I’ve written previously that an agent should focus on production, training, and income development for their dealer clients, not be the compliance cop.
That opinion hasn’t changed.
I do believe that agents have a responsibility to ensure their forms, processes, and training pass the compliance test. This, in part, also requires that agents help to monitor compliance. It is this during this monitoring when some dealers and managers voice an objection to implementing compliant processes. This article provides some word-tracks to help an agent overcome some of the more common objections.
In the brain mass of dealers and their managers, there is one side of the brain that is focused on marketing and sales. The other side contemplates risk management. Compliance objections typically have their genesis when the usually larger marketing side of the brain overtakes the risk management portion.
Sometimes the best transition phrase you can use when offering an answer to a compliance objection is to say, “You’re not wrong, you’re just not right.” A more direct approach (and a favored one used by my wife) is “You’re wrong, and I’m gonna tell you why you’re wrong.”
Some Useful Stats
Sometimes a successful approach to overcoming compliance objections is to shift the focus from urban legends and unfounded opinions to facts. Here are some useful stats to support your facts.
Some of the reported stats surrounding auto lending fraud are mind boggling. In the lending world, credit losses can be managed through either the number of times a loss occurs (frequency) or the average amount of the loss per occurrence (severity).
- Frequency: One industry insider estimates that one in every 200 auto transactions funded by finance sources have an element of fraud, be it a falsified credit application, identity theft, powerbooking, or a straw purchase, among other forms of fraud. Many dealerships finance 200 or more deals per month.
- Severity: This same source pegs the average loss at $24,000 per occurrence due to fraud for a finance source. A dealership with a $2,400 profit per vehicle retailed must sell 10 vehicles to recoup this average loss when shifted back.
- Potential liability due to fraud: Applying average frequency and severity, this means a dealer who finances 200 deals a month with its indirect lending sources will have one fraud deal in that portfolio. Further, if the finance source uncovers the fraud and forces it back to the dealer as a recourse deal, the dealer is writing a $24,000 check. As it takes the profit from 10 deals to cover this check, the dealership is left with the profit from 190 sales to cover other expenses and generate a profit.
Ten good deals to cover one bad deal can’t make economic sense to either the marketing side of the brain or the risk management side.
Here are five common compliance objections and some tips to overcoming these objections. Unfortunately, there is no instant gratification to overcoming compliance objections. It’s not like the thrill of overcoming a customer’s objection to a service contract and successfully selling a good product to benefit the customer. Overcoming compliance objections is a process of planting seeds for a future outcome.
Keep in mind that many times it takes an epiphany for a dealer to finally start drinking the compliance Kool-Aid. This epiphany sometimes happens when a 20 Group member is hit with a claim. Sometimes it is when the dealer has read one too many articles about a fellow dealer subjected to fraud or a claim. Unfortunately, it can also happen when the dealer is hit with a lawsuit or a Federale inquiry.
Here are some seeds to plant for when the epiphany hits:
1. "Its the Way We Have Always Done It"
The very same sales manager who donated his Sharpies to the daycare center and shred paper four-squares in favor of an edesking system is usually the one who raises this objection. Processes to increase sales are embraced, yet processes to enhance risk management are shunned.
Focus on the ever-evolving and -shifting compliance trends in the industry. Over the last year, we’ve seen the continuing confusion surrounding the Military Lending Act. We’ve also witnessed different Federales — including the Federal Trade Commission and the Department of Justice — publicly pursue dealers for payment packing, credit application manipulation, and bank fraud. Finally, finance sources are now filing lawsuits against dealers for fraud, unheard of 25 years ago.
The compliance risk hasn’t remained the same. A dealer’s response to ongoing risks must evolve.
Key word-track: “Some of yesterday’s practices are today’s felonies.”
2. "We Haven't Been Sued For it Yet"
Risk management’s basic premise is to forecast risks to the organization and establish policies, procedures, and processes to mitigate those risks. This objection looks backward at historical actions, not forward to potential future risk of litigation or regulatory oversight. It usually reflects a lack of understanding with the basic concept of risk management and a comfort level that nothing bad has happened yet.
My first response is to congratulate the dealer for her good luck. My second response is to review instances where other dealers have been sued for the very same practices we are discussing. I then flow into a discussion about how some dealers have successfully negotiated a reduction in their garage keepers liability insurance premium when they demonstrated a robust compliance management system was in place to help mitigate future claims.
Key word-track: “A CMS might reduce your liability insurance premium.”
3. "The Lenders Know and Don't Care. The Deal Has Funded."
These two objections kinda go together. Both involve finance sources, and both are based largely in urban myth.
A dealer once reported to me that a sales rep for one of his finance sources was terminated because she misrepresented the finance source’s position on accepting credit card down payments.
Finance source sales reps’ compensation can in part be based on the number of deals they generate for the finance source. This can lead to a sales rep’s willingness to mispresent the finance source’s requirements to get a deal funded. Just because the sales rep (who, by the way, may not be there tomorrow) gives conflicting assurances, these assurances may not override the reps and warrants contained within the dealer agreement with the finance source.
The old idiom succinctly states, “If it ain’t written, it don’t exist.” This objection is usually based in a false sense of security that the sales rep will fess up when confronted or that the finance source thoroughly vets every transaction at funding.
I firmly believe some finance sources essentially spot-deliver deals they know they can force a recourse on if the deal defaults. Their logic flow is like this: “I fund the deal. If it pays out, I make money. If it defaults, I have recourse to the dealer so I don’t lose money.”
Another potential issue for a dealer is having a finance source who thoroughly vets each offering because the finance source doesn’t trust the dealer’s managers. This will slow down the credit-decisioning process and in some cases may affect the decision to approve or decline a transaction. For example, if the dealer is being stipped for proof of down payment, the dealer is on that finance source’s watch list.
Be mindful that federally insured financial institutions are required to file suspicious activity reports whenever it discovers a suspicious transaction. Further, the financial institution is prohibited from sharing the SAR filing with the party it was filed against.
Turning the objection on its ear: “The lenders know and don’t care. They are just filing a secret report against the dealer with the Federales.”
Our advice is to get any deviations to the dealer agreement in writing and to retain copies of any stips provided in the funding package.
Key word-track: “If it ain’t written, it don’t exist.”
4. "The Computer Is Programmed That Way"
Many managers fly with the belief that the computer programming wasn’t right, so they shouldn’t have a compliance variance attributed to them.
The Dark Side loves mistakes or variances attributable to computer programming. If the documents contain errors that can be litigated, a mistake on every transaction is a key ingredient in a class action lawsuit recipe.
Successful dealers share a philosophy that sales managers and F&I managers are required to:
- Review, digest, and comprehend the front and back of every document the customer is presented for signature and execution. How many managers in your dealerships have read the back of the lease agreement?
- Hard-code as much of the information that prints onto forms as possible. Sometimes the errors found on forms require a human to load the information while loading the deal. Some examples of hard coding include the number of days to cancel the contract in some states, or the payee on product sales.
- Hold managers accountable for reporting erroneous information that is printing so that the programming can be fixed.
Key word-track: “Garage in, garbage out.”
5. "Compliance Puts Us at a Disadvantage"
This objection was the single largest one I had to overcome when I started consulting with dealers nearly 20 years ago. The fear was that by being transparent, the dealer’s PVR would shrink. Over the years, dealers report that, by implementing a CMS and being transparent with consumers, not only has gross PVR improved, but there has been a reduction in chargebacks.
These same dealers share that time spent defending claims is time detracted from selling vehicles. They take pride with their place in the community providing jobs, tax revenue, and supporting youth leagues. They shudder at the thought of the community thinking they are kinks and bad people to do business with.
Sometimes this objection is phrased as “If I don’t do this deal, a dealer down the street will, and I miss a sale.” The dealer may miss that sale, but looking forward, there is no guarantee the deal will stick. Going back to the useful stats:
Key word-track: “It takes 10 good deals to overcome one bad deal.”
Good luck and good selling