No member of the auto finance industry is unaware of the scourge of intentional vehicle overvaluation, commonly referred to as “powerbooking.” It is a dishonest practice undertaken for selfish and shortsighted purposes, typically to secure funding for an inflated loan amount.
Powerbooking is also bank fraud. Whether prosecuted by state or federal authorities, it’s a crime that can and has resulted in serious ramifications for F&I managers and dealers, up to and including prison time.
Overvaluation is typically discussed in terms of the harm it does to auto loan underwriters and the liability it creates for dealerships. But F&I product providers and administrators also can be victims of powerbooking.
Those who sell GAP waivers and vehicle service contracts — and insurance companies that sell GAP insurance — are willfully deceived when dealership personnel engage in vehicle overvaluation. GAP and VSC claim payouts are based on the value of the vehicle, accurate or otherwise. At a time when GAP losses in particular are mounting, providers can’t afford to overpay.
Writing for the Q2 2018 issue of P&A, attorney, compliance expert, and former regulator Terry O’Loughlin, now an executive with Reynolds and Reynolds, cited a dealer and finance source consultant who concluded nearly 70% of the sales he reviewed were powerbooked.
How can the industry solve this problem? Our sources offer three distinct but complementary approaches:
Solution No. 1: Dealership-Level Training and Discipline
Gil Van Over has uncovered countless instances of powerbooking throughout his career as a compliance expert and dealer consultant. The executive director of Automotive Compliance Education and founder of gvo3 & Associates counts overvaluation as one of several potential bank fraud issues ACE vets with every dealership visit.
“We find differing types of potential powerbooking, including nonexistent options, misstating mileage, misstating model or engine type, or using like invoices with a higher model series,” Van Over says.
The consequences are discipline — up to and including termination — and retraining for F&I managers. Offenders are informed of the many risks their behavior could have brought to bear on their employers.
“These risks include potential chargeback from the finance source, the filing of a secret Suspicious Activity Report against the business and possibly managers, consumer litigation, and governmental inquiries,” says Van Over, adding that, in his experience, powerbooking rates are at least on the decline — for the most part.
“We will terminate a dealer relationship if they refuse to correct the behavior or improve their processes,” Van Over warns.
Bill Kelly, executive vice president of Automotive Development Group (div. Brown & Brown Insurance), says his company “constantly” monitors dealers, performing regular spot checks to uncover and discourage powerbooking.
For certain stores, Kelly’s team takes things a step further, requiring photos of the vehicle in every deal jacket.
“I will say making people add pictures of any adds to a vehicle really helps curb any chance at powerbooking,” he says. “You have to inspect the process on a consistent basis.”
Kelly agrees with Van Over that the frequency of powerbooking appears to be decreasing — and that there is no good reason to maintain a relationship with a dealership where the culture fails to support real and lasting change.
“I think that enough dealers have been stung that they understand that they have to have a zero-tolerance policy, so in the stores that we work with, I am not seeing it as much,” Kelly says. “So less frequent, but absolutely something that we need to continue monitoring or it will creep back.”
Solution No. 2: Electronic Contracting
Can technology succeed where training and discipline fails? It already has, says Ron Greer, vice president of provider services at Provider Exchange Network and a longtime proponent of electronic rating and contracting.
“An econtract is the result of a confirmed rating process that produces an agreement within the provider’s system. There is no way a dealer could sustainably get away with powerbooking because of the audit trail,” Greer says. “You can do almost anything you want with paper.”
An example could be listing and charging for a nonexistent product for which the F&I manager pockets the premium, then prays the customer never makes a claim. Put the same deal through the checks and balances that occur throughout the econtracting process — all designed to promote if not ensure accuracy in every facet of the agreement — and “faulty practices” will soon be sniffed out, Greer says.
“Without econtracting, the purchase agreement may disclose GAP, VSC, and roadside assistance and the price for each, but with no data behind it.”
Solution No. 3: Big Data
In June, Black Book announced the launch of its proprietary Asset Verification Tool. Built by a team led by Director of Product Management Kyle Luck, AVT was designed specifically to detect overvaluation at loan origination for Black Book’s auto finance clients. But it soon became clear the technology could be applied to other markets, including GAP insurance.
“There is an additional risk to the GAP insurer if the vehicle is not properly verified or described,” Luck says. “If the asset is overvalued during financing, powerbooking exacerbates the gap.”
Just like banks and finance companies, insurance and F&I product providers will likely never “touch” the vehicle, increasing their reliance on accurate data.
“Let’s say the vehicle is really worth $25,000, and you’re insuring it for $28,000. To be off by $3,000 on day one? That’s a lot of money,” says Jared Kalfus, Black Book’s executive vice president of revenue. “We’ve been providing data to GAP insurers for years. Now we’re able to get a more precise VIN decode that leads to a more precise value.”
Kalfus stresses the need for accurate valuation starts but does not end at underwriting. GAP insurance and GAP waiver providers may have hundreds of thousands of covered vehicles on the road. In case of catastrophe, the combined loss on a book of overvalued GAP claims could be staggering.
In an effort to reduce that risk, Kalfus says, Black Book’s insurance company clients are using AVT to “refresh” their portfolios — not just once, but constantly — to ensure they are depreciating vehicles correctly.
“If you’re a GAP waiver provider, shouldn’t you be doing the same thing?” Kalfus asks. “Those companies have millions of GAP policies on the street. What are they on my books for and what are they worth today?”
Executives note the datasets that feed AVT — some of which are new to market — are also available to dealers through Black Book’s Cherry mobile app. Many are using it in the auction lanes.
Kalfus predicts that dealers investing in new equity-mining tools for sales, service, and buy-back offers will soon find powerbooking has a negative downstream effect. Sales managers do not want to tell a visiting customer they have $3,000 in equity only to discover their trade-in was overvalued at purchase.
After all, “They’re trying to sell another car,” Kalfus says.
Overvaluation puts dealerships at risk and can cost F&I product providers and administrators and finance sources on a per-deal and long-term basis. It may take a combination of new technology and good old-fashioned thought leadership to finally put a stop to this destructive and costly practice.