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Payment Packing in Los Angeles

February 2007, F&I and Showroom - Feature

by Gregory Arroyo - Also by this author

Sitting alongside fellow Los Angeles County deputy district attorneys, Dana Aratani and Michael Stewart, to discuss recently settled cases against three longtime dealerships in the Los Angeles County area — including the Norwalk, Calif.-based McKenna BMW — Jeff McGrath admits his office has only scratched the surface of what’s going on in a state the National Automobile Dealers Association (NADA) said had 1,659 new-car dealerships in 2005.

Despite most of these cases occurring between 1999 and 2002, the old-school practice of payment packing — where monthly payments are loaded with F&I products without informing customers — is still something McGrath and the two other deputy district attorneys hope to erase in a county where the 25 largest dealerships sold nearly 150,000 new and used cars, generating $5.1 billion in 2005 revenue. The California Department of Finance puts the county’s population at an estimated 10.2 million people.

“We’ve hit the two largest dealer groups in the nation,” says McGrath, whose office has taken action against 20 different car dealerships since the 1980s. “We’ve been successful at getting close to 19 people convicted of theft [since 2000], and have gotten back millions of dollars in restitution to the victims of these dealers.”

Within a 19-month period ending Nov. 30, 2006, the California Department of Motor Vehicles (DMV) logged 11,810 complaints against car dealerships. Armando Botello, spokesman for the DMV, says the practice of “payment packing” has been on the decline in the state since 2000, but warned the DMV continues to monitor the situation.

“It feels like we haven’t done enough,” says McGrath, whose office operates separate from the DMV, but has collaborated with the department on several cases filed against dealerships. “This goes beyond the mega dealerships. We got other smaller dealerships as well.”

From the conference room, McGrath points to his office where cases against at least two other dealerships await him, including an investigation against Power Toyota of Cerritos — the second AutoNation dealership McGrath’s office has investigated in a five-year span. There are also remnants of his office’s case against McKenna BMW involving criminal charges levied against one of the dealership’s former employees.

“I think what the dealers need to realize is that what they’re doing is still theft if [a false misrepresentation is made],” McGrath says. “The key part is to train people at the dealership. Sure it’s about money, but it’s when they misrepresent the circumstances of the deal that’s very disheartening.”

A growing trend, Aratani points out, is where consumers looking for a low monthly payment are switched to leases — only to find out later that the amount of the deal is much higher than the manufacturer’s suggested retail price (MSRP). Stewart says another growing concern is identity theft, where customers go to a dealership to lease a vehicle under someone else’s identity.

“As far as financing, if you come up with a 700 credit score, it’s automatic — you go right through,” says Stewart. “They’re not going to check your references until the payments stop being made. We’re seeing a lot of that right now.”

The Key-Chain Caper

That’s what put Stewart on the trail of McKenna Motor Co., a 50-year-old, three-dealership family operation. Settling with the District Attorney’s Office last November, it was McKenna’s BMW dealership that was charged with allegedly passing leases and purchase agreements with hundreds of dollars of extras without telling customers.

According to the suit filed January 2006 in Los Angeles Superior Court, McKenna Motor Co. allegedly inflated a vehicle’s capitalized cost by adding in the price of a pen, a key chain, a “Smart Choice” warranty or a combination of items.

Key chains and pens ranged in cost from $150 to $2,000, according to the suit. It said McKenna BMW personnel also allegedly misrepresented the “Smart Choice” warranty as a mechanical breakdown warranty, adding, in some cases, $1,500 to the capitalized cost.

The case was initiated by the Los Angeles County Sheriff’s Regional Auto Theft Prevention Task Force (TRAP), which began investigating McKenna after concerns were raised by KeyBank, a lending institution based in Cleveland. The probe involved the use of stolen identities to acquire lease deals that went unpaid. With the DMV taking the lead role, Stewart helped acquire the search warrant for the December 2001 raid. It was then that the DMV insisted that McGrath’s office review the dealership’s records for any follow-up investigations.

Several employees were interviewed during the raid, including Stuart Green, one of six named in a criminal case filed by the District Attorney’s Office in October 2004.

“Detectives were there interviewing him (Green) and he was boasting later to one of his employees that — while the automotive detectives were there — he was jockeying some deal with false information right in front of them,” Stewart recalls.

Green pleaded no contest to multiple counts, including conspiring to violate the Business and Professions Code for making untrue and misleading statements. Under terms of the criminal settlement, Green will have his felony counts reduced to misdemeanors upon completion of 200 hours of community service and payment of a $93,000 fine by this September.

“At one point, Stuart [Green] was bragging that he single-handedly pushed KeyBank out of the auto leasing business in the state of California,” says Stewart. “Pretty much everyone at the dealership had to have an idea that this was going on.”

In total, there were two sales managers, three finance managers and one director of finance named in the criminal complaint, including one finance manager whose alleged fraudulent transactions were referred to as “Jicky Jack” deals. There was also the finance director who allegedly spoke openly with other managers about the need to list a product as being sold on deals that had packed payments.

“We actually had a list of close to 13 people we were thinking about charging, and we weeded it down to six,” says McGrath. “We could have done more.”

Aside from Green, four other defendants pleaded no contest to violating the Business and Professions Code, with their felony convictions expected to be reduced to misdemeanors as part of the settlement agreement. One case remains open. McGrath says he could have done more, but the courts did not allow his office to pursue conspiracy to defraud — which would have carried a heftier sentence — because of a three-year statute of limitations.

In one case involving Green, according to the felony complaint, a customer was allegedly charged $1,110 for a key chain and $348.61 for a pen that cost the dealership approximately $15. That customer’s signature also allegedly appeared on a motor vehicle lease contract he never signed.

“I think it was pretty well known within that particular dealership and probably outside the dealership,” says McGrath. “Green offered to plead guilty at an early stage. He knew he was pretty much had.”

Stewart even recalls a story he heard from witnesses where Green received a gag gift recognizing some of his alleged practices between 1999 and 2000. It supposedly included an X-Acto knife, scissors, a ruler, liquid White-Out, glue and tape. He says one employee even pinned up an altered phone book ad at the dealership. It was a solicitation for copy services and had Green’s name on it. It read, “I’m Stuart Green, I can do it all.”

McKenna Motor Co. settled the case, but did so without admitting fault. Aaron Jacoby, an attorney for the company, said the six employees involved in the alleged wrongdoings were fired in 2001, and added that the company has since implemented several new processes to protect the dealership from future problems.

“In 1999 and 2000, which is when these deals at issue occurred, I don’t think dealers had as many compliance tools as have been developed every year since,” Jacoby said. “And I don’t think McKenna operated any differently than other dealers. Back then especially, I think McKenna and other dealerships were exposed to some rogue employees.”

Today, says Jacoby, McKenna requires compliance training for all F&I

employees. It also employs Auto Advisory services to perform regular audits of F&I and DMV practices, and uses Compli’s compliance tools to monitor all elements within the dealership. The company also has a compliance officer and an in-house auditing staff.

“Seems these days, good dealerships are smart to do this,” he says. “If you don’t, you’re more exposed to employees acting unlawfully.”

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