The Washington Post headline said “Crime Increases When Times Are Bad.” I suspect that most people seeing those words immediately imagined more burglaries and convenience store stick-ups. Not me. The first mental image I had was of several guys gathered in a dealership’s F&I office, plotting over ways to portray a bad deal as a good one.

These are perilous times for dealers in more ways than I can count. Lenders are pulling floor plans. Sales finance companies and banks have either quit buying paper or have gotten so picky regarding creditworthiness that Saint Peter couldn’t get financed. Customers have hunkered down to the point that the dealer’s postman counts as an “up.”

When those customers do show up, they are torn between the Escalade if they believe gas will stay at $1.59 a gallon, and the Fit if they see gas going back to $4.39 a gallon. And then there are those minor difficulties with the manufacturers, who, when they aren’t talking about bankruptcy, are discussing discontinuing entire lines of vehicles that all of us have grown up with. Perilous times, indeed.

So why should dealers, with all these problems to deal with, care about my mental image of the huddle in the F&I office? Isn’t that like worrying about how neatly the deck chairs are stacked on the Titanic? I would argue that dealers need to be especially vigilant regarding F&I practices when times turn hard. Why?

First, a dealer doesn’t need the expense and diversion of an attorney general investigation, a TV news investigation, a plaintiff’s class action lawsuit, or perhaps all three at one time, when the dealership is trying hard just to survive until times get better. Time, money and other resources spent dealing with these problems can’t be allocated to measures that might actually help the dealership survive.

Second, F&I abuse is fairly easy to prevent. I know that this is true because I have seen it prevented. Some dealerships have a culture of dealing squarely with customers and with their banks and finance companies. Others have a culture of cutting corners and hiding the ball whenever they can make a dishonest dollar. The culture that a dealership develops reflects the ethics, or lack thereof, of the dealer principal and top management.

If the guys at the top are dirty, the entire operation is likely to be dirty. It’s not enough, though, that the top folks at the dealership have pure hearts. They also have to have in place the training, audit processes and oversight to make sure that their good intentions get translated into good actions. We see dealers all the time who manage to do things right. I’m not saying that it’s easy to do so, but rocket science, it ain’t.

Finally, under the weight of other problems, the dealership can fold altogether, turn itself into an independent operation and forget about those pesky franchise problems, or go into some related business. People may lose fortunes, small and large. Absent other ethical lapses, no one will go to jail because the business fails. But people go to jail for F&I fraud.

When those guys in my mental image are manufacturing stips, “powerbooking” to inflate the perceived value of financed vehicles and inflating incomes (and phonying up income documentation to back up the inflated numbers), they might as well be wearing shirts with bulls’ eyes on them, because attorneys general all over the country have these practices squarely within their sights. When the AGs find these practices at a dealership, they trace them, when they can, from the bottom to the top.

The prospect of the shame and expense of defending criminal charges, and the inconvenience of having to spend several years as the guest of the state, will bring your other problems, like the possibility of losing that Pontiac franchise, into perspective.

These are perilous times, all right, but that’s all the more reason to keep your business legal and ethical.

Thomas B. Hudson, Esq. ([email protected]) is the author of several books, available at He is also the publisher of Spot Delivery, a monthly legal newsletter for auto dealers, and CARLAW, a monthly report of legal developments in all states for the auto finance and leasing industry. He is also a partner in the Maryland office of Hudson Cook LLP.

Copyright 2008, all rights reserved. Based on an article from Spot Delivery. Single-print publication rights only, to Special Finance Magazine. HC#4834-8818-7139 (12/08).