Author Archives | Jim Ganther

Providers’ Responsibility for Dealer Compliance

Providers’ Responsibility for Dealer Compliance

I was in the office of a large and successful F&I agent not long ago, and he bemoaned the need to take on duties related to dealer compliance. “I know I have to do it because all of my competitors are doing it. I need to do it to compete. But when did it become my job?”

A good question, and one deserving an answer. And more to the point for readers of this particular magazine, do providers and administrators have a responsibility for dealer compliance?

The answer, I believe, is yes, for at least three reasons: There is a legal responsibility, a moral responsibility, and a prudential responsibility. I will address each in turn. Stick around for the last reason — it’s where things get really interesting.

The Legal Responsibility

What is the basis of a legal responsibility for providers and administrators to ensure the legal compliance of their dealership clients? Put another way, how could a provider get sued by a dealer or an end user of the provider’s products?

One way is to fail to meet existing legal obligations. For example, providers and administrators receive, use and store customers’ nonpublic personal information (NPI). That makes those entities “service providers” under both the Safeguards Rule and the Red Flags Rule. This means that providers and administrators must protect that NPI and comply with the Red Flags Rule to the extent it applies to their duties.

Beyond the statutory requirements of those two rules, providers and administrators must avoid negligence in their dealings with dealers. For example, if the provider offers F&I training, that training must be accurate. I have seen F&I training that advocated what, in my opinion, constituted bank fraud. A provider would do well to have its training materials reviewed by an attorney familiar with car law every now and then.

Beyond that, providers need to be aware that plaintiffs’ lawyers are always on the prowl for “deep pockets,” and providers probably count as such. Whoever profits from an alleged fraud can reasonably expect to be in the chain of liability. Knowing this, what elements of dealer compliance should a provider be concerned about? Certainly the content of training, but also the proper use of F&I menus and the paper trail surrounding the sale of their products.

This, in turn, suggests the desirability of periodic deal jacket audits, but that’s a big topic (maybe next issue).

The Moral Responsibility

You don’t have to go to law school to understand the concept of moral responsibility. It’s the notion of doing the right thing. If you make money from a dealer’s F&I department, you have some moral obligation to make sure your products are being sold in a legally compliant manner. That implies honesty, accuracy, and transparency.

The process of training and audit described above apply here as well, not because Uncle Sam or the plaintiffs’ bar say so, but because it is the right thing to do.

The Prudential Responsibility

As promised, this is where things really get interesting. The two prior bases for responsibility for dealer compliance arise in some measure from the notions that you either <ital>gotta<ital> or you <ital>oughta<ital>. Some sense of compulsion underlies them both, and as human beings, we don’t like being told what to do.

A prudential basis for responsibility for dealer compliance is more appealing, for it reduces to enlightened self-interest, and we’re all good at that.

A simple thought exercise illustrates this point. Imagine a dealer surrounded by four providers eager to earn his business. The dealer’s pants catch fire. Three providers try to outshout each other with the same message: “Your pants are on fire!”

The fourth pulls out a fire extinguisher and puts out the fire.

Whose products will the dealer sell?

There are at least three fires that are certain to impact dealers in the near- to mid-term. Why am I so certain? For that, let us turn to novelist Tom Clancy.

In his 1991 bestseller, “The Sum of All Fears,” Clancy spins the tale of our worst collective nightmare: Islamic terrorists obtain and detonate a nuclear weapon. On Pages 615–619 of my copy, Clancy painstakingly describes the carefully choreographed series of events that must transpire within a weapons package to initiate a nuclear reaction. All of them take place, in order. He then sums up the result:

“As yet no perceptible physical effects had even left the bombcase, much less the truck. The steel case remained largely intact, though that would rapidly change. Gamma radiation had already escaped, along with X-rays, but these were invisible. Visible light had not yet emerged from the plasma cloud that had only three “shakes” before been over a thousand pounds of exquisitely designed hardware … and yet, everything that was to happen had already taken place. All that remained now was the distribution of the energy already released by natural laws which neither knew nor cared about the purposes of their manipulators.”

In other words, the bomb blast and mushroom cloud that we all associate with a nuclear explosion are not really the explosion. They’re just the natural and visible results of the nuclear reaction. If you know the elements of the detonation took place, predicting the bomb blast and the mushroom cloud is no great trick.

The elements of at least three such “explosions” have occurred, or are occurring. Predicting their result is no great trick, either.

The first is data security or, more properly, consumer awareness of data security as a risk that impacts them in a very real way. The recent Equifax breach impacted approximately 145 million Americans, myself included. (To find out if you were affected, go to and follow the instructions there.) Friends who were also impacted by the Equifax breach have already had their bank accounts drained, and they are angry.

Dealers have a ton of their customers’ nonpublic personal information in their paper files and, more to the point, in their computer network. If a major credit reporting agency can’t protect such data, what are the odds the average car dealer will? Exactly.

The first obligation of a dealer intent on protecting customer NPI is to conduct a network vulnerability assessment, or “NVA.” The NVA is the first step in determining what vulnerabilities exist within a network that could make an unauthorized loss of data more likely. If your firewalls aren’t properly configured, or if you lack intrusion detection software, the NVA will let you know and lead to corrective recommendations.

Conducting an NVA is not an optional extra; it is an express requirement of the Safeguards Rule. And while this falls outside of the provider’s “zone of compliance,” a prudent provider would be wise to find a reliable vendor or vendors for this service, use its volume potential to negotiate a reasonable cost, and make that service (and discount) available to its dealers.

Along those same lines is identity theft recovery service. The Red Flags Rule requires dealers to mitigate the impact of identity theft, but it doesn’t say what “mitigate” means. Identity theft recovery service, by definition, should help satisfy that requirement. And since identity theft recovery can (in most states) be provided as a blanket benefit to customers and additional years upsold in F&I, this is actually a product that fits neatly into the provider’s wheelhouse. Compliance is a lot more fun when you make money promoting it.

The second detonation is still in progress, but if all of the steps take place, the results will be game-changing. This one also involves data, but instead of security the operative concept is usage.

Right now, a dealer might have a desking program, an F&I menu program, and a finance portal, all of which operate on top of a proprietary dealership management system (DMS) but don’t talk to one another.

But what if they could, at an affordable price? Then the dealer could require the first pencil to be based on a standard APR; the final pencil could be based on the customer’s actual credit score (and not generated until the bureau had been pulled, after actual authorization had been obtained and recorded); the final pencil would flow into the top of the F&I menu; all products would be consistently offered; the results of the menu negotiation process would be documented and signed; those results would flow into the buyer’s order and installment sale contract; and all of the chosen products would be backed up by signed contracts with matching prices.

In short, much of the room for deceptive trade practices could be made impossible. And when a consumer protection like that becomes possible, it will soon become mandatory. The prudent provider will anticipate that development and have the software ready when the dealer asks.

The third reality generating a predictable reaction is the consolidation trend in the F&I industry. This is certainly obvious amongst agents and agencies. As first-generation F&I agents want to retire, they need to sell their agencies. These are being gobbled up by providers seeking to lock up their distribution or by other agencies growing in order to survive.

As the number of agencies declines, the size of those that remain must increase. And as they increase, they must demonstrate benefits to their dealers of that scale. Big for its own sake is not a winning value proposition.

And so we see providers and larger agencies expanding their service offerings. In addition to products and training, we see the innovative providing HR/recruiting assistance, reinsurance consulting, marketing/branding campaigns and — you guessed it — compliance services. Providers literally from A to Z already provide such services to their dealers at no cost or at deep discounts. One less reason to change providers.

Not long ago, former studio head Harvey Weinstein was exposed for being a Hollywood sexual predator and all-around creep for at least three decades. The real story, however, was that everyone seemed to know — especially those who profited from Weinstein’s business activities. Whether for legal, moral or prudential reasons, providers and administrators need to take an interest in the compliance of their dealers’ operations. Weinstein demonstrated the price we can pay for looking the other way.


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Lawn Mowers, Kill Switches and the Future of Compliance

Lawn Mowers, Kill Switches and the Future of Compliance

The easiest way to predict the future accurately is to wait until it happens and be the first to announce it. This is aided, in part, by the fact that homo sapiens, as a species, don’t have an impressive track record when it comes to learning from the past. This means that history tends to repeat itself. So to predict the future of compliance, I will first discuss the history of lawn mowers and product liability.

Mind the Blades

Lawn mowers are pretty simple devices. All you need is a sharp blade and a way to make it move at a rate high enough to cut grass. In the beginning, lawn mowers got their power from the people operating them. Push mowers connected curved blades to the drive wheels and presto! — neatly mown lawns.

Then came power mowers. Whether walk-behind or riders, they incorporated gasoline engines and rotary blades. The combination was much more powerful, much more effective, and much more dangerous.

The increased danger led to injuries, lots of them, and most of them horrific. Until the 1960s, the law did not favor plaintiffs in this area. The law of negligence was not much help, as the duty of due care was usually breached by the victim or a close family member. And product liability law didn’t help, as the product generally worked just fine as designed and built — it was that very fact that made the injury possible. What was a plaintiff’s lawyer to do?

Then came the Restatement (2nd) of Torts in 1965. The Restatements of the Law are published by the American Law Institute as a general summary of the common law to guide judges. For those of you who didn’t go to law school, there are two broad areas of law: statutory law, meaning written laws passed by the appropriate legislature, and common law, meaning the interpretations of law by judges. In case of a tie, statutory law is supposed to win. But it’s the common law-creating judges who determine what constitutes a tie. So while the restatements aren’t themselves binding precedent, they are considered very, very persuasive.

Restatement (2nd) of Torts brought about a revolution that transformed products liability law. In section 402A, the Restatement offered up a new principle: Manufacturers could be held liable for unsafe aspects of their products if a means of preventing that unsafe aspect was available and not unreasonably expensive. This meant that Toro, say, could be held liable for a perfectly well-made lawn mower if an inexpensive kill switch was not incorporated into the design.

This notion became known as the “risk-benefit test.” The crucial question was whether the risks of a particular design were outweighed by its benefits. Courts considered “the likelihood that the product will cause injury, the gravity of the danger posed, and the mechanical and economic feasibility of an improved design.”

So every time your lawn mower turns off when you let go of the kill switch beneath the push bar or get off the seat or a rider, or if the blade disengages when you put the rider in reverse (No Mow In Reverse — “NMIR” — is a thing), think of the Restatement (2nd) Torts. Lawn care is safer because of it.

Injury Potential

All of which brings us back to the future of F&I compliance. Consider the state of products liability jurisprudence and substitute “service” for “product.” Let us assume that a consumer can be injured in the process of financing a vehicle, and that the monetary injury can be severe. Is it possible for players in the finance process to prevent such injuries?

At first blush, the answer would seem to be “No.” Deceptive practices can be perpetrated when there is no method of recording:

  • What was said to a customer and when?
  • What was the basis for quoted payments?
  • There was no leg in the payment quoted.
  • No variance in APR was attributable to race or other impermissible reasons.
  • The final pencil information flowed seamlessly into the menu presentation.
  • The initial and final payments through the menu process were accurate.
  • The deal terms reflected at the end of the menu presentation flows into the buyer’s order.
  • The information on the buyer’s order is reflected in the retail installment sale contract.
  • The product prices on the RISC match those on the product contracts.

And at second blush, the answer would still seem to be “No.” After all, dealers may have a desking tool provided by one vendor, a menu system from a different vendor, and a third-party DMS. None of those functions talk to the others.

But what if there was a system that tracked and recorded every step of the vehicle finance process? What if every representation made to a customer was recorded and time-stamped? What if all the math had to add up? The injury from deceptive practices could be drastically reduced, or eliminated altogether.

In fact, such a system does exist and is already on the market (and no, I am not an employee, agent, or investor). And if one company can do it, others can as well. The state of the art proves that transparency can be dramatically enhanced and fraud drastically reduced. A court’s analysis could move on to consideration of the risks of noncompliant systems versus the benefits of maintaining such a system. Any bets on how a court would come down on that question?

So what is the future? It’s the present: using existing technologies to make fraud nearly impossible. All that remains is for a court (I’m guessing in California) to decide that what can be done to protect consumers must be done.

The providers and administrators that make that technology available first will not just profit in the future, they’ll help create it.

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Cover Your Acetabulum

Cover Your Acetabulum

If you’re old enough to read this article, you know what “CYA” means. For those of you who aren’t, it stands for “cover your acetabulum.” (That’s the large bone that contains your hip socket.) If you thought it meant something else, shame on you.

But for purposes of this article, CYA stands for “certify your associates,” and it’s closely related to the other definition. To explain how certification can accomplish the cover function, I need to go way, way back to when I was in law school — and that was so long ago, there were only six commandments.

The Law of Evidence

One of the things you learn as a 1L (first year law student) is the law of evidence. There are four general types of evidence: demonstrative, documentary, real and testimonial. When you’re trying to make your case or prove your defense, you want all the admissible evidence you can muster.

Admissible evidence needs to be both relevant and reliable. Relevant evidence is that which tends to prove the point for which it is offered and does not carry with it the infirmities that render evidence inadmissible, such as hearsay, unnecessarily prejudicial, privilege, and so on.

Reliability runs to the trustworthiness of the evidence offered. Are there enough points on the fingerprint to make a reasonable identification? Can the document be authenticated? Does the witness have an obvious bias?

What difference does all this make to an F&I provider? A great deal of difference if you’re ever sued. Consider the law of negligence: Negligence arises when one party breaches a duty to another and damage results.

An F&I provider owes a duty of care with respect to the content of its training. If the provider’s employees offer training to dealership personnel, it needs to be accurate. If it is inaccurate, and the poorly trained F&I Manager misrepresents the features and benefits of the product to a customer and the dealership gets sued, you can bet the provider will get sucked into the litigation. And then the law of evidence becomes you best friend — or your worst enemy.

Consider a provider whose employees regularly train dealership F&I personnel by going over each product contract in person, line by line. Sounds good, right? The testimony of the provider employee would support the theory that proper training occurred. … At least until the F&I manager takes the stand and contradicts everything the provider employee said. Both witnesses would have obvious bias. It’s what we call a he said/she said situation, and that’s not a good position to be in.

But what if the provider had a system in place of certifying that every F&I manager who pitches its products to the car-buying public was trained on the terms of each product contract? That type of documentary evidence goes a long way in supporting the testamentary evidence of the provider’s employee.

Get Prepared

So how does one go about creating a certification program? The first step would be to develop the content. That means finding an engaging way to explain all of the salient points about each of your products, pulling those points directly from the contracts that embody them. From long experience, I can testify (relevantly and reliably) that this is the hardest part.

Once the content is developed, step two is to present it. That can be done in a “live” format, either onsite at the dealership or at the provider’s home office, or at some neutral site, such as a Holiday Inn Express. Or it can be presented online. Each method has its advantages.

Live presentations – especially those at the provider’s home office or some other location away from the dealership – ensures that the instructors have the students’ undivided attention. Online presentations are generally less expensive and can be completed at the student’s convenience.

But whichever method of instruction is used, an examination that covers the material terms of the product contracts is essential. That’s the third step, and it is vital. You’ve got to be able to prove what it is that you taught and that the student actually learned it. For that, you need a test.

What should be the minimum passing score? Seeing that you are entrusting your company’s reputation to the F&I managers that take your training, I strongly suggest 100%. In a court of law, “80% compliant” is not a position of strength.

And once all three of these steps are completed, embody the accomplishment with a document that testifies (there’s that word again) to the student’s accomplishment. Present a certificate, suitable for framing (or better yet, framed). Require any dealership employees who want to represent your products to be certified before they are granted that privilege.

If these steps are taken, if the quality or content of your company’s training ever come into question, the appropriate employee (“custodian of records in the ordinary course”) can testify that the F&I manager in question was certified to sell your products, and explain what that certification entails. The records custodian can also produce the test records that confirm the F&I manager understood the content of your training.

Want to take your certification program up a notch? Make the certified F&I managers recertify annually. This doesn’t necessarily mean running them through the entire training program again, but it certainly means requiring a test that confirms they haven’t forgotten what they learned. And if the terms of any of your product contracts changed since the initial certification occurred, that information needs to be conveyed and tested before the new contracts get offered to the public.

All of this discussion surrounds the concept of a provider-specific certification program that revolves around product knowledge — a very good thing. But that is not the only thing that would profit from being certified. Another fine topic for certification is a working knowledge of the laws that govern dealership operations.

Providers are subject matter experts on their own products. They are unlikely to be experts on the law, as most of their executive teams had the good sense to avoid law school. So for this certification you need to look outside.

Fortunately, there is no shortage of certification programs to meet this need. So which one is best? To decide, consider the following:

  1. What does the program cover? There are some excellent certification programs, for example, that address Fair Credit issues in great depth. But “a mile wide and an inch deep” is not the best approach for the F&I industry. A meaningful compliance certification also should address such items as cash reporting, conditional delivery, the Equal Credit Opportunity Act, Red Flags, Safeguards, Magnuson-Moss, Regulations M and Z, and unfair and deceptive trade practices, among others.
  2. Who wrote the content? What are the authors’ credentials? Is the certification developed by attorneys or former dealership personnel? Whom would you trust more?
  3. How does it keep you current? You always want the F&I personnel who represent your product to use the current form and promote the current benefits. Guess what? Laws change, and it’s the current ones that need to be taught. Confirm that any certification program has an affordable mechanism to keep its participants abreast of the changing legal environment.
  4. How easy is it to deploy? Is the certification offered online, or must candidates attend offsite training? Can the candidate access the content at his own pace and convenience, or at someone else’s?
  5. How much does it cost? Not to put too fine a point on it, but if it costs so much that no one wants to pay for it, what’s the point? Does the certification program provide discounts (or commissions) to the providers or their agents?

Regardless of who occupies the White House, retail automotive and its supporting ecosystem will remain a highly-regulated industry. Training F&I personnel on the specifics of the products they sell and the laws that govern their activities, and certifying that those training initiatives have taken place and been effective, is in everyone’s best interest.

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Grand Theft Auto and the Law of Agency

Grand Theft Auto and the Law of Agency

It was the summer of 1980 and I was working for a local construction company to earn money before I shipped off for my freshman year of college. At that time, the four Ganther siblings (I was No. 3 on the seniority list) shared use of one “kids’ car,” a red 1969 VW Beetle named Oskar.

As it happened, I had a date lined up for the night of the crime, a Friday, and was blocked out from use of Oskar. Rather than cancel my date — Uber hadn’t been invented yet — I did what every red-blooded American teenage boy would do if he could. I stole a truck.

This is how it went down. I peddled my orange Schwinn Varsity 10-speed 2.5 miles north of our house to the construction company yard, used my master keys to get through the gate and into the warehouse, picked a set of keys off the rack in the foreman’s office, and drove off in a green Ford F-150 with the company name emblazoned on both doors.

Oh, yeah — about the company name. The ginormous stickers on each side of the truck read “Ben B. Ganther Co.” My great-grandfather, Ben B. Ganther, established the family business in 1900; 80 years later, my dad ran it. This will complicate things in very short order.

As I drove off, I was confident that, so long as I had the truck back in the fleet before, say, 6 a.m. on Monday, I should be OK. What could possibly go wrong?

I quickly ran the truck through a car wash, picked up my date, and drove to the Calhoun Beach Club at the corner of Irving and Main Street in Oshkosh (where it remains to this day). As luck would have it, I even got a parking spot right in front of the door.

The date ran its course and I got the truck back to the yard and peddled home in the dark. It was the perfect crime — at least until I came to the next morning. See, one of the disadvantages of growing up in a small town in Wisconsin in the 20th century was that everyone knew your business. Facebook hadn’t been invented yet, either, but gossips had.

So I started my Saturday with my dad in my grillwork. “What the #@*! were you doing parking a company truck in front of a bar?” he demanded. “Next time, park at least a block away!”

I let that sink in. My dad was not mad that I had stolen a company truck. He was mad that a truck with the name of his family business on the side was parked in front of a bar, with all that implied. Five years before I ever went to law school, my father gave me my first lesson in the law of agency.

Many providers and administrators engage independent agents to market their products to dealerships; virtually all use dealers to market their products to consumers. Using someone else to do something on your behalf is called “agency.” The person doing the something is called an “agent.” The person or entity for whom the agent is acting is called the “principal.” Given its prevalence in the F&I industry, it’s worth understanding the law of agency.

Whole books have been written on the topic of agency. I will focus briefly on the two narrow issues most important to providers and administrators: actual authority and apparent authority.

Actual authority is the easiest to understand. An employee in the field acts as an agent for his employer, so long as he is acting within the scope of his employment. He has actual authority by virtue of his role as an employee — it’s his job to act on behalf of the principal.

Many providers engage independent agents (there’s that word again) to promote and support their F&I products. Those agents are authorized by a contract typically called an “agent agreement” or something similar. That agreement sets forth the scope of the agent’s actual authority. And as long as the agent acts within the scope of that authority, the agent’s acts bind the principal.

But what happens if the agent acts outside the scope of his authority? That’s where things get interesting, and that’s where the concept of apparent authority comes into play. In a nutshell, if a third party reasonably believes the agent has the authority for the action in question, the principal will be bound.

An example might illustrate what that means in the context of F&I. Say an independent agent has the actual authority (as set forth in the agent agreement) to solicit dealerships to enter a contract with the provider to sell its F&I products. Agent signs up a dealership. So far, so good. But to induce the dealer to sign up, the agent represented (orally, of course) that the provider will routinely honor goodwill claims up to $1,000 per occurrence.

If the dealer reasonably believes the agent had the authority to make that change to the dealer-provider agreement, the provider is on the hook for those goodwill claims. The agent may be fired, and the dealership dropped, but the dealer is entitled to rely upon the agent’s apparent authority.

Want to really tighten your plumbing? The same theory applies to the dealership-customer relationship. This means that, if a customer reasonably believes an F&I manager is an agent for the provider, that F&I manager’s oral representation that the provider’s VSC is “bumper-to-bumper” and covers wear items, floormats and glass, well, it might.

Third parties are allowed to rely upon the actions of agents as if they were the actions of the principal, assuming the actions are within the scope of the agent’s authority. From the perspective of the third party, that is true whether the authority is actual or apparent. In the next issue, we’ll address how a provider can best deal with that reality.

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Zones of Compliance

Zones of Compliance

Unlike love, compliance at a dealership is not a many-splendored thing, but it is certainly many-faceted. Discrete facets of compliance include sexual harassment, advertising, human resources, sales, F&I, environmental, health and safety (EH&S), data security, taxation, and the list goes on.

Sometimes it is helpful to organize all of these issues into what I call “zones of compliance.” Zones of compliance chop the massive tangle of issues into manageable bites. And viewing the overall issue of dealership compliance into specific zones of compliance helps identify another important issue: Who is responsible for each zone?

Ultimate responsibility, of course, will always attach to ownership. But functional, day-to-day responsibility may be delegated to an appropriate person lower on the food chain.

Your Zone, My Zone

Some compliance zones are self-evident. Deploying policy documents and ensuring sexual harassment and other core training is accomplished falls naturally under the job description of human resources. Because of the heightened risk of industrial accidents and the presence of chemicals in the shop, EH&S responsibility usually runs to the service manager.

That’s within a dealership. Are there zones of compliance that impact a dealership’s vendors? I believe so. OEMs, for example, have at least a moral obligation to provide dealerships with accurate product information so the dealership’s sales personnel can accurately represent the vehicle’s features to potential customers.

Product providers have a similar obligation. To illustrate, indulge a lawyer’s war story. (The details have been changed to protect, well, me.) Unethical Dealer packs payments to include a vehicle service contract on almost every car financed at his store. Unethical Dealer F&I personnel go the extra mile and overstate the scope of what the “included” VSC covers, liberally using the term “bumper-to-bumper.” (There’s no such thing, by the way.)

Enough customers complain about uncovered claims that a class action lawsuit is filed. Remarkably, the plaintiffs’ attorneys are so unfamiliar with automotive finance that they ignore the obvious payment packing issues and focus on the overpromise part — claims for failures that the F&I personnel said would be covered but were not, such as gaskets, wear items, wiper blades and brake pads.

The kicker? Instead of happily settling for the cost of some brake pads and wipers, Unethical Dealer threatened to bring the F&I product provider into the lawsuit for failing to train Unethical Dealer’s F&I personnel on the limitations of coverage in the VSCs Unethical Dealer sold.

All of this was baloney, of course, and Unethical Dealer backed down when the provider’s counsel explained how easy it would be to prove Unethical Dealer packed payments if the parties were suddenly to find themselves on opposite ends of the lawsuit. But it illustrates an important point: Product providers have a dog in the hunt when it comes to how their products are represented and sold in the F&I office. It is their zone of compliance.

The Product Provider’s Role

So how does a product provider fulfill its duties in the zone of compliance it touches? In at least three ways:

  1. Provide accurate product information. This is obvious, and is something all providers should be doing already anyway. But most providers and their agents see this as a sales and marketing effort, not a compliance duty. In fact, it is both.
  2. Provide effective training on both product knowledge and legally compliant presentation/disclosure techniques. Again, one would think this is obvious and universally followed. Not so. Even as I was drafting this article, I got a phone call from a channel partner employee who informed me one of its dealerships, as a regular sales tactic, presented an initial payment that included a VSC and GAP. Honestly! Unvarnished payment packing as a baseline practice — in 2016! The point for the product provider is to provide verifiable training content so that, when the class action lawsuit comes, Unethical Dealer can’t say “My provider made me do it.”
  3. Prove the F&I personnel who sell your products actually took and understood your training. There are multiple ways to de-fur this feline. You or your agents can conduct onsite training at the dealership, or at your home office, or it can be done online. Be sure there is a test at the end so you can prove the students paid attention and learned the material. That way, if a different (and illegal) practice is used, you can prove it didn’t originate with you. Best practice here would be to require successful completion of the training before an F&I manager was allowed to represent your products in front of a live customer. Annual refresher training is also important.
  4. Encourage the F&I personnel who sell your products to learn the law that covers their activities. Product providers and administrators aren’t law firms, and they generally avoid giving anything that resembles legal advice in their own name. But everybody wins when F&I personnel know the law that impacts their jobs. Providers and administrators are in a position to encourage that training and make opportunities for it available. Multiple certifications are available to demonstrate this level of training, but that’s a topic for the next issue.

Within your dealership clients, you have a zone of compliance. Be sure to keep your clients safe in that zone.

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Trading Rate for Product (and Why It’s a Very Bad Idea)

Trading Rate for Product (and Why It’s a Very Bad Idea)

Your company may design excellent and appealing coverages, properly price and reserve, and perform exquisite claim administration. But at the end of the day, none of that matters if the F&I manager facing the customer can’t make the sale. Frustrating, huh?

To help F&I managers get over the hump and make the sale, providers and administrators offer onsite or home office training, technology tools such as menus and desking software, and advice. It is everyone’s interest that any advice given is actually legal. Sometimes that’s tricky.

The Nuisance Is in the Nuances

The reason lawyers can cost so much is their training and experience with “Depends.” No, I don’t mean the adult diaper (though there may be some overlap). Rather, whether something is legal or not depends on many different variables, not all of which are obvious. So even if an F&I manager knows a basic legal principle, the nuances can get him in trouble.

Case in point: I was recently asked by a TPA employee (responsible for keeping their representatives in the field out of trouble) if it was OK for a dealer to “trade rate for product.” Trading rate for product means offering a customer a lower interest rate if the customer will agree to purchase an F&I product, such as a vehicle service contract. The general legal principle is freedom of contract, right? Except in certain states (I’m looking at you, Florida), the retail cost of F&I products is not regulated, so dealerships may negotiate their price. APR is negotiable, too. So trading rate for product should be perfectly fine.

And it is … except when it’s not.

Here’s one variable to consider: does the product price become a finance charge? This is a very, very big issue, and the leading reason I don’t recommend dealers trade rate for product. The Truth in Lending Act (TILA) defines “finance charge” as “the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit. The finance charge does not include charges of a type payable in a comparable cash transaction.”

So let’s say a customer has been offered an APR of 4.5% on his financing and the dealer offers to drop the APR to 4.0% if the customer buys a $2,000 service contract. This could be a method of “hiding” rate within the cost of the VSC. In Florida, where there is a presumption every customer pays the same amount for the same VSC, this might not be a problem. Everywhere else, it might be. Say the finance customer pays $2,000 for the VSC that drops his APR, but a cash customer paid $1,500. A court could easily find that the $500 difference was, in fact, a finance charge.

“So what?” you ask. Here’s what: All finance charges must be accurately and conspicuously disclosed in the “TILA box” on the Retail Installment Sale Contract. If part of the finance charge is buried in the cost of the VSC, the disclosures in the TILA box will be inaccurate and misleading.

“So what?” you ask again. Here’s what, again: If the violation was (1) intentional, (2) grossly negligent or (3) part of a clear pattern, all affected customers are entitled to restitution. In most dealerships that trade rate for product on a daily basis, both factors (1) and (3) will be present. That is not good for the dealership. And it only goes downhill from there.

Regulatory fines are the least of the dealership’s worries. Because trading rate for product is often a standard sales tactic at the dealerships who indulge the practice, it now sets up a class action. And since it is a violation of federal law to understate APR or finance charge, punitive damages enter the picture.

The CFPB’s Mandate

But wait, there’s more. Remember the Consumer Financial Protection Bureau? When a dealership reduces the rate for customers that buy a product, it triggers a deviation from its standard dealer participation rate. The CFPB recognizes seven legitimate nondiscriminatory reasons for deviating from the standard rate. Purchasing an F&I product is not one of them. (If the dealership does not have a fair credit policy and program such as NADA offers, it has a whole other set of problems that we’ll address in a future article.)

And we’re not done yet — not by a long shot. If a dealership routinely trades rate for product, can it prove the initial APR was not artificially inflated to make room for the “discount”? This requires an analysis of the desking process and timing of when a credit report is pulled. In short, any dealership trading rate for product had better have a bulletproof and consistent desking process that can demonstrate the APR is appropriate for the customer’s credit risk, and has a consistent mark-up, like the standard dealer participation rate discussed above.

On top of that, to protect the process of trading rate for product, there should be a standard markup on products as well. If the profit margins on products are all over the board from deal to deal, proving a legally compliant deal is difficult at best.

And another thing: When a deal jacket is audited, one of the things auditors look for is variation in APR and amount financed from the first pencil to the menu to the buyer’s order and RISC. Any variation requires an explanation. Is there a process in place to memorialize the negotiations and create a clear paper trail?

Think this is confusing? Imagine how confusing it could be for the customer. And in the eyes of the FTC, if it’s confusing, it’s deceptive. Another potential whammy.

Does the dealer trade rate for product more often with women and minorities than white dorks in bow ties? Add potential discrimination to your list of worries.

Going back to the original question, is it OK to trade rate for product? Of course it is — as long as you dodge all of the landmines that come with the practice. Do you trust your client dealerships’ personnel to consistently do so? Neither do I. And that’s why I never recommend it.

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