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Contributing Author:
Jason Hash
Training Manager
EFG Companies

One of the biggest compliance concerns discussed at this year’s F&I Industry Summit was bank fraud. Just this past summer, two auto groups made headlines for falsifying loan documents. So, how do you keep your dealership out of the headlines?

Start by understanding what bank fraud entails. In a traditional retail installment contract, bank fraud can occur in a number of ways:

  • misrepresentation on the credit application, such as with consumer income, down payment information, or stability;
  • misidentification of the buyer as someone else;
  • falsification of vehicle information with options the vehicle doesn’t have to augment the size of the loan; and,
  • failing to report to the IRS cash receivables of more than $10,000 for a single transaction.

Bank Fraud: Misrepresentation of the Credit Application

One of the most prevalent scenarios facing F&I managers is what to do when a customer is trading in a vehicle with negative equity. All too often, this scenario results in falsifying loan applications. There are two compliant methods to record negative equity on an installment sale agreement, depending on whether customer has a down payment.

Gross

If there is no down payment and the customer owes more on the trade-in than the amount of the trade-in allowance (negative equity), the down payment must be shown as zero.  The amount of negative equity is disclosed in the “itemization of amount financed” section.

Netting

If the customer with negative equity also has cash down, you have a choice of either showing the cash as a cash down payment or applying the cash to reduce or eliminate the negative equity. It’s important to note to never record a negative figure on a contract.

In addition to income, customer stability is very important to lenders. On an application, if a customer has lived at a residence for less than two years, or worked for their current employer for less than two years, F&I managers should put down their previous address and/or employer as well. All too often, people in a rush to finalize deals will inflate these times. This counts as misrepresentation and bank fraud. And, it’s very easy for a lender to verify when pulling a customer’s credit. Also, to this point, lenders are making it a standard practice to contact every customer, regardless of credit, to ensure they have accurate information on the credit app. The lesson here is don’t let the pressure to close a deal cause your F&I managers to cut corners on loan applications.

Bank Fraud: Misidentification of the Buyer as Someone Else

Typically, misidentification only happens when potential customers are misrepresenting themselves and committing identity fraud. There are several processes dealerships should be following to safeguard their business from these customers, specifically with regards to the Red Flags Rule and Safeguards Rule.

Under the Safeguards rule, dealers are required to:

  • designate an employee to be responsible for developing and coordinating the program;
  • identify reasonably foreseeable internal and external risks to the security, confidentiality, and integrity of customer information that could result in unauthorized disclosure, misuse, alteration, destruction or other compromise;
  • develop and implement a written plan to control the risks to customer information that was identified during the risk assessment;
  • regularly audit the safeguards to ensure their effectiveness and evaluate and adjust it as needed; and,
  • oversee service providers who take possession of customer information even for a discreet task.

The Red Flags Rule was created to protect the accuracy and privacy of consumer information collected and maintained by credit reporting agencies. Under this rule, F&I managers must ensure the customer in front of them is who they say they are. Typically, a credit check will notify the F&I manager of any alerts to potential fraud. For example, if an F&I manager receives an extended fraud alert, they should call the individual listed in the credit report if a phone number is available.

If a customer claims to be a victim of identity theft, dealers may require the following information:

  • a written request mailed to a specified address;
  • information about the alleged fraudulent transaction sufficient to comply with dealer disclosure obligations; and/or
  • proof of the theft report filed with the government.

IRS Form 8300 Reporting Rule

Under the IRS Form 8300 Reporting Rule, any person in a trade or business who receives more than $10,000 in cash in a single transaction, or related transactions, is required to file IRS Form 8300. The IRS considers “cash” as a cashier’s check, bank draft, traveler’s check, or money orders if they have a face amount of $10,000 or less and are not otherwise excepted from the definition.

For example, if in the course of paying for a vehicle, a customer gives a dealership seven cashier’s checks, each amount less than $10,000, but the total is greater than $10,000, the dealer should file the form 8300 because it is a suspicious transaction.

Alternatively, if a customer puts $15,000 cash down on a vehicle, with the remainder of the balance to be financed, and no credit source would accept the deal, and the transaction was terminated, the dealership must still file the form 8300.

What can easily trip dealerships up is the “related transactions” clause, which includes transactions between a buyer and seller that occur within a 24-hour period, as well as transactions more than 24 hours apart but within one calendar year from the first transaction that are related. So, let’s break that down.

Two transactions within 24 hours:

If a customer paid $9,000 in cash for a pickup at 6 pm and came back at 9 am and pays the selling dealer’s shop cash to install a $2,000 lift kit, the dealership should file the from 8300 because both cash transactions were related and fell within a 24-hour period.

Related transactions occurring within one calendar year:

If a customer purchases a vehicle by paying a $6,000 cash down payment, then makes seven additional $1,000 cash payments within 12 months of the transaction date, the dealer should file the form 8300.

Each of these procedures can either protect the dealership, or if they aren’t followed, leave the dealership open to civil and criminal penalties in addition to potential loss of income. With more than 40 years of helping dealerships achieve compliant profitability, EFG Companies knows how to foster team accountability and protect your dealership from costly mistakes. Contact us today to find out how.

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