Quoting Payments: The Rules, Risks and Getting it Right

Give today’s Internet-savvy customer an inflated monthly payment and you not only run the risk of blowing the sale, but you risk spending a significant amount of time and money getting to know your friendly state attorney general.

Thanks to the Internet, today’s consumers are better informed about their financing options, current interest rates and monthly payments. Many have already obtained a copy of their credit bureau report, shopped various sources for financing and interest rates, and calculated their monthly payment on a lender or manufacturer’s Website before entering the store.

Today’s customer has zero tolerance for someone who lies, gives them inaccurate information, or avoids answering their questions. Many customers demand financing details before they agree to purchase a new motorcycle, ATV or personal watercraft. Often, the sale and financing is merged into a single decision, with the customer’s purchase contingent upon the interest rate and/or payment quoted by the sales department.

The problem with quoting rate and payment is attorneys general in several states are paying close attention to the sales and F&I process, mainly the scourge of hidden profits, also known as finance reserve. Several major lenders recently settled lawsuits regarding alleged discriminatory lending practices, resulting in finance reserve being capped and new disclosures being required on finance contracts. Now dealers must disclose to the customer that interest rates are negotiable and that the dealership may receive a portion of the finance charge.

Quoting inflated monthly payments on the showroom floor as a negotiating tactic, or leaving room in the payment for F&I products is simply not an option anymore.

“Consumers are entitled to accurate, non-misleading monthly payment quotes,” said Doug Walsh, Washington State assistant attorney general. “When they don’t get them, it’s deceptive and unlawful.”

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New Rules, New Risks

Many sales managers and salespeople at powersports dealerships mistakenly believe they can quote a payment range during the negotiation process. This range, which typically does not include the term or annual percentage rate of the payment shown at either end of the range, is then used to increase the front-end gross or F&I profit once the customer agrees to buy. Most dealers think this practice is OK since the customer agreed to a payment and not a price.

Unfortunately, some of these customers have no idea what the actual price of the motorcycle is or what they’re getting for their trade-in when presented with a finance contract. Many dealers and managers also mistakenly believe the three magic letters W.A.C. (with approved credit) written beside any payment gets them off the hook.

Every monthly payment is determined by a mathematical calculation, which includes the amount financed, the term and the APR. There is no room to fudge the figures. If you finance a $10,000 personal watercraft (PWC) for 60 months at 7.5-percent APR, the payment is $200.38. The only legitimate variable is the number of days to the first payment, which definitely can change the payment a couple of dollars a month. Any payment quote can take this into consideration, but that’s the extent of an acceptable range.

 

If the APR is increased to 12.5 percent for the same term, the monthly payment on a $10,000 vehicle goes from $200.38 to $224.98. Unfortunately, giving the customer a range of $200 to $225 per month when you know the customer qualifies for 7.5 percent can be considered deceptive, especially if used to hide the PWC’s sales price or to reduce the true cost of an F&I product.

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What’s the Triggering Term?

It is critical that every sales manager, F&I manager and salesperson comply with and understand the Federal Deposit Insurance Corp. (FDIC)’s Regulation Z disclosure requirements. And that mean knowing who in the dealership has their finger on the triggering term.

According to the FDIC’s Regulation Z, Sec. 226.24(c)(1), whenever certain triggering terms appear in credit advertisements, the additional credit terms enumerated in Sec. 226.24(c)(2) must also appear. These triggering terms include the down payment, number of payments, amount of payments, and the amount of finance charge. The use of any of these terms in an advertisement requires additional disclosures, including the amount or percentage of the down payment, the terms of repayment, the annual percentage rate using that term, and whether the rate can increase after consummation.

According to Reg. Z, the term “advertisement” means a commercial message in any medium that promotes, directly or indirectly, a credit transaction. That definition does not include direct personal contacts, such as follow-up letters, cost estimates for individual consumers, or oral or written communication relating to the negotiation of a specific transaction.

The question now becomes, does a payment shown or agreed to by the customer on the initial write-up, deal sheet, buyers order, or on the F&I menu constitute an advertisement? Do sales managers, salespeople, and F&I managers really have to give the customer the actual principal and interest payment based on the amount being financed, as well as show the customer the APR and term used to calculate that payment?

A better question might be, if the monthly payment quoted is accurate and not used to mislead or deceive customers, why would you not want to include all the Reg. Z disclosures with every payment quote? It will increase your credibility with the customer, and provide proof that every customer is given an accurate, non-misleading monthly payment quote. In these litigious times, helping customers make informed decisions is much more profitable than trying to outwit or deceive them.

Whatever sales and F&I process is being used, every dealer needs to consult with his or her attorney to ensure the dealership’s process of quoting payments is legal. Every document utilized by the sales and F&I departments should be reviewed by the dealership’s attorney, because the initial write-up, buyers order, F&I menu and installment loan agreement all leave behind a paper trail for a plaintiff’s attorney to follow. Some state attorneys general have become extremely aggressive in their pursuit of deceptive sales practices.

In recent years, many powersports dealers routinely included F&I products in the customer’s payment without his or her knowledge or consent. There’s a story of one dealer who was confident he didn’t have this problem since he used a computer-generated menu and because customers were not given a payment range. He made sure payments at his dealership were never “packed,” and the desk always included the term and APR for any payment shown on the write-up.

Unfortunately, one of the dealership’s managers had set the software to default to 365 days on the first payment, which dramatically inflated the principal and interest payment on a 60-month loan. Once in the F&I office, even the standard option on the menu only increased the payment by a few dollars each month.

Imagine the fun the plaintiff’s attorney or the attorney general had when they discovered that little sales technique, which wouldn’t be difficult since the sales process is well document. That’s why the one question every dealer should be asking is, “What’s in your deal jacket?

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You Need A Plan!

Your dealership must have a plan when it comes to quoting monthly payments, one that everyone involved in the sales and F&I process must follow. The process should include utilization of a finance rates form (see illustration) to ensure consistent payment quotes prior to and after obtaining a customer’s credit bureau report.

The dealership’s management team should determine the average interest rate for customers within an established credit score range, and use that rate to calculate payments for everyone in that range. These rates should be used by every manager when quoting payments before lender approval to ensure consistency and to eliminate any hint of discrimination.

No one on a dealership’s management team should quote an interest rate to a customer and promise that it is the “best rate” available. Dealership personnel should also never say, ‘We’ll get you the best rate we can.’ He or she is creating potential legal liability for the dealership, whether that promise was made on the showroom floor or in the F&I office.

In addition, any payment quote provided by the sales department should be for principal and interest only. The quote should also include the information used to calculate that payment, such as the down payment, amount financed, term, and APR. There should be no more than a $5 payment range unless the term and APR is shown for the payments on both ends of that range.

Any menu used by your salespeople or F&I department to sell F&I products should also include the principal, interest payment, the rate used to calculate that payment, and the options available in connection with customer’s purchase. Your menu should also provide a principal and interest payment exclusive of any F&I products. All payments should also include the disclaimer that all rates, terms, and payments are subject to credit approval.

Knowing the rules, avoiding the risks, and getting it right requires that your dealership has a plan when it comes to quoting payments. Your dealership must have written guidelines for each stage of the buying process. Those payments must be accurate and not be used to deceive or mislead customers. Everyone on your team, including salespeople, sales managers and F&I managers, need to know the rules so they can get it right.

Ron Reahard is president of Reahard & Associates Inc., an F&I training company providing F&I certification classes, ongoing in-dealership and online F&I training. He can reached at [email protected].