A few years ago, several employees from the same dealership were convicted of defrauding their customers, lending institutions and warranty companies, and some received stiff prison sentences. Their crimes — many originating in the finance and insurance (F&I) department — could repeat themselves in your dealership if you aren’t aware of the possible F&I schemes.
Are Employees Padding Costs?
In this fraud, an F&I department employee includes items in the vehicle price that the customer didn’t agree to, such as destination fees and, most frequently, warranty costs. The salesperson quotes a price that doesn’t include the warranty fee, and then gives the customer the monthly payment amount that does include it — without getting the customer’s consent.
If the customer questions the warranty, the salesperson may say it’s required in order to lock in a certain interest rate. This is false: The interest rate depends on only the customer’s credit history.
To help prevent schemes such as this one, have customers fill out and sign a checklist acknowledging that they’ve approved or rejected your dealership’s various products (gap insurance, extended service contracts, rustproofing and so on). Then have accounting personnel compare the checklist against individual sales and finance contracts to verify that the information is accurate.
Is Financing Approval Legitimate?
This scheme involves telling the customer that he or she has been approved for financing, delivering the vehicle and letting the customer drive it for a few weeks. But then the other shoe drops: A financing department employee calls back to say that the loan fell through and, to keep the vehicle, the customer must pay a premium and a higher monthly payment.
Crooked employees usually practice this rip-off on customers with poor credit, who they assume feel shaky about their creditworthiness. The employee knows the real payment amount and the interest rate offered by the financing institution before delivering the car. But he or she assumes that, after driving the vehicle for a time, the customer will develop a certain comfort level and agree to pay more to keep it.
To catch employees doing this, watch your contract-in-transit schedule to see if any deals are taking too long to be funded. You also can send out customer satisfaction surveys and read any responses received carefully. If you notice several buyers — or even one — complaining that monthly payments went up unexpectedly, investigate further.
Another internal control: Almost all lenders provide some type of approval process for customer loans. Create a document for customers that acknowledges they’re aware of the lender’s financing terms. Make sure that the document contains the bank’s approval code for the loan.
Then have your accounting department compare the customer’s acknowledgment of the loan terms with the bank’s approval. Accounting also should compare the acknowledgment document with other documents in the deal — sales contract, financing agreement, bank approval of loan and so on — to ensure that everything is spot-on.
Are Credit Scores Accurate?
In this fraud, a financing department employee lies to the customer about his or her credit score, saying it’s lower than it really is. The employee then charges the customer a higher interest rate, increasing the dealership’s income from the sale.
Crooked employees try this on customers who won’t be too surprised to hear they’re having financing problems. Most consumers with strong credit ratings would know they were being duped.
One way to prevent this scheme — and, indeed, most financing-related schemes — is for an F&I manager to review all customer agreements. If a customer’s credit score doesn’t mesh with the interest rate being charged, foul play could be to blame. Just be sure to rotate reviewing duties among several F&I managers. If you don’t have more than one, randomly review customer agreements yourself on occasion.
The After Effects
If you detect F&I fraud in action, the end result might be a conviction of your crooked employee. But think of the inestimable damage to your business’s reputation as word is passed from the unhappy customers around your community. The best defense is a strong offense, they say, so safeguard against F&I fraud in all feasible ways. As a dealership owner, your customers’ loyalty is the trump in your hand of cards.