Jeffrey Rachor, president and COO of Sonic Automotive Inc., makes no apologies for the profits achieved in his company’s F&I departments. After all, it’s no secret that a well-run finance office is vital to every dealership. For Sonic in 2004, F&I represented 17 percent of gross profit, which amounted to over $225 million. This trend is expected to continue as pressure on new-vehicle margins persists.

And while F&I is necessary for the dealership, it also offers important advantages to consumers. Despite negative media coverage, Rachor says customers are offered tremendous value-added services. Dealer-arranged financing gives customers the convenience of one-stop shopping, competitive rates, access to multiple sources of credit and exclusive incentive programs from the manufacturers. The F&I department also offers customers products that provide peace of mind from risks related to their vehicle, such as service contracts, GAP protection, prepaid maintenance, anti-theft protection and environmental protection.

However, the rewards of F&I come with significant potential risks. State and federal laws govern the process and there is a high level of scrutiny from regulators, plaintiffs’ attorneys, consumer organizations and the media. Sonic’s own experiences with F&I haven’t been all profits and success. The associates of this dealer group have had to learn from some painful mistakes very close to home. But the lasting lesson is how the company has confronted the problems and changed its approach to compliance.

Negative Exposure Hurts Industry

When auto dealers are featured negatively on the news, people pay attention and many remember Sonic’s starring role on NBC’s Dateline in December 2003. It’s also received negative media coverage for F&I practices in local markets, including Tampa, Charlotte, N.C., and Denver.

A settlement involving just two dealerships in Florida and the attorney general resulted in a $1.7 million restitution payment in 2002. Investigations are ongoing in Los Angeles and North Carolina.

“You can imagine that defending these suits comes with significant costs and legal expenses that take away from maximizing the profitability of a dealership business,” Rachor says.

The dealership group has even had former employees criminally indicted for their actions. In October 2005, six former employees of a dealership in Los Angeles received indictments relating to an investigation that commenced in 2002.

“I hope that by sharing some of our own company’s painful lessons, perhaps Sonic can gain some credibility to talk about this topic [compliance],” Rachor says.


What Sonic Has Learned

Rachor uses the analogy that Sonic’s move toward better compliance was much like any 12-step program. The first thing his company did was admit it did have a problem.

“And the first thing we have to do as an industry is acknowledge that we have a problem,” he asserts. “There remains a lot of denial surrounding the risks with F&I compliance.”

In late 2001, in the wake of highly publicized F&I scandals involving other dealers, Sonic created an internal task force to examine its existing F&I policies and practices. The goal of the task force was to significantly improve compliance without hurting financial performance or customer satisfaction. Since 2002, the policies and procedures continue to be re-examined with the purpose of continuing to improve compliance while increasing department profitability.

Rachor stresses that one thing Sonic has learned through its efforts is that a dealer does not have to choose between profitability and compliance. “We can’t afford to choose between compliance and profitability and I don’t believe any dealership in America can,” he adds.

As a publicly traded corporation, Sonic Automotive is a prime example of the necessary balance between strong financial performance and compliance. It’s held accountable to its shareholders to deliver industry-leading F&I results while also being held to the highest standards of transparency and compliance in this post-Enron era.

As a result, the company has worked diligently to develop F&I solutions to meet both of these critical goals and has identified four key components of good compliance:

  • Communication

  • Disciplined processes and controls

  • Training

  • Audit measures

    Communication is approached with a “tone from the top” mentality. Whether you’re the CEO of a large consolidator or the individual owner of a family business, you must constantly and consistently communicate your expectations regarding business ethics to employees, Rachor explains.

    He adds, “It’s impossible to expect your employees to do it right if they see you doing it wrong or even if they see you tolerating somebody else doing it wrong.”

    At Sonic, the “tone from the top” is communicated through a Code of Business Conduct & Ethics signed by each employee once a year. Furthermore, a framed poster of the code signed by Sonic’s CEO is posted prominently in two locations in every dealership in the organization.

    A detailed F&I compliance statement must be signed by all F&I interface associates before they can receive their first paycheck as Sonic employees. This includes general managers, controllers, sales managers, front-end managers, F&I department personnel and even billing clerks.

    Furthermore, every Sonic F&I office displays a 22 in. x 30 in. “Taking the High Road” poster, which gives helpful disclosure information to consumers and promotes complete transparency. The framed poster must also be posted in at least one other prominent location in the dealership.

    Putting Processes in Place

    Part of the organization’s proactive compliance measures involves the hiring process and pre-employment screening. According to Rachor, “One of the great threats to doing it right and achieving top F&I performance and compliance is turnover in your F&I office and management ranks. That’s one of our big initiatives, and we’re putting a lot of investment into doing a better job of hiring, orientation, recruiting, training and retaining F&I professionals.”

    All prospective employees undergo a comprehensive background check, which includes driving record, criminal record and drug testing. Candidates for positions that handle company funds are also required to get a financial background check. Sonic’s hiring procedure begins with a disciplined interview process, significant due diligence and reference checking.

    To further control F&I practices, a menu is mandatory to present products to customers. Sonic has also implemented self-imposed profit caps on all F&I products, as well as self-imposed interest rate caps before the captive finance companies made this a requirement. Billing clerks review every deal based on a checklist before the transaction is consummated and they are empowered to send any deal back to the F&I department that contains a problem.

    Like most F&I pay plans, Sonic’s standardized compensation scheme focuses on performance. However, it also factors in product penetration and customer satisfaction based on the F&I portion of the manufacturer’s survey. There are penalties for cancellations and chargebacks, which are additional deterrents to excessive F&I performance.

    “I’ve always said that in our industry, a pay plan is a job description,” Rachor says.

    Finally, any Sonic associate can report unethical business practices or other concerns anonymously through an 800 number.


    Training, Audits Guide Associates

    Employee training is an ongoing process that constantly emphasizes the balance between profitability and compliance. New associates attend a five-day comprehensive training course and receive additional instruction from an F&I DVD that reinforces Sonic’s commitment to doing things right. In addition, all front-end managers receive quarterly compliance training.

    Regional F&I directors (one for every 12-15 stores) serve as in-house consultants to provide training and development to F&I professionals throughout Sonic’s 177 franchises. And the company has developed its own Sonic Dealer Academy, Sonic University, Leadership 101 and Honors College.

    Once associates understand what is expected of them, Sonic conducts internal audits. This is done by a 12-person auditing staff and the F&I directors who conduct ongoing operational audits quarterly. Each month, an exception report is sent directly to Rachor and Sonic’s senior management team highlighting over achievers.

    “If we see somebody over achieving on a per-retail-unit basis or who has excessive product penetration, we see that as an early red flag, and we immediately engage our audit function,” Rachor explains.

    The organization has even invested in mystery shoppers through an independent service that test the dealerships. These shoppers go through the entire sales and F&I process, actually purchasing a vehicle in some cases. General managers provide a further safeguard by randomly inspecting at least five deal jackets every day.

    Finally, Rachor says he draws on the words of one of his heroes, Ronald Reagan, in his approach to managing an organization: “Trust, but verify.”

    “We want to empower and support our people,” Rachor says, “but we want to verify after the fact that they are in fact committed to taking the high road with their compliance efforts.”