In the beginning, there was General Motors Acceptance Corporation (GMAC) and the emergence of indirect auto finance. The Treaty of Versailles was signed around the same time, ending World War I. A typical GMAC deal file was the title and a contract too small to fit in today’s standard printer tray.
That innocuous beginning ultimately begat numerous federal regulations to oversee the dealerships who funnel installment sales contract to GMAC’s successor and other finance sources. As the genesis of the Federal Trade Commission (FTC) pre-dates GMAC by five years, it ultimately became the primary overseer of dealership business practices. Ergo the FTC Used Car Rule, the FTC Safeguards Rule, etc.
Jump ahead nearly a century and witness the birth of the FTC’s little brother, the Consumer Financial Protection Bureau (CFPB). The CFPB jumped into our consciousness in 2011 as a reaction to the mortgage lending meltdown. Its charter is similar to the FTC’s charter — to be the consumer’s watchdog.
Sibling Rivalry
Just like a little brother, the CFPB wants to prove it belongs in the same conversation as its big brother. An aggressive compiler of consumer complaints of all thing financial, it recently logged its millionth consumer complaint in a short five years.
And although the CFPB was unable to wrestle oversight of car dealerships away from the FTC, there is no questioning the agency’s intent to regulate dealerships though the wormhole known as the finance sources that dealers sell contracts to.
The CFPB has awakened its big brother with a series of headline-grabbing actions. For example, the FTC recently announced payment packing and yo-yo charges against nine California dealerships, its first such charge levied against an auto dealer for yo-yo transactions. Unconfirmed rumors have the first yo-yo transaction taking place in California in about, oh, 1920.
This is an important development for agents and dealers to pay attention to. It signals the willingness of the FTC to accept and adopt some of the CFPB’s methods and processes and ideologies.
One potential, very significant future event is the development and implementation of a compliance management system (CMS). The CFPB requires the finance sources it regulates to have a formalized, documented CMS in place.
My prediction is the FTC will require auto dealerships to have a formalized, documented CMS in all areas of the dealership’s operations in the next handful of years. As an agent, you have the opportunity to put your dealer clients on the path to compliance today. Let’s take a closer look at the components of a CMS and how to formalize the system.
Components, Audits and Procedures
A compliance management system is the method by which a dealer manages the entire consumer compliance process. It includes both the compliance program and the compliance audit function.
The compliance program consists of the policies and procedures which guide employees’ compliance with laws, regulations and potential litigation defense.
The compliance audit function is an independent testing of the dealer’s transactions and processes to determine its level of compliance with consumer protection laws and internal policies and procedures.
The process to develop and implement a CMS is consistent with the required components outlined by the FTC in its guidance with the Safeguards Rule and the Red Flags Rule. These components are:
Appoint a compliance officer
Conduct a risk assessment to gauge current practices vis-à-vis requirements
Develop a policy and procedure to address the compliance requirements
Provide and document employee training on the policy and procedure manual
Perform periodic audits to confirm compliance with the policy and procedure manual
Let’s use the Monroney Rule, a rather simple federal requirement, as an example of how the CMS compliance model would work at a dealership. The first task is to understand the compliance requirement. The Monroney Rule requires that all new vehicles offered for sale have a Monroney label affixed to a window.
Now that the requirement is understood, a dealer must conduct an assessment to see how the dealership is complying with this requirement. The logical approach would be to do a lot walk and review the placement of the Monroney label on each vehicle.
Next, the dealer would create a written procedure that explains how the dealership will comply with the requirement to have a Monroney label on every new vehicle offered for sale.
Once the procedure is written, it becomes a policy. The fourth step in implementing a CMS is to train the employees on the policy and instruction on the procedures required to implement the policy.
The final step to implementing a CMS is to schedule periodic inspections of the vehicles available for sale to ensure that each one has a Monroney label affixed to a window.
Most successful dealers intuitively use the CMS model to manager the processes in the dealership, but they may not be documenting the approach. The day may be coming soon when documenting will be as important as doing.
