CUMMING, Ga. -

How far over the line will you go to sell cars and make a profit before you break the compliance threshold? That’s almost like asking how far over the speed limit you’re willing to go before you consider the consequences of being ticketed for reckless driving. But there are many people out there, myself included, who know that the clock is running out on this particular fool’s gamble.

The game is rapidly changing, and a new era of upfront sales tactics is upon us. At least for those who want to avoid the potentially nasty backlash of regulatory scrutiny and — dare I say it — negative media coverage. The obvious question now is: Can a transparent approach to selling cars really lead to higher sales and big profits? Many people think so.

If this sounds like an alien concept with no basis in reality, then this article is definitely required reading.

Business is Booming: Why Change Gears Now?

Many in the business share the point of view that with market conditions booming, there’s no point in making changes to established business practices. After all, with interest rates at an all-time low and banks buying at an all-time high, where’s the incentive to do so?

Fact: The subprime lending market is growing at an exponential rate. The Federal Reserve Bank of New York shows a doubling of the number of loans issued to consumers with credit scores below 660. In 2008, approximately 22,000 auto retailers sold 16 million cars. Since then, that number has grown to 17 million across just 17,000 retailers. With seemingly shrinking competition, what is the incentive to make changes to the way business is done?

The answer to that question is pretty sobering. There’s a perfect storm brewing on the horizon, and the proverbial pendulum is beginning to swing. As a result, untold numbers of auto retailers are putting themselves at risk of being caught square in the crossfire.

To Fudge or Not to Fudge?

If you’ve been in the business any length of time, you’ve heard these words from your manager. “If you’re not taking at least 10 cars back per month, you’re not spotting aggressively enough.” Or perhaps, “Sign the customer up. Get them on paper, no matter the terms they qualify for — we’ll worry about the rest tomorrow.” Sound familiar? I thought so.

For many, fudging the customer’s income is simply the way things have been done for years. All’s good that ends with a sale, as long as nobody gets caught. But anyone with a head planted firmly on their shoulders knows this is a recipe for disaster.

Sales managers who have never so much as stepped foot in an F&I office are notorious for forwarding deals into F&I that are riddled with liability. They seem to have no idea how lenders operate, and seem to think that the “three C’s” of credit are “Cars, Craps and Commission.” Wrong.

What’s truly insane is the fact that some of these sales managers send transactions into F&I on payments and terms that stand no chance of ever getting approved — imagining deals that will never materialize and pounding on F&I managers to do “whatever it takes” to put the deal together. Even if that means fudging customer creditworthiness.

The rationale behind why some dealers offer incentives to one group and not the other is mystifying.

In one incident, a dealer offered a money back guarantee, promising the customer they could bring the car back within three days if they weren’t completely satisfied — but this incentive wasn’t offered to the subprime customer. The explanation was simple: The subprime customer should be happy with what they got. When asked if the dealer at least offered a waiver to the customer, the response was, “It wasn’t necessary.”

This is just one example of how some dealers throw out the playbook when it comes to subprime customers, when they should be enforcing a consistent process to ensure all customers are treated equally, all the time.

It’s also an example of how taking a two-department approach (one F&I department for prime customers, another for subprime customers) can be wholly detrimental to the overall store process. I have seen dealers who add subprime departments to fulfill the specific requirements it takes for approval and funding without a thought as to how it may influence segregation within their dealership culture.

I’ve also seen dealers who utilize menu selling for prime customers, but throw the process out the window when it comes to subprime customers.

At what point do these managers realize the potential consequences for their actions? How far over the line will they push it before all hell breaks loose?

Disclosure is King

Menu selling is not mandated by the state, nor is it required by the Federal Trade Commission. But in the article, “What’s On the Menu?” by Tom Hudson of Hudson Cook, Hudson offers prudent advice about using menus and disclosing the base payment as part of the presentation without hesitation.

“Disclosing the base payment as part of the menu presentation eliminates the possibility that a plaintiff’s lawyer or state attorney general could argue that the customer was misled into thinking that the Tinfoil Package was the lowest cost option available,” Hudson wrote.

Simply put, these rules apply to all customers.

It’s only a matter of time. What was once considered a slap on the wrist can wreak veritable havoc on a dealer if they fall under scrutiny for bank fraud by manipulating a customer’s credit information, perpetrating power booking and offering in-house rebates, to name a few.

The Heat Is On

To quote the now-classic Glenn Frey song, “The heat is on.”

For those not paying attention, the Consumer Financial Protection Bureau fully intends to step up its scrutiny of big banks — and the CFPB has recently requested governance over major finance companies for acts of disparity caused by auto dealers.

What does this mean? It means that the new oversight would impact 38 nonbank companies and put them in the hot seat for aggressive crackdowns on deceptive marketing practices and illegal debt-collection techniques.

Lenders realize the reach of the CFPB and are preparing to implement policy and procedures that mandate best practices when approving loans — especially those that qualify as subprime. If lenders continue to see negative patterns of behavior, they’ll have no choice but to drop that dealer like a hot potato. This will leave many dealerships out in the cold.

With competition as fierce as it is, is this something you really want to fool with? I didn’t think so.

Upfront Sales Negotiation Doesn’t Equal Lack of Sales

Dealers today have to recognize that reputation plays a critical role in your success. Without that, you might as well close up shop for good.

Every single member of your staff is responsible for ensuring a culture of integrity. It’s not about how close to the line you can go before you’ve piqued the interest of an attorney. It’s about taking the reins and being transparent with your customers, 100 percent of the time.

The secret to “cracking the code” lies in the understanding that compliance doesn’t begin and end in the F&I office. It should begin the very moment a customer enters your lot or clicks onto your website. Institute a storewide culture that invites equal opportunity for all customers, and focus on teaching your staff how to effectively negotiate without manipulation.

Work smart and purposefully by insisting that your F&I manager engages the customer on their terms early on in the sales process. Today’s F&I managers must get involved, helping to create a fluid buying experience between sales and finance. 

Consider putting your F&I manager at the sales manager’s desk whenever possible. Two heads are always better than one. Validating income status and determining the reasons behind the subprime customer’s slow pay history is a vital step that should take place sooner rather than later. This prevents the epic blunder of landing a customer on a car they simply can’t afford before determining if they qualify. It also goes a long way toward reducing delivery time and boosting customer satisfaction.

Understand this: A credit score is not the deciding factor. Each customer has varying circumstances that prevented them from making payments on time. Treat them like human beings, and never like “scores.”

Insist on presenting menus to all of your customers, not just some of them. Let your customers know that additional products options are available, and that products not allowed in the advance can be paid for in cash.

You can also look into offering your customers product payment alternatives, like Ways to Pay or SPP. It may surprise you how often some customers will offer additional money down if you just ask for it. As the saying goes: “If you don’t ask, you don’t get!”

Offering consistently priced products with a fair mark-up — and not picking and choosing which product will be presented — will greatly increase product penetration and income earned. Inconsistent product pricing (choosing products for incentives) leads to discriminatory practices that can result in excessive charge-backs.

Rebecca Chernek, who founded Chernek Consulting in 2001, has nearly three decades of dealership experience ranging from working with her father at their family-owned dealerships in Have De Grace, Md., to district manager for the AutoNation division of the JM&A Group. She can be reached at (404) 276-4026 or via email at becky@chernekconsulting.com.