Tough times usually mean an increase in the number of consumer complaints filed against retailers and creditors, at least that's been the case in my experience. So, as we face what many believe will be a difficult year for profits, it’s probably a good idea for you to be diligent about enforcing your store’s compliance policies and procedures. Here are some thoughts to consider.
1. Avoid Problematic Sales Practices: As competition for what is a shrinking consumer pool intensifies, resist the urge to employ overly-aggressive advertising and sales techniques. Customers who feel pressured into deals aren’t happy customers. Additionally, misleading advertising and high-pressure sales tactics easily turn into claims of unfair and deceptive practices, consumer mistreatment (gouging, deception, bait-and-switch tactics, failure to pay off trades), violations of consumer protection laws, and more.
2. Avoid Fraud: With credit difficult to get, fewer spot delivery deals will get financed. Some salespeople or F&I staff may feel the need to make deals happen no matter what. In fact, some may think it’s OK to inflate the customer’s income on a credit application, or include options on financing documentation that the customer never OK’d. If that’s the case with you, I fear what other types of fraud you condone at your store.
Bad deals are bad deals no matter what, and they rarely benefit the bottom line. All the profit from a thousand deals can be wiped out in a single lawsuit or criminal prosecution. The good news is I hear dealers are more cognizant of their compliance obligations, and are making efforts to train staff in proper procedures. There’s no time like the present to get on board with that!
3. Be Ready for Red Flags Rule Enforcement: After May 1, 2009 (when the Federal Trade Commission (FTC)’s delay in enforcing the new Red Flags Rule comes to an end), we can expect to see a fair amount of Red Flags enforcement activity from the FTC. We saw it in 2003 after the Information Safeguarding Rule went into effect, and we think we’ll see it again this time. Retailers and big-ticket-item creditors may be enticing targets for a regulatory agency looking to make a big splash.
4. More Compliance Litigation: As more consumers default on their credit obligations, we’ll see increased claims of compliance violations in installment sale contracts and other sale and financing documentation. Make sure you’re using documentation approved by your finance sources, and that you’ve filled everything out correctly. Finance companies are less willing than ever to overlook compliance obligations, and flawed documentation will reappear on your doorstep in a jiffy.
5. More Regulation: Unless you’ve been living under a rock, you know there is increased interest in regulating financial activities. While much of the press has focused on what’s happening in Washington with the bailout for the automakers and financial services industry, there has been increased activity at the state level as well. Expect to see an increase in legislative efforts to impose more restrictive rate caps, and more attempts to subject insurance and other aftermarket products to the cap.
6. Lenders to be More Diligent: Banks and finance companies are demanding increased documentation and identity verification (e.g., paycheck stubs, references, employer contacts). They are also getting more aggressive in enforcing reps and warranties in dealer agreements. This results in increasing demands on dealers to buy back defective contracts. Finance sources are taking a hard line on this, so make an extra effort to put clean deals in front of them.
Some of this may happen; some of it may not. But things tend to get more contentious when times are bad, and I think it’s fair to say this down economy is a bad time. A contraction in the business cycle is a good time to renew your dealership’s focus on process and procedure, and doing things right. A little extra effort can go a long way in protecting those badly needed profits.
Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. He is an expert on a variety of consumer credit topics. He can be reached at [email protected]. Nothing in this article is intended to be legal advice and should not be taken as such. All legal questions should be addressed to competent counsel.