Phil Mickelson finally broke through the majors' barrier
this year when he won the Masters in April. Now admittedly,
although I'd rather see Boom Boom Couples or Doom Doom Daly
win every tournament, I was still happy to see Phil pull
this one out once my two favorites were out of contention.
If you were among the less fortunate (like me) that were not
at Amen's Corner on Saturday and watched the broadcast, you
may recall Jim Nance talking about the "defining moment" for
Mickelson. Apparently, Phil's Titlist attaching itself to a
piece of velcro in the rough off the green instead of
rolling into the water earned him his first green jacket and
qualified as a defining moment.
We all have defining moments in our lives. Sometimes it is a
personal mistake we learn from. Other times it is making
business decisions based on observing the effects of other's
mistakes.
I have seen the effects on dealers that have made mistakes
in the way they have decided to document the sales and F&I
transaction with customers. These observations have been
gathered through reading depositions as an expert witness
and from articles available in various industry
publications. From these observations, I've generated a list
of prohibited practices that tend to cause dealers grief and
deplete bank accounts. Unfortunately, this list is growing
as the dark side continues to generate new conspiracy
theories in its quest to separate dealers from the money
deposited in their cash management accounts.
Here, in alphabetical order, is my list of common prohibited
practices that are being scrutinized by the dark side.
Blank, signed documents Bundling products Completing
documents after the fact Credit card down payments Dealer
rebates Falsifying information to lenders Forging customer's
signatures Front end improvement (A.K.A. selling air)
Handwritten entries Including F&I products in the vehicle
price Inconsistent product pricing Menu manipulation Missing
enrollment forms Payment packing Power booking Product
stuffing Scooping rebates Signature on file Straw purchases
Trading rate for product
The balance of Part One will deal with the definitions of
the first half of this list and provide detection methods
you can put into place to ensure your employees are not
practicing what some consider deception. We will pick up the
second half of the list in next month's Dealer Magazine.
1. Blank, signed documents This one is self explanatory.
Asking a customer to sign a blank legal document such as a
credit application, a retail installment sales contract or
product enrollment forms is simply wrong. Many of these
documents have language above the signature line that
basically says "I acknowledge that I am signing a completed
document."
Be warned - F&I Managers have good sounding excuses!
For example, you may hear that the captive lender requires
its proprietary credit application be signed as a condition
of purchasing the contract and the F&I Managers prefer to
use the generic credit application to shop the deal to other
lenders. Therefore, they get the customer to fill out and
sign the generic credit application and have the customer
sign the captive credit application in the event the deal is
funded through the captive.
Baloney!
Permitting your F&I Managers to continue this practice is
providing them with the tools to change the customer's
demographic information in the event the deal is turned
down. Don't allow it!
Detection Methods Include a review for blank, signed
documents on your F&I checklist that is completed by the
Billing Clerk. Arrive before your F&I Manager on Monday
morning and pull all of the weekend's open deals from his or
her office. Look through the files before the manager has
had an opportunity to clean the file out.
2. Bundling products Each product must be priced and
disclosed separately. While it is permissible to sell
products as a package via a menu, each product must be
available for purchase individually and the customer must
understand what the price of the product is. A menu simply
helps to package products for the customer's convenience and
to allow for discounting of non-regulated products if a
group of products are sold. Do not combine products into one
price on any document (sometimes done with vehicle service
contracts and pre-paid maintenance).
Detection methods: The premium pricing for products is not
consistent between all forms that disclose the premium. The
DMS prints a combined price for products on the washout
sheet and the billing clerk handwrites the correct
allocation. The pricing on product enrollment forms is left
blank or denoted as "NA", the premium is combined on the
Buyer's Order and/or RISC and the products are broken out
separately on the washout sheet.
3. Completing documents after the fact All documents
presented to the customer for signature must be fully
completed before obtaining the customer's signature.
This is sometimes common with F&I Menus. An experienced F&I
Manager that has spent a career step selling is now being
asked to change selling techniques. Resistance ensues. But
the Office Manager is strong. She will not bill out a deal
unless there is a menu in the file. Guess what happens. The
F&I Manager say to himself "You want a menu, I'll give you a
menu." He continues to step sell, then tells the customer
"My boss makes me fill one of these out. You've already
agreed to buy the moon, so please sign here" on a blank
menu. The manager then fills the menu out after the customer
leaves.
Detection Methods: Some dealer's F&I Menu software provides
a date and time stamp on the form. Compare the date and time
stamp to the other documents in the file. Compare the
balance to finance on handwritten menus to the amount
financed on the RISC. If the balances are the same and the
customer purchased products, the menu had to be completed
after the contract was prepared.
4. Credit card down payments Most dealer-lender agreements
prohibit borrowed down payments and a down payment on a
credit card is considered borrowed. Some lenders will permit
a credit card down payment if the lender knows of the down
payment prior to making a credit decision.
Regulation M, (Consumer Leasing Act) requires that credit
card down payments be separately disclosed on the lease
agreement, along with trade in equity, rebates and other
non-cash credits, and cash.
Detection Method: Check the receipt in file. Be careful not
to confuse a debit card transaction with a credit card
transaction.
5. Dealer rebates In its strictest sense, cash back to the
customer is called and considered a rebate. If the
manufacturer is providing cash back to a purchaser, it is
called a manufacturer rebate. Doesn't it stand to reason
that if a dealer gives cash back to the customer as part of
the deal that it is a dealer rebate?
A recent phenomenon that is surfacing goes like this:
Some lenders are providing dealers with a maximum loan to
value guideline when they provide a credit decision. For
example, "Approved up to 120% LTV."
Some dealers figure that since the lender is willing to go
120%, they can increase the amount financed to that level.
If that increase in the amount financed exceeds the purchase
price of the car, why not give the difference to the
customer?
Now that the dealer knows this works to close one deal, it
becomes part of the sales negotiation and is disclosed on
the four square.
Rebates must be specifically disclosed on the RISC, but most
lenders look unfavorably upon dealer rebates. If a dealer
rebate is not disclosed, a case could be made by the lender
that this practice constitutes bank fraud.
I can also see the dark side coming up with a conspiracy
theory that alleges that this practice is a Truth In Lending
violation since the retail installment sales contract
typically discloses that line one on the contract is for the
cash price of the vehicle, accessories and taxes not
disclosed elsewhere. Where does a side loan fall within
those definitions?
Detection Method: A check or similar media supporting a
check to the customer in the file. Notes on the four square
alluding to "Cash Back" that is not a manufacturer's rebate.
6. Falsifying information to lenders Providing false or
misleading information to lenders in an attempt to obtain a
credit approval is a violation of the agreement executed
between this dealer and the lender. Lenders can require that
the dealership repurchase the contract once it discovers the
violation, whether the lender has repossessed the vehicle or
not.
If the lender is a federally insured institution, the
institution is required to report the tainted receivable
and/or falsified credit application information to the
Department of Justice using a form called a "Suspicious
Activity Report". I don't know about you, but I sure don't
want any document at the DOJ tying my name to a suspicious
activity.
Detection Method: Substantial changes to the customer
information on a credit application that enhances the
applicant's creditworthiness. Representing a false down
payment amount on the RISC. Compare the down payment on the
RISC to the down payment receipts in the file. Accepting a
promissory note as a down payment and not disclosing it as a
deferred down payment on the RISC.
7. Forging customer's signatures Forgery is a crime. 'Nuff
said.
Other forms of affixing a customer's supposed approval to
any document is "Signature on file" or as I recently saw at
a dealership "Amended".
Detection Method: Compare signatures on all forms. For
verification, use the signature on the driver's license or
on a form that was completed in the sales process where a
different person obtained the signature (four square,
customer welcome form, privacy notice, delivery receipt).
Look for shaky signatures. It is difficult to mimic another
person's signature and some forgers write the name slowly to
get the loops right.
8. Front end improvement This practice is usually specific
to subprime transactions. It occurs when the agreed upon
vehicle price negotiated during the sales process is
increased by the F&I Manager. The F&I Manager is paid a
percent of the increased sales gross. Commonly called
"selling air", this increased gross could be construed as a
hidden finance charge, since the customer likely would not
have had to pay the additional gross if he or she were
paying cash for the vehicle.
Detection Methods: Notes on the washout sheet disclosing a
commission to the F&I Manager for "Front End Improvement" or
other such language. Increase in the purchase price of the
vehicle from the four square to the top of the F&I menu or
Buyer's Order. A pay plan that pays the F&I Manager for
Front-End Improvement.
9. Handwritten entries The only forms where it is
permissible to have handwritten entries are the four square,
the handwritten buyer's order and the aftermarket agreement.
All other forms should be properly programmed into the
Dealer Management System and must be printed by the DMS.
Detection Methods: Any number generated by the DMS that is
stricken over and a handwritten entry is in its place.
Common on F&I product enrollment forms where the system
generates an "NA" for the product price or does not print a
price on the enrollment form.
10. Including F&I products in the vehicle price The sales
people are to sell the vehicle. The F&I Manager is to sell
ancillary F&I products. Sales people are not to include
ancillary F&I products in any price quote. Be wary of
addendum window stickers that include products with the
purchase price of the car, typically etch, environmental
protection packages and tire and wheel coverages.
Detection Methods: Products are included on the addendum
window sticker and used to increase MSRP in the pricing
negotiations. Check the initial price on the four square to
the vehicle's MSRP. The four square has a note that payment
"includes service contract or other product", yet the price
of the service contract is not separately disclosed. Notes
in the file to the F&I Manager that price and/or payment
include a product.
Have fun correcting these prohibited practices in your
dealership while I write the next edition, giving you more
homework! I reserve the right to modify this list between
now and then if anything else comes up...
Gil Van Over is the president of gvo3 Consulting, LLC. He
will be discussing compliancy and litigation issues at each
F&I Mastermind seminar.
http://www.gvo3consulting.com
He assists dealers in developing and implementing a
litigation defense strategy for the F&I Office. Copyright
2004 by gvo3 Consulting, LLC. All rights reserved.
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