Out of Trust, Out of Control

When it's the dealer who's in trouble with fraud, things usually unravel fast.

Here's how it happens. A dealer starts to fudge the numbers a little in a bad month. An accounting staffer is told to cook the books to look good on floor planning and inventory. Dealers think they will catch up in good months but that doesn't happen. So starts a domino effect that leads down a road to peril.

“The biggest problem I see with fraud cases is dealers getting out of trust,”

says Robert Sexton, a former law enforcement investigator. “They're not crooks, but (in most cases) are just trying to survive.”

Out of trust can translate into out of control. Out of trust means the dealer does not have the money to operate the business due to cash flow problems, and is unable to pay for floor-plan financed vehicles.

When a dealership gets out of trust that causes a domino effect that can crush everyone caught in the food chain — other dealers, creditors and customers.

The dealer begins digging a ditch by selling vehicles and using the floor plan money to operate the business, or for personal finances.

These cases are increasing and can harm dealers and creditors. Consumers also can get tangled in the evil web. A buyer might drive a car for several years without a title because the finance company or state wouldn't release it without a clear title.

Sexton explains that after a dealer floor plans vehicles with a lender, the floor planner pays off the existing loan or pays the dealer the amount of money allowed for the vehicle in trade. The floor planner usually keeps the title as security on the vehicle. When the vehicle is sold the floor planner releases the title and is paid for the vehicle plus interest.

The domino effect for dealers starts by not clearing the title on the sale and paying for the vehicle using funds on the sale of the next vehicle. As cash flow worsens, the dealer may be selling a third vehicle to pay for the first one, and so on.

Eventually he owes the floor plan for more vehicles than he can pay for or clear the title.

“The purchaser, either another dealer of a consumer, can't get a title for the vehicle they purchased,” Sexton says. “In most cases the purchaser has financed the vehicle and the finance company may have paid the dealer. Now the consumer has a vehicle that is encumbered by both a finance company or a floor planner.”

Many vehicles are sold in dealer-only auctions which are really dealer exchanges, so dealers in trouble impact other dealers, especially smaller dealers with limited cash flow, Sexton adds.