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Compliance

Valuing Compliance

March 2007, F&I and Showroom - Feature

by Michael Benoit

Being a compliance lawyer, I ask new and potential clients to consider this question: “How do you value good compliance practices in your operation?” What would your response be?

After your initial knee-jerk response of “a lot,” think about it some more. It’s really a hard question to answer. Not because folks don’t value good compliance practices, but because we all conceptualize “value” differently. For some, “value” is simply the out of pocket dollar cost. For others, more intangibles are involved. For example, a particular benefit may be hard to quantify in terms of dollars, but it is meaningful nonetheless.

Car buyers and airline passengers are great examples of this concept. Car buyers may be driven by pure dollars or by value. How many times have you seen that customer who wants a specific vehicle and has his price (or monthly payment), and just isn’t going to pay a penny more? Conversely, when you are able to articulate additional value that is important to that customer, how many times have you found that price becomes a little less important? For example, a family with young children may value safety to the point that they’re willing to pay a little extra for that peace of mind side airbags provide.

Airline tickets are another thing. The cost of a ticket on the same flight can vary by $1,000 or more. Why would Passenger A be willing to pay a $1,000 premium over the price paid by Passenger B? I can’t speak

for everyone, but having been Passenger A, I can tell you that the value I associate with arriving at my destination at a particular time has a significant impact on the out-of-pocket cost I’m willing to pay. For example, the airlines know that most folks are willing to pay more for business travel because of the economic interest the traveler has in getting to that last-minute meeting on time. Leisure travelers tend to be able to plan well in advance and can shop for better prices at different times. In both examples (car buyers and airline passengers), the economics of the transaction tend to be driven by the value perceived by the consumer.

So, think about the value you perceive in good compliance practices. Is it simply a dollar cost thing? Or are there intangibles and other things that impact your perception? Let’s take a look at some value propositions you can consider.

Good Compliance Practices Are Good For Business

Many of you out there work in dealerships that are fixtures in your communities. Your dealership has spent a long time building a reputation for excellence, trustworthiness and integrity, right? Of course. You value your reputation in the community, right? Yes indeed. You know your best sources of new business are repeat customers and referrals, right? Absolutely. So, it wouldn’t make sense to have a shoddy compliance
program that could negatively impact your repeat business and referrals, right? You betcha.

Good Compliance Practices Protect the Bottom Line

Let’s face it; you don’t get something for nothing. Good compliance practices require an initial and ongoing investment. Ben Franklin’s old adage, “An ounce of prevention is worth a pound of cure,” is right on the money when it comes to valuing good compliance practices. Invariably, the money spent developing and maintaining good compliance practices is a drop in the bucket compared to the costs of defending yourself against a lawsuit or enforcement action. Add the costs incurred as a result of the bad press you’re sure to endure and that pound of cure gets mighty heavy, mighty quick.

Talk is cheap they say, so let me paint a little picture. The chart on the next page quantifies the potential damages your dealership could suffer as a result of shoddy compliance practices. Take a look, I’m sure you’ll be convinced that efforts to remain compliant are worth the investment.

These look pretty bad, don’t they? Without a doubt. And keep in mind that the penalties associated with these violations are only part of the cost a dealership could face — you’ll incur costs defending yourself in a lawsuit or enforcement action, and a good defense is expensive.

Assume that you have a security breach in your dealership that results in the misappropriation of your customers’ personal financial information. In this case, someone walked out with a copy of every credit application you took in the last three months. Some states would require you to notify all of the affected consumers, so it will undoubtedly find its way into the press. The Federal Trade Commission and your state attorney general both read newspapers, and they come knocking at your door.

Your cost at this point is the cost of dealing with the FTC and the AG (and trust me, you need lawyers for this). They’ll find you had inadequate safeguards in place and the FTC will hit you with a cease and desist order and some sort of consent decree that will allow them to come checking up on you every so often. You’ll also have to deal with articles in the local paper and on the TV news about this unfortunate incident.

The AG, on the other hand, will probably hit you with a suit for unfair and deceptive practices under state law (many times, a violation of federal law can be an unfair and deceptive practice under state law). These laws often have uncapped liability, and if something really bad happened (like consumer identity theft), then be prepared to cut into the grandchildren’s legacy.

Now, I don’t want anyone to think that the worst thing always happens and that I’m advocating spending loads of money to prepare for the worst. Life doesn’t work that way. What I am advocating is that you really think about how you value good compliance practices. Doing so will require you to take a measure of your particular circumstances and your appetite for risk.

If you’re so inclined, drop me an e-mail and let me know how you value good compliance practices in your shop, and what your particular value motivator is. Or, if you don’t know what your compliance obligations are (assuming that you’d be the one responsible for it in the dealership), let me know that too. If I hear from enough of you, I’ll publish an article here with the results (anonymous, of course) and some comments that hopefully will be of benefit to all.

Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. He is a frequent speaker and writer on a variety of consumer credit topics. He can be reached at michael.benoit@bobit.com. Nothing in this article is intended to be legal advice and should not be taken as such. All legal questions should be addressed to competent counsel.

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