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.
Is car salesman a good decision?
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