The ever-increasing scrutiny of dealers by regulators and attorneys highlights the need to be ahead of the industry’s compliance curve.
Consider this observation: It is not only bad, heartless, devious dealers who are being sued. Rather, based on what is being seen in the courts, it seems that every dealer is a potential target nowadays.
Simple technical violations of Regulation Z can land a good dealer in the class-action soup. Plaintiffs’ attorneys are becoming increasingly competent at bringing suits that will generate large fee awards, even where the customer has suffered very little (if anything) by way of actual damages.
In fact, an amicus brief filed in 2003 by American Financial Services Association referred to Regulation Z as "a trap for the unwary creditor, often permitting a large windfall for the plaintiff’s attorney where the customer suffered no actual damages." This brief was filed with the U.S. Supreme Court in the Nigh v. Koons Buick-GMC case.
Dealers should do whatever is necessary to keep from being the low-hanging fruit upon which the plaintiff’s attorneys love to feast.
If a plaintiff’s attorney quickly reviews one of your customer’s deal files but finds nothing glaringly wrong, the attorney might simply drop the case, preferring instead to find a much easier meal. And that, in short, is your objective.
Conduct a Programming Audit
So how does a dealer avoid being the easiest target? Simply load a hypothetical deal where the customer has negative equity in his or her trade-in, applies a manufacturer’s rebate toward the down payment, puts additional cash down, and elects to purchase every optional F&I product that your dealership chooses to sell.
Next, print out a complete set of the deal documents (and make sure that you print out a retail installment sales contract from every financial institution to which you assign customer paper) and analyze if everything is disclosed correctly.
When analyzing the deal documents for correct disclosure, it is absolutely essential to engage an expert to assist in this audit. If the programming isn’t perfect, fix it quickly. This way, you will make significant systemic improvements, your compliance index will rise and you will no longer be repeating the same programming-related compliance errors that become good material for a class-action lawsuit.
Compliance Starts With People
The compliance challenge that remains after the deal programming audit is substantial, but also more beneficial in the long run.
The challenge is to build and sustain a culture of integrity, ethics and compliance. These elements must become a fundamental and pervasive part of your dealership’s culture.
The dealership’s owners and executive managers must develop and communicate clear policies and procedures for what is to be done, how it is to be done and what is prohibited. It takes good people to carry out the business’s operations in accordance with the policies.
The critical elements of people and policies are necessarily intertwined because good people and clear policies can create an integrated compliance system and culture. First, let’s identify the employees involved in building a compliance culture.
Obviously, F&I managers and directors are of paramount importance and their compliance responsibilities are extremely broad in scope. This spans from federal and state truth-in-lending laws and regulations to unfair and deceptive trade practices statutes to the Patriot Act to OFAC to ECOA.
Sales management personnel must also be well-versed with the compliance requirements associated with their job duties. This includes ECOA, FCRA and other prohibited practices such as payment packing.
Furthermore, a better understanding by the sales manager of the F&I manager’s compliance responsibilities should contribute to a more seamless handoff from front to back. This leads to better CSI scores and higher profits.
Our organization holds a weekly meeting of our compliance committee, which consists of our CFO, our corporate controller, our corporate compliance officer, our DMS programmer and me (corporate counsel). At those meetings, we conduct and report on our compliance audits, design and implement compliance training programs and undertake other compliance projects. We also brainstorm about ways to improve our paperwork and procedures in order to leave a better written record in our deal jackets.
You might think this level of effort is overkill, but we consider it absolutely essential in our effort to consistently improve our compliance quotient.
Hiring. When hiring new employees, do not underestimate the benefits of taking your time. Your odds of developing a trusted, long-term employee are greatly increased by interviewing several candidates instead of hiring the first one that seems decent.
Also, don’t be afraid to factor in your personal judgment about each candidate’s integrity and ethics. At Southwest Airlines, new employees are hired based on how well they fit in with the company, then they are trained for a specific job.
Given the huge investment you make in new F&I personnel, you want to make sure you choose the right people for the positions.
When I interview someone for an F&I position, I look for two things:
Of course, promoting from within your organization should be the preferred manner of filling an open F&I or sales manager’s position whenever possible.
When a position becomes available, you will already know the prospective manager’s ethics and work habits. Internal candidates are known quantities and are often more deserving of the considerable investment required for training.
Orientation & Training. It is hard to expect good performance in the compliance arena without training your employees on the proper manner to handle deals. As mentioned earlier, a programming audit can yield quick, substantial and ongoing compliance benefits but, to build and sustain an integrated compliance culture, your dealership must undertake much more personal training.
Our organization is nearing the launch of an internal F&I orientation and training program. This monthly formal training session will take at least one full day and will be mandatory for all of our new F&I personnel.
We envision a comprehensive compliance desk reference manual to accompany the program. The other required coursework and licensing applications will also be tacked on so that the new F&I professional can get credentialed and up to speed with our systems.
Auditing. In our organization, the corporate compliance officer audits a handful of deals from each F&I manager every month to ensure that:
The compliance officer also trains the managers when new forms or compliance procedures are issued.
It may not be necessary in every organization to have a full-time compliance officer. But you should have someone who is responsible for all compliance matters and who has the authority to see that employees are disciplined for non-compliance.
Discipline. When there are allegations of a policy being broken, management must conduct a swift and thorough investigation. This involves determining if a policy was broken, identifying whether any mitigating circumstances are present and doling out disciplinary action in an appropriate measure. If it is found that a policy has been broken, there must be disciplinary action taken.
If these procedures are not followed in every case, your dealership can be exposed to claims of discriminatory application of policies and discipline across the employee body. While this article is not about employment law, it is important to note that broken policies generally deserve the same punishment, regardless of who and regardless of why.
When exceptions to policies are made, the policy itself becomes diluted. Also, your employees’ understanding of and adherence to the policy decreases.
Backing down from policy enforcement is a surefire way to cede back much of the progress you’ve made in building a compliance culture within your dealership.
Our organization has developed several sets of non-negotiables (one for F&I personnel, another for sales consultants and a third for sales management). Each clearly lists the policy violations that will result in termination of employment.
These are the instances that cannot be tolerated and cannot be excused. And, because discipline must be doled out swiftly and consistently, if someone violates one of these, we part company.
Contribution From Outsiders
To this point, we’ve discussed the care and nurturing of the dealership’s employees. But certain outsiders also play a rather important role in the development and sustenance of a dealership’s compliance culture.
We work frequently with outside legal counsel to assist in reviewing and revising forms, tweaking sales and F&I processes and developing other compliance solutions.
Outside counselors (especially those with a national practice) also make us aware of the strategies employed by plaintiffs’ attorneys and regulators in other states.
We implement improvements and solutions right away because there is a good chance that those strategies will be employed by attorneys in our own backyard.
How long has it been since you reconsidered your choice of outside law firms? When choosing an outside firm for assistance with sales and F&I compliance, the dealership is far better served by hiring an expert in the field than by asking the capable and well-intentioned generalist. Go for the expertise.
Your dealership should also engage a knowledgeable external auditor to conduct deal jacket reviews at least quarterly. You need an auditor who has a great eye for paperwork details and a thorough understanding of dealership sales and finance practices.
In addition, a well-traveled auditor can also bring you examples of how other dealers from around the country are succeeding in their compliance efforts. Similar to the legal counsel with a nationwide practice, an auditor with wide-ranging experiences can tell you how attorneys from around the country are suing dealers and what the basis is for their newest claims.
Like many dealerships, we employ a combination of internal and external trainers. Internally, we have a corporate sales trainer who is extremely knowledgeable on sales and F&I compliance issues. He uniformly advocates our corporate mission of integrity to our newest sales employees, and he will lead our F&I orientation and training program when it is implemented.
The auto dealership’s F&I product vendor-partner is also an extremely important player. Make sure that you choose a company that provides high quality F&I products that offer the customer a strong value/price relationship and are backed by a highly-rated insurance company.
Your vendor-partner should also operate with an extremely high degree of ethics and integrity. Recall that your F&I product vendor-partner will prosper as your dealership’s performance and penetration improve.
Here’s a due diligence question for your current or prospective F&I vendor-partner: How deeply have you involved in-house and outside counsel in the review of your forms and the design of your training curriculum? If your vendor-partner has a lot to say on that issue, then you’ve likely found one who takes compliance and ethics as seriously as you should.
In the next issue of F&I Management & Technology, we’ll explore how a dealership’s owners and the executive management team develop policies and procedures to foster the growth of the dealership’s compliance culture.
Steve Straske serves as the vice president and corporate counsel of Ferman Management Services Corp., which is the management company for 11 family-owned retail automobile and motorcycle dealerships in the greater Tampa Bay, Fla., area.