Legal Compliance: Although this phrase is the retail automotive industry’s current hot topic, the buying public generally considers Finance & Insurance and legal compliance an oxymoron. In the public’s eye, our industry has a reputation of conducting business in a way that is neither legally compliant nor ethical. Unfortunately, this perception is, more than likely, a reality in many dealerships today. On the bright side, just as many dealers are working hard to prove this image wrong.
As more dealers jump on the bandwagon to become legally compliant, the focus typically turns to the Finance and Insurance department, which has a reputation for being non-compliant with today’s complex legal issues. In an effort to comply, many dealers have started using menu selling to offer the consumer valuable F&I products. The idea behind using a menu is to eliminate payment packing. Finance and Insurance departments that use menus also receive the benefit of additional profit, simply because 100 percent of the products are offered to 100 percent of the customers, 100 percent of the time. Not only does this increase profit, but it also provides the added benefit of absolving a dealership from accusations of discrimination —another area of concern in today’s industry.
However, what many dealers fail to recognize or overlook is that payment packing typically begins long before the customer meets the business manager. That’s right, payment packing and other unfair and deceptive trade practices typically begin during the process of negotiation. One of the most common violations practiced by many dealerships has to do with computer defaults. Many dealerships default the sales manager’s computer to quote payments that include F&I products. These defaults typically include vehicle service contracts, credit insurance, and Etch. If the computer has product defaults, payments quoted from the computer will be packed. When confronted with this topic, sales managers are typically quick to say that although the computer defaults the products, they take them out before quoting a payment. What happens on a busy Saturday when many deals are worked simultaneously? Is it possible the removal of these products may be overlooked? One of the easiest ways to start on the road to legal compliance is to remove all defaults from sales department computers.
Another area to look at in the effort to become compliant are managers who quote payments with “leg.” A leg is an insider’s term that refers to any payment quote that is based on more than just principle and interest. Legs are typically added to a payment in two ways. The simplest way is to include a spread when quoting the payment. This spread is used to facilitate the sale of F&I products. Although many attorneys generally agree quoting a payment with a spread of $5 to $10 is an acceptable practice, many sales managers quote a much higher spread. Providing a spread is acceptable because an exact payment cannot be quoted until the exact date of the first payment is determined, the exact interest rate is determined, and the exact tax, title and license fees are calculated. Payment spreads of $60 to $80 are not unheard of in some stores. This practice is not only deceptive, but it is also hard to justify to today’s knowledgeable consumer. With many consumers choosing to finance their cars for a term of 60 months, it is hard to justify a quote that has $3,600 to $4,800 of room.
The second way “leg” is added to a payment quote is by calculating the payment and then simply showing the customer a higher payment. For example, say a payment of $500 is based on principle and interest only. Instead of showing the customer a payment quote of $500 to $510, a payment of $550 to $560 is offered, thereby leaving thousands of dollars in leg to facilitate the sale of additional products. Some stores call this “payment assistance” and even go so far as to track which sales manager does the best job leaving room in the payment quote.
It is not hard to see why our industry is under attack. Some stores deserve this increased scrutiny. The problem is these rogue stores continue to give our industry a bad reputation. You may not be able to change the public perception of our industry, but you can change the perception of your store. The proper way to do business is to quote payments truthfully. If you choose not to, be prepared to suffer the consequences of the legal compliance witch-hunt our industry is currently experiencing.
Mike Tamas is the director of training for American Financial & Automotive Services, Inc.