Why you shouldn't backdate a sales contract
At the end of each month, the finance department at Herman Cook Volkswagen is on ‘high alert' to make sure documents have been properly signed, says Finance Director Connor Cook.
When a California appeals court handed down a July 2010 ruling that held San Diego dealership Pearson Ford liable for backdating sales contracts, it grabbed the attention of many dealers.
Dennis Cook, owner of Herman Cook Volkswagen about 25 miles to the north in Encinitas, Calif., rounded up his staff and gave strict orders: Make sure the date on the sales contract is the current date.
"There are no ifs, ands or buts about it," said Connor Cook, Herman Cook Volkswagen's finance director. "There's no backdating of sales contracts permitted whatsoever."
Backdating occurs when the date on a document is earlier than the one on which the document was prepared.
Connor Cook, who is Dennis Cook's son and the third generation of the Cook family working at the dealership, said he only knows of a couple of instances in which backdating inadvertently happened at his family's dealership. But before the Pearson ruling, backdating of contracts seemed to be fairly common among Southern California dealerships, he said.
Even after the costly legal problems faced by Pearson Ford and others, many dealerships continue to backdate contracts, dealership experts say. Of the 158 dealers, finance and insurance managers and others who responded to a recent unscientific online Automotive News survey, almost 15 percent acknowledged backdating contracts.
The situations typically arise when a customer takes spot delivery of a vehicle or accepts the keys before completing the financing. If initial financing falls through and the deal is delayed while alternative financing is sought, the sales contract is rewritten.
The problem: Using the original date on the rewritten contract can lead to violations of the federal Truth In Lending Act and of some state laws. Use of the old date can cause a miscalculation of the annual percentage rate of interest and leave the car buyer paying additional interest.
Under the Truth In Lending Act, the disclosed annual percentage rate must be accurate to within one-eighth of 1 percent of the properly calculated rate.
"Actual damages in those cases don't amount to very much," said Rob Byerts, partner with Bass Sox Mercer, a law firm in Tallahassee, Fla. "The attorneys' fees and the court costs can add up to be a lot more than actual damages."
Byerts uses the Pearson Ford case as a warning in the compliance training he conducts for dealers.
In that case, a six-day backdating discrepancy on the 2004 purchase of a used Infiniti caused a customer to improperly pay $27 in additional finance charges. It led to a class-action lawsuit representing 1,500 customers of Pearson Ford, which was ordered by the trial court to pay $50 to each class member, plus legal fees of around $400,000.
An appeals court determined the dealership was liable for the backdating violations.
"That's why you don't do it," Byerts said. "It's the horror story. It's what you hold up to say what could happen."
So why does backdating persist? Reasons vary.
Some dealership personnel don't realize the legal ramifications of backdating, dealer lawyers and a dealer association executive said. Indeed, more than half of the respondents who acknowledged backdating in the Automotive News survey said they just never changed the original date.
When a sale happens near the end of a month, the motivations are often money related.
The dealership may be trying to preserve a manufacturer incentive for the customer that otherwise would have expired. Or the dealership may be trying to hit a sales target to earn a dealer incentive from the factory. In the case of manufacturer stair-step incentives, the penalty for missing a target can be huge.
For a large dealership, stair-step payouts can top $100,000, said Tim Jackson, president of the Colorado Automobile Dealers Association. The Colorado association covered backdating in several compliance seminars it sponsored for its members last fall.
At Herman Cook Volkswagen, the finance department is on "high alert" at the end of the month to make sure everything has been properly signed, Connor Cook said. The incentives don't make it worth the risk to backdate.
"Just don't do it," Cook said. "And you can sleep better at night."
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