If Your F & I Department Were
Put Under a Microscope, Would You Like What You See?
By: Keith E. Whann
A new trend among consumer attorneys and state and
federal regulators is stirring up panic among motor vehicle dealers
across the country.
The policies and procedures in F & I departments of motor vehicle
dealerships of all sizes are under attack and dealers are urgently
seeking compliance solutions. Part of the urgency is naturally created
by the great deal of media attention surrounding the California Dealership
that paid $2.6 million in penalties and restitution to settle a civil
fraud lawsuit and whose F & I policies led to employees receiving
prison sentences for defrauding their customers.
Recent headlines in national and local newspapers and magazines confirm
that dealerships across the United States are facing similar claims.
In addition to class action lawsuits being filed by plaintiffs’ attorneys,
federal and state regulators have filed lawsuits against motor vehicle
dealerships and lenders focusing on loan rates and practices related
to the sale of services and products such as service contracts, credit
insurance, GAP products and window etch theft deterrent products. Numerous
lawsuits have been filed asserting that motor vehicle dealerships are
increasing interest rates without making the proper disclosures to customers
and are “packing payments” or extra costs onto monthly payments without
the customer’s knowledge. During the past couple of months, a class action
was certified against a dealership for including pre-printed charges
on the Retail Purchase Agreement, a subprime lender agreed to pay $215
million for deceptive practices related to credit insurance product sales,
and another dealership paid $125,000 for packing the cost of service
coupon booklets into the transaction. At the same time, the FTC issued
a consumer alert warning consumers about deceptive F & I practices
and the Office of the Comptroller of Currency adopted a new regulation
requiring national banks to make certain disclosures to consumers before
they purchase debt cancellation or debt suspension contracts in connection
with a credit transaction.
As subprimes lending practices, and corporate scandals in general, have
raised ethics questions for companies across the United States, motor
vehicle dealerships have begun looking for ways to guard against payment
packing and other F & I related claims. Concerned about their image
and civil fraud and discrimination lawsuits, all six of the largest publicly
held Dealership Groups are introducing tighter pre-employment screening,
ethics training and internal audits of their Dealerships. Other popular
F & I trends within the motor vehicle industry include menu selling,
videotaping F & I closings, utilizing video presentations of F & I
products and installing starter interrupt devices. Unfortunately, if
not handled appropriately, these solutions can create as many problems
as they are intended to resolve. For example, using menu selling and
video presentations will not cure paperwork problems and may give rise
to new problems if the verbal presentation of the products is inconsistent.
There is at least one more factor to consider, the effect that Executive
Order 13224 and the USA Patriot Act and its emerging implementing regulations
will have on a dealership’s F & I policies, practices and overall
operations. The Executive Order prohibits U.S. citizens from entering
into “any transaction or dealing” with individuals or entities identified
either in the Executive Order, by the Department of Treasury or by the
Secretaries of State as posing a significant risk of committing or supporting
terrorist acts. All property and interests in property of the individual
or entity in the United States or in the possession or control of U.S.
persons are blocked. An alphabetical master list of Specially Designated
Nationals and Blocked Persons that is over 70 pages long is maintained
by the Office of Foreign Asset Control and is being updated regularly.
The penalties for noncompliance with the Order can be severe, including
fines for up to $500,000, seizure of assets and prison terms of up to
10 years.
In addition, the USA Patriot Act imposes certain reporting and record-keeping
requirements, and mandates that all covered industries establish anti-money
laundering programs that, at a minimum, include: (1) the development
of internal policies, procedures and controls; (2) the appointment of
a compliance officer to oversee the program; (3) training employees to
follow the program; and (4) conducting an independent audit to make sure
the program is followed. Motor vehicle dealerships must comply with the
Act or face civil and criminal penalties for non-compliance that range
from between twice the amount of the transaction and $1 million for any
one violation, and may include complete forfeiture of accounts and property
involved in the transaction. Motor vehicle dealerships should already
be complying with regulations requiring them to report certain cash transactions
and share information with Government Agencies upon request, while regulations
requiring dealerships to establish anti-money laundering programs and
procedures for identifying and verifying customer identities are expected
in the near future.
The simple facts are that the sluggish economy, the decline in the creditworthiness
of the average consumer and the disappearance of financing options are
all contributing to an increase in the number of consumer and regulatory
claims. The F & I presentation, pre-printed disclosures in F & I
paperwork and the completion of finance related documentation are natural
targets for consumer attorneys and federal and state regulators. Motor
vehicle dealers that haven’t done so already should take steps now to
ensure that their F & I products and services are structured, presented
and sold in the proper fashion, preferably with the help of experts who
are familiar with the motor vehicle industry and the F & I related
claims that motor vehicle dealerships are encountering. |
