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Florida Toyota dealership avoids backup-financing requirement in spot-delivery ruling

Eric Freedman
Automotive News -- December 28, 2011 - 12:01 am ET

A Florida dealership is not contractually required to provide financing to a customer who failed to qualify for a third-party loan, a federal judge has ruled in a spot-delivery case.

U.S. District Judge Robert Hinkle also ordered Janice Mack to return the used 2005 Avalon that she bought from Bobbin Trace Automotive LLC, which does business as Legacy Toyota in Tallahassee. She had made no payments beyond a $300 down payment in the nearly three years since the transaction.

Legacy now is seeking damages for the reduced value of the car, plus "substantial" attorney fees, said dealership lawyer Michael Coppins of Tallahassee.

Mack bought the car through a conditional sales contract. In finance and insurance, spot delivery refers to the practice of dealerships delivering cars to customers before a lender approves a loan.

When the prospective lender declined the retail installment sales contract, Legacy asked her to return the Avalon as the contract required and suggested that she pick a less expensive car, the decision said.

"Mack refused to return the vehicle and refused to consider alternative financing," Coppins said.

She didn't make the first two monthly installments after taking possession in February 2009. Afterward, she tendered monthly payments to Legacy, which returned them on the grounds that it wasn't financing the transaction.

She sued for breach of contract and violation of federal equal credit opportunity and Florida finance and consumer protection laws. Legacy filed a counterclaim to recover the Avalon.

In throwing out all of Mack's claims, Hickle said that the transaction was clearly conditional, and that "the deal was off" if financing couldn't be arranged.

"The documents include not a hint that if financing could not be arranged, Mack could keep the car, paying Legacy only in the installments that would have been due a third-party lender," he said.

Hinkle also ruled that Legacy properly exercised its right to cancel the deal and rejected allegations by Mack that "Legacy's real goal was to provide financing on worse terms."

Mack's lawyer, David Abrams of Tallahassee said the decision "is not an affirmation that the court is necessarily condoning spot deliveries." Spot deliveries are a "risky business practice," legally and fiscally, Abrams said.

It will be up to Mack to decide whether to appeal, he said.

You can reach Eric Freedman at freedma5@msu.edu. Readers are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Automotive News. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification.

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'Fictitious down payment' snags dealership

Eric Freedman
Automotive News -- December 21, 2011 - 12:01 am ET

A Connecticut dealership that listed a fictional down payment on a customer's sales contract owes her damages, a federal district judge in Hartford has ruled.

Don Mallon Chevrolet Inc. in Norwich, Conn., must pay plaintiff Agdaliz Negron $1,000 plus attorney fees for violating the Truth in Lending Act, U.S. Magistrate Judge Thomas Smith said.

After a nonjury trial, Smith rejected the store's argument that it had merely made an inadvertent, "bona fide error" during a "super sale" when it hired five temporary salespeople and three temporary F&I managers on a part-time basis.

However, Smith ruled in favor of the dealership on Negron's claimed violation of the state unfair trade practices law.

'Sloppy' procedures

The case stems from the May 2007 purchase of a 2004 Chevrolet Impala, including a service contract, VIN etching and a GAP policy. With financing, the total sale price was $27,580.

Documents listed a $250 down payment. In his decision, Smith said the $250 "fictitious down payment" resulted in assessing sales tax on that amount, making the extra sales tax "in reality part of the finance charge."

The dealership's procedures to avoid such an error were "casual and sloppy," Smith said. He noted that the store could not even identify the temporary sales and finance personnel who participated in the transaction.

The $1,000 statutory award is the maximum allowed for such a Truth in Lending Act violation. Smith has not yet ruled on the amount of attorney fees, but dealership lawyer Kevin Greene of Hartford said Negron requested $25,000, which, Greene said, is unreasonable and unsupportable.

At the same time, Smith found insufficient evidence to support the unfair trade practices claim that the dealership deliberately falsified Negron's credit application to defraud her and the lender. The application misstated her employment history, including job title and length of service.

The salesman who handled the sale denied supplying false information or telling Negron and her father to lie to the bank if asked about the down payment.

Smith emphasized that Negron signed the application, which had a provision stating that she had read and understood it.

'Credibility contest'

Smith said the unfair trade practices allegation "boils down to a credibility contest" between the plaintiff and two men: one a used-car salesman and the other a used-car sales manager. "To argue that none of these three witnesses has a motive to lie is absurd," he said. "All three have a motive or motives to lie."

Smith gave no weight to "scant and sketchy testimony" by Negron's father, who attended only part of the transaction, and to testimony by another employee, which, Smith said, "does not ring true."

Defense lawyer Greene said the dealership hasn't decided whether to appeal the judgment. He added: "The financial discrepancy claimed by the plaintiff actually inured to her benefit because the disclosure of the financial terms was inaccurate."

Negron's lawyer did not respond to requests for comment.

You can reach Eric Freedman at freedma5@msu.edu. Readers are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Automotive News. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification.

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Default rate for auto loans continues to fall

Jim Henry
Automotive News -- December 28, 2011 - 10:23 am ET

Auto loans outperformed other major categories of consumer debt in November, part of an ongoing pattern in consumer behavior, according to figures released last week by Standard & Poor's and Experian.

The default rate for auto loans fell to 1.17 percent in November, down from 1.22 percent in October and 1.77 percent in November 2010, according to the S&P/Experian Consumer Credit Default Index.

Meantime, the default rate for bank credit cards was 4.91 percent in November. That was an increase from 4.85 percent in October but down from 6.85 percent a year earlier.

The average default rate for first mortgages rose in November from the previous month to 2.17 percent. It was the third consecutive month that first mortgage default rates rose, though the November 2011 figure was lower than the level a year ago -- 3.06 percent.

"In the last recession, there was definitely a shift in consumer behavior," said David Blitzer, an S&P managing director.

"Traditionally -- in previous recessions -- people would do anything to hang on to their house; to make their mortgage payment. They might have six credit cards, all in arrears," he said. "This past recession people didn't always take that attitude. Defaults in mortgages happened much faster and bigger than autos."

Blitzer said that in the 2008-09 recession, consumers in many cases apparently decided that keeping up their car payments was more important than making their mortgage payments because they needed cars to get to work or to look for work.

"It could also be there was no point," in making the house payment, he said. "Some people were so far underwater on their mortgage there was no hope of catching up."

You can reach Jim Henry at autonews@crain.com. Readers are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Automotive News. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification.

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Sales could hit 14 million in '12

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Longer loans return to help boost sales

Donna Harris
Automotive News -- December 7, 2011 - 12:01 am ET
Faunda: People want lower payments.

The long loans that were used to goose car sales a few years ago are back.

Finance managers say auto lenders are promoting loan terms of 72 months and even 84 months, as they did just before the credit markets crashed in late 2008.

"Customers have no aversion to signing longer-term notes these days," says Marv Eleazer, finance director for Langdale Ford in Valdosta, Ga. "I'm seeing 72-month loans at 120 percent [loan-to-value] and greater. I've even papered a few at 84 months."

In 2011, loans of 73 months and longer account for 9 percent of new-vehicle loans. That's up from 6 percent in 2009 and 2010 and close to the peak of 10 percent in 2008, reports consulting firm J.D. Power and Associates.

Loans of 61 to 72 months make up 40 percent of the loans written, J.D. Power data show.

The longer term lowers monthly payments, which appeals to many shoppers.

While unemployment remains high, consumers "just want their monthly payments cheaper," says Greg Faunda, business manager of Greenwood Chevrolet in Austintown, Ohio.

At a recent finance and insurance conference in Las Vegas, keynote speaker Kevin Borgmann, president of Capital One Auto Finance, said he feared looser credit terms and extended loan terms could short-circuit the auto sales recovery.

His concern: The longer maturities will keep people out of the car market for six or more years, stalling sales.

But in recent years, that hasn't been the case. Several factors take the edge off long loan terms:

-- Car buyers are making bigger down payments after the credit crisis, finance managers say. Used-vehicle values also are strong. Both help people build equity in their vehicles quickly.

-- Consumers often trade in vehicles before the loan expires, says Paul Taylor, chief economist for the National Automobile Dealers Association. So they'll be back for another car sooner than you think, he says.

-- Healthy lease volume will bring people back for another car sooner, says Tom Kontos, chief economist for the ADESA auto auction group. Currently, more than one in five new vehicles is leased, and leases are typically three years, he notes.

Since 2007, Toyota Financial Services has offered its most creditworthy customers 84-month loans. The seven-year loans represent just 2 to 4 percent of its loan portfolio and most are paid off early.

Brock Bayles, Toyota Financial's national manager of pricing analysis, says the extended term is one of several strategies the lender uses to stimulate sales. The long loans "support the automotive recovery," he says.

Recent history suggests long loans could become the new normal. Auto loan maturities have been increasing as new-vehicle prices rise.

From 1971 to 1983, three-year car loans were the norm, reports the Federal Reserve in its data from finance companies.

In June 1984, the average maturity exceeded 48 months for the first time. In 2003, the average maturity exceeded 60 months for the first time.

Since then, the average term has zigzagged upward peaking at 67 months in July 2008 and never dipping below 59 months. In January, the latest figure available, the average maturity was just over 62 months.

"Customers gravitate toward lower payments, and extended terms provide more affordable options," says Gary Allgeier, finance director for the Suburban Collection dealership group near Detroit.

"Since many lenders have relaxed terms to 2008 levels, it should be no surprise that customers are choosing them."

Steadily rising retail selling prices have led to correspondingly larger loans with longer repayment terms.Average loan maturity (months)Source: Federal Reserve, National Automobile Dealers Association

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How best to improve FandI? More training, dealers say

Jim Henry
Automotive News -- December 14, 2011 - 11:16 am ET

Better training was the No. 1 choice for improving F&I this year among dealerships responding this month to an informal Automotive News online survey.

And it's no wonder. In addition to finance contracts for loans and leases, F&I managers have to stay on top of a changing menu of products, plus a long and growing list of legal disclosures.

For example, the Federal Trade Commission this year started enforcing the Red Flags Rule, aimed at preventing identity theft. Meanwhile, dealers have said throughout 2011 that F&I products are more important than ever to overall dealership profitability. Those factors add to the F&I manager's workload and the need for more training.

Half of the 143 dealership respondents to the nonscientific multiple-choice survey answered "Better training for F&I managers" to a question that asked: "What did you do this year to improve your F&I results?" That was far and away the most popular answer. Respondents had to choose only one answer.

The next-most-popular choices were: "New rewards/compensation system for employees" and "Improved menu presentation technology," such as iPads. Those responses each got about 19 percent of the total.

Only about 6 percent of the respondents said they started selling service/maintenance contracts in the service lanes, making it the least favorite choice among dealerships to improve F&I results. That's surprising because several of the big publicly traded retailers said that they were pushing hard this year to sell more F&I products in the service department, especially extended-service contracts.

Dealerships' top and bottom choices could be related. Larry Dorfman, CEO of F&I vendor EasyCare, said separately that training is an important part of launching F&I sales in the service department.

Said Dorfman: "The challenge is in the training."

You can reach Jim Henry at autonews@crain.com. Readers are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Automotive News. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification.

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TransUnion: Steady delinquency rate through '12

An annual national auto delinquency forecast by risk-management company TransUnion today suggests the ratio of borrowers with loans 60 or more days past due will remain at the current level through the end of next year.

Auto loan delinquencies are expected to decrease in the first two quarters next year before rising back to 0.51 percent at year end to finish 2012 at the same percentage as year end 2011, TransUnion said.

The company said auto loan delinquencies have decreased noticeably since peaking during the recession at 0.86 percent in the fourth quarter of 2008.

"Auto loans have performed quite well since the beginning of 2010, and we expect delinquencies to remain relatively low throughout 2012 as the gradual recovery in the economy will benefit both lenders and consumers," Peter Turek, automotive vice president of the company's financial services unit, said in a statement.

Since the end of 2008, the company said, 60-day auto loan delinquencies have dropped year over year from 0.81 percent in the fourth quarter of 2009 to 0.59 percent in fourth quarter of 2010 and are anticipated to drop to 0.51 percent at the end of 2011.

Of the 21 states expected to see auto delinquencies decrease next year, Michigan, Rhode Island and North Carolina are expected to have the biggest drops, all at about 14 percent.

Among the 29 states expected to have increases in delinquencies, North Dakota, Alaska and Iowa are projected to have the largest percentage gains.

Although North Dakota is expected to have the largest percentage increase in delinquencies, TransUnion said it still expects the state to have the lowest delinquency rate: 0.16 percent.

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It's still wait-and-see on consumer bureau's impact

December 14, 2011 - 12:01 am ET

Jim Henry is a special correspondent for Automotive News

Dealers get to wait a while to find out how the new Consumer Financial Protection Bureau will affect day-to-day F&I business.

That's because Republican senators last week made good on their earlier promise to block the confirmation of Richard Cordray to head the CFPB. Cordray is a former Ohio attorney general.

Led by Sen. Richard Shelby, R-Ala., ranking member of the Senate Banking Committee, Republicans want to place a supervisory board over Cordray. In their view, the CFPB isn't sufficiently "accountable." Senate Democrats, led by Banking Committee Chairman Tim Johnson of South Dakota, accuse the Republicans of "holding financial reform hostage."

According to the law establishing the new bureau, the CFPB can't regulate "non-bank entities" -- including many auto lenders -- until a permanent head is confirmed. Its ability to regulate banks is also limited.

Auto dealers are exempt from CFPB regulation, except for buy-here, pay-here dealers. However, any new rules that affect auto lenders -- such as reporting requirements or potential limits on what the CFPB could consider abusive lending practices -- are likely to affect dealerships, too.

The CFPB was supposed to go into business in July, but Cordray's nomination and confirmation process have held that up. Not to worry, until the situation clears, dealerships have plenty of existing regulations to meet.

You can reach Jim Henry at autonews@crain.com.

Readers are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Automotive News. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification.

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Ex-salesman at N.Y. dealership among 18 charged in auto loan schemes

Jim Henry
Automotive News -- December 7, 2011 - 8:40 am ET

Eighteen people, including a former salesman at a new-car dealership in Jamaica, N.Y., have been charged in auto loan schemes that generated losses of about $1.9 million at 18 financial institutions, prosecutors in New York City said.

The alleged schemes were for the purchase of used, high-end luxury cars. Make and model details weren't immediately available, but prosecutors said brands included Maserati, BMW, Porsche, Lexus, Cadillac and Mercedes-Benz.

A used-car dealership in New Jersey also was charged as a corporation. Prosecutors announced the indictments Thursday, Dec. 1.

The schemes included the use of straw buyers, according to the indictments. In some cases, the straw buyers were people with good credit scores who allegedly were paid to obtain loans for cars that were resold to someone else, according to the New York City Police Department and the district attorney's office for the borough of Queens.

After making a few payments, the defendants would let the loans go bad, leaving the straw buyers on the hook for the balance, according to prosecutors.

"Unfortunately, these individuals wound up with ruined credit, multiple banks suing them for money, and suspended driver's licenses for unpaid parking tickets on vehicles they allegedly 'own,'" Queens District Attorney Richard A. Brown said in a written statement.

To keep the scheme going, the defendants made enough payments to make sure the selling dealerships wouldn't be charged back for the bad loans, authorities said. Auto lenders would demand repayment from a dealership if loans defaulted in the first 90 days, prosecutors said.

A former salesman at Hillside Honda in Jamaica, Adrian Sylvester, 28, of Brooklyn, has been charged with grand larceny, falsifying business records, possession of stolen property and conspiracy, according to court records.

Hillside Honda was not charged, according to court records. Dealership management did not return a call asking for a comment on the case.

Prosecutors said the investigation also discovered a second group of defendants who allegedly obtained auto loans through false pretenses and used the money for other purposes.

That second group of defendants included Silver Arrow Auto Sales, a used-car dealership in Teterboro, N.J., according to court records. According to the indictment, the dealership submitted false paperwork to banks in support of loan applications, then transferred the money to corporations controlled by the defendants.

The owner of Silver Arrow Auto Sales listed in court documents did not respond to an e-mail request for comment. He was not charged in the indictment.

You can reach Jim Henry at autonews@crain.com. Readers are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Automotive News. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification.

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When scores don't mean 'doo-doo'

December 7, 2011 - 12:01 am ET

Jamie LaReau covers auto dealers for Automotive News

A friend of mine recently got out of debt, which boosted his credit score.

But when he enthusiastically told me the news, I was nonplussed.

After all, what did his credit score really mean in the scheme of things?

Credit ratings are subject to each lender's evaluation and ranking. So what is considered near-prime with one lender might be subprime to another.

Case in point: I asked a couple of F&I managers for the current average subprime score.

I got various answers. It's basically a score below 600 or 590 with the bottom of the range at about 520. Anything below 520 is abysmal.

Meanwhile, a prime rating is usually defined as a credit score above 700.

But even that's a bit misleading.

As one of the F&I managers, Eric Judson of David Chevrolet-Buick in Niagara Falls, N.Y., said, "Credit scores often don't mean doo-doo."

Judson recalled two customers he had back-to-back, about two months ago. One was a vice president of a local business. He was in his 50s. This man has had numerous auto loans and mortgages and was earning more than $200,000 a year. His credit score was 771.

The next customer was a 19-year-old woman who had an authorized user account with a $500 limit in which her parents enrolled her when she was 12. She had a part-time job earning $900 per month. Her credit score? 778.

"The judging of credit scores is ambiguous at best," says Marv Eleazer, finance director at Langdale Ford in Valdosta, Ga. "Especially considering there are three major units publishing them, not to mention that lenders have their own internal scoring systems that augment credit scores."

He adds: "Which is why lenders have developed and constantly tweak the internal scoring systems. The bureaus publish scores for a variety of industries and market customized models for each."

I'm still nonplussed.

You can reach Jamie LaReau at jlareau@crain.com.
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Longer loans return to help boost sales

Donna Harris
Automotive News -- December 7, 2011 - 12:01 am ET
Faunda: People want lower payments.

The long loans that were used to goose car sales a few years ago are back.

Finance managers say auto lenders are promoting loan terms of 72 months and even 84 months, as they did just before the credit markets crashed in late 2008.

"Customers have no aversion to signing longer-term notes these days," says Marv Eleazer, finance director for Langdale Ford in Valdosta, Ga. "I'm seeing 72-month loans at 120 percent [loan-to-value] and greater. I've even papered a few at 84 months."

In 2011, loans of 73 months and longer account for 9 percent of new-vehicle loans. That's up from 6 percent in 2009 and 2010 and close to the peak of 10 percent in 2008, reports consulting firm J.D. Power and Associates.

Loans of 61 to 72 months make up 40 percent of the loans written, J.D. Power data show.

The longer term lowers monthly payments, which appeals to many shoppers.

While unemployment remains high, consumers "just want their monthly payments cheaper," says Greg Faunda, business manager of Greenwood Chevrolet in Austintown, Ohio.

At a recent finance and insurance conference in Las Vegas, keynote speaker Kevin Borgmann, president of Capital One Auto Finance, said he feared looser credit terms and extended loan terms could short-circuit the auto sales recovery.

His concern: The longer maturities will keep people out of the car market for six or more years, stalling sales.

But in recent years, that hasn't been the case. Several factors take the edge off long loan terms:

-- Car buyers are making bigger down payments after the credit crisis, finance managers say. Used-vehicle values also are strong. Both help people build equity in their vehicles quickly.

-- Consumers often trade in vehicles before the loan expires, says Paul Taylor, chief economist for the National Automobile Dealers Association. So they'll be back for another car sooner than you think, he says.

-- Healthy lease volume will bring people back for another car sooner, says Tom Kontos, chief economist for the ADESA auto auction group. Currently, more than one in five new vehicles is leased, and leases are typically three years, he notes.

Since 2007, Toyota Financial Services has offered its most creditworthy customers 84-month loans. The seven-year loans represent just 2 to 4 percent of its loan portfolio and most are paid off early.

Brock Bayles, Toyota Financial's national manager of pricing analysis, says the extended term is one of several strategies the lender uses to stimulate sales. The long loans "support the automotive recovery," he says.

Recent history suggests long loans could become the new normal. Auto loan maturities have been increasing as new-vehicle prices rise.

From 1971 to 1983, three-year car loans were the norm, reports the Federal Reserve in its data from finance companies.

In June 1984, the average maturity exceeded 48 months for the first time. In 2003, the average maturity exceeded 60 months for the first time.

Since then, the average term has zigzagged upward peaking at 67 months in July 2008 and never dipping below 59 months. In January, the latest figure available, the average maturity was just over 62 months.

"Customers gravitate toward lower payments, and extended terms provide more affordable options," says Gary Allgeier, finance director for the Suburban Collection dealership group near Detroit.

"Since many lenders have relaxed terms to 2008 levels, it should be no surprise that customers are choosing them."

Steadily rising retail selling prices have led to correspondingly larger loans with longer repayment terms.Average loan maturity (months)Source: Federal Reserve, National Automobile Dealers Association

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Subprime competition heats up as rates fall

Jim Henry
Automotive News -- December 7, 2011 - 8:43 am ET

Subprime auto loans keep growing, with competition heating up in the segment and interest rates edging lower for the riskiest customers, according to Experian Automotive.

"If you talk to some of the lenders, they say some of the larger subprime lenders are buying deeper, putting out more competitive rates," said Melinda Zabritski, Experian's director of automotive credit.

"That pushes the bigger lenders to do the same," she said last week.

That should be good news for dealers, who have complained that the comeback in subprime continues to lag the rebound in prime-risk loans.

Zabritski, during a Dec. 1 conference call, reviewed several positive trends in auto loans for the third quarter:

• Delinquencies and repossessions were down as a percentage of the total. For the industry, the average amount charged off per repossession was down 10.7 percent, to $6,820, Experian said.

• The average amount financed rose for new and used vehicles. (See table)

• Leasing was even with the year-ago quarter, at 22.7 percent of all new-vehicle financing, Experian said. That was up from only 14.2 percent in the third quarter of 2009.

Subprime loans made up 21.9 percent of all new-vehicle loans originated in the third quarter, up from 19.1 percent a year ago. For used vehicles, subprime made up 51.6 percent of loans, up from 48 percent a year earlier.

Zabritski said it was a year ago, in the third quarter of 2010, that subprime loans increased their share of total loans for the first time since the recession began.

"Ever since then, we've seen subprime increase," comparing quarters year-over-year, she said.

Interest rates were down for auto loans across all risk categories, according to Experian. In the prime-risk segment, it's likely that incentives played a role in bringing down the average interest rate, Zabritski said.

In the subprime segment, incentives were unlikely to be a factor, she said.

Subprime rates had more room to decline because auto lenders raised those rates more when credit was tight, she said.

For new vehicles, the average interest rate was 4.55 percent, down from 4.98 percent a year ago. For used, the average was 8.6 percent, down from 8.83 percent.

"We are certainly seeing the biggest [rate] decrease in these higher-risk areas," Zabritski said. "These did see increased rates when the market tightened."

You can reach Jim Henry at autonews@crain.com. Readers are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Automotive News. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification.

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Former Texas dealership wins loan dispute

Eric Freedman
Automotive News -- December 7, 2011 - 12:01 am ET

An arbitration award in favor of a former Texas dealership has been upheld in a dispute over loan terms and a co-signer’s claim that her signature was forged on the retail installment sales contract.

The three-judge panel of the Texas Court of Appeals unanimously ruled that the dispute properly went to arbitration rather than to a court trial.

Based on his credit rating, Tomasa Lopez failed to qualify for financing to buy a used 2004 Chevrolet Suburban at what was then Casa Pontiac-Buick-GMC Inc. in Baytown, the court said. His sister in December 2004 agreed to co-sign for the loan and signed various documents, including one containing an arbitration agreement.

The Lopezes sued Casa under the Texas consumer protection law, alleging unconscionable conduct. The dealership was sold after the Lopez transaction, said Casa’s lawyer, Daniel Pappas of Houston, and no lenders were involved in the litigation.

The suit asserted that when the sister later received copies of the paperwork, she discovered different loan terms from what they had agreed on, that monthly payments and finance charges were higher than expected and that her signature had been forged on a sales contract containing several fees to which they had not agreed.

Lopez spoke no English. The plaintiffs also contended that Casa deceived him about being able to improve his credit rating by making payments on a note in his sister’s name.

Pappas said the suit sought “considerable damages,” including mental anguish and punitive damages.

A lower-court judge ordered the case to arbitration and later confirmed the arbitration award against the Lopezes.

The Court of Appeals agreed with Casa that the arbitration agreement was enforceable and that the Federal Arbitration Act applies because purchasing and financing of the Suburban clearly involved interstate commerce.

“All of the factual obligations arise out of or relate to the sale and financing of the vehicle,” Chief Justice Adele Hedges wrote in the court’s opinion. “These types of claims all fall within the scope of the arbitration agreement.”

The court also held that the Lopezes failed to provide evidence that the agreement was unconscionable due to their lack of education, lack of sophistication in financial and legal affairs and weak English-language skills.

And it emphasized that the sister admitted signing the arbitration agreement.

The plaintiffs’ lawyer, Philip W. Green of Kingwood, could not be reached. Pappas said Green has indicated that there will be a further appeal.

You can reach Eric Freedman at freedma5@msu.edu. Readers are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Automotive News. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification.

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Worst-case scenario: The inside job

December 7, 2011 - 12:01 am ET

Jim Henry is a special correspondent for Automotive News

Car dealers can't let every little thing bother them. But the possibility of an inside job -- especially in the F&I department -- must keep a few dealers awake at night.

Case in point: A couple of recent stories in which dealership insiders who knew how to work the system are accused of taking part in illegal schemes that used real customer information. (See stories below)

The Red Flags Rule, which has been in effect since 2008 but only began being enforced by the Federal Trade Commission this year, is aimed at protecting consumers from identity theft. The same precautions also protect the dealership from straw buyers who aren't who they say they are.

But what if the same hand that's supposed to wave the red flag is in on the scam?

That's something to lose sleep over.

You can reach Jim Henry at autonews@crain.com.

Readers are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Automotive News. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification.

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Dealerships are targets for ID thieves, from inside and outside

Amy Wilson
Automotive News -- December 7, 2011 - 12:01 am ET
Hurley: “Spin master” was top F&I producer.

When Scottsdale, Ariz., police pulled over a vehicle on Sept. 10, 2008, they uncovered a fraud ring with ties to drugs, prostitution -- and a local auto dealership.

"It was basically a forgery mill on wheels," Scottsdale Police Detective Scott Much said.

Inside the car, mixed in with credit card numbers stolen from a telemarketing company, were sales contracts from Henry Brown Buick-GMC-Pontiac in the nearby suburb of Gilbert, Ariz. Police went to the dealership and talked to owner Henry Brown.

Brown, shocked to hear about the security breach, cooperated with investigators. Together they figured out the common element to the sales contracts gone missing: All those customers were handled by finance manager Dominick Hurley.

It's a crime story that law enforcement officials say happens too often -- one that dealers fear and can be reluctant to discuss when it happens at their dealerships and their customers are victimized.

Hurley, then 46, had long worked for area dealerships -- in between prison stints, that is. With 17 felony convictions for such crimes as burglary, credit card theft and drug violations, Hurley was a "career criminal," Much said.

But he also was charismatic and a top producer in the finance department, earning $200,000 or more annually. Even some of the dealership customers who were victimized initially couldn't believe Hurley had been involved in stealing their personal information, the investigator said.

Dealership management, however, already was suspicious, according to police. A General Motors audit of a gift card incentive to truck buyers had turned up discrepancies. Hurley later admitted diverting $28,500 in Lowe's and Best Buy gift cards to himself and another member of the fraud ring, officials said.

Brown did not respond to requests for an interview. But the dealer fired Hurley after that police visit, Much said. Two days after the visit, police stopped Hurley as he was driving away from his home and arrested him. A search of his house and car turned up more customer files.

In all, Hurley stole the personal information of about a dozen customers of Henry Brown Buick-GMC-Pontiac from late 2007 until he was fired the next September, said Maryann McKessy, chief of the Fraud and Identity Theft Bureau of the Maricopa County Attorney's Office.

"He was giving it to his buddies that he was running around with, doing drugs and prostitution," McKessy said. "It was access to a different lifestyle."

The finance manager's buddies used that customer information to apply for store credit cards, lease vehicles and rent hotel rooms. Dealership customers, who learned from the police that their identities had been stolen, had a mess to clean up regarding their financial histories.

"It absolutely screwed with their credit," McKessy said.

In 2010, Hurley agreed to a plea deal in exchange for testifying against the others and was sentenced to 10 years in prison.

McKessy, who has been prosecuting fraud and identity theft for more than 10 years, said it isn't the first time one of her cases has involved a car dealership.

"I hate to say it, but it's a pretty common ground where information is breached," she said.

It's why the auto industry and regulators have worked to crack down on the problem in recent years. Dealerships are targets for identity thieves -- those working from both the inside and outside. And since cars are such big-ticket items and dealers are so vulnerable to bad word-of-mouth, the consequences of such fraud can be devastating.

"A security breach can be a business killer," said Patricia Covington, a partner at law firm Hudson Cook in Maryland. She is a former CarMax deputy general counsel who has been advising dealerships on legal issues for 14 years.

The Red Flags Rule, which went into effect in 2008, requires businesses such as dealerships to identify likely indicators of identity theft and put reasonable detection and response procedures in place. In certain circumstances, dealerships can be fined up to $2,500 for each violation of the Red Flags Rule.

While it has increased dealership compliance and training costs, it also is helping prevent incidents, in part, by increasing awareness, Covington said.

Dave Robertson, executive director of the Association of Finance and Insurance Professionals, agrees that crackdowns like the Red Flags Rule have been beneficial.

"It's still a major problem, but it's not growing as fast," Robertson said.

While no hard numbers are available on identity theft cases specifically involving dealerships, the Federal Trade Commission does report data on consumer complaints to law enforcement and consumer advocacy organizations. Identity theft is the top consumer complaint, according to the FTC, though the number of complaints dropped through 2010 after peaking at 314,521 in 2008. Complaints had fallen to 250,854 by last year.

McKessy, the prosecutor in the Arizona case, says she has seen fewer instances of identity theft related to dealerships in the past five years.

McKessy and dealership advisers say instances can be cut down further with some simple practices.

It can be as low tech as closely examining a customer driver's license and then scrutinizing the person in front of you, they said. If the license says he is 40, ask more questions if he doesn't look 40, Robertson said.

Use the information a Social Security number reveals as another test, Robertson said. The first three numbers correspond to the geographic area. So a finance manager could say: "So you got your card in Illinois," when it really came from Iowa, to see whether the customer knows to correct that information. AFIP has laminated cards available that list Social Security number prefixes and their place of origin.

A dealer who is hiring should ask for references, particularly prior employers, and then call and check those references, Covington said.

Make sure middle managers also are informed on identity theft and prevention tactics, she said.

"The biggest thing a dealer can do is build the culture of awareness about identity theft," Covington said, "so everyone is thinking about it and thinking about preventing it."

While there is increased cost involved in complying with the Red Flags Rule and putting preventive measures in place, the benefits far outweigh the expense, Covington said. A security breach could cost the dealership a lot more in the long run.

Dominick Hurley's criminal history also underscores the need for an employee background check.

That didn't happen when Hurley was hired at Henry Brown, which has since tightened its policies. According to McKessy and Much, the Brown dealership management didn't know the extent of Hurley's felony convictions when they hired him -- but they were aware he had been to prison.

"But this guy is the most magnanimous person you would meet," McKessy said of Hurley. "He's a spin master. That's why he's so good at his job."

Dealers should follow simple rules to prevent ID theft from insiders and outsiders, experts say.
• Perform criminal background checks, possibly even credit checks, of prospective employees.
• Contact references for all job applicants.
• Provide employees extensive and ongoing compliance training.
• Switch to electronic deal jackets to eliminate paperwork.
• Use compliance software to detect discrepancies.
• Conduct regular audits; spot-check deals.
• Inspect dealership computers for suspicious spreadsheet files.
• Block Web sites that help create phony proof of income.
• Lock down computer systems so that customer information can be pulled only 1 record at a time, not in large batches.
• Don't allow customer paperwork to leave dealership premises.
• Carefully compare customer credit application with credit history.
• Test customers with questions about rent payments, mortgage balances or where their Social Security numbers were issued.
• Examine customer documentation carefully; compare driver's license photo with the person sitting in front of you.
You can reach Amy Wilson at awilson@crain.com. Readers are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Automotive News. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification.

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DETROIT — As the Chevy Volt's battery safety is called into question by the National Highway Traffic Safety Administration, the General Motors team is stepping up to the plate to reassure consumers it is standing firmly by the product. Management outlined several steps its taking to confirm the model's safety and is also offering free loaner vehicles.

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Pitching products in the service drive works. Just ask Nestor.

Jim Henry
Automotive News -- November 30, 2011 - 12:09 pm ET
Alvarez: "We reward whoever sells it, whether it's a sales person or a cashier. "

It's impossible to miss Service Manager Nestor Alvarez at Land Rover North Dade, a Miami dealership -- or the fact that he offers extended-service contracts in the service lane. "We promote it pretty heavily," he says.

That's an understatement.

The slogan "Ask Nestor" appears on dealership banners, e-mail promotions, all over the dealership's Web site, and on hats and buttons dealership employees wear, Alvarez says. A typical banner: "PROTECTING Your Investment with an Extended Warranty is Even SAFER than Driving a Land Rover! Ask Nestor!"

Land Rover North Dade is part of the Warren Henry Auto Group. The group has six locations with seven franchises in Florida (Fisker, Infiniti, Jaguar, Lamborghini, Land Rover, Subaru, Volvo).

The group has been promoting and selling extended-service contracts -- sometimes referred to as extended warranties -- to service customers for about a year. On Nov. 17, Alvarez gave a presentation in a 30-minute Webinar hosted by Automotive News, titled "Master Extended Warranty Sales." [To view it at no charge, go to autonews.com/webinars] Special Correspondent Jim Henry interviewed Alvarez by phone on Nov. 29.

Do you offer contracts to all service customers?

We offer contracts on the service drive to everybody who would qualify ... We can go up to a 7-year-old car, and up to 80,000 miles. They're working on providing us with something a little bit longer.

Who's "they?" Do you have a particular supplier, or do you sell a lot of different contracts?

We use Vanguard Dealer Services. We only sell EasyCare service contracts. That is one part of the business. We also sell KeyCare [key replacement policies], dent repair, tire and road hazard.

So service contracts aren't the only F&I products you sell in the service department.

It's not just service contracts. We try to sell road-hazard [policies], for example, but that's not so much. The other big thing we sell here is key replacement. Without it, it can cost $500 to get a key replacement for a Mercedes. It's $150 for the policies, and you can use it as many times as you need. You can also get a package where you can get a house key and everything. We also do very well with dent policies.

Do customers accept the idea of being pitched these products in the service lane rather than the sales department?

The actual effect is bigger if you take F&I to the service drive. If you're at a dealership that sells 20, or 30, or 100 cars a month, that's all the people you see in a month. We [in the service department] see that many in a day.

How do service writers get paid for F&I sales?

One of the problems [in other dealership groups] is that dealers, general managers — when you have one — try not to reward the people who sell it. We reward whoever sells it, whether it's a sales person or a cashier. They get $100. The profit is $1,000 even, so we keep the $900. If they sell enough, they can also qualify for prizes. Some [service] advisers pick up an extra $1,500 per month. We've probably tripled our extended warranty sales.

What do the people in the new-car and used-car departments think about this? Aren't you competing with them?

The competition is minimal. They're focusing on the cars they're selling that day. If a dealership sells 50 used cars in a month, that's 50 chances they have to sell a contract. We have 40 customers a day. The sales department doesn't have that kind of traffic. I don't think it's business that they would be getting anyway. There's not a real hard competition with sales.

Is the whole Warren Henry group doing this, or just your market?

It's everybody. The profits are nice, of course, but the big thing is for retaining people. For retaining people, it's a great tool.

When you say retaining people, you mean retaining service customers, right? J.D. Power says people quit going to the dealer for service after their original warranty expires.

That's right. Especially at the high end, you see more people hanging on to their cars longer. We always ask how long the customer plans to keep their car. If it's at least three years, they'll probably get their money back.

You can reach Jim Henry at autonews@crain.com. Readers are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Automotive News. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification.

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Captives lead auto finance recovery

Jim Henry
Automotive News -- November 30, 2011 - 8:45 am ET
With retail sales of new cars and light trucks rebounding in the U.S. market, auto financing is on the upswing, too.

Photo credit: BLOOMBERG

Retail sales are in recovery mode and so is auto financing.

The comeback is much stronger among captive finance companies -- especially for subprime customers -- compared with banks and credit unions, according to Equifax. Since the captives fell harder in the 2008-09 recession and overall credit freeze, they had more ground to make up on the road back to normalcy.

Since the captives fell harder in the 2008-09 recession and overall credit freeze, they had more ground to make up on the road back to normalcy.

"When we look at what's going on in automotive, you see a tremendous amount of growth coming from a specific area," said Michael Koukounas, senior vice president of special client services for Equifax. "It's coming from the captives."

Comparing July 2011 with July 2009, Equifax said auto originations for the captives increased 47 percent, to almost 855,000 contracts, including new and used vehicles. In the same comparison, banks and credit unions dropped 1.4 percent, to 820,000, Equifax said.

"Banks are being very cautious about lending -- and they have significant regulatory oversight, telling them to be cautious," Koukounas said earlier this month.

So the recent momentum is in favor of the captives.

For example, Ford Credit reported last month it originated 27.5 percent more U.S. loans and lease contracts in the third quarter than it did the year before. Ally Financial Inc., the preferred lender for GM and Chrysler Group, said it originated $10 billion worth of U.S. auto loans and leases in the third quarter, up about 17 percent.

For the same period, Chase Auto Finance, one of the biggest banks in auto lending, reported its auto originations were down 3.3 percent to $5.9 billion.

To put the recent numbers in context, Ford Credit originations fell about 43 percent for all of 2009 vs. 2008.

Koukounas said the captive finance companies in particular have been quicker to get back into the subprime segment. However, Equifax doesn't break out company-by-company results, except for clients.

Auto loans to subprime borrowers now account for 38.5 percent of all auto loan originations for the captives, and 17.6 percent for banks and credit unions, according to Equifax. The credit bureau defines subprime borrowers as those with Equifax credit scores below 640.

You can reach Jim Henry at autonews@crain.com. Readers are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Automotive News. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification.

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