For more than a decade, attorneys general, plaintiff attorneys and dealer attorneys have been saying — make that screaming — that the practice of payment packing is unfair, deceptive, and downright illegal.
Yet, I still hear of instances where dealer personnel engage in the practice. What's a dealer compliance attorney to do?
I propose that dealers eliminate the selling of financing in the F&I office.
In traditional payment packing, the sales manager (“the desk”) would merely add, say, $25 of “air” to the payment during negotiations.
Upon closing the deal (and assuming the customer failed to negotiate away the pack), there was a “leg” left for F&I. I saw this as a young and naïve car salesman in the first dealership I ever worked.
Dealership staffers have moved towards the more subtle, yet equally problematic, rate and term packing techniques.
Rate packing works like this:
The desk will run the credit of a prospective buyer and knowing full well the buyer has A+ credit, calculate the monthly payment using an interest rate that is well beyond what an A+ credit customer would normally receive and even higher than what the finance company would be willing to pay reserve on.
Once the deal is closed, the desk has effectively left a “leg” in the deal for finance. Finance personnel will drop the rate down to the maximum rate they can receive reserve on and put some products in the deal. The customer is then presented with expensive options or service contracts “for only a few extra dollars per month” or “for no extra charge.”
Term packing works the same way except instead of using an inflated APR to close the customer, the desk or closer uses a shorter term (i.e., 36 or 48 months) to calculate the quoted payment. Then, once in F&I, the contract is written at 60 months and options are included (again for little or no extra charge).
These modifications of the old shell game are just as unethical and illegal. The real challenge for dealer principals and upper management is in the detection of these types of practices.
In proposing that “finance” be taken out of F&I, payment, I suggest that rate, down payment and term should all be set by the desk/sales manager and locked into place upon closing the customer.
Finance personnel should not be allowed to change the rate, term, or down payment. If circumstances require any changes, the sales manager must be called back and the customer “re-closed.”
Worksheets presented to customers should cover monthly payment, APR, down payment and contract length. Penciling deals back with just monthly payments is old school and needs to stop.
The main objection I often hear to this approach is that sales managers aren't as knowledgeable about credit requirements and finance programs offered. My response: They should be.
With rate, term, and down payment locked prior to the customer going into the F&I office, the finance representative focuses on two things: selling products and explaining all the documents to the customer (including those that contain the finance terms previously agreed upon).
This may create commission issues (based on finance reserve) that must be dealt with. But look what it accomplishes:
- It dramatically reduces employees' ability to engage in payment packing.
- The customer is aware of the exact terms of financing early on in the sales process. This transparency creates more trust and eliminates “APR shock” in F&I (which often requires finance personnel to “re-close” the deal).
- Finance personnel spend more time selling products and explaining documents.
- It leaves a clear audit trail for self-regulation.
Change “F&I” to something like “contracting.” It makes more sense.
Rob Cohen is managing partner of Auto Advisory Services, a dealer compliance consulting firm.
