How Has Auto Industry Compliance Changed Over the Last 15 Years?
“An ounce of prevention is worth a pound of cure.”
That’s according to Michael Benoit, an attorney with Hudson Cook, LLP. A leading legal advisor for vehicle dealerships, Michael advises the organizations he serves on a wide range of consumer financial services law topics, and represents clients in investigation and enforcement matters involving the Federal Trade Commission and the Consumer Financial Protection Bureau.
Michael told us that, these days, dealerships are approaching workforce compliance proactively, rather than waiting for a problem to occur. And this shift in attitude is a dramatic change from the status quo just a decade or so ago:
“It [used to be] difficult to get a meeting with dealers to talk about compliance because it had never been a big issue,” he told us. “The analogy I like to use is ‘If I’m speeding but I don’t get caught, am I really speeding?’ Except for the very large dealer groups, the tendency for dealers was to wait until somebody got dinged for something before they’d begin to prioritize compliance.”
While he admits that compliance is an investment, “it’s a whole lot cheaper than one class action lawsuit. You’re buying yourself a lot of protection.”
Over the past few months, we’ve covered the complexities of auto industry compliance, taking a look at the various departments in a dealership and their associated regulatory obligations. With that information fresh in our minds, we thought it would be a good time to revisit the interview we conducted last year with Michael and his colleague Eric Johnson:
COMPLI: How do you talk about the benefit of proactive compliance to dealers in terms of ROI?
MICHAEL BENOIT: For a long time, there wasn’t a lot of focus on dealer activities, particularly in F&I. If you’ve been doing things a certain way for years and have never gotten in trouble, it’s easy to assume things are fine. That makes a conversation about compliance management hard to have. But it’s a good conversation, because even though what you’ve been doing for the last 40 years may be working for you from a business perspective, the passing of each successive year without compliance management has increased your litigation risk exponentially.
Like you said in the speeding analogy. How fast are you willing to go in this market if the speed limit is 65 and you’re going 80, or 90, or 100?
MICHAEL: In a lot of areas, we know what the speed limit is. Truth in lending, equal credit opportunity, and fair credit reporting laws have been around for a long time. The challenge in the last several years is that we’ve had a police department, if you will, that is saying, “You’re speeding.” And you say, “How fast was I going over the speed limit, officer?” And they say, “I’m not going to tell you.”
We’ve watched many clients tie themselves in knots trying to guess what an unpredictable regulator is going to think about something. That will just be what it is. But for the things that you do know how to manage—which is most of the laws that apply to dealers anyway—it’s in your best interest to manage them in the ways that we have historically worked. Why open yourself up to litigation or enforcement risk unnecessarily?
ERIC JOHNSON: In the last few years, as the CFPB and the FTC have stepped up their enforcement, they’ve made it easier to convince dealers to take compliance more seriously. There are many examples now of di erent actions that included personal liability on the part of the principal or owner of the dealership. Now you’re not just risking a fine, you’re risking your personal assets.
MICHAEL: That’s something the CFPB and FTC have done more frequently. They’ve gone after individual principals. Your liability is not just tied to your business assets; your personal assets become fair game too depending on the degree of your involvement in the business. And there’s big business consequences too. We’ve seen many cases where clients have entered into consent orders with an agency, and the next thing they know, they’re getting a notice from their bank, with which they’ve had deposits with for 25 years, that says: “We’re closing your accounts because you had this enforcement action.”
All sorts of fallout can come from an investigation, even if you really didn’t do anything. The best place you can be in an investigation is where you can clearly show that you had everything in place to prevent whatever the alleged violation was. If you can show that the alleged violation never really happened, even better. If you walk away with the investigation being closed without action, then nobody even knows about it. That’s the place you want to be.
But the challenge with the government is that it has very deep pockets and virtually unlimited resources. They can just keep going. I can’t tell you the number of consent orders that I’ve seen where clients have agreed to pay significant sums of money for alleged violations of law that never happened. The settlement decision simply became a cost of doing business.
Let’s talk about the benefits of protection. As a dealer, are there unexpected benefits of having your house in order—such as fewer complaints and more time to focus on business growth?
MICHAEL You’re more likely to recognize systemic issues more quickly, and better able to attend to them quickly. If you’re getting a lot of complaints, you can more easily manage them, but if you start getting a lot of complaints about the same thing, that’s a red flag that you have a systemic issue to fix.
ERIC: From a dealer’s perspective, you may also have less potential for buybacks from the finance company. You may also get a better cost of credit, because the bank knows that you’re a well-oiled machine and you have your policies and procedures in place. Finally, there may be less scrutiny by the finance company or by the bank, which, in turn, could translate to fewer costs on the dealership for non-compliance.
MICHAEL: Even for some finance companies, if the customer defaults in the first six months, the dealer doesn’t get paid. So, again, if you have procedures to follow, you’re more likely to improve the quality of your financing decision. It will probably improve your revenue, too.
For more from Michael and other dealership compliance experts, download Compli’s free Definitive Guide to Workforce Compliance.