Valuing Compliance

Being a compliance lawyer, I ask new and potential clients to consider this question: What value do you place on good F&I compliance practices in your operation? So, what would your answer be?

Whether or not your initial knee-jerk response is “a lot,” think about it some more. It’s really a difficult question to answer. Not because folks don’t value good F&I compliance practices, but because we all conceptualize “value” differently. For some, “value” is simply the out-of-pocket dollar cost. For others, more intangibles are involved. For example, a particular benefit may be hard to quantify in terms of dollars but is meaningful nonetheless.

The ATV buyer and airline passenger are great examples of this concept. Like any buyer, your customer may be driven by price dollars or by value. Some may be driven by a combination of the two. How many times have you seen that customer who wants a specific ATV, but won’t pay a penny more than the price (or monthly payment) he or she had in mind before coming to the dealership? Conversely, when you are able to articulate another value important to that customer, how many times have you found that price becomes a little less important? For example, folks may value the quality of a particular brand so much that cost doesn’t seem as important.

Airline tickets are another thing. The cost of a ticket on the same flight can vary by $1,000 or more. Why would passenger A be willing to pay a $1,000 premium over the price paid by passenger B? I can’t speak for everyone, but having been passenger A from time to time I can tell you that the value I associate with arriving at my destination at a particular time has a significant impact on the out-of-pocket cost I’m willing to pay. For example, the airlines know most folks are willing to pay more for business travel because of the economic interest the traveler probably has in getting to a last-minute meeting on time. Leisure travelers tend to be able to plan well in advance and can shop for better prices at different times.

In both examples, the economics of the transaction tend to be driven by the value perceived by the consumer.

So, think about the value you place on good F&I compliance practices. Is it simply a dollar cost thing? Or are there intangibles and other things that impact your perception? Here are some value propositions for you to consider.

Good F&I compliance practices are good for business: Many of you out there work in stores that are well respected in your communities. You’ve spent a long time building a reputation for excellence, trustworthiness and integrity, right? Of course. You value your reputation in the community, right? Yes indeed. You know that your best sources for new business are repeat customers and referrals, right? Absolutely. So, it wouldn’t make sense to have a shoddy F&I compliance program that could negatively impact your repeat business and referrals, right? You betcha.

Good F&I compliance practices protect the bottom line: Let’s face it, you don’t get something for nothing. Good F&I compliance practices require an initial and ongoing investment. Ben Franklin’s old adage, “An ounce of prevention is worth a pound of cure,” is right on the money when it comes to valuing good compliance practices. Invariably, the money spent developing and maintaining good F&I compliance practices is a drop in the bucket compared to the costs of defending yourself against a lawsuit or enforcement action. Add the costs your likely to incur as a result of the reputational injury and that pound of cure gets mighty heavy, mighty quick.

Talk is cheap, they say, so let me paint a little picture. The chart on the next page quantifies the potential damages your store could suffer as a result of shoddy compliance practices. I’m sure you’ll agree that they look pretty bad. Keep in mind the penalties associated with these violations are only part of the cost your store could face. There are also costs associated with defending yourself in a lawsuit or enforcement action, and a good defense is expensive.

Now assume you have a security breach in your store that results in the misappropriation of your customers’ personal financial information. In this case, someone walked out with a copy of every credit application you took in the last three months (the documents were not adequately secured). Some states would require you to notify all of the affected consumers, so it will undoubtedly find its way into the press. Let’s say the Federal Trade Commission (FTC) and your state attorney general (AG) were reading the newspaper that day and gave the story a read. The next think you know they’re knocking at your door.

Your cost at this point is the cost of dealing with the FTC and the AG (and trust me, you need lawyers for this). They’ll find you had inadequate safeguards in place and hit you with fines. They’ll also make you agree to let them come checking up on you every so often. You’ll also have to deal with the bad publicity that’s sure to follow this sort of unfortunate incident.

The AG, on the other hand (or a disgruntled consumer), will hit you with a suit for unfair and deceptive practices under your state law. These laws often have uncapped liability. So, if something really bad happened (like consumer identity theft), be prepared to spend your grandchildren’s inheritance.

Now, I don’t want anyone to think that the worst thing always happens and that I’m advocating spending loads of money to prepare for the worst. In the compliance world, you get points for effort. What I am advocating is that you really think about the value good F&I compliance practices provide. And to do that you need to need to understand the risks. Why? They may be greater than you think.

Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. He is a frequent speaker and writer 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.