The Associated Press reported on June 24 that a former North Carolina auto dealer and 10 of his employees were sentenced for their roles over several years in connection with fraudulent “loans” (we’re sure that AP meant to call these transactions “credit contracts” and not “loans”) that cheated “lenders” (again, probably “sales finance companies”) and stuck some customers with inflated vehicle payments they couldn't meet.

According to the AP’s report, prosecutors claimed that the dealer, who owned and operated three auto malls, used widespread corrupt practices. Specifically, the dealer was accused of using his laptop computer to generate false pay stubs, Social Security benefits letters, tax returns and other documents that could be used to support inflated claims about a buyer's income. He also sold fake documents to co-workers preparing “loan” applications, prosecutors said. He charged $25 for a false pay stub and $100 for two year's worth of faked tax returns, according to the indictment. Sometimes the car buyers knew about the fraud, sometimes they didn’t. When the buyers wouldn’t themselves engage in the fraud, the dealership employees simply forged the buyers’ signatures and went on with the sales.

The dealer got three years in the federal pen, while the former GM got a two-year stretch. The remaining nine employees’ sentences ranged from a year’s probation to 366 days in prison. Each of the eleven was ordered to pay restitution of $1.5 million.

The prosecutor did some crowing about the result, stating that it should serve as a warning to the auto industry to clean up its act.

That’s a cheap shot, in my opinion, unless the prosecutor has evidence that the practices of this dealer and his employees are typical of the practices of dealers as a whole.

I don’t believe that to be the case. I do believe, though, that the manufacture and use of fake documents does happen at some dealerships. While most people who work at dealerships are professional and ethical, there’s a very low “barrier to entry” to people who want to work for car dealers. Educational requirements aren’t that high and sometimes the background checks aren’t what they should be. So some folks of marginal and sub-marginal integrity can end up in positions in which they can engage in bad acts like those described by AP in this case.

Assuming that top management isn’t involved in bad acts, as was the case here, how can a dealership protect itself against bad apples in the F&I room?

I can think of four ways.

• First, dealers may want to consider using mystery shoppers to see if dealership employees are urging customers to engage in fraud and to see how dealership employees portray the credit credentials presented by the mystery shoppers to the sales finance companies.
  
  

• Auditing will really help, as well – carefully examining credit documents in customers’ files and contacting customers after the deal has closed and finding out how the customer’s information provided to the F&I department differed, if at all, from the information provided by the F&I folks to the sales finance company. You can pay someone to do this, but if you are budget-minded, you can do it yourself.
  
  

• Videotaping F&I proceedings will make it very difficult for some aspects of these frauds to be carried out.
  
  

• Last, but never least, serious training is in order. If everyone in the dealership knows that he or she could go to jail and have to pay restitution to customers and finance companies that might – just might – keep some employees from getting caught up in these activities.

If you cannot say for certain that shenanigans like these are not happening at your shop, it’s time to consider what you can do to reduce the possibility that they are. Vol 3, Issue 8