Dealer Fraud

Below is a list of auto dealer activities which may signal possible auto fraud in your automobile purchase or lease transaction of a vehicle in California.

• Switching the consumer from a sale to a lease without full disclosure
• The sale of a vehicle which was previously repurchased from a prior owner as a lemon without full disclosure to the consumer
• The sale of a vehicle that was previously salvaged as a total wreck without full disclosure to the consumer
• The sale of the trade-in vehicle and then later undoing the transaction
• Failing to provide the consumer with a written contract in the language in which the consumer negotiated the transaction (in Spanish, Vietnamese or Tagalog as well as certain other languages)
• Improper calculation of the negative equity on the trade-in vehicle
• Failing to disclose to the consumer the vehicle history including records of all substantial accidents causing considerable damage
• The sale of a vehicle that was previously used as a rental vehicle without full disclosure to the consumer
• Charging more than the advertised price for the vehicle

The dealer may commit many other improper acts that may not constitute fraud by themselves. At all events, if one or more of these types of behaviors occur the dealer may indicate that there is something improper about the transaction. That’s why the consumer should be very wary about signing any documents without further review and understanding of the transaction.

After receiving a lawsuit, the Dealer will often investigate what happened by talking to each of the people involved in the sale. These interviews can be video recorded, tape recorded, or other notes made. It is not unusual for the employees to be asked to write down everything they can recall about the deal, step by step, in as much detail as possible, in order to aid in the defense of the lawsuit. Sales persons, and F & I people, may actually keep a diary of their deals and potential customers, too.

After the deal has been bought, and closed, the Dealer often has an employee whose job is to “clean up” the Deal File. This person usually has a checklist, real or mental, which they go by in order to be certain that nothing is missed. They look to see that every required form is signed and in the file, that all blanks on the forms have been filled in where necessary, that extra forms (often signed in blank at the F & I closing) are discarded. In other words, their job is to “purge” the file and make the file reflect a “clean” deal with nothing unusual and nothing unaccounted for. This may happen in an accounting office of the Dealer which is physically located on a different floor or in a different building from the sales floor, in order to isolate the people from the sales process itself (thereby lending an air of legitimacy to their work).

Now, the Dealer has to sell “the paper”. That means the Dealer has to get the Bank or some other lender to buy the retail instalment sales contract or the lease agreement, if they haven’t already. Most of the time, the Dealer has gotten a tentative (or even final) loan approval on the deal before the car is actually delivered to the customer.

One thing also to be aware of when you finance the purchase of a car through a dealer is that dealers receive a kickback from the lenders for the privilege of faxing your credit application to the lender. The dealer and lender share in an undisclosed “yield spread premium” as it’s called in the industry. Yield spread premiums are a dirty little secret, the auto lending industry has not owned up to. Car dealers do not do the actual money lending, but they send the buyer’s application to lenders, who tell them what interest rate the buyer would qualify for. That rate is called the “buy rate”. However, if the dealer already got the buyer to sign onto a loan with a higher interest rate, the dealer and lender split this extra “yield spread premium” which can result in thousand to several hundred dollars difference.

In those cases where financed has not yet been approved, the car is “spot delivered” to the customer. In California, a dealer has 10 days to get the financing approved. The forms Dealers use in California state that the customer agrees to either get their own financing or to bring the car back if the Dealer is unable to assign the loan within 10 days of the contract. The Dealer is required to refund any down payment or the trade in vehicle’s allowance, less some small charge for the customer’s use of the vehicle, often based on mileage driven.

At this point the sales person will return and escort the customer to their newly purchased car. With all the paperwork signed, the car Dealer doesn’t want the customer to linger (they might take the time to read what they just signed). This is the emotional “high” of the transaction for the customer. They think they have just “beat the house” on their hard-won deal and they are ready to strut out of the dealership and drive off into the sunset. The Dealer wants to encourage that. There is a psychological aspect to putting the car over the curb and the Dealer knows that if the customer figures out what happened to them and refuses to take delivery, the odds are that they will have to “unwind” the deal sooner or later (i.e., “back out the deal”, cancel it, rescind it). That’s the last thing the Dealer wants to do. In fact in California there’s a “no cooling off” period so the sooner the Dealer gets you to drive off with car, the better.

The Dealer’s staff has just worked for 3 or 4 hours to package the deal and get it signed, sealed, and delivered. They made no small amount of money in the process. To unwind the deal would mean having to start all over again with some other customer and lose the profit that they just “earned”. That’s a nightmare for any car dealer. They’d rather work the next deal on the next customer than have to work this deal all over again.

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[ To Learn more our services and areas of practice, please visit our website at www.DealerFraud.org]

Of course, some dealerships just “pack” it into the deal without making the customer fully aware of the additional cost for these items by using the “just sign here, and here, and here” approach to the closing process, with the documents all stacked up one on top of another and the friendly Business Manager holding the stack still with one hand while turning the pages one at a time with the other hand and pointing to the signature line (often marked ahead of time with an “x”). “I’ll give you a copy of all this paperwork right after I process it” is a good line to trivialize the event in the customer’s mind. This kind of “five finger close”, when done nonchalantly and smoothly, can generate hundreds or even thousands of extra dollars in profit. In fact, a “successful” dealership will make more money in F & I sales than on the sale of the vehicle itself. Ward’s Auto Online is a great source for such information on the 500 biggest car dealers in the country.

“Smoking the paperwork” is a phrase that means the paperwork slides by the customer so fast that the friction of it sliding across the table, so to speak, makes it “smoke”. At the end of the process, the F & I person will usually tear out the customer copies of the papers, line up the corners in the stack, staple them together, fold them all up, and put them in an envelope. Then the envelope is usually given to the customer with the admonition that the papers are important and they should put them in a safe place and keep them. Of course, doing all of that discourages the customer from looking closely at the papers on the way home. Putting them into a safe place at home also discourages the customer from looking too closely at the papers, or for too long, at home. This way, the customer is less likely to discover anything that is not quite what they expected until weeks or months later.

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[ To Learn more our services and areas of practice, please visit our website at www.DealerFraud.org]

At the height of the ether, the customer is “t.o.’ed” (turned over to the Dealership Finance Manager). This person’s job is to close the deal and maximize the profit in the process. If done really well, the customer will never know how bad it really is.

Much like passing the baton in a relay race, the smoother that the Turnover is executed, the less likely it is that the customer will expect what is about to happen next. At this point, the customer actually thinks the hard part is over with and that all they have to do is sign some papers. After all, that’s what the sales person said they were going to do next. Actually, the selling process is still going on. The customer has just arrived at “part two”.

The F & I Manager can also be called a “Business Manager” or something similar. The reality, however, is that they are just another sales person in the chain. Their job is two-fold: first, to get all the paperwork signed; second, to sell (or pack) soft add-on’s into the deal. This is where knowing the customer’s background can be extremely useful. If the customer is married, credit life and disability insurance become much easier to sell (”gosh, you wouldn’t want the bank to come and take your car and leave your wife/husband stranded if something suddenly happens to you, would you?” is a question that is most effective when asked right in front of the other spouse). If the customer had a trade in with “negative equity” (a phrase invented by the car sales business), it is easy to convince them that they really do need Gap insurance.

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[ To Learn more our services and areas of practice, please visit our website at www.DealerFraud.org]

The sales person calls the attention to all the attributes of the new(er) car and all the negative aspects of the old(er) car while working the deal. All the usual factors are in play: mileage, age, options, equipment, plus the usual personal factors that are customer-specific. The idea is to get the customer so bind up in the idea of getting the new car, and how much it will improve their life, the envy of others, family harmony, their peer reputation, etc., that they lose track of the numbers in the deal. This is called putting the customer in the ether. The deeper the ether, the higher the gross profit on the deal. The objective at this stage is to get the customer firmly committed to the deal. That is why getting the customer to say “yes” is so important at this stage of the sales process. Part of that “yes” psychology is getting the customer to sign their name to a worksheet or other form of early commitment. Something, almost anything, has to be signed by the customer before the Turnover takes place.

This also means that some sort of payment amount must be agreed to before the Turnover. It often starts with the sales person presenting three numbers written on the worksheet. It often looks something like this:

700/-0- down 600/1k down 500/5k down

The numbers don’t necessarily have anything to do with reality. What the sales person often says when presenting the numbers is something like “with no down payment, your monthly payment is going to be about $700. If you put $1,000 down, I can get your payment down to $600. But if you really want to pay less each month, then I have to have $5,000 down on the financing.” The psychological motive is, obviously, to “scare up” as much down payment money as possible by putting a huge monthly payment right in the customer’s face.

Notice that the sales person may have said nothing at all about how long the loan will be for. The customer doesn’t know if they are talking about a 3 year loan, a 4 year loan, or a 5 year loan. The absence of that information gives the F & I department more flexibility to determine what the interest rate and price will end up being, and just how much of the “soft add-on’s” they can pack into the deal’s numbers. Of course, this high monthly payment shock is where the customer often has their first stroke. Soft add-on’s are things like credit life insurance, disability insurance, Gap insurance, rust-proofing, fabric protection, paint protection, etc. The idea is that the sales person creates the room in the monthly payment for these things to be packed into the deal by the F & I department after the Turnover.

Of course, the sales person often has no real intention of ending up with a $700 monthly payment, but they know that if they start out with a “500 - 400 - 300″ set of numbers, there will be less chance of landing the customer on a higher number in the first place. By presenting the “700 - 600 - 500″ numbers, the sales person has already conditioned the customer to expect that the monthly payment is going to be much higher than they thought. Having accepted that as the reality of the situation (after all, the sales person deals with these numbers every day so they must be right), the Dealer now has more room (and leverage) to actually end up with a higher number.

Once a payment number has been agreed to (usually with the customer initialing or signing the worksheet number that they go along with), the customer is ready for the Turnover.

When you have to land the customer on a car but  you don’t find out what they want, the customers will wander around the lot, poking their head into every car, test driving who knows what, until hours have gone by and nothing has been accomplished. The dealer wants to hold back all of that by asking the customer what kind of car they are interested in, sedan, mini van, sports car, pickup truck, or whatever. Next,figure out if the customer likes a particular make, Ford, Chevy, Chrysler, whatever. Find out what color the customer likes. Surprisingly, many customers buy by color and style first and the model second.

As for the used cars, many dealers prefer the sales person take the customer on a test drive, rather than let the customer drive it off the lot, conspicuously “for insurance purposes”. In reality, if the car malunctions during the test drive, the sales person can feign the malfunction on their own lack of product knowledge, if they can’t conceal the malfunction completely. Test drives are usually done on an established route that the sales person is familiar with. That can help avoid road and traffic issues that can bring out a car’s problems. Bad shocks can be harder to detect if you avoid certain road surfaces. If a warning light lights up on the dash, or the fan doesn’t work on high speed, the sales person is trained to quickly point out that it will be fixed before the customer takes delivery.

Next, you have to land the customer on a car. If you don’t find out what they want, and “land” them on it, the customer will wander around the lot, poking their head into every car, test driving who knows what, until hours have gone by and nothing has been accomplished. The dealer wants to avoid all of that by asking the customer what kind of car they are looking for, sedan, mini van, sports car, pickup truck, or whatever. Next, find out if the customer likes a particular make, Ford, Chevy, Chrysler, whatever. Figure out what color the customer likes. Surprisingly, many customers buy by color and style first and make and model second.

With used cars, many dealers want to have the sales person take the customer on a test drive, rather than let the customer drive it off the lot, ostensibly “for insurance purposes“. In reality, if the car acts up during the test drive, the sales person can feign the malfunction on their own lack of product knowledge, if they can’t conceal the malfunction completely. Test drives are usually done on an established route that the sales person is familiar with. That can help avoid road and traffic issues that can bring out a car’s problems. Bad shocks can be harder to detect if you avoid certain road surfaces. If a warning light lights up on the dash, or the fan doesn’t work on high speed, the sales person is trained to quickly point out that it will be fixed before the customer takes delivery.

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[ To Learn more our services and areas of practice, please visit our website at www.DealerFraud.org]