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Payment packing brings unwanted scrutiny

November 23, 2010
By Gil Van Over

First of Two Parts
Dealer groups from coast to coast are under attack from state attorneys general and consumer advocates who allege illegal payment packing practices and violations of the Equal Credit Opportunity Act and the Truth In Lending Act. In the first quarter of 2002, consumers filed 504 lawsuits in federal courts and countless actions on state and local levels. Many of the suits seek class action status.

Aggressive attorneys general in several states have charged automobile dealers with unfair and deceptive trade practices. For example, Bob Ciasuilli Automall in New Jersey recently agreed to restitution and fines in excess of $800,000, as well as a host of amended business practices, in its settlement on an action by the state's attorney general. Clearwater Toyota and Clearwater Mitsubishi are under the microscope of Florida's attorney general. And horror stories resonate from Southern California and that state's attorney general's settlement with Gunderson Chevrolet. Besides consumers looking for a free lunch, or attorneys general padding their resumes for a run at the governor's mansion, why are dealers under attack?

Automobile dealers sell a lot of cars and trucks, which means there are a lot of potential clients for attorneys and a lot of votes for attorneys general. And since cars and trucks cost thousands of dollars, emotions can be high. Further, dealers have a reputation, largely unwarranted, that suggests their business practices are not necessarily above board. Automobile dealers are known to be independent businesses and, as such, are perceived as part of a fragmented industry that cannot mount a consistent defense against charges of unfair and deceptive practices. Most claims revolve around the practice of payment packing and the proper disclosure of F&I products sold by dealers.

To better understand the basis of the allegations, let's review payment packing, the Equal Credit Opportunity Act and the Truth In Lending Act. Payment packing is a term used to describe a practice originally promoted by the credit insurance industry. Dealers use the practice to get customers to agree to buy additional F&I products-service contracts, credit life, GAP and window etching-without disclosing the increase in the customer's monthly payment to pay for those products. Payment packing occurs when a customer agrees to a purchase price and the dealer quotes a monthly payment that is $10 to $40 higher than what is needed to cover the price of the vehicle, taxes, license, title and Doc fees.

The additional $10 to $40 creates a pack in the payment so that the F&I manager can sell optional products without increasing the payment the customer already agreed to. Using the terms "free," "included" or "protected payment" when referring to the optional products are indications that the payment was packed in the sales process. The Equal Credit Opportunity Act was enacted in the 1960s to protect consumers against discriminatory lending practices. The act prohibits discrimination against consumers based on race, sex, age, religion and marital status.

Dealers must comply with the Equal Credit Opportunity Act because the courts treat dealers as a creditor in the indirect financing transaction with its lenders. The Truth in Lending Act has been around more than 40 years. Consumers sue dealers under the act, charging that dealers do not properly disclose the sale of soft and hard ads; do not provide adequate disclosures about the entire transaction; and do not consistently assess certain statemandated or permitted fees, such as Doc fees, on all retail transactions, both credit and cash. What can a dealership do to protect itself?

Part Two in the next edition of this newsletter will provide some tips. Gil Van Over is president of gvo3 Consulting and provides proactive F&I Office compliance review services for automobile dealers. He also is available as an expert witness. He can be reached at (312) 961-9065.