As a member of various F&I forums, I’m often asked to weigh in on compliance questions. Many of these inquiries involve disagreements about the validity of various long-held beliefs surrounding F&I compliance – now and then referred to by some as “Compliance Myths.”
So, I decided to take a crack at clarifying some of the compliance issues that apply to these philosophies. Let me start by saying that just because a trainer or vendor insists “it must be done this way” doesn’t necessarily mean that it’s the only way to skin a cat.
No legal advice here – just my thoughts based on years of being a car guy, a compliance guy, and perhaps a bit of common sense. Ultimately, it’s up to you to decide what works best for you, your customers and your dealership. Hopefully, having a few more details based on actual regulations and case law will help you when making those decisions. There are few absolutes in our business, but I feel it’s always safest to make decisions based on facts, not fiction.
“The 300% Rule is a compliance tool”
Many F&I processes that started out as solid sales techniques somehow morphed into “compliance requirements.” The 300% Rule is a great example.
I wholeheartedly agree that the idea behind the rule certainly makes sense from a sales perspective. As they say, you’ll miss 100% of the shots you don’t take. But a compliance requirement? I’m not so sure. In fact, I believe that unchecked adherence to the 300% Rule could lead to unintended legal consequences.
First, let’s look at the reasons why claims are made that not following the 300% Rule is a compliance blunder. A common rationale is that if you don’t offer protection products to your customers that they end up needing, you can be sued. This thought process makes sense and has some basis in fact. For instance, I’ve heard of actual lawsuits where a customer wasn’t offered credit life insurance, subsequently died and the spouse sued the dealership.
“To me, a lawsuit for not offering a customer products that are readily available on the open market would be frivolous at best.”
However, there would seem to be a far less likelihood of being sued for not offering other types of products. For instance, it’s likely that credit life is only available from the dealer at the time of sale, so there may indeed be an obligation to inform eligible customers of its availability. On the other hand, many other products sold in the F&I office are available elsewhere. I recently purchased a new car and within days my email box was full of offers from independent service contract providers, my insurance agent offered GAP coverage, and my local carwash offered paint & fabric protection. To me, a lawsuit for not offering a customer products that are readily available on the open market would be frivolous at best and I’m not sure even the most desperate attorney would want to try that on.
Next, some insist that we must practice the 300% Rule without exception and have a declination sheet signed in every deal lest we’ll be accused of discrimination. But what is the basis for this claim? How exactly are we discriminating against people by not offering all products? Discrimination is defined as treatment of an individual or group based on their actual or perceived membership in a certain group or social category, “in a way that is worse than the way people are usually treated”. In my view, if you fail to offer all of your customers all of your products all of the time it would be a big hill to climb to prove that you’re being discriminatory.
On the other hand, if you offer all of your products to all of your customers all of the time, but at different prices – that discrimination claim may very well be low-hanging legal fruit.
Now let’s look at the reasons why absolutely adhering to the 300% Rule can possibly cause legal problems.
Let’s say for example you present your customer with 100% of your products and she says “I’ll take it all.” So far so good. But you then discover that your lender won’t allow you to finance it all. Besides the obvious customer satisfaction issues, you’ve made an offer that was accepted that you can’t deliver upon, haven’t you? Is it conceivable that a lawyer may try to make a contractual legal issue out of that? It certainly wouldn’t surprise me. The same applies with max LTV or amount financed calls. If you present 100% of your products in these scenarios, I suggest you let the customer know up front how much more money they’ll need to come up with.
What about other situations where the customer shouldn’t be offered all of your products? Like GAP protection for cash or low LTV deals (especially when the LTV falls below state or lender limitations), or no service contract is available due to high mileage, or paint and fabric protection on a vehicle that doesn’t qualify for a warranty? Offering these products can result in a deceptive practices or fraud claims.
Again, the theory behind the 300% Rule is good, but adhering to it blindly because you’ve been told that it’s necessary to be compliant just doesn’t hold water. The same goes for declination sheets. They aren’t a bad thing and they certainly come in handy with customers complaining they were not offered a product that they now need. But their significance as a compliance tool has been somewhat overstated in my opinion. From a sales standpoint, declination sheets can provide you with one additional chance to sell products, but they should be used accurately. Products that aren’t available to particular customers shouldn’t show up on their declination sheet, or if they do, they should be marked “N/A” or “Unavailable”.
“It’s illegal to give a customer a copy of their credit report”
There is no basis in law regarding the statement that it is illegal to give a consumer a copy of their credit report that I am aware of. In fact, the Fair Credit Reporting Act specifically states that a credit bureau provider cannot prohibit a user (the dealer) from disclosing the contents of the credit report to the consumer. Here’s the passage from the FCRA:
Section 607(c) – Disclosure of consumer reports by users allowed. A consumer reporting agency may not prohibit a user of a consumer report furnished by the agency on a consumer from disclosing the contents of the report to the consumer, if adverse action against the consumer has been taken by the user based in whole or in part on the report.
It’s certainly reasonable to assume that “disclosing the contents” would include giving the customer a copy since it’s not stated otherwise.
However, contracts with some credit bureau providers may prohibit the dealer from giving the consumer a copy of their credit report.
Telling a customer that it’s illegal to give them a copy of their credit report when that information is inaccurate is not a good idea in my opinion. On the other hand, telling the customer that you can’t give them a copy of their credit report because your company’s contract with the credit reporting agency prohibits it is accurate and true. Never a downside to telling the truth.
“It’s illegal to highlight a contract”
Many automotive professionals believe that this is a no-no because you can be accused of “leading the customer” to sign the highlighted areas and not read the rest of the contract. In reality, you can “lead” a customer by pointing your finger to the signature sections and saying “sign here”.
It appears that this folklore originated with a case where a creditor utilizing a motor vehicle pawn contract was sued for failure to disclose the APR in a more conspicuous way than other conspicuous disclosures on the contract. The court ruled that the creditor violated TILA because it put dashes and arrows pointing to the due date, thereby making the due date disclosure more conspicuous than the APR and finance charge.
In this case, there was far more going on than simply highlighting the signature areas. According to the court decision, there was handwriting and other markings as well as highlighting that served to make the due date more conspicuous than the APR. No surprise there, the annual percentage rate on the contract was 304.24%.
So while highlighting customer signature areas probably isn’t a big issue, highlighting, circling or otherwise marking individual contract terms may be if it results in more prominence to certain TILA disclosures than others. Highlighting signature areas is a good way to avoid missing signatures which result in delayed funding and customer inconvenience.
Of course, if you work with a particular lender who won’t accept a contract with highlighted signatures, you’ll probably want to avoid that practice as well.
“A contract is valid once signed by both parties even if the customer doesn’t take physical delivery”
The validity of this statement depends on where you conduct business. Some states specifically define when a contract is considered valid. For instance, California law states that “a sale is deemed completed and consummated when the purchaser of the vehicle has paid the purchase price, or, in lieu thereof, has signed a purchase contract or security agreement, and has taken physical possession or delivery of the vehicle.”
So before you attempt to hold a customer’s feet to the fire before they’ve taken physical delivery, you may want to check state laws.
“Menus are required to disclose the base payment”
This has been the subject of much spirited debate in F&I circles. First, menus are not required by law at all. Contrary to popular opinion, even California does not require the use of a menu. All that is required is a “pre-contract disclosure” that shows the monthly installment payment with and without the optional products or services. There are several different forms that are typically used for this disclosure in California and the use of a menu to do so is not very common.
So, legally there is no requirement for an F&I menu to disclose the base payment and as such, there is no such thing as a “legally-compliant menu” as some vendors will lead you to believe. But, as a best practice to avoid payment packing claims, it’s not a bad idea to include the base payment in your menu presentation (and in your write-up as well).
“Everyone must be charged the same doc fee”
This notion again stems from worries about discrimination claims. The reasoning is that if a dealership charges one customer a fee of any kind they have to charge everyone the same fee, or they open themselves up to a lawsuit.
I agree that there is some validity to those concerns since it’s certainly conceivable that charging different doc fees can attract the attention of regulators. We’ve certainly heard enough about alleged discrimination in rate markups over the last few years, so doc fee disparities would seem to be a ripe target. As we’ve learned from recent actions by the CFPB and DOJ, even if there’s no intent to discriminate, you may be accused of such if there’s a significantly different amount that protected classes pay for doc fees than non-protected classes.
So the easy answer is to just charge everyone the same doc fee, right? Perhaps. But here’s the rub: Doc fees are dealer-imposed charges and therefore not mandatory – only government fees are compulsory. So it is improper to tell a customer that you MUST charge them the fee – this could lead to a deceptive practices claim. Next, some states, like Washington, require that you inform the customer that the doc fee is negotiable. Any claim that the doc fee is NOT negotiable may get you in legal hot water in those states.
So how do you avoid potential discrimination claims? By being able to show proof that any downward deviations in fees are for valid business reasons. For example, if a manufacturer limits the doc fee for an employee purchase, that reason should be documented in writing and a copy kept in the deal jacket. Another example would be that a competitive dealer offered a lower doc fee that you needed to match to make the deal. Again, documentation is key.
“Payment ranges up to $XX are allowed”
To many regulators and plaintiffs’ attorneys, using a payment range in certain circumstances may equal payment packing. While it’s generally acceptable to quote a range of payments using an average APR before the customer’s credit report is run, once a credit profile is accessed, a best practice is to quote an exact payment.
Let’s say you’re not exactly sure what the rate is yet even after running credit because you’re waiting for a call back from the bank. In that instance, if you pencil the deal back with a payment range, it’s safest to include an APR range as well. Once you determine the actual terms of the deal, a final exact base payment should be disclosed. Also, if you’re using a payment range to account for variations in days to first payment, you should disclose the exact payment at each level. In other words, never give any impression that will allow a regulator or court to infer that the payments quoted are in any way misleading. Full disclosure is your best protection.
So that’s my two cents. Again, how you handle these areas may depend on laws in your state and your individual processes and philosophies. You may agree or disagree with my analysis and that’s OK. My goal here is not to steer you in any particular direction, but to simply give you something to think about beyond the status quo.
Author: Jim Radogna
Jim Radogna is a nationally recognized auto industry consultant specializing in dealership sales and finance department legal compliance. His background includes founding and operating a national compliance consulting firm, Dealer Compliance Consultants, Inc., as well as having spent over 15 years in various dealership management positions .