On my way out of the dentist’s office after my last cleaning, I stopped to set my next appointment. The young lady behind the desk informed me with a somber face and sad voice that the office no longer sends out reminder postcards. She promised to call me prior to my next cleaning.
I pulled out my smartphone and proudly informed her that I didn’t need any postcards since I’m no longer an analog guy in a digital world. I can’t say the same for some of the dealer principals, controllers, F&I managers and sales managers with whom I frequently speak. Some of them are still operating under old-school misconceptions about contracts, still holding onto a decades-old view of proper processes.
So, to help bridge the generation gap, I’ve come up with a list of misconceptions I deal with all too often, along with my take on the matter.
Misconception No. 1: “I have to backdate the contract.”
Let me start by saying there is absolutely no reason to backdate a contract. Dealers have lost Truth in Lending (TILA) violation cases from Virginia to California because the date on the contract wasn’t the date it was signed by the customer. The customer’s attorney can argue that dating a contract prior to its actual execution creates interest charges during a period of time when there is no contract in place.
See, rolling the interest charged forward during this time and recalculating the annual percentage rate creates a situation where the APR is not properly disclosed on the contract. Again, there is no reason to backdate a contract, but that doesn’t mean dealers don’t have excuses for it. Here are four I’ve heard:
- Recontract: The transaction couldn’t be funded as delivered, so when the customer came back in to recontract, the F&I manager used the date of delivery on the second contract. Sorry, this won’t work in court.
- Incentives: The customer agrees to purchase a vehicle after an incentive period expires and the sales or F&I manager agrees to backdate the contract so the customer can qualify for the promotional offer. This scenario carries a double whammy: The courts won’t like it, and you could catch the attention of your manufacturer’s incentive auditor. And you know what that means: a chargeback.
- Used-Vehicle Value: The customer agreed to purchase a used vehicle shortly after the book value changed and the transaction is bumping up against the approved loan-to-value ratio. In addition to a potential Truth In Lending Act (TILA) violation, backdating this contract to a prior month could be viewed as bank fraud by the lender.
- Borrowed Vehicle: Sometimes a dealer will put the customer out on a borrowed-vehicle agreement and submit the credit application for approval rather than spot delivering the vehicle. This is a common practice in states where spot deliveries are frowned upon. The problem occurs when the deal is approved and the customer comes back in to sign the paperwork. Oftentimes, the F&I manager “forgets” to change the date of the deal in the DMS.
Misconception 2: “It doesn’t matter that the print doesn’t line up on the contract; the customer knows what I meant.”
A dealer in Maryland made the same argument in the course of a class-action lawsuit and lost the case. The dealer’s DMS was printing the first payment due date on an area of the contracts that made it almost impossible to read. The judge ruled that to be a TILA violation. That’s why you should periodically review what your DMS is outputting to make sure all information is printing in the proper place and on the proper form.
Misconception 3: “There’s no need to waste time reprinting the F&I provider’s enrollment form.”
Unfortunately, each new deal requires new paperwork. The recontracted deal must be thought of as a separate transaction because the first one is effectively voided. And the product enrollment form is effectively an addendum to the contract, which means it must contain the same date as the contract. That means reprinting, redating and resigning a new menu, purchase agreement, contract and product enrollment forms.
Misconception 4: “Doing a backup contract won’t hurt anyone.”
I know this comes as a huge shock, but sometimes customers expect to take delivery of a vehicle today and bring you the $10,000 down payment next week. When that happens, dealers will argue that they should be able to have the customer sign two contracts: one with the $10,000 down payment and one without. These dealers view this as an easier and more effective way to handle the transaction, whether the customer comes back with the down payment or not.
The dark side views this as a potentially deceptive and inexcusable practice since the dealer is effectively holding two contracts for the purchase of one vehicle. Your policy should be to have the customer assign the contract without the down payment and offer to hold the contract for an acceptable period of days. This will motivate the customer to bring the down payment in, at which point you will recontract the deal (using the current date). If the customer fails to show, you still have a contract you can present to a lender for funding.
Again, there cannot be a valid reason to date a contract with any other date than the one on which it was actually signed. So, don’t do it.
Gil Van Over is the president and founder of gvo3 & Associates, a national consulting firm that specializes in F&I and sales compliance. E-mail him at [email protected].