If Your Dealership's F&I Department Were Put Under a Microscope, Would You Like What You See?

Keith 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.

This information is provided by Keith Whann of the law firm Whann & Associates, LLC and is for general information purposes only. You should contact legal counsel for specific application.  Keith Whann October, 2002.