Dealership finance and insurance departments might wish to review internal practices to head off two errors that safety and compliance firm KPA is repeatedly observing in the industry.
I asked Ryan Daly, who oversees 42 states as KPA's F&I compliance district manager, which incorrect practices stood out as those dealerships should watch out for going into 2022. He cited payment packing and a lack of vigilance regarding loan applicants.
"That's a starting point," he said.
Payment packing involves describing a price that exceeds the payment actually necessary to buy the car. "You're holding fictitious numbers," Daly said.
For example, it costs $400 a month to buy a vehicle, but the dealership tells the consumer it's $500, according to Daly. Such inflation might derive from either a fictional interest rate or the cost of products added to the deal but undisclosed to the customer, Daly said, estimating the two payment packing practices occurred with equal frequency.
"To me, dealerships inherently do it on a regular basis," Daly said.
Daly, a former dealership employee, recalled being instructed during his first sale to add products to a payment and not tell the customer. After asking if that was illegal, Daly was told, " 'We've never been caught.' "
When behavior resembling payment packing is brought to a dealership's attention, the retailer will argue it wasn't the intention, Daly said. But from the government's perspective, "where there's smoke, there's fire."
According to Daly, enforcement of payment packing by the Federal Trade Commission and state attorneys general fell off during the Trump administration. But the laws remain on the books, and KPA saw a rise in private litigation during that time — lawsuits that led the FTC or state attorneys general to take action.
"It didn't start at the state or federal level," he said.
The other major issue observed by KPA involves dealerships' failure to guard against fraud by customers, according to Daly. They must do their due diligence, he said.
"Dealerships are banks," Daly said. "Until they ship that contract off and it gets funded, they're still the bank."
Dealerships are skipping steps such as the Red Flags Rule and Office of Foreign Assets Control due diligence, he said.
"People are just so afraid to lose a car deal," Daly said. "They're not stopping the deal to ask questions of, 'You live in Jamaica, but you're in Connecticut buying this car?' "
He said he had examples of situations where signatures on contracts "don't match anything." This can backfire on the dealership.
"The bank just takes their money back after that," Daly said. The retailer is left hanging.
Daly recalled speaking to one dealership insurer who had paid more than $1 million in losses in six months, including $400,000 related to identity theft.
Daly said COVID-19 and the microchip shortage have exacerbated the issue of fraud with an environment of masked customers and out-of-state vehicle purchases. He suggested dealerships use notaries in situations where vehicles will be shipped to customers off-site.
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