In a case highly publicized in trade magazines, a North Carolina dealer recently agreed to plead guilty to a series of felony charges. Federal prosecutors charged that the dealer and nine employees systematically falsified customer information and misrepresented down payments to finance sources. The dealer was sentenced to two years probation, was required to pay back more than $1.2 million, had to resign all dealership management positions, and must stay away from his family’s dealerships for two years.
A number of the practices with which he and his employees were charged were clearly felonies. But others raised the eyebrows of some dealers. Let’s review what was involved in the case.
A federal statute makes it a felony to make a knowing and willful misrepresentation to a federally insured financial institution. The dealer in question was allegedly engaged in a pattern of doing just that. His employees inflated incomes and job titles, invented jobs, and created documents to substantiate the false qualifications. They were also charged, however, with inflating or creating fictitious down payments by using in-house rebates, accepting checks the employees knew would probably bounce, and inflating trade values (not just on vehicles but on household appliances traded to create equity).
For some time, we have been warning dealers about the criminal exposure they and their employees can face when they do not adequately train and supervise personnel. Tricks to enhance the qualifications of buyers, especially when done with the use of forged documents, have been the subject of criminal prosecutions.
The aspect of the North Carolina case that concerns some dealers was the charges surrounding inflation of or invention of equity in deals. In-house rebates, over-allowance on trade ins, and hold checks not collected by the time a retail installment sale contract is assigned have been used as reasons for finance sources to charge violations of the representations and warranties accompanying assignment of retail installment sale contracts.
However, dealers must understand that financial times have changed. Financial institutions are under intense pressure. Those who have accepted TARP money will be scrutinized heavily by regulators. Add to that the difficult economy and the concerns about the financial condition of some dealers, and financial institutions may seek to cover themselves not through simple demands to repurchase paper, but also by complaints to federal or state authorities.
Complaints by financial institutions to authorities have been steadily increasing in the car business. Practices that were accepted in the car business at one time are no longer accepted. It is no longer acceptable to do whatever is necessary to get a car across the curb.
Dealers must explain to employees that compliance with the law is expected, must train them to operate properly, and must review activities and take action when necessary.
- Adopt a Standard of Conduct. You can’t identify every single practice that your employees should not be involved in. Sometimes they just have to understand how you wish your business to be conducted. You want to do business fairly, in compliance with all federal and state laws, and in a manner that reflects well on your company. Establish specific standards of conduct that make those points.
- Communicate Your Standards Clearly to Your Staff. Make sure they understand what you expect. Put your standards in writing.
- Train Your Staff. Training on production issues is commonplace. However, training on methods by which you expect your business to be conducted is just as important.
- Review Compliance. Are you hearing negative reports from customers? When you look at representative samples of deal files, are the documents in order? Are you listening to your employees about what is going on in your dealership?
- Enforce Your Standards. Regularly stress the importance of proper behavior. Have you heard of a problem or have you seen a problem? Make sure it is corrected. Make sure employees understand why it was necessary to correct the problem and why it is important to avoid a recurrence.
- Who is in Charge? When law enforcement comes to your dealership they have no question who is in charge. The dealer is. The buck stops there. The dealer should either be personally involved to be sure the standards are met or the duties should be delegated to trusted senior personnel.