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The Compliance Side of Nonprime Finance

April 2007, F&I and Showroom - Feature

by Joe Bartolone - Also by this author

The growth of special finance has provided a win-win situation for dealers, finance companies and customers. Dealers are selling more cars, finance companies are making money and credit-challenged customers are getting new opportunities to finance their purchases. And when it comes to compliance, there really is no difference between prime and subprime, as the rules are the same for both. However, the risks and exposures for non-compliance are not, as they increase dramatically when it comes to subprime lending.

Prior to a gvo3 & Associates compliance audit, we ask to review a dealership’s sales and F&I report so we can select the deal files we want to audit. I try to include as many subprime lenders on the list because it only takes a review of a few deal files to determine the dealership’s level of compliance. In this article, I would like to recommend several best practices to ensure your special finance efforts are considered compliant.

Acquisition Fees

If you’ve had any F&I training, you know that acquisition fees can’t be added to the sale price of the vehicle. They should be treated as a cost of sale. The problem here is that sales people and sales managers may not have the same amount of training. Even though your state may not require you to post a suggested retail price on a used car, there are other ways to determine if you’ve increased the price.

Most dealer management systems (DMS) have an inventory management system with an established retail price. You may also have advertised the vehicle in the newspaper or may have posted it on your Web site. I’ve also found multiple worksheets in the deal file that clearly indicate the price was increased. If you’re going to be active in special finance, your sales staff must be trained to qualify customers so the deal and credit terms can be properly structured.

Credit Applications

To properly structure the deal and credit terms, you must run a credit report early in the sales process. The issue here is how to get the customer’s consent. Our recommendation is for you to have the customer complete a credit application in the presence of a trained F&I professional. If you’re using an UP card, a worksheet, or some other form to get the customer’s consent, make sure the consent statement is in the same size font as the other printed information on the form, which it is no less than a 10-point font. You should also make sure that the customer’s signature line is directly below the consent statement.

Some dealerships will get the F&I department involved right away if they feel the customer qualifies for special finance. Others will have the customer fill out a credit application during the sales process. If your process is to complete the credit application during the sales process, make sure the customer completes the employment and income sections. The F&I manager will most likely interview the customer and can make the appropriate corrections, with the customer’s initials, before the application is submitted. If your process is for the salesperson or F&I manager to fill in the credit application, then it is important you have the customer initial his or her time at a residence, time on the job, and income. Also make sure that they sign the bottom of the application. This rule also applies to printed applications submitted through DealerTrack or RouteOne; as customers should initial the same information. This process provides a very defensible position that you didn’t alter the information provided by the customer.

Down Payments

A common issue with down payments in special finance is the hold check. If you take a hold check and submit the contract to the sales finance company before the funds are collected, you technically have a deferred down payment. There are two issues with deferred down payments. First, most lenders do not allow deferred down payments because it is a violation of your dealer/lender agreement. The second issue is a deferred down payment must be properly disclosed on the retail installment sales contract (Reg. Z).

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