In retail automotive, there is still a debate over whether the practice of packing is illegal or not. In this short post, we'll learn what payment packing is, and why it is illegal.
This video was originally published in December 2018.
Payment Packing Defined
There are a lot of definitions when it comes to what exactly constitutes payment packing. The only official definition I could ever find was the one adopted as a resolution by the National Association of Attorneys General (NAAG). NAAG defines payment packing as the deceptive practice of misrepresenting monthly payments to consumers during auto sales and lease negotiations, in order to facilitate the sale of automobile-related products and services.
In other words, payment packing begins at the payment quotation. It is intended to artificially inflate what the monthly payment is going to be so you can detect the customer's pain point. If you say to the customer, “this will be $500 per month,” when you know that the actual likely payment for the product and the interest should be $400 a month, you have created $100 of leg in the deal. That is illegal because it's deceptive.
Leg creates room to “pack” the inflated payment with products or excessive finance reserve without the customer’s knowledge or informed consent.
If you detect that the customer is fine with a $500 payment—artificially inflated by $100 (the leg)—and then you pack that payment and fill that leg with products whose monthly payment will fill up that surplus hundred dollars, you have broken the law because you have deceived the customer by misrepresenting monthly payments.
It doesn't matter if all of the documentation is accurate at that point. Payment packing begins at the first pencil. By the time you get the documentation straight it should be accurate, but all your accurately recording is the fraud.
Best Practice for Quoting Payments
Payment packing starts and ends with artificially inflating the quoted payment. To avoid even the potential appearance of payment packing, you should always:
accurately quote payments at every step of the process
explain every change in those payments
get the customer to acknowledge the reason for every change in the monthly payment
have the customer initial or sign on the menu, the buyer's order, the installment sale contract, and on all of the contract documents for the products
If you follow these best practices, payment packing can't happen and it won't happen. Always be honest. Always tell the truth and as a practical matter until you know the customer's exact actual credit score always quote a consistent and realistic credit score or credit tier so the APR will be uniform. Until you know differently, assume every customer that walks in qualifies for your captive finance company's tier two APR and use that as a basis for your payment quotations and you should be just fine. Payments should always be quoted accurately, transparently, and consistently. If you can do those three things (and you can!) payment packing will never be a worry.