize they paid much more than they thought? How many times are credit unions, insurance companies, friends or family members telling your customers they paid too much? Even if you hold their feet to the fire for non-cancellable products, what are the chances you’ll ever see that customer again?

Improved Reputation (your REAL reputation, not necessarily the one you “manage” online) - A dealership’s reputation is difficult, if not impossible, to maintain when staff members depend on “old school” practices. Customers often make decisions during a vehicle sale transaction that they come to regret after the “ether has worn off”. You can be sure they’re telling somebody about the transaction. Or perhaps they’re telling thousands of people online?

Increased Customer Satisfaction - Lack of ethical behavior and old school tactics invariably diminish the customer experience. Nobody likes surprises. Sure, you made the deal but are your customers truly satisfied with your processes or do you just wear them down? At the end of the day higher customer satisfaction translates into more repeat and referral business.

Increased Customer Loyalty - Customers only have loyalty if you earn it from them. Ethical processes help build customer loyalty and retention. You’ll find that customers will be willing to spend more when they feel they’re buying from a business they can trust.

You’ll Exceed Customer Expectations - Your potential customers have unprecedented access to information in real time. The increase in the amount of data available to consumers has brought them a quick and easy way to analyze not only different prices but also to identify who they want to do business with. Car shoppers simply have too many choices and will quickly discard dealers they feel are hiding something. Holding back information or playing fast and loose with the truth will only make them trust you less.

You’ll Stand Out From Your Competition – Progressive dealers can easily differentiate themselves by marketing their ethical processes and demonstrating their honesty. Consumers will respond - after all, how many consumers prefer old-school tactics?

Good ethics can be the pot of gold at the end of the rainbow. An ethical business model can greatly enhance your sales, reputation, customer retention, and bottom line. The most successful dealerships have not only a standard of “don’t break the law” but a standard of “always do the right things”.

Here’s something to think about: If you treat each customer as you would like your mother to be treated, you’re most likely practicing good ethics. After all, it was probably your mom who first said “just because you can, doesn’t mean you should.”

F&I Fact vs. Fiction

It’s not uncommon for me to be asked to weigh in on the occasional compliance conundrum posed on some social media forum. Many such inquiries involve disagreements about long-held beliefs in F&I and whether or not they’re legally valid. 

So I’ve decided to take a crack at clarifying some of the issues surrounding these pervasive compliance myths. Now, there’s no legal advice here — just my thoughts based on a bit of common sense and my years of being a compliance car guy. Ultimately, it’s up to you to decide what works best for you, your customers and your dealership.

Myth No. 1: The 300% rule is a compliance tool

Many F&I processes that started out as solid sales techniques have somehow morphed into compliance requirements. The 300% rule is a great example of this phenomenon. I wholeheartedly agree with this rule from a sales perspective. As they say, you’ll miss 100% of the shots you don’t take. But as a compliance requirement, I’m not so sure.

First, let’s look at why failing to adhere to the 300% rule is considered a compliance blunder. A common rationale is that if you don’t offer protection products to your customers that they end up needing, you can be sued. I have, in fact, heard of lawsuits where a customer wasn’t offered credit life insurance, subsequently died and the spouse sued the dealership.

However, this scenario seems far less likely when it comes to other products. For instance, credit life insurance is only available from the dealer at the time of sale, so there may indeed be an obligation to inform eligible customers of its availability. On the other hand, many other products sold in the F&I office are available elsewhere. I recently purchased a new car, and within days my inbox was full of offers from independent service-contract providers. I’m not sure even the most desperate attorney would want to file a lawsuit against a dealer for not offering products that are readily available on the open market.

But some F&I pros insist on practicing the 300% rule without exception and having a signed declination sheet in every deal jacket to avoid claims of discriminatory treatment. Discrimination is defined as treatment of an individual or group based on their actual or perceived membership in a certain group or social category, “in a way that is worse than the way people are usually treated.”

In my view, if you fail to offer all of your customers all of your products all of the time, it would be a big hill to climb to prove that you’re being discriminatory. On the other hand, if you adhere to the 300% rule but offer your products at different prices,  that discrimination claim may very well be low-hanging legal fruit. But there are other potential issues that subscribing to the 300% rule could raise.

Let’s say, for example, you present your customer with 100% of your products and she says, “I’ll take it all.” So far, so good, right? But you then discover your lender won’t allow you to finance it all. Besides the obvious customer satisfaction issues, you’ve made an offer on which you can’t deliver. Is it conceivable that a lawyer may try to make a contractual legal issue out of that? It certainly wouldn’t surprise me. The same applies with max loan-to-value (LTV) or amount-financed callbacks. If you present 100% of your products in these scenarios, I suggest you let the customer know up front how much more money he or she will need to come up with. 

There are also situations where the customer shouldn’t be offered all of your products. For instance, you wouldn’t sell GAP protection on a cash or low LTV deal (especially when the LTV falls below state or lender limitations), or a service contract on a car that’s exceeded your program’s mileage limit. Offering such products in these situations could result in deceptive practices or fraud claims.

The same principle applies to declination sheets. They certainly come in handy when a customer complains that he wasn’t offered a product that turned out to be needed. But the significance of declination sheets as a compliance tool has been somewhat overstated, in my opinion. From a sales standpoint, declination sheets can provide you with one additional chance to sell products, but they should be used accurately. Products that aren’t available to particular customers shouldn’t show up on their declination sheets. If they do, they should be marked “N/A” or “Unavailable.”

Myth No. 2: It’s illegal to give a customer a copy of their credit report

This myth has no basis in law, as far as I am aware. In fact, the Fair Credit Reporting Act specifically states that a credit bureau provider cannot prohibit a user (the dealer) from disclosing the contents of the credit report to the consumer. However, contracts with some credit bureau providers may prohibit the dealer from giving the consumer a copy of his or her credit report.

Telling customers it’s illegal to give them a copy of their credit report when that information is inaccurate is not a good idea, at least in my opinion. On the other hand, telling the customer you can’t hand over a copy of his or her credit report because your company’s contract with the credit reporting agency prohibits it is accurate and true. There’s never a downside to telling the truth.

Myth No. 3: It’s illegal to highlight a contract

Many automotive professionals believe that this is a no-no because you can be accused of “leading” the customer to sign the highlighted areas without reading the rest of the contract. In reality, you can lead a customer by pointing your finger to the signature sections and saying, “Sign here.” It appears this folklore originated with a case where a creditor utilizing a motor vehicle pawn contract was sued for failure to disclose the APR as conspicuously as other disclosures on the contract.

The court ruled that the creditor violated the Truth in Lending Act (TILA) because it put dashes and arrows pointing to the due date, thereby making the due date disclosure more conspicuous than the APR and finance charge. So there was far more going on than highlighting. In fact, according to the court’s decision, there was handwriting and other markings on the contract, and the annual percentage rate on the contract was 304.24%. No surprise there.

So while highlighting customer signature areas probably isn’t a big issue, make sure certain TILA disclosures aren’t more prominent than others. Of course, if you work with a lender that won’t accept a contract with highlighted signatures, you’ll probably want to avoid the practice altogether.

Myth No. 4: A contract is valid once signed by both parties, even if the customer hasn’t taken physical delivery

The validity of this statement depends on where you conduct business. Some states specifically define when a contract is considered valid. For instance, California law states that “a sale is deemed completed and consummated when the purchaser of the vehicle has paid the purchase price, or, in lieu thereof, has signed a purchase contract or security agreement and has taken physical possession or delivery of the vehicle.”

So before you attempt to hold a customer’s feet to the fire prior to the delivery of the vehicle, you may want to check the laws in your state.

Myth No. 5: Menus are required to disclose the base payment

This has been the subject of much spirited debate in F&I circles. First, menus are not required by law at all. In fact, contrary to popular opinion, even California doesn’t require the use of a menu. All that is required is a “pre-contract disclosure” that shows the monthly installment payment with and without the optional products or services.

So, really, there is no such thing as a legally compliant menu as some vendors claim. But it’s not a bad idea to include the base payment in your menu presentation (and in your write-up as well).

Myth No. 6: Everyone must be charged the same doc fee

This notion again stems from worries about discrimination claims. The thought is that if a dealership charges one customer a fee, it has to charge everyone the same fee to avoid potential litigation.

So, could charging varying doc fees attract the attention of regulators? Well, we’ve certainly heard enough about alleged discrimination in rate markups over the last few years. And as recent actions by the Consumer Financial Protection Bureau (CFPB) and Department of Justice (DOJ) show, even if there’s no intent to discriminate, you can still face fines if protected classes pay more than non-protected classes.

So the easy answer is to just charge everyone the same doc fee, right? Perhaps. But here’s the rub: Doc fees are dealer-imposed charges and therefore not mandatory;  only government fees are compulsory. So it is improper to tell a customer that you must charge them the fee, as you could be setting yourself up for a deceptive practices claim. Some states, like Washington, require you to inform the customer that the doc fee is negotiable.

So to avoid potential discrimination claims, be sure you can show proof that any downward deviations in fees are for valid business reasons, such as needing to match the doc fee offered by a competitive dealer in order to close the deal. Remember, documentation is key.

Myth No. 7: Payment ranges up to $XX are allowed

To many regulators and plaintiffs’ attorneys, using a payment range in certain circumstances could be a sign of payment packing. While it’s generally acceptable to quote a range of payments using an average APR before the customer’s credit report is pulled, once a credit profile is accessed, a best practice is to quote an exact payment.

Let’s say you’ve pulled the customer’s credit but aren’t sure what her rate is because you’re waiting for a callback from the bank. If you pencil the deal back with a payment range, it’s a good idea to include an APR range as well. Once you determine the actual terms of the deal, a final base payment should be disclosed. Also, if you’re using a payment range to account for variations in days to first payment, you should disclose the exact payment at each level. In other words, never give any impression that would allow a regulator or court to infer that the payments quoted are in any way misleading.

So there you have it: my take on some of F&I’s most common compliance myths. Again, how you handle these issues may depend on the laws in your state and your individual processes and philosophies. You may agree or disagree with my analysis and that’s OK. My goal here is not to steer you in any particular direction, but to simply give you something to think about beyond the status quo.