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Compliance

The Rising Cost of Noncompliance

Compliance expert says the propagation of rules and escalation of enforcement should persuade more dealers to invest in basic compliance safeguards.

March 2017, F&I and Showroom - Feature

by Ken Suprenant

Ken Suprenant 
Ken Suprenant 

When most auto dealers sit down to calculate their financial assets and liabilities, it’s easy to anticipate items such as inventory, labor costs, marketing expenses, and taxes. Another critical factor that may help determine your financial success is your compliance with the litany of rules and regulations governing your business.

Given the long list of daily operational demands you confront just to keep the doors open and the lights on, it’s understandable that sometimes bureaucratic regulations might feel as though they are just an afterthought. But just as any doctor will tell you, prevention really is the best medicine. In the automotive industry, compliance is the best way to prevent the often considerable costs involved with remaining fully compliant with applicable regulations.

Of course, keeping up with the wide array of applicable federal and state laws governing automotive dealerships is no small task. Audits, lawsuits and even fraud are all unwanted distractions that can frequently impede an auto dealer’s ability to spend his (or her) limited time focusing on his primary goal: building and maintaining a successful relationship with his customer base.

The list of federal and state regulations governing auto dealerships is lengthy and complex. Some rules, such as the Americans With Disabilities Act (ADA), are not specific to the auto industry. There are also other regulations that might not specifically mention the auto sector but have far more relevance to auto dealers — and related lending — than they might for other businesses. One example is the Fair Credit Reporting Act (FCRA), which is designed to protect the privacy of credit report information while guaranteeing that the information supplied is as accurate as possible.

There are, of course, some compliance laws that are designed specifically to address issues particular to the automotive sector. A prime example is the Red Flags Rule, which was written specifically to include auto dealers. This regulation compels auto dealers and other creditors to implement a program designed to detect and prevent identity theft.

Red Flags compliance has gained even greater importance with the dramatic increase of identity theft in recent years. Online programs offered by my company and others provide training for dealership staff and proof-of-identity reports that clearly display any “red flags” for potential car buyers. We also offer identity-verification and fraud-detection tools with every credit report we generate.

Another critically important compliance regulation that directly affects auto dealers and creditors is the Adverse Action notice. In the event that a potential customer is denied credit, written notices — including a list of specific reasons why the adverse action was taken — must be sent to the applicant, typically within 30 days.

To be clear, the adverse action category can include either a denial or revocation of credit, a refusal to grant credit in the amount or under the terms requested, or any negative change in account terms connected with an unfavorable review of a consumer’s account. To address these challenges, consider joining forces with a compliance partner that can offer solutions designed to help you manage adverse action notices and related calls in-house, handle the printing and mailing of the reports, and field related incoming consumer calls on your behalf.

As if domestic compliance challenges weren’t enough, auto dealers also have to comply with regulations from the Office of Foreign Assets Control (OFAC), which requires dealers to check customers’ names against the Specially Designated Nationals (SDN) list.

While all regulatory noncompliance fines can be significant, fines associated with OFAC violations can be very substantial. Auto dealers found to be noncompliant with OFAC regulations can face up to 30 years in jail and fines of up to $10 million against your company plus up to $1 million per incident. In 2016, OFAC-related fines and penalties totaled in excess of $21 million.

To ensure clients avoid OFAC’s very harsh penalties, I advise dealer clients to screen customers against the most current OFAC list of terrorists, drug traffickers and others on the SDN list, and include the results of this screening with each credit report.

Given the enormity of the task of remaining fully compliant with the litany of applicable laws, perhaps the most important operational compliance rule auto dealers need to remember is simply this: Never underestimate or forget the potentially skyrocketing price that accompanies noncompliance!

Ken Suprenant is senior vice president of data solutions for National Credit Center and has expertise in dealer compliance from a retail and service provider perspective. Contact him at ken.suprenant@bobit.com.

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