An Ounce of Prevention

In past columns I’ve talked about compliance as a value proposition —something that often is hard to quantify except in comparison to “what might happen.” After numerous years in this business, I have to say the old adage, “an ounce of prevention is worth a pound of cure,” perfectly sums up the value of good compliance practices.

Too many times, well meaning people give the “I’ve not gotten caught” too much weight in their compliance cost-benefit analysis. Sure, you may feel comfortable driving 20 miles over the speed limit on a stretch of road when you’re reasonably certain that Larry Law Enforcement is on his lunch break. But you may not know that Larry has backup out there, or that there may be a new sheriff in town. And that’s the thing about compliance — you never know when an attorney general or a plaintiff’s attorney is going to come sniffing around.

So, this month I want to share with you the facts of a case that came down in March. Keep it in mind the next time you’re thinking about pushing the envelope to close a deal that just shouldn’t close.

Betty Buyer decided to buy a car from BadBoy Dealer. After choosing her new wheels and playing the financing dance with Bobby BigShot, a BadBoy manager, she (stupidly) signed a credit application that had been completed by the Mr.BigShot. I don’t know whether she had a vision problem or she was gaga over Bobby, but apparently she didn’t notice that the credit application (mis)represented her annual income as $78,000 when she actually earned $11 an hour. (Hmmm … how far off is that? $11 multiplied by 2,000 hours is about $22,000 a year. So, it was only $56,000 off. That’s a mistake anyone could make —a slip of the pen, right?)

Based on her generous income, Big Bank was more than happy to buy Betty’s contract from BadBoy. Unfortunately for Betty, Big Bank was also happy to repossess her ride a couple of months later when she couldn’t make her payments (big surprise).

As you might imagine, Betty was slightly miffed. Well, maybe a little more than slightly. She sued BadBoy for violating the state’s Unfair Trade Practice Act (because BadBoy — through its employee, Bobby BigShot —misrepresented her income on the credit application). She also sued for “slander of credit” as a result of her now awful credit score.

BadBoy, who probably found it hard to believe that one of its employees may have falsified Betty’s credit application, asked the court to throw out Betty’s claims. Alas for BadBoy, the court said “no.” Betty’s claims were strong enough to show that Bobby’s alleged falsification of her in come on her credit application caused harm to her, sufficient enough to violate the state’s Unfair Trade Practice Act. Without Bobby’s alleged misrepresentation, the court felt that Big Bank would not have bought the paper. Therefore, Betty would not have sustained the financial injury when her ride was popped.

BadBoy did get lucky on the “slander of credit”claim, although mostly because the court didn’t know what to do with it. It just was not a recognized claim in Betty’s state. That being the case, the court let BadBoy off the hook on this one. Still, don’t try Bobby’s clever approach.

What does BadBoy face as a result of Bobby’s alleged misdeeds? Well, for starters, try triple damages if Betty proves her claims. That number may not be so bad by itself, but add to it the potential for unlimited punitive damages, plus attorneys’ fees (both BadBoy’s and Betty’s) and you’re talking mega-big bucks. I’m telling you folks, there’s a reason we lawyers went to law school, and some of them just might have been economic.

Then, there are the potential criminal claims that the case doesn’t discuss. You should know that this kind of behavior probably violates federal and state criminal laws (can you say “fraud”), and BadBoy and Bobby could find themselves making license plates instead of slapping them on cars. Not to mention the potential for some steep monetary fines. And yes, more attorney’s fees.

A little bit of training here (an ounce of prevention) could have gone a long way toward avoiding huge costs (the pound of cure). Sure, there will always be the bad apple, but you want to recognize that behavior and start culling it out of the organization. And the only way to do that is to train folks and monitor what’s going on in your shop. Comprehensive and ongoing training gives you a defense when a rogue employee wanders off on his own path. And trust me, the amount you’ll spend up front on legal compliance pales in comparison to what you’ll spend defending a single claim.

If your compliance policies and training programs are lacking, think seriously about getting them in order. Most folks instinctively want to do the right thing, and you’ll serve your organization well by giving them the tools to do it. Heck, if you want to get really novel, throw folks a bone for doing things right. As they say (and as any lawyer can attest), money talks.

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 [email protected]. 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.