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Dealers Guide to Compliance

Before you select your next compliance software tool, read this primer on connecting technology to your dealership’s compliance processes.

June 2011, F&I and Showroom - Feature

by Joe Bartolone - Also by this author

The multimillion-dollar settlement against five captive lenders for discriminatory practices early last decade will be fresh in regulators’ minds for years to come. Dealers who demonstrate a willingness and ability to play within the rules will benefit as auto lending continues its comeback.
The multimillion-dollar settlement against five captive lenders for discriminatory practices early last decade will be fresh in regulators’ minds for years to come. Dealers who demonstrate a willingness and ability to play within the rules will benefit as auto lending continues its comeback.

The Federal Trade Commission (FTC)’s Risk-Based Pricing Rule is the latest example of how compliance creates industries, as a slew of solution providers lined up to help dealers navigate the industry’s newest regulation. The technology they developed will undoubtedly add efficiency and accuracy to their dealer clients’ compliance efforts, but it can’t be effective without the right processes and procedures in place.

Before you begin your search for new software, let’s review some areas of the sales and F&I processes where technology can support your dealership’s compliance efforts.

Sales: Discriminatory Lending and UDAP Claims

The Goal: Although dealers escaped litigation from the class action discrimination lawsuit filed against five captive lenders early last decade, they need to be careful that the processes they use to quote payment avoids any hint of discriminatory practices. The suit, which ended in a multimillion-dollar settlement, is still fresh in the minds of plaintiffs’ attorneys and regulators, so expect the new Consumer Financial Protection Bureau to continue to monitor auto lending practices.

Second, dealers need to be cognizant of potential claims of Unfair and Deceptive Acts and Practices and enact procedures that foster full disclosure. Remember, attorneys are on watch for these types of issues because UDAP awards typically provide for treble damages if the court finds evidence of willful misconduct.

The Process: If your dealership runs credit before presenting the first pencil, a good best practice for avoiding charges of discrimination is to develop a rate matrix based on credit scores. The matrix can be broken down in increments of 25 or 50 points. One method would be to take a captive finance rate matrix and add two points to the tier-two buy rates. So, in practice, every customer who has a 625 score should be quoted a payment using the same first pencil rate.

If your store doesn’t run credit before the first pencil quote, then establish a “store” rate that is used for all customers. This rate could be based on an average rate of sold deals over the last 90 days. The key here is consistency.

Full disclosure is critical to avoid UDAP claims when the deal reaches the negotiation stage. That means giving each customer all the necessary deal terms, including the selling price, trade allowance, payoff, down payment, rebate, the amount financed, payment, term and rate. Transparency will not only help answer any future questions about what the customer agreed to, it also will eliminate the potential for payment packing or using hidden or unrealistic terms or rates to calculate payments.

Technology Breakdown: A computer desking system can be your greatest weapon against discrimination or UDAP claims. Look for a solution that integrates with your dealership management system, as this will allow desk managers to quickly and accurately work a deal while computing multiple combinations of finance and lease terms. Built-in rate matrices are another nice feature, allowing managers to compute first-pencil payments based on credit scores. When a solution is selected, be sure to lock down the defaults on the rate matrices, and to retain the first-pencil and final agreed-to term worksheets.

Sales Finance: Bank Fraud

The Goal: Falsifying credit app information, stips, down payments and collateral are potential areas of exposure for dealers. However, your employees are not the only ones you need to watch. There are customers who’ve been around the block a few times and know how to work the system.

The Process: There are two key processes to consider: First, have customers complete their own application. When an application must be completed on the customer’s behalf, have him or her sign the application and initial key credit determinates, such as time at address and job. This is not a legal requirement, but it will provide a nice defense if the customer provides false information.

Dealers also must institute safeguards to ensure that hold checks, deferred down payments and credit cards aren’t accepted without the lender’s knowledge. Not only is this found to be in violation of dealer-lender agreements, but accepting these types of payments and disclosing them as a cash down on the retail installment sales contract could be a violation of the Truth in Lending Act’s Regulation Z.

Dealers also must take steps to ensure the value of the collateral is properly stated. That’s why it’s a good practice to create a book-out sheet for trades and purchased used cars added to inventory. These sheets should be signed by the manager who created and submitted them to the lender.

Additionally, all stipulations should be authenticated. Benefit letters from the Social Security Administration can be authenticated by understanding the codes embedded in the letter. Stips such as pay stubs, utility bills and tax statements also should be scrutinized.

Technology Breakdown: A solution to electronically submit credit applications will definitely speed up the process, but the real benefit of these tools is they can print out the data in a format that discloses the credit app, deal terms and the collateral description. This can serve as an exceptional auditing tool to ensure the information provided and submitted match up.

Automated inventory systems also provide protection against powerbooking, a practice where the seller artificially inflates a vehicle’s value by listing a higher trim level or nonexistent options. The right system will timestamp any modifications made to each vehicle’s record and record the name of the person who made the change.

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