From the Red Flags Rule to the Safeguards Rule, the Equal Credit Opportunity Act and compliance with standards enforced by the Occupation Safety and Health Administration, we all know that a compliance management system is critical to managing all the rules and regulations the various departments are subject to. But a CMS can’t be effective if it doesn’t account for compliance initiatives that don’t often capture the headlines.

I’m referring to corporate filings, business licenses, professional licenses, and annual registrations. Commonly referred to as “entity vitals,” they are just that — vital to the long-term survival of a dealership. Ideally, your operation will have three key components in place to ensure all departments are consistently compliant:

  • A human resources director who understands applicable human resources and workplace laws and can also successfully implement company policies to adhere to those laws
  • A dedicated compliance officer — a requirement of the Federal Trade Commission’s Red Flags Rule and Safeguards Rule — to manage the CMS and train employees involved in the sale of vehicles.
  • Outsourced fixed-operations compliance and third-party audits for the service department.

But all these initiatives will not matter if, for example, an annual report is not filed with your secretary of state. This seemingly small task can become extremely vital to your dealership’s future and reputation. Are you aware of the required entity vitals for your dealership?

Entity Compliance
Entity vital requirements will depend on your state as well as the F&I products you sell. For example, key replacement and credit insurance have different licensing requirements based on the state in which the dealership operates. Some entity vitals may include:

  • Annual reports filed with the state department
  • Assumed name filings with the state or county department 
  • Business licenses filed with the state, county, or city department
  • Trademark registration
  • Domain registration
  • Franchise tax reporting
  • Department of Revenue annual tax filings
  • Insurance licensing
  • Motor club licensing
  • State DMV licensing
  • Office of Consumer Credit Commissioner licensing
  • Applicable out-of-state registrations for multistate operations 
  • Building and land permits

These are just a few examples. Failing to register, renew, or maintain any of these could result in fines, penalties, and license revocations. Your dealership could even be subject to involuntary corporation dissolvement by your secretary of state.

Annual reports filed with your state could arguably be the most important filing on your list. A serious consequence of not filing could be that the dealership must cease to do business until rectified. When a dealership’s status with a secretary of state is “not in good standing,” the dealer may be faced with penalties, loss of revenue, or worse. In fact, if a dealership’s name is at stake because the dealer failed to submit an annual report, a competitor can claim it.

Also critical are the entity vital requirements around assumed name files, more commonly known as a DBA, for “doing business as.” They are applicable to most dealership entities. And depending on the state, a DBA must be registered with the county, state department, or both.

By not filing a DBA, a dealership may be subject to fines or penalties. More importantly, failing to file may ultimately result in having to think up a new name for the store, and we all know the immense role a dealership’s name plays in its public perception, branding, and growth.

Texas’ Specialty License Requirement
These real-life, worst-case scenarios do happen. Here’s an example with some of the identifying details changed: A customer purchased a credit life policy at ABC Motors in El Paso, Texas. The customer submitted a claim that was denied for an unknown reason. The customer then contacted an attorney.

Texas Secretary of State Hope Andrade sent this notice of involuntary termination to a dealer who essentially forfeited the right to their store’s name by failing to heed an “entity vital” requirement.

Texas Secretary of State Hope Andrade sent this notice of involuntary termination to a dealer who essentially forfeited the right to their store’s name by failing to heed an “entity vital” requirement.

Whether the claim was legitimately denied or not became irrelevant once the attorney looked at the dealership’s insurance licenses issued by the Texas Department of Insurance. ABC Motors was properly licensed. However, in Texas, a “specialty” license requires dealers to train each employee acting under that license. This training must be approved by the Texas Department of Insurance and the dealer must keep a completion certificate on file for each employee.

In this case, the ABC Motors employee who sold the credit life policy to the customer did not have the training completion certificate. The dealer was fined $50,000. Beyond the fine, the state insurance department could have revoked ABC Motors’ license as well, which would mean the dealership would no longer be able to sell credit life, credit disability, or GAP, which was classified as insurance and not a waiver at the time of this case.

While we used an F&I example, compliance is a broad term that extends to every operational point of a dealership. Following all of the rules and regulations is important for the sustainability and success of a dealership. The important takeaway is that lack of compliance — or even suspicion of lack of compliance — seems to have a chain reaction.

If a customer has a simple complaint about a bad experience at a dealership, and it is discovered that the dealership is not in good standing regarding an entity vital, that simple complaint can snowball into major fines, penalties, or termination. So make sure maintaining entity vitals is a priority. Failing to do so could nullify every other effort put into your dealership.

Brennon Romney serves as account development supervisor for American Financial & Automotive Services. Email him at [email protected].