Packing Payments – The Biggest Blip on the Regulators’ Radar Screens

A bit of history
Quoting an artificially higher monthly payment owes its origin to periods of high inflation. It was used to give the prospective customer, who had been out of the car-buying loop for three or four years, a dose of reality. Start them high and close the sale by providing some form of payment relief. The payments could be packed based on rate, term, and the first payment due date.

The inevitable morph was the ability to use the extra money to facilitate the sale of aftermarket products by reducing their retail price. The now attractively priced service contract became another good reason for the prospective customer to buy the car.
An argument can also be made that automobile dealers are no different than any other merchant who draws upon an array of related secondary products and services to help achieve the primary objective of making a sale.

Especially so when our actions are tempered by overarching federal and state regulations governing every facet of the vehicle sales, funding, and owner protection processes. Caps on the markup over the buy-rate, soon to be addressed aftermarket product markup guidelines, full disclosure affirmed by compliance oversite by the CFPB, FTC, the state AGs, state and federal legislators and consumer advocacy agencies.

That said, the National Association of Attorneys General issued a resolution stating in part, “Packing is the deceptive practice of misrepresenting monthly payments to consumers during automobile sales and leasing negotiations to facilitate the sale of aftermarket products.”

The practice of packing payments constitutes an unfair and deceptive practice or act at the state and federal levels – and in California a breach of the Car Buyer’s Bill of Rights. It’s against the law; it’s a breach of the ethical practices covenant with your customers.
But I gotta do it to hit my numbers!

Well, maybe within your own mindset you can’t live without it. However, it’s worth noting that a vast majority of desk managers and F&I practitioners don’t pack payments while meeting their employers’ performance objectives.

The benefits of packing payments are not only overrated, they can be counterproductive. When an individual walks on the lot, he is looking to find and finance a new or newer vehicle. He is not looking to find and finance a new or newer vehicle and make an undisclosed down-payment on a vehicle service contract.

With the exception to true cash deals, paying for what a consumer decides to buy is reduced to a monthly obligation – regardless of the funding source. Installments are ideally based on what that individual can reasonably afford. If the monthly payment included a “leg” for the F&I department, the dollar amount quoted as a monthly payment is artificially higher than what is required to purchase the vehicle.

As is often the case, the customer continues to negotiate to get the monthly payment down to the level he or she can afford. In this case, the new or used vehicle gross profit is sacrificed for the potential of generating F&I income – which may or may not occur. If the monthly payment objective cannot be achieved, the customer walks and a sale is lost resulting in zero F&I department revenue.

Because I believed in the value of the aftermarket products while I was presenting, my penetration figures were above the norm. What I realized is that if I attached sufficient value to the product I was presenting, any dollar amount reduction in the retail price that would have been created by a typical “leg” would not have made any difference as to whether the customer opted to purchase the product.

It is also worth noting that in today’s hyper-disclosure environment, computer menu-based posting, the introduction of set markup thresholds on aftermarket products, and millennial era astute buyers, effectively mousing the numbers is nearly impossible to pull off.

On the other hand, as a seasoned expert witness, when packing occurs it is easy to detect and if I can find it, so can a plaintiff’s attorney and any regulator who walks in your store.

If packing payments is a condition of employment – you’re working in the wrong store. If you have to pack payments to hit your numbers – you’re in the wrong profession.

Proactive Funding Source Oversight…Everyone Benefits
The debtor, dealer, and you
This isn’t a matter of good versus evil, it’s simply a common business sense exercise affirming relevant factors incidental to the transaction in addition to the accuracy of the calculations and the affixing of the required signatures.

Fair warning – A positively worded notice should be sent to the dealers or F&I personnel citing more aggressive oversight by the certain federal regulators and consumer advocacy groups of practices incidental to dealer-arranged financing. Accordingly, for the mutual benefit of all parties involved, certain debtors will be contacted regarding their installment funding process experience. The notice should be drafted by a qualified attorney.

What to look for – Evidence of straw deals and power booking can be identified by deftly worded customer satisfaction inquiry and equipment verification questions. For example, “We thank you for the opportunity to fund the purchase of your automobile. I’d like to confirm that we have accurately recorded all of the optional equipment on your vehicle.”

Straw deals inquiries can be couched in key information verification inquiries, e.g., “Are there other primary drivers or is the vehicle garaged or kept at a different address?”
The practice of power booking is more difficult to discern as it relates to the manipulation of certain elements of funding transaction unbeknownst to the customer. However, the “leg” has to manifest itself at some point in the transaction. A well above the norm penetration rate for a certain aftermarket product – especially peripheral offerings such as Etch – is worth investigating. The same holds true for higher than average retail pricing.

In an era of full disclosure coupled with the NADA/NAMAD/AIADA Voluntary Protection Products model policy requisite to set markup thresholds for all add-on products and to document the key elements of the transaction will help in rendering this practice obsolete. Aftermarket product markup is of interest in other quarters as well.

Just letting everyone know that you’re watching and inquiring – can be an effective deterrent. Kicking back an installment contract based on the information obtained from the debtor interview will bring these practices to the attention of upper management. The closing caveat: all inquiries should be based on prepared scripts conducted by people properly trained to conduct customer follow-up inquiries – the results of which need to be fully documented.

Dave Robertson
Dave Robertson, MBA, is a co-founder and the executive director of the Association of Finance & Insurance Professionals (AFIP), a nonprofit continuing education association. Dave’s 40-plus years in the automobile business include vehicle sales and F&I, followed by work as an account development manager and home office executive for a credit life company, industry consultant specializing in aftermarket products, and independent VSC administrator. Contact him at 817-428-2434 or [email protected]