A few years ago, when the news first broke, we wrote an article about four dealerships in Arizona and New Mexico who, along with the owner and his wife, were named in an FTC complaint alleging a range of illegal activities. The FTC recently announced a court-approved settlement resolving charges against the corporate dealership entities. Let’s take this opportunity to review the claims brought by the FTC, the settlement, and suggested best practices to prevent your dealership from ending up in a similar state.
Summary of the Claims
Falsification of Income on Credit Applications
The FTC alleged that the dealerships falsified customers’ credit applications by inflating income disclosed on the applications, at times by thousands of dollars a month. In some instances, the income stated on an application was nearly double the consumer’s actual income. The FTC obtained information from third-party lenders who regularly conducted business with the dealerships corroborating this practice. According to the lenders, income falsification was so pervasive throughout the auto group that at three out of the four stores, income inflation was seen in nearly 40% of all applications submitted. Because many customers were obtaining financing even though they were not qualified, customers were defaulting on their finance contracts at a higher than normal rate.
What is more, the FTC also alleged that there were instances where dealership employees altered documents after the customers signed them, and where dealership employees filled out applications on behalf of customers and did not allow customers to review their information on the applications. Importantly, and perhaps diabolically, these practices made it appear as though the consumers provided the false information, thereby exposing the consumers to the risk of liability for such acts.
Inflation of Downpayment
Dealership employees also allegedly deceived lenders by inflating downpayment amounts shown on contracts. The amount of downpayment listed on the contract was often far greater than the downpayment provided by the customer, which sometimes was nothing at all. Inflation of downpayment (and inflation of income on the credit application) portrayed customers as more creditworthy, thus making them more attractive to lenders for financing.
The FTC also brought forth a litany of advertising claims against the dealerships. These claims included having deceptive monthly payment amounts on advertisements that fail to discern whether the payment is for a purchase or lease, and that fail to disclose the upfront costs the customer must pay in order to obtain such a payment; having ads with deceptive “incentives” that do not have clear and conspicuous disclosures regarding qualifications customers must have to obtain the incentives; and failing to disclose required finance terms. You can read more about these allegations in detail (including pictures) in the FTC Complaint.
The four corporate dealership defendants have recently reached a settlement with the FTC. Per the terms of the agreement, the settling defendants have agreed to cease all business operations. The settlement also includes a monetary judgment of $7,203,227 against the defendants. You can read the court-approved settlement order here and the FTC press release about the settlement here.
Best Practices for Protecting Your Dealership
Clearly, the penalties for being the target of an FTC action are steep. But the silver lining here is that we can always learn from these FTC actions, especially this one. So, what can you do to protect your dealership?
Follow Credit Application Best Practices
For a detailed discussion of credit applications, you should refer to our newsletter article from earlier this year, New Year, New You (Part 2). Included in that article is a section on best practices, and given the importance of the subject, these best practices bear repeating:
- Only use credit applications from reputable forms providers;
- Have a customer complete a credit application in their handwriting and always get the customer to initial next to the income statement. You must never ask a customer to sign a blank or incomplete credit application, and dealership personnel must not add information to a credit application. Remember to always have a customer sign the credit application as well;
- Dealership personnel must never submit knowingly false information to the finance company, even if the customer provides such information. Note that you must never coach consumers into providing false information either;
- All credit applications should be accompanied with proper identification, and the dealer should retain a copy of the identification along with the application;
- The consumer should always be provided with a copy of the completed credit application;
- The customer should always complete a new credit application where significant changes need to be made, such as ones that will result in cross-outs or other ambiguities.
- Also, it bears reminding to provide a Credit Score Disclosure (or No Score Disclosure) to all credit applicants [16 Code of Federal Regulations §§ 640.5(e)(f); Vehicle Code § 11713.20], as well as a Privacy Notice to all customers who obtain financial products or services primarily for personal, family, or household purposes. [16 Code of Federal Regulations Part 313].
Follow Downpayment Best Practices
This could be an entire article all on its own, but suffice it to say, when your dealership employees collect a downpayment in cash (or cash equivalent), always issue a receipt to the customer and keep a copy of it in the deal file. You should also periodically audit your deal files to ensure the receipt matches the downpayment amount stated on the contract. As an aside, this is one of many things we look for in our deal jacket audits at KPA.
Review Your Advertisements
Advertising has been the subject of many of our newsletters recently, and briefly, you should always review your ads before publication, whether they be in print or on a website or other social media platform. Many of problems identified by the FTC above can be spotted and remedied by a simple ad review. For a more complete discussion on advertising tips and best practices, please read What’s Hot on the Hotline?—Advertising Tips. KPA also offers an ad review product to its clients.
We know that these times are hard, and everyone everywhere has been affected by this global pandemic. We are all in this together, and this too shall pass. If you are interested in KPA’s deal jacket audits or advertising review, please contact us for more information. Hotline clients are also invited to contact us at (800) 785-2880 (then press “4” for hotline) or [email protected]. We are here to answer any questions you may have.