In 1919, the same year the Treaty of Versailles was signed to end World War I, General Motors Acceptance Corp. (GMAC) opened its doors, creating what we refer to today as the indirect auto finance channel. The typical deal file consisted of a title and a contract too small to fit in today’s standard printer tray.
That innocuous beginning ultimately begat numerous federal regulations governing the dealerships that funnel installment sales contracts to GMAC’s successor, Ally, and other finance sources. Although the genesis of the Federal Trade Commission (FTC) predates GMAC by five years, it ultimately became the primary regulator overseeing dealership business practices. Ergo the FTC Used Car Rule, the FTC Safeguards Rule, and other regulations.
Nearly a century later, the FTC’s little brother, the Consumer Financial Protection Bureau (CFPB), was born. It jumped into our consciousness in 2011 in response to the mortgage lending meltdown. Its charter is similar to the FTC’s: be the consumer watchdog.
And just like a little brother, the CFPB wants to prove it belongs in the same conversation as its big brother. And in just five short years, this aggressive compiler of consumer complaints of all things financial logged one million complaints this past September.
And although the CFPB was unable to wrestle oversight of car dealerships away from the FTC, there is no questioning the agency’s intent to regulate dealerships through the finance sources to which they sell finance contracts. And, well, its headline-grabbing activities have awakened its big brother.
A good example of that is the FTC’s recently announced payment packing and yo-yo financing charges against nine California dealerships. It was the first time the FTC levied charges against an auto dealer for yo-yo transactions. Unconfirmed reports put the first yo-yo transaction in California around 1920.
The FTC’s actions represent an important development dealers need to pay attention to, as it signals the willingness of the FTC to accept and adopt some of the CFPB’s methods, processes and ideologies. And one of the things the CFPB requires of finance sources it regulates is a formalized and documented compliance management system (CMS). I predict the FTC will require the same of dealers in the next five years.
So what is a CMS? Well, it is a method by which a dealer manages his or hers entire consumer compliance process. And it entails not just the compliance program, but the compliance audit function as well.
The compliance program consists of the policies and procedures that guide the dealership’s compliance with laws, regulations, and potential litigation defense. The compliance audit function refers to an independent testing of the dealership’s transactions and processes to determine the operation’s level of compliance with consumer protection laws, as well as internal policies and procedures.
The process to develop and implement a CMS is consistent with the required components outlined by the FTC’s Safeguards and the Red Flags rules. These components include:
- Appoint a compliance officer.
- Conduct a risk assessment to gauge current practices vis-à-vis requirement.
- Develop a policy and procedure to address the compliance requirements.
- Provide and document employee training on the policy and procedure manual.
- Perform periodic audits to confirm compliance with the policy and procedure manual.
We’ll use the Monroney Rule as an example of how to implement your CMS. The first task is to understand the compliance requirement. The Monroney Rule requires that all new vehicles offered for sale have a Monroney label affixed to a window. Simple enough, right?
Well, now that the requirement is understood, the dealer must assess how the dealership is complying with the rule. A logical approach would be to walk the lot to review the placement of the Monroney label on every vehicle offered for sale.
The dealer then needs to create a written procedure that explains how the dealership will comply with the requirement. Once written, the procedure becomes a policy.
The fourth step is to train employees on the policy and on the procedures required to implement the policy. The final step is to schedule periodic inspections of the vehicles available for sale to ensure that each one has a Monroney label affixed to a window.
Most successful dealers intuitively use the CMS model to manage the processes in the dealership, but they may not be documenting the approach. Well, the day may be coming soon when documenting will be just as important as doing.