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Q&A From Sales and Finance Professionals

Toby Graham /

Q: What are the most common enforcement actions taken against dealerships today?

A: Number one is advertising. This is a big issue with the FTC, and with state authorities. The NY attorney general’s office penalized 23 dealerships for ad violations last month, and New Jersey hit a dealer with $135,000 in penalties in June. Advertising violations are very easy to catch, and very difficult to defend.

Next would be unfair, and deceptive acts and practices. Eight employees at a dealership in Alabama were criminally charged, and pleaded guilty to fraud charges this year. The employees were finance managers, sales managers, and salespeople, so they went after the entire sales operation. The charges included falsifying credit apps, power booking, and straw purchases among others. To add insult to injury, the dealer is now involved in a class action lawsuit, alleging that he operated a criminal enterprise under the RICO Act!

Number three, I think, is F&I product sales. The NY attorney general is investigating over a dozen dealerships for aftermarket product sales, and already settled with one for $13.5 million.

Q: What agencies are the most active in enforcement?

A: On the federal level, definitely the FTC. This is kind of new. The Dodd Frank Act that created the CFPB also gave enhanced enforcement authority over dealers to the FTC, and they’ve definitely been flexing their new-found muscles.

The Department of Justice has been getting in the game as well. There’s been a lot of press about the CFPB. But they have no direct enforcement authority over new car dealers. They do however have authority over some used car, and buy here, pay here dealers, and are creating grief for new car dealers through their enforcement actions against our lenders.

On the state level, attorney general offices have been very active. They win the prize this year so far for the biggest penalty of $13.5 million dollars I mentioned earlier.

On the local level, we’re seeing more activity as well from departments of consumer affairs, motor vehicle agencies and others. There’s a lot of political capitol in targeting car dealers, and everybody seems to be getting in the game.

Back in March of last year, the FTC made a big splash with Operation Ruse Control, where they partnered with 32 law enforcement agencies in a nationwide crackdown to “protect consumers when purchasing or leasing a car.”

Q: Are there government requirements for sales & finance compliance, or is this optional?

A: Compliance is mostly optional with two exceptions. The FTC requires dealers to have Information Safeguards, and Red Flag compliance programs, including having an in-house compliance officer, and training for all employees.

In my opinion though, a strong compliance policy covering both the sales and finance departments should be in place in EVERY dealership whether the government requires it or not. Ignoring compliance nowadays is playing with fire.

Q: Lenders are starting to push having a compliance program in place. How can they be satisfied?

A: Yes, that’s the trickle-down effect from the CFPB dealer exemption. Although they don’t have authority over most dealers, they do have authority over most lenders dealers use. This puts a lot of pressure on lenders to strongly encourage dealers to have Compliance Management Systems (or CMS) in place. A  good CMS would include training all employees regularly, conducting regular compliance audits, having a fair lending policy in place, as well as a customer complaint resolution policy. All good ideas.

Q: How can dealerships avoid potential liabilities?


This may seem obvious but it’s not always. I had a conversation recently with one of our district managers about that. She was speaking with a dealer client who told her that he had compliance handled because his staff attends seminars given by their state dealer association. Yet, as she toured the dealership, she found deal jackets sitting on unattended desks in the showroom, and no locks on the doors in the F&I department. Yikes!

Let’s face it, compliance is not very exciting, and can seem like a big burden but it couldn’t be more important. Having a cavalier attitude about compliance obligations is a recipe for disaster in today’s regulatory environment!

The key is to develop a culture of compliance in the dealership. To do that you hire the right people, and train them. Train ALL of your employees not just your F&I personnel. Many compliance programs out there only cover the finance department, and completely ignore the sales floor where most violations occur. Do regular audits, either internally, by using an outside party, or both. As they say, you don’t know, what you don’t know.

And understand that compliance, and ethical behavior needs to be a non-negotiable in the dealership. You just can’t look the other way because someone is a top performer. Unfortunately, this happens all too often.

Q: I’ve heard about really honest, conscientious dealers getting caught up in compliance violations. It seems like if a dealer is unlucky enough to get targeted by the government they’ll always find something. Is there any way that a dealer can really protect themselves, or is it just the luck of the draw?

A: I believe so, the key is being able to demonstrate a good faith effort at compliance to regulators and courts. If a dealership can prove that it took appropriate steps to educate, and supervise ALL of its employees, it will have a much stronger defense against any claims.

Regulators are generally looking for dealers that display patterns of noncompliance. Chances are if the dealer can show that there are strong compliance policies and processes in place, they somewhat can get off the hook for inadvertent violations. Instead of a big fine, it might be a warning for instance.

The same goes for plaintiff’s attorneys, they’re looking for the low hanging fruit so they can threaten big class action lawsuits. Dealers that have strong compliance programs in place are NOT low hanging fruit. Dealers that take a wishy-washy approach to compliance ARE. If a plaintiff’s attorney smells blood in the water, the results can be devastating.

Q: Our F&I products provider takes care of our compliance needs for free. Isn’t that enough to cover us?

A: Great question! There are a number of excellent F&I compliance programs available through product providers but they cover only one piece of the puzzle. Many compliance violations occur before the customer enters the finance office, or even before they arrive at the dealership. I know many F&I professionals who are compliance wizards. But they can only control what happens when they’re personally dealing with the customers. If compliance violations are occurring at the sales desk, or outside on the lot chances are the finance manager will have no idea what’s going on, and be unable to correct it. In my opinion, ANYONE who deals with selling, financing, or marketing vehicles needs to be a part of the dealership’s compliance initiatives. Let’s face it, if employees don’t know the rules, they can’t be expected to follow them.

Also, don’t get lulled into a false sense of security because you use a compliance program by DealerTrack, RouteOne, or your credit bureau provider. These are great compliance tools, and I highly recommend them but they are nowhere near being a complete compliance solution.

Q: Our customer satisfaction is off the charts, and we get virtually no complaints. Doesn’t the government mostly focus on seedy dealers with lots of customer complaints?

A: Another great question. I applaud your dealership’s commitment to customer satisfaction. Compliance isn’t rocket science. If your customers are happy that’s a great indication that you’re operating compliantly for the most part. But, understand that many compliance violations are not discovered due to customer complaints. Take advertising for example, almost all ad violations occur not from customer’s complaining but because the ad itself is viewed by a regulator. Regulators have been trolling the internet over the last few years, and finding violations on dealer websites, YouTube, and social media. Another example is buyers guide violations. All an enforcement authority needs to do is walk your lot to find those, and they do. The FTC recently hit a dealer for $90,000 in fines.

Other examples are Red Flags, or Customer Information Security violations.  You don’t need customer complaints for those either.

Q: Mistakes happen. Aren’t we covered by insurance for any violations?

A: The answer is, it depends. In a recent case, a federal judge agreed with two insurance companies that denied coverage in lawsuits against a large public auto group. The court found that since the dealership’s employees “intentionally misled” customers. The insurers were within their rights in refusing to cover the claims. Also, some states don’t allow insurance coverage for punitive damages. Plus, insurance deductibles are often tens of thousands of dollars, so the dealer ends up writing a big check anyway.

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