A national finance source released a dealer bulletin late this summer announcing its updated policy on requiring a dealer to gross up fixed income when submitting credit applications. This marketing move shifted the responsibility for grossing up fixed income from the finance source (who had been doing so internally) to the dealer.
This policy shift potentially creates a compliance nightmare for dealers in accurately reporting income when submitting credit applications.
The Terms of Your Agreements
You enter into a dealer-lender agreement with every finance source you submit contracts to. Under many of these agreements, the dealer agrees to certain representations and warrants. Additionally, the Federales are pursuing dealers for falsifying credit applications; specifically, any of the five key credit determinants: income, time on job, time at address, occupation, and housing expense.
I reviewed several finance sources’ program guidelines, dealer agreements, and bulletins available in Dealertrack and RouteOne. Some finance sources:
- Expressly permit the grossing up of fixed income.
- Expressly state a minimum income requirement to consider an application for approval.
- Expressly forbid the grossing up of fixed income.
- Stay silent on grossing up fixed income.
- Stay silent on minimum income.
For those finance sources, there are varying levels of eligible fixed income and the percent the income can be grossed up.
One captive limits the grossing up to “public assistance.” Another national finance source permits grossing up for “nontaxable income.” Still another finance source provides specific examples of eligible fixed income that can be grossed up.
When a finance source permits fixed income to be grossed up, the percentage is not always consistent. The percentages range from 115% of net income to 125% of net income. Some finance sources also have minimum income requirements, ranging from $1,500 to $1,900.
Silent or Expressly Forbidden
In much of the documentation I reviewed, the finance source either stayed silent on the topic of grossing up income or expressly forbade grossing up income. You can assume if the finance source stays silent on the topic, then it is not acceptable. Put another way, grossing up of fixed income is only permissible for those finance sources who put it in writing.
Permitting or requiring a dealer to gross up fixed income can create a compliance nightmare. Assume that you do business with a finance source that permits it. This means that when you enter the customer’s income in Dealertrack or RouteOne, you are entering a grossed-up amount. If you submit that same application to a source that forbids it, you have unwittingly misrepresented the income.
The easiest compliance solution is to avoid the grossing up of fixed income. This could mean that some deals which might be approved with the grossed-up amount at eligible finance sources will not be eligible for financing.
If the easiest compliance solution is not acceptable, then understand which finance sources permit the grossing up. Credit applications must be submitted through Dealertrack or RouteOne specifically for those finance sources. Another application must be created with the net amount disclosed for other finance sources.
Ultimately, the best solution lies outside the dealer’s control. This would require Dealertrack and RouteOne to rework the credit application submitted to finance sources to include a field for nontaxable income (similar to other income), so that each finance source can do the grossing up in accordance with its policy.
Alter Your Audit Process
Most dealers have a robust compliance auditing process that includes both a transactional review and a higher-level monthly sampling review.
On a transactional basis, an accounting employee is required to review the file using a checklist to ensure all requirements have been met. This review should also include a comparison of the aforementioned credit determinants on the source credit application to the submitted credit application. Differences should be brought to a manager’s attention for further review.
Monthly, the office manager or compliance officer takes a deeper dive of five to 10 deals per F&I manager. The purpose of this review is to confirm the accounting employee is properly completing the checklist and to look at some compliance items not necessarily on the transactional checklist. This review should include confirming the grossing up of fixed income requirements are fully met.
Dealers should also create a matrix with three columns: finance source, gross-up policy, and minimum income. Review all the requirements of the finance sources you do business with, and if the finance source is silent on either policy, so state on your matrix. Make sure to keep it current. Requirements can shift frequently.
Good luck and good selling!
Gil Van Over is executive director of Automotive Compliance Education (ACE), the founder and president of gvo3 & Associates, and the author of “Automotive Compliance in a Digital World.” Email him at [email protected].