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Don’t Let Payment Packing Cost You Millions

Emily Hartman /
In this episode of The F&I Minute, Emily chats with F&I District Manager, Ryan Daly, talk about payment packing, how it can cost your dealership millions in fines, and when you don't do it it won't affect your numbers.

So today we are talking about payment packing. And I know you have a lot of thoughts on payment packing, Ryan. So I’m hoping that you can kind of just give a sort of basic definition of payment packing and kind of talk us through, yeah, exactly what it is, and why this is really still a thing.

Yeah, I have a lot of experience with this, my very first car deal in the car business back in 2004. Quite frankly, my manager told me the payment that you’re about to show the customer has a vehicle service contract gap and interior and exterior added to it, but don’t tell them that. That in a nutshell, is what payment packing is that’s when you’re telling a client, prospective customer, whomever, that their payment is X, and it’s really Y. The biggest reason to do that is just to create more “leg” for yourself. Leg is illegal. It’s a term that is used frequently in the car business. It’s been illegal for many, many years, even back when I was told I had to do it.

But it’s just beginning that non-transparency and fear that dealers have and they translate that over to a customer. And it really can harm you in the long run because there’s a lot of different ramifications for that, you know, one from the federal government, the Attorney Generals or even a private attorney who can sue you for things just like this, and it’s happening all over the country. I see it all the time from my auditors.

 

Can you talk a little bit about like, why that’s still happening because I’m thinking about like, aren’t there like payment calculators and things that as a consumer, you can do your due diligence to know what if this is gonna happen to you, or if this is happening to you?

Yeah, it’s still happening because it’s extremely easy to do. There are no straightforward federal guidelines on how you’re supposed to pencil a deal. Penciling a deal is just giving out, you know, whatever the payment’s gonna be. There’s a good amount of better business practices to use, which I employed to myself when I was desking deals as a finance manager, sales manager, whatever capacity that I was actually in. But back to the easy part, most customers are not walking in with calculators, they’re not walking in understanding what the math is. A lot of people still love to shop for cars like they did 20, 30 years ago. The internet hasn’t killed the car industry in that effect. It’s just given access to people to see more vehicles.

There are plenty of ways to figure out your payment, but unless you have a banking background or a calculator in your brain, you can’t formulate all of the interest rates and APRs that go into it. So dealers take advantage of the customer by saying, “Your payment is this,” when it’s really, you know, sometimes $20, $30, $40 even $100 lower than that. And it goes back to that fear factor. They want to make as much money as possible. And for the most part, most dealers do want to be reputable, and they want to do things the right way. But again, this is one of the oldest things that dealerships have been doing for years. So it’s hard to break that trend.

 

Why don’t you talk us through some of the things that you most commonly see when you come across this at a dealership?

Yeah, I’ll actually start with what I’ve seen, I’d say has been the rise in the past 10, maybe 15 years. Looking at the menu, and I’m sure we’ve got a slide that’s gonna show this here. And when I was trained as an F&I Manager, this was actually shown to me as a way to get more profit.

So when you submit a deal to a bank, you get a buy rate, and you’re still legally allowed to mark that rate up. So right about now around the country, it’s mostly two points that you can mark it up. Well, on the menu, you can mark it up even higher, just to bring it back down. If the customer says, “Well, that payment’s too high,” most finance managers are saying, “Well, what if your payment is $20 less?” Maybe you’re going over the interest rate on the forms. Maybe you’re not. I always did, but this was not a practice that I felt comfortable with because I knew right away that it was payment packing. You know, transparency is key, especially in the finance office, because this is where you start to really get into hot water with all sorts of legal ramifications.

So you also have the old tried and true method of just quoting a rate that you feel like the customer can get. Now, on this next slide here that we’re gonna show here, these are the identical vehicles, identical money down, identical terms, identical everything, except for the payment mysteriously goes down $150. When I pressed the general manager on this, we delved down into it, the sales manager who penciled this deal, actually told us I felt by the look of them, this is what rate they could get. That just brings up a whole bunch of different issues. Are you quoting the same rate to everyone else, or are you saying they look different so I’m gonna charge a different rate? This still happens all over the country.

Training is a big key to this, because maybe people don’t understand that what they’re doing is a federal crime. But they should. But you know, again, on this one that I pressed on, I was just floored because in a protected class, you know, there’s seven or eight different protected classes that they have to adhere to, and understand that you can’t do certain things that you can do like you think you want to. This one right here happened to be a protected class. And this was a clear violation of several different federal laws, payment packing being one of them. But you know, showing them that the fine can start around $250,000 for what they just did right here, just by their best guess, and not imploring a better business practice is extremely frustrating to me because it’s very easy to do.

And if you’re the customer and your payment magically goes down $150 I really think that that some of that falls on the customer to say, “Why did it go down and nothing changed?” And we also see sometimes even when you’ve itemized everything, that even if you quote an exact rate, there are still ranges for some reason, and I truly don’t understand that.

So looking at certain payment quotes, could say 84 months, with a certain amount of money down. And in the next column, there’d be a giant disparity in everything and there’s no difference in money down, interest rate, term, you have to be able to explain that. You know, I always tell people, when I’m doing their audits, that it’s just like math in school, you have to show your work. It can’t just be, well, we thought this and then maybe X, Y and Z. The government doesn’t fall for that. They want to know how you got there, and why you got there, and making sure you have a better business practice in your location at every single time just, you know, breeds honesty. And customers, first of all, will understand, “Hey, I don’t know what your rate’s gonna be. Let me tell you what our normal rate is for a new car versus a used car. And if your credit is better, it may go down. If it’s worse, it might go up.” There is nothing wrong with making that statement. What you see on a lot of these slides that we’ve got on here is just they’re just winging it sometimes.

And CDMs don’t stop payment packing. You know, all of these tools that you have, they don’t stop you from manipulating the numbers. I’ve actually caught payment packing on a cash deal. I just simply did the math, and they were still mysteriously putting another $1,100 into the price of the vehicle that they couldn’t explain. Customer actually paid that amount. But mathematically, it didn’t make sense. Being a cash deal, payment packing doesn’t really exist, but they did actually defraud the customer by $1,100. And people can lose their jobs, you can go to jail, you’re gonna pay a monetary fine, but the risk to the dealership is huge, because you don’t want to get brought up on these charges and be all over the news for things like that, because people are not gonna want to come see you ever again. You lose all of that validity that you have as somebody who, hey, I want to do things the right way, but we’re not really gonna do it.


You kind of just spoke to the one thing I was gonna ask you because you’ve gone through a few different examples here and the repercussions that this has for your dealership just I mean, there’s any number of things that could happen. Do you… I guess, depending on the type of thing that you come across, how much of a fine or violation could you incur at your dealership?

So I’ll tell you and just like I tell everybody else when a government agency comes in, they’re not coming in to do an audit to say, “Let me look for it.” They’re coming in with what they have, this thing called evidence. They’ve already proven that you’ve done it. The onus is then on you to prove that you’re not. And as far as I can tell, the government’s undefeated. They’ve come in with all of these complaints or things that they have found. And payment packing is one of those things that they’re gonna attack. And it could start with something as simple as they saw your advertising was wrong. And then they come in, and this is probably the next big thing that they’re looking for is something like this, because the average fine that we see from the FTC is over a million dollars now. Dealerships are making more money than ever right now. But you’d rather keep that money because you did it ethically, rather than make as much money as you can and hope that averts the fine. You know that’s not something that I would want to do.

Nobody wants to give away a million dollars if they don’t have to.

No, because you’re also gonna end up on a website somewhere and people see those things, and it’s not good information to have out there for your dealership.

So we’ve gone through and you mentioned earlier, just how to use training as a way to educate your staff about discrimination and good business practices. What else do you advise? Or what kind of advice do you give to dealerships, KPA customers, when it comes to preventing it from happening, and if someone comes across an example of payment packing at their dealership?

Well, I’ll speak to the training piece first. Most F&I managers were good salespeople who got promoted. The same thing goes for sales manager, they were pretty good finance managers. I can tell you from my own experience, I never had one bit of compliance training. It’s basically sell, sell, sell, make as much money as you can. So when I started diving into these issues over a decade ago, I didn’t feel comfortable with it. So I started looking at all of these and I started educating myself, there’s a ton of resources out there. But what I came across is one of the nation’s largest compliance trainers, and they actually did my compliance training. They said go with a 90-day rolling average. Well, what that means is you take the new, you take the used, throw out any incentive rate and leases from your manufacturer, and those are your rates that you go with. And that is probably the easiest and best way to do it because you’re telling the customer, “This is our average interest rate.”

Now, in my 15 years working in car dealership, that’s always what we told everybody, but it never really was, until I started implementing those things. My numbers did not go down. The store’s numbers didn’t go down. The breadth of honesty that we were giving people, it made everyone else, including the salespeople and sales manager feel at ease to say, “I know I’m telling everybody the correct thing,” because you want to be upfront and honest. So the training comes with implementing this and actually using it. You know, KPA has several different tests that we have for all of our F&I sales people that have all of this information in there and why you can actually get into trouble and how to not get into trouble and still be able to do your job effectively.

 

So that was just the training piece. Do you have any other advice that you give to dealerships when they come across payment packing?

So I had a rule of thumb when I was in the business. So I always audited deals for my own partners or anybody that worked under me as a sales manager or finance director. I would basically tell them, “Explain to me how you got there. You need to get me to this point as well because I’m gonna be the customer.” Once you find out that they couldn’t, like I told you before, show your work, you need to have a example of, you know, this is how we’re supposed to do it. This is the way we do it at X dealership. There cannot be a deviation from there because, one, the owner doesn’t want to pay the fine and you can go to jail yourself. Explaining to everyone why it’s so important that everyone do it the correct way and a smart way is the only…it’s not the only but it’s a huge benefit to everyone in that dealership, especially the customers.

 

That’s some great advice. And I think with that, unless there’s anything else that I have missed, we are going to wrap up today. Thank you all for listening.

Thank you very much.

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