If you’ve been in this business for any length of time, you’re no doubt familiar with the spot delivery. That’s when a dealer signs a contract with a customer, allowing them to take possession of their new car before they’ve even received bank approval. It’s a practice about as old as the industry itself — and one that’s also fraught with risk.

Back in my retail days, I worked with numerous general managers who didn’t think twice about spot deliveries. They’d espouse the notion that if you weren’t bringing enough cars back, you just weren’t spotting aggressively enough! Their motto seemed to be: “If the customer can fog a mirror, we’ll spot them.”

The fact that spot deliveries still occur today seems a bit of a mystery. With the advent of technology and the development of channels like Dealertrack, RouteOne and CUDL, you’d think the practice would have gone the way of the DeLorean. This is hardly the case.

Many dealers will stop at nothing to put a deal together, including pushing spot deliveries. This is a frequently used tactic to remove a buyer from the market until the dealer has had enough time to hash out the particulars with the lender. This effectively keeps the buyer from going elsewhere while waiting for approval and limits the risk that they’ll be scooped up by the competition.

Often times, dealers bank on catching lenders asleep at the wheel. But it’s when third-party financing can’t be obtained at the quoted rates that things start to get messy. That’s when the customer is called back into the dealership and presented the cold hard facts by the F&I manager: The deal was not approved on the original terms offered. In order to keep the car, they’ll have to resign on higher payments or different terms.

Although many states have no laws in place preventing the practice of spot delivery, there are several conditions that apply. For example, it’s considered a deceptive practice to have a customer sign a contract on terms you know they may not be approved for. This is commonly known as a “yo-yo” deal, and can lead your dealership into a world of trouble — not the least of which could result in a class action lawsuit.

When spot deliveries go bad

Spot deliveries gone bad often result in one of two scenarios: recontracting and unwinding. Unwinding is a more straightforward action, resulting in the complete cancellation of terms and the return of the vehicle to the dealership.

Recontracting is the most common result of failed spot deliveries. That’s when the original contract is rescinded and a new contract is written up, this time for terms more likely to result in a third-party approval. Some states, like California, require the use of specific forms when recontracting customers. These forms also typically require dealers to provide full disclosure for the reasons why.

Recontracting is a sticky practice. Many dealers aren’t aware that back-dating contracts isn’t legal. All recontracted deals must show the new date of the contract. If not, this may lead to the inaccurate disclosure of a stated APR — a major no-no that can cause your dealership to be hit with a Truth in Lending Act violation.

Stips and liabilities

Another common mistake dealers make is letting customers slip on stip collections, attempting to collect stips only after the customer has taken possession of the vehicle. This practice can open you up to significant risk — like the customer being unable to offer proof of income, or the provided proof of income not matching what was entered into the application.

In this case, you as the dealer will have no choice but to send the deal to another bank. This provides customers with anywhere from two weeks to 45 days to shop the loan without adversely impacting their credit. If credit is pulled outside of that allowance, it may damage the customer’s credit file. This can leave your dealership liable. The solution? Never let the customer leave without validating their income and without all stips in hand.

Insurance and liability

Yet another danger inherent in the spot delivery is the question of insurance in the event of an accident. If a customer drives a new car off the lot and gets into an accident — wrapping the vehicle around a telephone pole and injuring others in the process — your dealership will be responsible for paying for the damages. In this scenario, an insurance provider is not obligated to pay the claim. It’s not until the transaction is fully funded by the bank that insurance kicks in.

State requirements vary

Some states require dealers to obtain bank approval within a specific time frame. Recently, New Jersey revised spot delivery time frames to four days. If bank approval can’t be obtained within that time, the customer has to return the vehicle. Once outside that four-day allowance, customers can demand the originally contracted terms – leaving the dealership responsible for providing in-house financing. In-house financing, also known as full recourse, can open up a can of worms with respect to various regulations.

Other states have different rules about spot delivery. In Wisconsin, dealers there are required to provide financing if they spot deliver a vehicle and can’t get the customer approved through a third-party lender. Because state laws differ, ensure you are up to speed on where your state stands with respect to spot delivery.

Deferred down payments and promissory notes

Often, dealers offer to hold checks or promissory notes to defer the customer’s down payment when doing a spot delivery. While this may not be considered illegal by FTC standards (as long as no interest is charged to the customer and you’ve been fully transparent), it could raise serious issues with your bank provider.

If the customer fails to make payment to the lender and the lender discovers your dealership accepted a deferred down payment or promissory note in lieu of actual money down, your dealership could be on the hook for the full value of the car. Naturally, much of this has to do with your established relationship with the lender in question – but it’s a risk better not taken. As a point of caution, always read your dealer agreement and closely review your retail installment sales contracts.

No such thing as a free ride

Spot deliveries offer numerous conveniences for both customers and dealerships. Customers can drive their new vehicle off the lot much sooner, and dealerships enjoy selling more cars. But spot deliveries also come wrapped in risks that must be considered. Spot decisions can wreak havoc in the wrong hands. As a dealer, it’s imperative that you examine the potential pitfalls of spot delivery and determine if the risks to you outweigh the benefits.

Rebecca Chernek of Chernek Consulting provides customized in-dealership training for franchised, independent and high-line luxury brand automotive dealers. Interactive virtual training programs in conjunction with role play, including a recently added course on compliance, are available at www.chernekconsultingvirtualpro.com.