Dealers Guide to Compliance

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.[PAGEBREAK]

Rebates/Dealer Incentives: Eligibility Checks

The Goal: Most new-car sales are tied to some form of factory rebate and/or dealer incentive, so it’s critical that you take measures to ensure that your dealership, the customer and the vehicle are eligible for the incentive claim submitted to the factory.

The Process: Ensuring that no mistakes are made requires a joint effort between sales, F&I and the administrative office. First, sales should print a copy of the inquiry to the incentive program, confirming the amount of the rebate, promotional rate or dealer incentive available.

Sales should then be required to collect any of the required documentation for consumer-specific programs. The finance office should then ensure that the incentive is properly applied to the deal and that the customer properly executes documentation confirming the amount of the rebate and assignment to the dealer.

Following the delivery, all rebate documentation should be collected and attached to an acknowledgement form indicating that all three departments agree that the rebate is valid. Also, be sure to file the paperwork in the deal jacket.

As for dealer incentives, remember that they are vehicle-specific and may have a volume bonus attached. Eligibility is usually tied directly to the vehicle’s delivery date and the incentive payable is generated when the dealer writes up a retail delivery report. That’s why it’s critical that your dealership’s RDR reconciliation process ensures that vehicles reported monthly to the factory match the sold vehicles detailed in the DMS and then eventually match the credits applied by the factory. Remember, charge-backs resulting from factory audits can be the most expensive penalty a dealer will face.

Technology Breakdown: Gaining knowledge of the factory applications and working with your DMS providers can provide you with exception reporting tools to manage this important component of your operation.

IRS and FinCen Reporting: Form 8300

The Goal: Reporting to the Internal Revenue Service and the Financial Crime Enforcement Network (FinCen) transactions for which more than $10,000 is received from a single buyer can’t be overlooked. Those who intentionally disregard the rule’s requirements could be fined $25,000, or the amount of cash they received but failed to report, whichever is greater. The required reporting document is called the Form 8300. Check out the IRS Publication 1544 for more instructions on complying with this rule.

The Process: Your cash receipting system should provide a detailed description of the form of cash tendered, as disclosing that money received was cash, check or credit card does not provide enough detail to support a good Form 8300 process. That’s why each cashier should be provided with a set of standard abbreviations to properly identify the form of cash received — was it currency or a personal check, cashier’s check, money order, bank draft, credit card or something else?

Technology Breakdown: Most DMS offerings include an automated cash receipts application, which generally provide for multiple classifications of the type of money received. This will assist the accounting office in making sure the Form 8300 is filed within 15 days after receiving a payment, as mandated by this requirement.

Identity Check: Red Flags Rule

The Goal: The enforcement moratorium the FTC placed on the Red Flags Rule was finally lifted as of Dec. 31, 2010. That means dealers must have a written “Identity Theft Prevention Program” in place to identity, prevent and mitigate ID theft. Currently, the law sets $3,500 as the maximum civil penalty per violation, but that doesn’t include civil liability.

The Process: This rule requires dealers to designate a compliance officer and perform a risk assessment to identify the threats of identity theft relevant to their operation. Dealers must also develop written policies and procedures for detecting, preventing and mitigating identity theft, and employees must be trained to follow them. Audits on the effectiveness of the dealership’s program must be performed periodically, and an annual report detailing the success and shortcomings of the program — as well as any required improvements — must be submitted to the dealership’s board of directors or senior management.

Technology Breakdown: Many companies offering consolidated credit reports, F&I menus and specialty ID theft services have incorporated automated “Red Flag” tools. These solutions use a variety of indicators to suggest the likelihood of identity theft. Some tools display pass or fail indicators, while others will use proceed-with-sale or a do-not-proceed indicators. Other solutions use a numerical value (e.g., buyer index score, customer identity score).

It’s important to remember that these indicators are generated as a result of searches conducted by data aggregators that track fraud-related activities from other industries and other public records. In other words, these solutions may miss discrepancies in the customer’s credit report. They also can’t measure Red Flag behavioral patterns detected during the sales process. 

Out-of-wallet questions are another great weapon against ID thieves. These questions are typically based on information available in public records. They’re a good way to catch customers who may be posing as someone else. You probably can think of a few such questions yourself, but most solution providers can electronically generate a set for you.

Joe Bartolone is an associate with gvo3 & Associates, a nationally recognized sales and F&I compliance consulting firm. He can be reached at [email protected].