I have spoken at several buy-here, pay-here dealer conferences over the years. Federal enforcement actions are a popular topic.
Afterward, dealers line up to ask me this paraphrased question: “Can you give me a basic playbook to help me set up a compliance program that will keep the Federal Trade Commission and the Consumer Financial Protection Bureau from flogging me in the public square and throwing me in jail?” Evidently, these dealers have taken the compliance message to heart.
That oft-asked question is usually accompanied by a caveat that the compliance program must be one that won’t break the bank. This article outlines some steps you can take toward establishing a serious compliance program, followed by a guesstimate of the ‘hard costs’ involved, not including management time, implementation time, and the time your employees spend studying, training, and researching.
Step 1: Make the decision to become a squeaky-clean operation.
Without this step, none of the rest of the stuff we recommend will work. The decision needs to come from the top of the organization, and, if your organization has had compliance problems, all hands need to understand that it is a real sea change and not just window dressing. Your people need to be told that anyone who does not treat customers honestly and ethically will be fired. Anyone who doesn’t buy into the new compliance culture should be told to hit the road. Cost: $0.
Step 2: Appoint a privacy officer.
While you’re at it, make that same person your compliance officer and the administrator of your Red Flags program. If your organization is large enough, this person may need help in the form of a small committee. The privacy/compliance officer should report to the highest-ranking person in the organization. Have signs made for your dealership showroom that identify that person. Cost: $5 for the signs.
Step 3: Give your privacy/compliance officer a real budget so that he or she can actually get some stuff done.
No budget for privacy and compliance will assure that you will have a privacy/compliance program that’s not worth a hoot. Several of the tools that the privacy/compliance officer will need, such as copies of the federal Truth in Lending Act and Regulation Z, the federal Consumer Leasing Act and Regulation M, the federal Equal Credit Opportunity Act and Regulation B, the federal Gramm-Leach-Bliley Act, the Federal Trade Commission’s privacy regulation, the FTC’s Used Car Rule, the Red Flags Rule, and the Risk-Based Pricing Rule, can be found online, although your privacy/compliance officer might need some training to access them. As part of that privacy/compliance budget, allocate enough money to send as many people as you can possibly afford through a compliance certification course (your mechanics are trained – your F&I people need training, too). One such program is offered by the Association of Finance and Insurance Professionals (www.afip.com). Have your privacy/compliance officer obtain and read all the books on F&I compliance that he or she can find. Likewise, have the privacy/compliance officer subscribe to online legal compliance services. Cost: Start with at least $5,000, but you easily can spend a lot more.
Step 4: Train, train, train.
Dealers tend to have high turnover of sales and finance personnel, and this compliance stuff can be less than riveting. So, you need to train your revolving sales and finance force and periodically re-train the ones who stay with you. There are third-party trainers, some of whom are quite good, but if your privacy/compliance officer turns out to be a crackerjack, he or she might well be able to handle the training. Cost: $0 in-house, $10,000 for outside training twice a year.
Step 5: Download and print copies of “Understanding Vehicle Financing.”
This consumer education pamphlet is free on the National Automobile Dealers Association website and is available in English and Spanish. It provides an overview of how car financing at dealerships works and bears the seal of approval of the FTC. Everyone in your organization will benefit from reading it. Make copies to display around your dealership, and put a copy into each customer’s packet of papers as you close each deal. Cost: The download is free, plan on $1,000 for printing.
Step 6. Download and print copies of “Keys to Vehicle Leasing.”
This is another consumer education pamphlet. It’s from the FRB and is a good overview of closed-end auto leasing. It also is available in English and Spanish, and you should use it just like you use “Understanding Vehicle Financing.” Cost: The download is free, plan on $1,000 for printing.
This should include credit life and accident policies and certificates, GAP addenda, service contracts, “etch” agreements, and anything else the customer sees. Make up a test to determine how much of what each employee has read he or she actually understands. Cost: $0.
Step 8: Adopt a true, transparent “menu” process for the sale of additional products through the F&I office.
Work with your lawyer to prepare the menu and the script. Dealers who use a menu say that the transparent sales process costs them some sales that they might otherwise make, but that offering every product to every customer every time through a menu results in more sales. Follow up with your employees to make sure that they’re actually using the menus you’ve adopted in the way they are supposed to be used. Cost: $0.
Step 9: Appoint a person to help customers if they have a complaint.
Sometimes referred to (using a $10 word) as an “ombudsman,” such a person helps the customer work through a complaint with the dealership. You don’t want customers resolving complaints with the dealer representatives that they originally dealt with – and who often caused the complaint and get defensive as a result. You want someone who did not take part in the sales and financing process who can look at the customer’s complaint dispassionately. Having a formalized complaint-resolution process might deter some customers from taking their gripes to a lawyer or to the CFPB. Cost: $0.
Step 10: Have your privacy/compliance officer periodically search the web.
He or she should check the site of your state’s attorney general so that you’ll know what the AG’s current hot buttons are. Another site to check is that of your state’s motor vehicle dealer regulatory body. Also, on a regular basis, check the CFPB’s and the FTC’s websites, the NADA website, your state and local ADA’s or IADA’s website, and any other sites you’ve discovered that are useful. Use your Microsoft Outlook program to set up a weekly or monthly reminder to do these searches. (Confession-I stole the Outlook tip from Gil Van Over). Cost: $0.
Step 11: If your dealership isn’t using a mandatory arbitration agreement in its sales, leasing, and financing transactions, consider doing so.
The CFPB has announced that it is studying the use of arbitration agreements in consumer transactions, and the Bureau may eventually ban their use. Until that happens, using an arbitration agreement can be an effective defense against those predatory class action lawyers. Some state association-produced buyers orders contain arbitration language, or you can buy free-standing arbitration agreements off the shelf from vendors like Reynolds and Reynolds (but make sure your state permits the use of additional documents and doesn’t have a so-called “single document rule”). Regardless of which way you go, have a lawyer who is really knowledgeable about consumer arbitration agreements look over the agreement you intend to use. Cost: $2,000, plus any ongoing printing costs.
Step 12: Have a forms and procedures review and a written compliance program.
All of your sales and F&I forms and procedures, underwriting procedures, and servicing and collections procedures should be reviewed by a lawyer who is knowledgeable about compliance law. All of these procedures should be documented and maintained in a compliance manual. You and your lawyer should periodically review your manual because laws and regulations change. Use your Microsoft Outlook program to schedule a review at least every six months. Cost: $10,000 to $20,000.
So, there you are. If you implement those 12 steps, you’ll spend about $30,000 to $40,000. You still won’t have a first-class compliance program, but you’ll be miles ahead of where most dealers are. Once you get these measures in place, we can start talking about how to bring the program to the next level.
Not willing to invest serious money in compliance? Maybe it’s time to think about closing the dealership and opening a bait shop.
Thomas B. Hudson, Esq. (email@example.com) is the Publisher of Spot Delivery(r), a monthly legal newsletter for auto dealers, and the Editor in Chief of CARLAW(r), a monthly report of legal developments in all states for the auto finance and leasing industry. He is also a partner in the Maryland office of Hudson Cook, LLP. Spot Delivery and CARLAW are produced by CounselorLibrary.com LLC. For information, call 410-865-5411 or visit www.counselorlibrary.com.