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Dealer Insights - Jan-Feb 2015 - Beware of F&I scams - Internal Controls Can Guard Against Employee-driven Frauds

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In newspapers nationwide and online, one occasionally sees reports of employee-initiated scams in dealership F&I departments. Greed, personal circumstances or even pressure to make quotas can drive staff members to exploit customers.

Being alert to this type of fraud is the first step toward preventing it. Let’s take a look at a few of the most common scams.

“If only your credit score were better…”

In this fraud, a financing department employee lies to the customer about his or her credit score, saying it’s lower than it really is. The employee then charges the customer a higher interest rate, increasing the dealership’s income from the sale.

Crooked staffers try this on customers who won’t be too surprised to hear they’re having financing problems. Consumers with strong credit ratings are more likely to know they’re being duped.

One way to prevent this scheme — and, indeed, most financing-related cons — is for an F&I manager to review all customer agreements. If a customer’s credit score doesn’t mesh with the interest rate being charged, foul play could be to blame. Be sure to rotate reviewing duties among several F&I managers. If you have only one, randomly review customer agreements yourself on occasion.

“This item is necessary…”

Here, an F&I department employee includes items in the vehicle price that the customer didn’t agree to, such as destination fees and, often, warranty costs. The salesperson quotes a price that doesn’t include the warranty fee, and then gives the customer the monthly payment amount that does include it — without getting the customer’s consent.

If the customer questions the warranty, the salesperson may say it’s required to lock in a certain interest rate. This is false: The interest rate depends on only the customer’s credit history.

To help prevent schemes such as this one, have customers fill out and sign a checklist acknowledging that they’ve approved or rejected your dealership’s various products (gap insurance, extended service contracts, rustproofing and so on). Then have accounting personnel compare the checklist against individual sales and finance contracts to verify the information.

 “Customer, we have a problem…”

This scheme involves approving the customer’s financing, delivering the vehicle and letting him or her drive it for a few weeks. But then a financing department employee calls to say that the loan fell through and, to keep the vehicle, the customer must pay a premium and a higher monthly payment.

Crooked employees usually practice this rip-off on customers with poor credit, who they assume feel shaky about their creditworthiness. The employee knows the real payment amount and the interest rate offered by the financing institution before delivering the car. But he or she assumes that, after driving the vehicle for a time, the customer will develop a certain comfort level and agree to pay more to keep it.

To catch employees doing this, watch your contract-in-transit schedule to see whether any deals are taking too long to be funded. You also can send out customer satisfaction surveys and read any responses received carefully. If you notice several buyers — or even one — complaining that their monthly payment went up unexpectedly, investigate further.

Another internal control: Almost all lenders provide some type of approval process for customer loans. Create a customer document that acknowledges they’re aware of the lender’s financing terms. Make sure that the document contains the bank’s approval code for the loan.

Then have your accounting department compare the customer’s acknowledgment of the loan terms with the bank’s approval. Accounting also should compare the acknowledgment document with other documents in the deal — such as the sales contract, financing agreement and bank’s loan approval — to ensure that everything is spot-on.

Be proactive

Unfortunately, all dealerships are at risk for F&I fraud, as are the entities that underwrite vehicle loans and provide warranties. Your CPA can help you establish internal controls that can help detect wrongdoings.


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