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Three Cs, Key Credit Determinants and Urban Legends

Three Cs, Key Credit Determinants and Urban Legends

Quickly advancing in the risk rearview mirror for a dealer is the risk of an investigation for bank fraud.

As the trusted advisor to your dealer, identity theft and the risk it presents to dealers remains a very real and present danger. The threat is usually an external one. Sure, there are instances of inside identity theft jobs in the industry. But most of the time, the agent and their dealers are in a defensive position, fighting off potential identity thieves.

Quickly advancing in the risk rearview mirror for a dealer is the risk of an investigation for bank fraud perpetrated by that inside ring of employees in a dealership. I have worked in litigation support for a dealer accused of bank fraud where we were able to show that the consumer was the one who provided the bogus documentation. And there are fake paystub and fake stips websites that consumers can access to provide fake stips and POI. Again, the agent’s dealer and its employees are in a potential defensive position to ensure the documentation provided is accurate and correct.

The risk that dealers should fear is that the managers of their sales and F&I processes are the ones manipulating the credit application information being provided to the finance sources — under the dealer’s logo.

Three Cs of Credit

Other industries have a cherished “three ‘C’s,” such as the diamond industry (clarity, cut and carat). In the credit industry, the three Cs are character, capacity and collateral. The 3Cs are the three legs of the stool that every finance source leverages to develop its underwriting guidelines.

“Character” refers to stability and measures the intent to repay the debt. It is measured by time on the job, time at the address, occupation and credit history. “Capacity” is the ability to repay the debt. It is measured by payment to income ratio, total debt to income ratio, and disposable income. “Collateral” looks at the potential loss position if the consumer defaults on the debt and the finance source has to liquidate. Loan to value is the common measurement.

Finance sources take different approaches to developing underwriting guidelines. Superprime finance sources tend to focus on character more than the other two. Subprime finance sources usually require a stronger capacity or collateral position to overcome the character shortcoming.

Five Key Credit Determinants

Finance sources are focused on five key credit determinants on the credit application: income, housing expense, time on the job, time at the residence, and what the customer does for a living.

From a three Cs perspective, these five key credit determinants help the finance source to measure character and capacity. Any enhancements or improvements to one or all of these five determinants could be considered credit application fraud.

Urban Legends

Through discussions with many finance sources and some of my consulting competitors, I’ve developed a list of common urban legends that the finance sources consider to be credit application fraud:

Urban legend: “It is acceptable to split the rent or housing expense.”

Finance source rebuttal: “It is not acceptable. We want, and expect the dealer to provide, the amount the consumer is obligated to pay through an agreement, whether a rental agreement or mortgage. The dealer employee can put a note on the credit application that states the consumer has a roommate and only pays half of the rent. It is then on the finance source to make the adjustment. We are required to file a suspicious activity report if we suspect credit application fraud.”

Urban legend: “Everyone manages some part of their job, so we make everyone a manager. For example, a Walmart greeter is really a ‘customer relations manager.’”

Finance source rebuttal: “Nice try, Mr. Wordsmith. Elevating a consumer’s perceived job status by making her or him a manager is credit application fraud.”

Urban legend: “Self-employed people have a trade or manage their business. It is OK to show them as a mechanic or a manager.”

Finance source rebuttal: “The majority of small businesses fail within five years. We want to know if someone is self-employed and will sometimes stip the approval for three months’ bank statements or tax returns. Trying to circumvent that stipulation is credit application fraud.”

If you provide credit application training for your dealers, make sure to clear up these urban legends. Good luck and good selling!

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How to Answer Dealers’ Compliance Questions

How to Answer Dealers’ Compliance Questions

As trusted advisors to dealers and the dealerships they own, they look to us to provide expertise in a number of areas. We are smart enough to know what we know and how to look for help for those things we do not know.

For example, if a dealer asks me to help with OSHA compliance, I know enough to know I don’t know enough to provide the level of expertise the request deserves. I set up a referral.

Likewise, when you are asked to be the compliance cop for a dealer, you suggest that your expertise is in helping to run a profit center profitably. You want to be the compliance monitor, not the compliance cop.

Still, it never hurts to learn a little bit more so you can help with an informed referral. To that extent, here are the hottest compliance concerns dealers face today, who is driving the issue, and what a dealership should do to protect itself.

Identity Theft

We have been saying for the last decade that identity theft is the fastest-growing crime in the United States, and it remains so this year. You would think that, after a decade, the law of mathematics would catch up and slow down annual double-digit growth, but it hasn’t slowed down.

Dealers have a statutory obligation to confirm the identity of the person they are selling a vehicle to. The Red Flags Rule, for example, requires a dealership to have a robust program to vet the identification being used by the purchaser and to document the clearing action used to demonstrate it performed this task.

I am receiving too many calls from attorneys and insurers looking for an expert witness to help defend a dealer in actions brought by consumers whose identity has been stolen and used to finance a vehicle.

If you get the same call, or have a dealer who is not sure if a sufficient identity theft program is in place, review these questions with the dealer:

  • Who is your compliance officer and do the employees know that?
  • Do you have a written identity theft policy?
  • Can you demonstrate you provided training to your employees on the policy?
  • What were the results of your last audit?
  • What changes were enacted to your policy as a result of your last audit and can you document how you shared that with your employees?

Finally, review last month’s Red Flags report in the software used to vet Red Flags, and look for sold units that still show uncleared or incomplete alerts.

Credit Application Fraud

Every day, it seems like there is a new breaking news case of a dealer or a manager or both either accused or convicted of credit application fraud. Yet many people in the industry still believe credit application fraud is a victimless crime.

The Federales are putting pressure on the finance sources we do business with to enforce the representations and warranties of the lender agreements a dealer must sign with every indirect finance source. So to pass their regulator audits, they have to show they are enforcing those agreements.

When your dealer has an epiphany that he doesn’t look good in orange and is concerned about credit application fraud, you are a likely resource to help assuage their fears.

Your conversation with the dealer should include:

  • The finance sources are focused on five key credit determinants on the credit application: Income, housing expense, time on the job, time at the residence and what the customer does for a living.
  • Any enhancements or improvements to one or all of these five determinants could be considered credit application fraud.
  • You need to retain the credit application the customer gave you to show the finance source what you were told.
  • You need to retain the credit application you submitted to the finance source.
  • You need a process to compare a sampling of source to submitted credit applications to ensure the information is consistent or that differences are documented in the file.

Payment Packing

Payment packing has been taking place since payments were first quoted in the sales process. In the late ’90s, the National Association of Attorneys General passed a resolution calling it a “deceptive sales practice.” Essentially, this organization of regulators set the standard that a customer has the right to a payment quote that accurately reflects the deal being contemplated at that time.

This is where your expertise can shine for your client. You know how to desk deals the right way. You simply need to assist your dealer in desking deals in a transparent fashion with no indications of payment packing.

As an aside, it is my experience that deals using old-fashioned four-squares and Sharpies are more likely to exhibit traits of payment packing than those deals desked using an edesking software package.

Discriminatory Pricing

Finally, some of the Federales have been rattling sabers about F&I product pricing. Some states have filed or regulated rates on one or more products. Some dealers go one step further and have established a one-price policy for F&I products.

While I am agnostic to one-pricing, I am a firm believer that a dealer must establish a product pricing guideline if the state it operates in is silent on product pricing. I’ve developed an industry standard for these products based on what I have seen in the marketplace.

If your dealer is asking about a product pricing guideline, feel free to drop me a line and I’ll share my thoughts with you, product by product.

Good luck and good selling!

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How to Establish Product Pricing Guidelines

How to Establish Product Pricing Guidelines

Most of our clients have established a product pricing guideline to help the F&I manager in pricing decisions and processes. Using this internal guideline helps a dealer to sell products, make a fair profit and, hopefully, establish a defense against price gouging.

But establishing a pricing guideline takes some thought and an understanding of state requirements, finance source limitations and industry standards.


There is not a national regulatory pricing guideline. As a substitute for a national pricing guideline, dealers rely on one of three sources to establish an internal pricing guideline: state statutes, finance source limits and industry standard.

In establishing a pricing guideline, agents and dealers should start with any pricing guidance from the state in which the dealer operates. Some states provide pricing guidance for some of the products an F&I manager sells. Florida, for example, requires dealers to file the rates at which it sells a variety of service contracts. Florida dealers, therefore, have set guidelines for service contract pricing, but are free to establish transactional pricing for maintenance or surface protection products. A declining number of states are dictating the pricing for GAP, while all states determine the pricing for credit life and A&H.

The second consideration in establishing a pricing guideline is the finance source. The most common pricing limitations from finance sources are with rate markup on GAP and vehicle service contracts. Understanding the finance source limitations helps establish a pricing guideline on a portfolio basis, but it can be modified by a transactional credit decision. When establishing a pricing guideline, focus on the portfolio finance source limitations.

The final consideration, in the absence of state regulatory pricing or finance source limitations, is the industry standard. This is an important consideration as a potential defense against price gouging claims. A judge or attorney general is not necessarily impressed if one of your competitors has similar pricing, but they do pay attention if your pricing is in line with your industry. Being able to label a pricing guideline as consistent with the industry standard requires some background work from the agent who is helping a dealer establish a pricing guideline.

Other Considerations

A few other considerations must be taken into account before starting down the path of developing a pricing guideline. The first consideration is whether to establish a pricing guideline by using a maximum retail price for the product or using a cost plus allowable profit model.

If the retail price of etch, for example, is $399, and the cost plus allowable profit is $250, this tells the F&I manager that the maximum selling price is either (a) $399 or (b) department cost for etch plus $250 profit.

Whenever possible, I prefer to use the cost plus allowable profit model. The pricing guideline must be constantly monitored and revised as prices change. Using the cost plus allowable profit model provides the flexibility to adjust product pricing without the need to generate a new pricing guideline.

Another consideration is establishing a pricing guideline for dealer groups with multistate locations. The group should have a consistent pricing guideline, but the guideline must be flexible enough to accommodate state-mandated pricing restrictions.

The same thought process exists for dealer groups with a mix of luxury and non-luxury franchises. Some of the same products at these two franchise types can have vastly different wholesale pricing and consumer pricing elasticity.

Here is a sample of what a pricing guideline can look like:


Hope this helps! Good luck and good selling.

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How to Prove Every Customer’s Identity

How to Prove Every Customer’s Identity

Occasionally, even the seemingly simplest tasks become fraught with minutiae that encourage some to make it more difficult or cumbersome than necessary. The latest example of this idiom surfaced in a dealer’s quest to sell and finance a vehicle to an individual who could not provide a government-issued photo identity to prove she was who she said she was.

This customer presented a driver’s license without a photo. Instead of a photo, there was a state seal and the words “Valid without photo.” Her explanation was that she was a Department of Defense employee and this was a valid ID.

The dealer’s Red Flags policy is very straightforward: Each customer must provide a valid, current, government-issued photo ID. Similar requirements to confirm a customer’s identity are resident in finance source agreements, the USA PATRIOT Act and good risk-management practices.

Her ID and the dealer’s identity-confirmation policies are at odds. How is the dealer supposed to sell a vehicle in instances such as this? How about another recurring scenario in which a customer presents a driver’s license with the phrase “Not valid for federal identification.”

Thankfully, there are options.

Behind the ID

There is not a nationwide ID card issued by the United States, and the state driver’s license is the de facto ID. A few reasons complicate the ability to confirm a customer’s identity:

  • Customer does not drive
  • Customer is active-duty military in a state that does not require a current state driver’s license
  • Customer has recently applied for a driver’s license and has a temporary ID without a photo

In these cases, an alternative form of photo ID must be obtained as identity confirmation. A few federal laws also play into the scenario of alternative IDs. One law prohibits anyone from making a photocopy of a military ID except to be used for the customer’s benefit. Applying for a military rebate does not quality as a reason to make a photocopy of the ID.

The REAL ID Act also applies. Passed in 2005 but not fully enforced until 2020, this law requires anyone who wants to board a plane or enter a federal facility to provide an ID which conforms to the standards provided under the act. Forty-five of the 50 states have a vetting process to issue driver’s licenses and state IDs that meet these standards, and if a consumer is unable to provide the full documentation necessary, she or he receives an ID with the phrase “Not valid for federal identification.”

An Agent’s Responsibility

As an agent, if you have any interest in keeping your clients on the right side of these laws, you must encourage them to apply the same standards to confirming an identity as the standards found in other identity-vetting programs. Banks are required to confirm the identity of anyone opening an account. The TSA is responsible to identity anyone flying on a plane. State DMVs must ensure anyone receiving a driver’s license or state ID is who he says he is.

In those small percentage of times when the customer is unable to provide a valid, current, legible photo driver’s license or state ID card, your dealers must obtain an alternative form of photo ID. Some examples include:

  • Military ID (with the aforementioned caveat against making unauthorized photocopies)
  • Department of Defense Common Access Card (to which the photocopying standard also pertains)
  • Passport issued by the United States or foreign nations
  • U.S. passport card
  • Global Entry or NEXUS ID card
  • Gun or concealed weapon license that includes a photo (in states that issue them)

Ultimately, a dealer’s responsibility is to confirm the person purchasing a vehicle is not an identity thief, and this starts with vetting the identity provided. When using a military ID as an alternative form of ID, have the salesperson complete the following statement and sign it:

“I certify I reviewed a military ID or a CAC for [name of customer]. I confirmed the photograph is the same as the person providing the ID. I confirmed the height and eye color are consistent with the person providing the ID. The ID was issued on [date] and expires on [date].”

They should also confirm that the information on the credit application matches the story provided by the customer and use an internet search engine to confirm what the alternative form of ID should look like. Finally, they must verify the driver’s license number or state ID number with the state DMV and retain documentation.

Good luck and good selling.

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Naïve, Sloppy or Kinky?

Naïve, Sloppy or Kinky?

During our exit conferences with dealers, we can categorize the issues we found into one of three types: naïve, sloppy or kinky. “Naïve” issues that are caused by being so naïve as to not understand what the compliance requirements are. “Sloppy” issues arise when the dealer and the managers know what the requirements are — and have policies and procedures in place to comply — but they don’t execute them consistently.

Being naïve or being sloppy can be corrected through training or motivation. The final category is caused by being kinky. Once a kink, usually always a kink. The only cure is to kick kink from the organization.

Being Naïve, Lax, Lazy, Sloppy

Being naïve, being lax, being lazy or being sloppy creates its own special set of issues.

For example, when a deal is started in the dealership’s computer system, it is assigned that day’s date. If the vehicle is delivered on a subsequent date, or the deal is recontracted at a later date, the DMS does not always update the date. If the F&I manager does not change the date on the deal, all the documents are effectively backdated. This can cause potential Truth in Lending violations or possible incentive qualification issues.

The reasons for these potential issues is that that the F&I manager either did not know to change the date (naïve), was in a rush to get the deal completed (lax) or just didn’t feel like doing it (lazy). Being lax or lazy constitutes being sloppy.

The fixes are to either provide training so that the F&I manager knows better, or provide motivation so that the F&I manager knows better.

Being a Kink

Similarly, being a kink creates its own special set of issues. A kink will sign a customer’s name to a document when he neglected to get it signed while spinning the deal and does not want to get the customer back in. Forgery is a crime. Dealers have had to face the local “News on Your Side” camera when their employees were accused of forgery or cringed at their name in the local paper’s headline next to the word “forgery.” The market backlash can be extensive and the locals’ trust shot.

A kink will give the customer a raise or a promotion when transferring the credit application information from the handwritten credit application to RouteOne or Dealertrack. A kink will lie to the bank about how the subcompact car grew a moonroof. A kink will falsify the amount of cash down payment on the contract so that the transaction fits within the lender’s underwriting guidelines. A kink will knowingly orchestrate a straw purchase.

Bank fraud is a crime. When an employee commits (or tries to commit) bank fraud, the dealership’s name is listed on a secret Suspicious Activity Report that the finance source is required to file with the Federales.

A kink will tell your customer that the lender required a GAP policy. By requiring an F&I product, a kinky F&I manager is violating the federal Truth in Lending Act if she does not include the premium in the APR calculation. Too many of these situations could create a class-action lawsuit against the dealership.

All of these things that a kink will do can put the dealer and dealership in harm’s way.

A kink has a faulty moral compass. You just can’t fix kink.

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How to Formalize a CMS

How to Formalize a CMS

In the beginning, there was General Motors Acceptance Corporation (GMAC) and the emergence of indirect auto finance. The Treaty of Versailles was signed around the same time, ending World War I. A typical GMAC deal file was the title and a contract too small to fit in today’s standard printer tray.

That innocuous beginning ultimately begat numerous federal regulations to oversee the dealerships who funnel installment sales contract to GMAC’s successor and other finance sources. As the genesis of the Federal Trade Commission (FTC) pre-dates GMAC by five years, it ultimately became the primary overseer of dealership business practices. Ergo the FTC Used Car Rule, the FTC Safeguards Rule, etc.

Jump ahead nearly a century and witness the birth of the FTC’s little brother, the Consumer Financial Protection Bureau (CFPB). The CFPB jumped into our consciousness in 2011 as a reaction to the mortgage lending meltdown. Its charter is similar to the FTC’s charter — to be the consumer’s watchdog.

Sibling Rivalry

Just like a little brother, the CFPB wants to prove it belongs in the same conversation as its big brother. An aggressive compiler of consumer complaints of all thing financial, it recently logged its millionth consumer complaint in a short five years.

And although the CFPB was unable to wrestle oversight of car dealerships away from the FTC, there is no questioning the agency’s intent to regulate dealerships though the wormhole known as the finance sources that dealers sell contracts to.

The CFPB has awakened its big brother with a series of headline-grabbing actions. For example, the FTC recently announced payment packing and yo-yo charges against nine California dealerships, its first such charge levied against an auto dealer for yo-yo transactions. Unconfirmed rumors have the first yo-yo transaction taking place in California in about, oh, 1920.

This is an important development for agents and dealers to pay attention to. It signals the willingness of the FTC to accept and adopt some of the CFPB’s methods and processes and ideologies.

One potential, very significant future event is the development and implementation of a compliance management system (CMS). The CFPB requires the finance sources it regulates to have a formalized, documented CMS in place.

My prediction is the FTC will require auto dealerships to have a formalized, documented CMS in all areas of the dealership’s operations in the next handful of years. As an agent, you have the opportunity to put your dealer clients on the path to compliance today. Let’s take a closer look at the components of a CMS and how to formalize the system.

Components, Audits and Procedures

A compliance management system is the method by which a dealer manages the entire consumer compliance process. It includes both the compliance program and the compliance audit function.

The compliance program consists of the policies and procedures which guide employees’ compliance with laws, regulations and potential litigation defense.

The compliance audit function is an independent testing of the dealer’s transactions and processes to determine its level of compliance with consumer protection laws and internal policies and procedures.

The process to develop and implement a CMS is consistent with the required components outlined by the FTC in its guidance with the Safeguards Rule and the Red Flags Rule. These components are:

  1. Appoint a compliance officer
  2. Conduct a risk assessment to gauge current practices vis-à-vis requirements
  3. Develop a policy and procedure to address the compliance requirements
  4. Provide and document employee training on the policy and procedure manual
  5. Perform periodic audits to confirm compliance with the policy and procedure manual

Let’s use the Monroney Rule, a rather simple federal requirement, as an example of how the CMS compliance model would work at a dealership. The first task is to understand the compliance requirement. The Monroney Rule requires that all new vehicles offered for sale have a Monroney label affixed to a window.

Now that the requirement is understood, a dealer must conduct an assessment to see how the dealership is complying with this requirement. The logical approach would be to do a lot walk and review the placement of the Monroney label on each vehicle.

Next, the dealer would create a written procedure that explains how the dealership will comply with the requirement to have a Monroney label on every new vehicle offered for sale.

Once the procedure is written, it becomes a policy. The fourth step in implementing a CMS is to train the employees on the policy and instruction on the procedures required to implement the policy.

The final step to implementing a CMS is to schedule periodic inspections of the vehicles available for sale to ensure that each one has a Monroney label affixed to a window.

Most successful dealers intuitively use the CMS model to manager the processes in the dealership, but they may not be documenting the approach. The day may be coming soon when documenting will be as important as doing.

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