In the not-too-distant past, regulatory oversight of the vehicle-acquisition and -funding processes didn’t start until the customer was turned over to the F&I manager. Not so today. When a prospective buyer opens the showroom door, a bevy of laws come into play. If you count dealer-placed ads, the regulatory scrutiny starts even before a customer steps onto the lot.
This month I’d like to focus on the practice of having monthly payments computed by a desk or sales manager. When that happens, two qualifiers come into play: The first is when the payment is computed after the customer’s credit history has been obtained and a lender tier has been identified. The second is when a payment quote is offered before a copy of the customer’s credit report has been received.
In both situations, the basis on which the monthly payment is calculated must be limited to the amount of money required to be financed in order to consummate the sale. The factors that determine this amount will vary widely from one deal to the next. They include the negotiated vehicle price, the appraised value of the trade-in plus any negative equity, and the retail cost of any accessories or products identified and agreed to by the customer as an integral element of the purchase price.
What the payment cannot include is an undisclosed amount of money to generate a “leg” to aid the F&I person in the sale of aftermarket products. The term quoted must also be commensurate with the repayment period normally used to fund the purchase. Shorting the term by six months — quoting payments for 54 months — to establish a “leg” will be exposed during an investigation of in-store practices. A review by a regulator or plaintiff’s attorney of a representative sampling of deals identifies repayment terms of 54 months as quoted by the desk manager, when a subsequent assessment reveals that virtually every customer rolled out of the F&I office with 60-month installment sales contract terms.
Remember, payment packing is prohibited in every state by either a statute, such as California’s Car Buyer’s Bill of Rights, or by the application of the unfair and deceptive acts or practices (UDAP) statute.
It is permissible, however, to quote multiple payment options based on established repayment terms (e.g., 60 or 72 months). Representative payment calculations noting the impact of a larger down payment on the monthly installments can also be offered. Here’s some additional guidance on payment quoting:
- Quoting payments with a known credit tier: With the payment packing prohibitions heeded, simply relate to the salesperson how much the car will cost on a monthly basis — computed on the current negotiated purchase price, the tier-derived cost of credit, and the term traditionally used to fund the purchase.
- Quoting payments without a credit tier: As noted in the Truth in Lending Act/Reg. Z, it is permissible to use estimates. However, they must be commensurate with the elements of the transaction. For example, an estimated cost of credit (APR) can be used if it is statistically verifiable and applicable to the situation.
An accepted industry and AFIP best practice is to use a running average of the store’s new-car annual percentage rate for the last 60 or 90 days — factoring out any zero-APR deals. For used cars, compute the average used-car APR for a 60- or 90-day period.
The customer is then told that — in the absence of any credit history information — the monthly payment quoted was based on the average APR for the store and that his or her cost of credit will be higher or lower depending on his or her credit worthiness. And because most customers are average, the odds are good the F&I practitioner can secure the funding without an untenable payment bump.
The sales and desk managers — and the F&I manager — have different roles to fulfill and are typically compensated under different sets of standards. However, they share a common objective: Within the constructs of equitable dealings for all parties to the transaction, they have optimized the income potential and put another mark on the board. Any attempt to gain an unfair advantage by one party in this process works to the detriment of all parties. The big money is in working together and keeping it legal.
By the way, desk and sales managers are now officially part of the AFIP certification equation, and, yes, special AFIP Certified desk manager and sales executive diplomas will be issued upon completion of a mildly tweaked core curriculum and 200-question exam.
David Robertson is executive director of the Association of Finance & Insurance Professionals. Email him at [email protected]