Kicking the Trade

The Wall Street Journal recently featured an article discussing kicking the trade on a car deal. The article would lead one to believe this deceptive practice is prevalent in the industry. I disagree with that assessment, but I am not denying it can happen, occasionally.

I know you want to be aggressive and go after every possible deal, but employing a deceptive practice to finalize the sale is simply not worth the risk.

Kicking the trade is an old-school tactic employed by unscrupulous sales people, sales managers, and F&I managers. The ruse generally follows a similar fact pattern. A consumer shows up at the dealership to purchase a newer vehicle but is severely upside down on the trade-in. After reviewing the deal structure, the only path to financing appears to be removing the trade-in from the deal. Removing the trade improves the loan to value and payment to income ratios to levels more conducive to financing approval.

The dealership employee then convinces the consumer to purchase and finance the newer vehicle from the dealership without the trade-in. The consumer is then schooled to turn in the underwater vehicle as a voluntary repossession.

As we all know, the voluntary repossession route creates some rather severe consequences for the consumer. The consumer’s credit score takes a swan dive with a voluntary repossession. They will also likely be faced with a deficiency balance after the lender sells the repossessed vehicle. I suspect that a bankruptcy filing is in their future as well.

Is Your Dealership Guilty?

Hopefully your professional sales people and managers would not stoop to this deceptive practice. But, since we know it can happen, it is prudent to be on the lookout.

From the transaction documents, you should look for three potential data points in a deal looking for kicking the trade:

1. If there is a trade-in on an early payment quote that is subsequently removed from the final deal.
2. If there is an open auto loan in the bureau that is not being traded.
3. Finally, the motivation for kicking the trade is that the customer is so deeply underwater that keeping the trade-in as part of the deal jeopardizes the potential for obtaining a finance source approval.

None of these means that a trade is being kicked, but they can be red flags of kicking the trade, and worthy of follow-up questions.

Red flags of kicking the trade can also be uncovered when reviewing transcripts of phone calls or videos.

The finance sources can be an additional layer of scrutiny. They will often stipulate an approval to include the open auto as a trade, proof the open auto has been paid, or information on why an open auto is not being traded.

Why Should a Dealer Be Concerned?

The risks to the dealer are three fold:

• A potential deceptive practices claim can be made against the dealership for orchestrating a scenario where the consumer was advised to knowingly damage his or her credit.
• When the kicked trade is repossessed, and the customer faces a deficiency balance, the likelihood of a consumer bankruptcy increases. This would pull the new finance source into the bankruptcy and could become a chargeback request to the dealer.
• There may also be a misrepresentation to the finance source during the credit approval process. I’ve seen notes on the credit bureau reports, the texts between F&I and the finance source, or on callback approvals, documenting why open auto loans are not being traded. These notes include “someone else pays payments” or “giving to someone.” Such statements, if false and provided to cover up kicking the trade, could constitute bank fraud.

Real-Life Example

I have a client where the owner admitted that this had occurred at his dealerships. This dealer had to buy back several contracts, subsequently terminate employees, and implement a policy forbidding the practice.

I know you want to be aggressive and go after every possible deal, but employing a deceptive practice to finalize the sale is simply not worth the risk.

Good luck and good selling.

Read: Ferreting Out Fake Paystubs