The Rules, Risks And Getting It Right!

- By Ronald J. Reahard

When it comes to quoting payments, the sales and F&I process still used in many dealerships has to change.  The old “quote ‘em an inflated monthly payment, peel ‘em off the ceiling, and see what sticks” is not only deceptive, it doesn’t work anymore!  Give today’s informed, internet savvy customer an inflated monthly payment from the sales desk, or in the F&I office, and you not only run the risk of blowing the sale, you might end up spending a significant amount of time and money getting to know your friendly state Attorney General.

Thanks to the internet, today’s consumers are much better informed with regard to their financing options, current interest rates, and the monthly payment.  Many have already obtained a copy of their credit bureau report, shopped various sources for financing and interest rates, and calculated their monthly payment on a lender or manufacturer’s website before they ever walk into the showroom.

Today’s customer has zero tolerance for someone who lies, gives them inaccurate information, or avoids answering their questions.  Many customers demand financing details before they agree to purchase a vehicle.  Often, the sale of the vehicle and the financing is merged into a single decision, with the purchase of the vehicle contingent upon the customer obtaining the interest rate and/or payment quoted by the sales department.

The sales and F&I process is under increased scrutiny by attorneys general in several states over the scourge of “hidden profits,” also known as finance reserve, inflicted on unsuspecting and naïve consumers.  GMAC and Nissan Motor Acceptance Corporation recently settled lawsuits over alleged discriminatory lending practices, resulting in finance reserve being capped, and new disclosures being required on their finance contracts.  These disclosures include informing customers the interest rate is negotiable, and that the dealership may receive a portion of the finance charge.

Consumer advocates, regulatory authorities, and plaintiff’s lawyers have current dealership sales practices, F&I practices, as well as F&I menus squarely in their sights.  Quoting inflated monthly payments on the showroom floor as a negotiating tactic, or leaving room in the payment for F&I products is simply not an option anymore.   As Doug Walsh, Asst. AG in Washington said, “Consumers are entitled to accurate, non-misleading monthly payment quotes.  When they don’t get them, it’s deceptive and unlawful.”   Your dealership’s old 4-Square might just get you three squares… and a cot.

New Rules, New Risks
Many dealers, desk managers and F&I managers mistakenly believe they don’t have a problem at their dealership, because they only give customers a payment “range” during the negotiation process.  This “range,” which typically does not include either the term or APR of the payment shown at either end of this payment range, is then used by the desk to increase the front-end gross or F&I profit once the customer agrees to buy, since they agreed to a “payment,” not a price.

Unfortunately, some of these customers arrive in the F&I office with no idea what they’re actually paying for the vehicle (surprise!), or getting for their trade-in.  Many dealers and managers also mistakenly believe that there are three magic letters W.A.C. (with approved credit) that when written beside any payment, gets them off the hook, regardless of what they quoted the customer in order to get them to buy.

There is just one small problem.  Every monthly payment is determined by the amount financed, the term, and the APR.  It is nothing more than a mathematical calculation.  There is no room to fudge the figures, and there is no way for there to be a payment “range.”  If you finance $20,000 for 60 months at 7.5% APR, the payment is $400.76.  That’s what the payment is.  The only legitimate variable is the number of days to the first payment, which definitely can change the payment a couple dollars a month.  Any payment quote can take this into consideration, but that’s the extent of an acceptable range.

If the APR is increased to 12.5%, for the same term the payment on $20,000 goes from $400.76 to $449.96.  Unfortunately, giving the customer a payment “range” of $400 - $450 per month, knowing they qualify for a 7.5% loan, in an effort to increase dealership profits by hiding the sales price of the vehicle, or to reduce the true cost of additional F&I products, is a deceptive practice.

The reality is that everyone involved in the sales and F&I process has a responsibility to ensure the customer is provided with accurate payment information with regard to the financing of their new vehicle.  It is also critical that every sales manager, F&I manager, and sales person comply with Reg. Z disclosure requirements.  Sales people, sales managers, and F&I managers all need to understand what they can and cannot do when it comes to quoting monthly payments.  In your dealership, who has their finger on the “triggering term?”

What Is A Triggering Term?
According to Reg. Z, (Sec. 226.24(c)(1)) whenever certain triggering terms appear in credit advertisements, the additional credit terms enumerated in Sec. 226.24(c)(2) must also appear.  These “triggering terms” include the downpayment, number of payments, amount of payments, and the amount of finance charge.  According to Reg. Z., the use of any of these terms in an advertisement trigger the need for additional disclosures, including “the amount or percentage of the downpayment, the terms of repayment, and the annual percentage rate (APR) using that term, and, if the rate may be increased after consummation, that fact.”

The question now becomes, does a payment shown or agreed to by the customer on the initial write-up, deal sheet, buyers order, or included on an F&I menu constitute an “advertisement,” thereby requiring these additional Reg. Z disclosures?

According to Reg. Z, the term “advertisement” means a commercial message in any medium that promotes, directly or indirectly, a credit transaction. (Reg. Z, Sec. 226.2 – Definitions and Rules of Construction).  According to the Official Staff Commentary On Reg. Z. (Sec. 226.2, 2(a)(2)(ii)(a), the term “advertisement” does not include “Direct personal contacts, such as follow-up letters, cost estimates for individual consumers, or oral or written communication relating to the negotiation of a specific transaction.”

So the question remains- do the payments written on a work sheet, buyers order, or F&I menu have to comply with Reg. Z requirements?  Do sales managers (and F&I managers) really have to give the customer the actual principal and interest payment based on the amount being financed, and show them the APR and term that were used to calculate that payment on these forms?

A better question might be, if the monthly payment being quoted is accurate, if it is not being used by anyone to mislead or deceive customers in an effort to increase dealership profits, why would you not want to include all the Reg. Z disclosures with every payment quote?  It will certainly increase your credibility with the customer, plus you can prove that every customer is given an accurate, non-misleading monthly payment quote.  In these litigious times, helping customers make informed decisions is much more profitable than trying to outwit or deceive them.

Whatever sales and F&I process is being used, every dealer needs to consult with his or her attorney to ensure that attorney is comfortable with the dealership's process when it comes to quoting payments.  Some states AG’s have become extremely aggressive in their pursuit of deceptive sales practices.  In addition, every document utilized by the sales department and F&I department should also be reviewed by the dealership’s attorney, since the initial write-up, buyers order, F&I menu and installment loan agreement all leave a paper trail for a plaintiff’s attorney.

In the not too distant past, F&I products were routinely included in the customer’s payment without their knowledge or consent.  One dealer was quite confident he didn’t have this problem, since they used a computer generated menu, and customers were not given a payment range.  Payments at his dealership were never “packed,” and the desk always included the term and APR for any payment shown on the write-up.

The only problem; one of his managers had set the software to default to 365 days to first payment, dramatically inflating the principal and interest payment on a “60 month” loan.  Once in the F&I office, even the Standard option on the menu only increased the monthly payment a few dollars a month, despite including several F&I products.

Imagine the fun a plaintiff’s attorney or the attorney general would have when they discovered that little sales technique!  The dealership’s deceptive sales practice was well documented, on customer… after customer… after customer.  One question every dealer, every sales manager, and every F&I manager needs to ask himself or herself; what’s in your… deal jacket?

You Need A Plan!
Your dealership has to have a plan when it comes to quoting monthly payments, and everyone involved in the sales and F&I process must follow that plan.  That plan should include utilization of a finance rates form (see illustration) to ensure consistent payment quotes prior to, and after, obtaining a customer’s a credit bureau report.

The average interest rate for customers within an established credit score range should be determined by the dealership’s management team, and used to calculate payments for everyone in that range.  These rates should be utilized by every manager when quoting payments prior to approval by a lender, to ensure consistency, and eliminate any hint of discrimination.

Whatever interest rate a customer is quoted, no one should ever make a commitment that it is the “best rate” available.  Whenever someone in the dealership tells a customer “we’ll get you the best rate we can,” they’re creating potential legal liability for the dealership, whether that promise was made on the showroom floor or in the F&I office.

In addition, any payment provided by the sales department should be for principal and interest only, and include the information used to calculate that payment, including the down payment, amount financed, term, and APR.  There should be no more than a $5 payment range, unless the term and APR is shown for the payments on both ends of that range.

Any menu used in the F&I office should also include the principal and interest payment and the rate used to calculate that payment, along with the options available in connection with their purchase.  It’s important that your menu include a principal and interest payment without any F&I products included, and customers understand they are allowed to not buy any F&I products if they so choose.  All payments should also include the disclaimer that “all rates, terms, and payments are subject to credit approval.”

Knowing the rules, avoiding the risks, and getting it right requires that your dealership have a plan when it comes to quoting payments.  Your dealership must have written guidelines for quoting payments in each stage of the buying process, and those payments must be accurate, and not be used to deceive or mislead customers.   And everyone on your team, sales people, sales managers, and F&I managers… need to know the rules, so they can get it right!