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News broke recently about 5 dealership employees that were arrested and face federal charges of conspiracy, bank fraud, wire fraud, and aggravated identity-theft. This brings the total to 7 employees at the same dealership who have been indicted so far this year. Not very pretty.
Now you may be thinking that these folks must have engaged in really outrageous behavior to get arrested, especially by the feds. You’re likely also thinking that this could never happen to you – and you may be right. But before you ignore this as something that only happens to people in other dealerships, you might want to read on.
For a number of reasons I’ll get into shortly, my take on this latest government action is that there’s a profound change occurring in the car business legal environment – not only for dealers, but for everyone who plies their trade selling cars. I know, I know - you’ve heard this all before – but please stay with me for a little bit.
It’s no secret that for the last few years federal and state regulators have sent a clear signal that they’re fed up with what they consider to be deceptive practices in the auto industry -- and they’ve placed a bulls-eye squarely on the backs of car dealers. But where the game is changing the most is that instead of just hitting up dealers with their typical arsenal of fines, lawsuits and consent decrees, the Powers-That-Be have apparently decided to go directly after dealership staff. Eye-opening to say the least.
Since it’s likely that you don’t go to work every day with the intention of getting charged with a crime, you might want to hear about some significant takeaways from this recent action as I see it:
The indictments resulted from practices that have been around for many years and still are common in some dealerships – The charges included creating or altering documents to submit to financial institutions to show inflated income, misrepresenting proof of a customer's residency, unlawful use of a customer's personal identification, listing accessories not actually included on a vehicle so a financial institution would increase its loan amount, utilizing straw buyers, and quoting customers an inflated monthly vehicle loan payment so that a finance manager could add a service contract and GAP insurance without the customer realizing it. In carspeak, that’s kinking credit apps and stips, power booking, straw purchases, and payment packing – sound familiar?
Virtually all positions in the sales department were caught up in the operation – Sales managers, a finance manager, a GSM, and 3 salespeople were indicted. So if you’re involved in any aspect of selling a car, you could be at risk.
The idea that only employers are responsible for any illegal activities that occur at their dealership is simply not valid - There’s no indication in the media stories that the dealership owners were named in the indictment – just the employees (although news that 7 of your employees were arrested can’t be good for business).
Multiple law enforcement agencies were involved – The U.S. Attorney’s office, the FBI and the IRS all participated in this operation. Thought you only had to worry about the CFPB and FTC looking over your shoulder?
It’s easier than you think to get caught – According to media accounts, a confidential informant who had previously worked at the dealership “provided multiple volunteered audio recordings regarding the loan fraud, documented proof of the loan fraud, and miscellaneous documentation he acquired during his employment at dealership” to the FBI. So not only are dealership employees at risk of exposure for illegal practices from disgruntled customers, their co-workers could also implicate them.
The potential penalties are very real and quite devastating - According to the media stories, the maximum penalty for conspiracy is five years in prison and a $250,000 fine. The maximum penalty for bank fraud is 30 years in prison and a $1 million fine. The maximum penalty for wire fraud is 20 years in prison and a $250,000 fine. The minimum penalty for aggravated identity theft is two years in prison. And if those numbers aren’t bad enough to shake you up, here’s something else to think about: even if these employees are found not guilty - was it worth being criminally charged, having their reputations ruined, paying legal fees, losing their livelihood and likely having to change professions?
Quite frankly, many dealership employees get caught up in risky behavior not because they’re bad people, but because they simply don’t know any better. In many cases the old-timers have taught the new hires the “old school” way of doing business. It’s not unusual for dealership employees who have never been properly trained to simply rely on doing business the way it’s always been done.
Obviously, compliance training is vital for all dealership personnel, but it goes beyond that. The missing element in most compliance programs is that employees are taught what not to do but given no guidance on how to be successful doing things the right way. Let’s face it, sales department staff members are put under tremendous pressure to “make the numbers”. In the absence of proper knowledge and skills, this can lead to the temptation to step over the line legally and the rationalization that “everyone else is doing it that why, why shouldn’t I?”
The answer is complete education. When dealership personnel learn skills like loan underwriting guidelines, subprime financing and proper deal structuring, it eliminates the need for kinking credit apps, power booking and straw purchases. This goes hand-in-hand with superior sales training to teach employees how to build relationships with customers so that they can land them on the right vehicle that fits their budget and credit profile – again eliminating the need to “fudge” things because the customer “needs more income” or doesn’t have enough down payment. Next, when F&I personnel become better at selling products, there’s no longer the need to “pack payments” in order to increase their numbers.
In my humble opinion, it’s really pretty simple. By becoming better educated on doing things the right way, you’ll not only be far more successful, but you’ll sleep better at night. Sounds like a win-win to me.
Good luck and good selling!