Channel | Compliance

The Black Box of Government Regulation

Understanding and avoiding government regulators
By: Terrence J. O'Loughlin

The Black Box of Government Regulation

The term “black box” refers to the concept of a device, or a box, in which there is input, something is moved or transferred into it, and voila, out of this device or box there is a measurable and quantifiable outcome. But, the workings of the box itself remain a total mystery. The human brain, especially in some people, such as government employees for example, is a great example of a black box. How the human mind accepts data and produces concepts and thoughts is still a challenge for psychologists to explain.

I was reminded of the black box concept as a consequence of appearing at a conference recently where I served on a panel. The issue of jousting with government agencies was a topic of discussion. It was also apparent from the questions that a discussion of these pertinent agencies, and their allies in the private sector, might be helpful. Perhaps the black box can be made less opaque and more translucent and the “black box effect” (the consequential actions of regulators) can be controlled or avoided entirely.

Who Are the Regulators?

I was a regulator for sixteen years at the Florida attorney general’s office and worked with Florida agencies, other states’ agencies, federal agencies such as the Federal Trade Commission and Federal Reserve Board, and many private plaintiffs, class action attorneys, and consumers. Most of my time was spent on policing dealers and their financing sources.

There are four groups of regulators, among others, which all dealers must observe to protect their hides:

  • State agencies such as the state attorney general
  • Private plaintiffs, local agencies, and class action attorneys
  • Federal Trade Commission (FTC)
  • Consumer Finance Protection Bureau (CFPB)

In spite of the great bluster, palaver, and the gnashing of teeth, regarding the CFPB and FTC, and their immense power to discipline and fine dealers, it is far more likely that dealers will have problems with state agencies or a consumer attorney than they will ever face the stern government countenance of federal agents. Consequently, I will initially address the first two categories of these regulators in this column. I will address the CFPB and FTC in a future column as they deserve in-depth attention as to their “black boxes.”

State Agencies

In most states there are various agencies, divisions, and boards which interact with dealers: attorney general, departments of motor vehicles, Departments of Revenue (DOR), controller’s offices, vehicle licensing boards, and Departments of Consumer Services (DCS). Each state is somewhat different. What is true regarding all these state agencies is the fact that the auditors or investigators are usually not experts in their fields. For example, they do not understand the automobile business nearly as well as any dealer. Dealers should use this superior knowledge to their advantage if a state auditor visits the dealer’s store and educate them, disabusing them that certain practices are not dishonorable such as spot deliveries. It is equally true that these agencies refer most dealer prosecutions to the state attorney general for disposition since the attorney general has more power and laws at his disposal. For example, I regularly received referrals from the Florida DMV and conducted investigations with it as I did with the DOR and DCS.

The State Attorney General

The attorney general may have the most positive profile of any public official serving in any government office. He is thought to always wear the white hat and courts routinely grant the attorney general great deference. This reputation is generally deserved. But the attorney general seeks public acclaim through the media as he remains, after all, a politician. And in some states, the attorney general keeps the money he gets from settlements and places it in his trust fund. In other words, the attorney general’s office can be a money-making enterprise. The assistant AGs, as a consequence, are often graded on how much money they bring in. This focus on money may color the attorney general’s selection of cases to some degree. In addition, the media heavily reports on consumer cases since they are human interest stories. Hence, consumer cases will always constitute a good percentage of the attorney general’s efforts since it gets him publicity.

For example, one need only ask the question as to when an antitrust case prosecuted by the attorney general ever attracted the media’s attention as much as a consumer case regarding car dealers.

What laws does the state attorney general enforce?

The attorney general, in many states, has almost no limit as to which statutes he wishes to enforce. As the deputy attorney general told me many years ago, the attorney general doesn’t care about jurisdiction. The fact that the attorney general may have a civil rights, antitrust, or criminal appeals section is not truly relevant to dealers. The relevant laws to dealers, which attorneys general, enforce are civil theft, civil fraud, finance, lease, UDAP (Unfair or Deceptive Trade Practices Act) and civil RICO (racketeer influenced and corrupt organizations act). The “civil” aspect of these criminal acts means that the standard of proof is far lower and financial penalties can be assessed. Civil RICO is especially attractive since the attorney general can seek to have the dealer’s assets forfeited to the state. In my first case, the assets of a dealer were forfeited to my office and I was the receiver for a BHPH store. And, the attorney general can enforce federal laws such as the Truth-in-Lending Act (TILA), Equal Credit Opportunity Act (ECOA), and other federal acts as he or she so chooses.

Private Plaintiffs, Local Agencies, and Class Action Attorneys

Many angry and disgruntled consumers will file their complaints with their attorneys or local consumer agencies. Counties and local government often have consumer complaint departments and limited jurisdiction in some instances. Bar associates encourage attorneys to provide their services pro bono (i.e., the exact translation is “for good” but it means “for free”) in some cases. And, of course, the Legal Aid Society may assist consumers in need.

What is less well-known is that there is an army of attorneys who specialize in suing dealers and they participate in an organization called the National Consumer Law Center (NCLC) which hosts conferences and produces legal practice manuals. The NCLC is an excellent organization, with laudatory goals in advancing consumer interests, and its manuals are superb. One of the titles in the series should provide an idea of the types of publications it offers: Automobile Fraud. In my attorney general days, I participated in this organization and still subscribe to their manuals. I would encourage dealer defense attorneys to do likewise so that they may counsel their dealers in how to be compliant.

Private attorneys also prosecute the same laws that the attorney general does. Attorneys who specialize in suing dealers will often attempt to transform a private action into a class action using these same laws. Finally, attorneys and local agencies often request assistance from the attorney general’s office to help prosecute their cases.

Avoiding the Black Box Effect

One need only consider the enormous costs of litigation, fines, damages, and statutory penalties, to recognize that the actions of these regulators can be costly.

For example, the basic law used to prosecute dealers is the Unfair and Deceptive Trade Practices Act and its statutory penalty, in some states, is $25,000 per incident. Every attorney general and plaintiff’s attorney relies upon this statute and it allows class actions to be filed by its language.

There are two rules to follow in avoiding or muzzling the black box effect:

  • Don’t get noticed by regulators.
  • If dealers are the subject of an investigation they should have a response strategy.

Some advisors to dealers recommend that dealers get to know their regulators. In my opinion, this is only true where an actual regulator or auditor visits that dealership on a routine basis. I offer two rules of contending with regulators which will be examined later in greater detail. In my regulator days, I often thought that if I hadn’t heard of a dealer in Florida they must be observing the law. All dealers reading this column should wish for the same by their state agencies.

The two best ways to not get noticed is to have a compliant advertising program and a thorough complaint handling process.

If a dealer becomes a target of an investigation the dealer should consider the following responses after contacting his attorney:

  • Always agree to cooperate.
  • Study the problem and know everything about the issue.
    • Dealers should always know more about the issue than the regulator.
  • Request a meeting.
    • Take the opportunity to educate the regulator, as there may be a misunderstanding.
    • Request all documentation from the agency as public records laws are quite liberal.
  • If it is clear that the dealer is in error, the dealer should admit the error.
    • Apply the theory of “checkbook justice” and quickly pay the fine.
    • Be prepared to offer a reasonable resolution.
  • Demonstrate the operations due diligence, internal controls, and compliance efforts.
  • Give reasons for closing the file.
  • Avoid and prevent the continued investigation of the deal.

People who work for state government are quite busy and have many cases they can prosecute. Dealers should take advantage of this reality by employing some of these suggestions so that regulators’ attention can be diverted with dispatch.

Conclusion

Having a modest understanding of how regulators undertake their obligations, their “black boxes,” may be helpful in avoiding them or redressing their concerns. Upon scrutiny these black boxes aren’t that entirely complex after all.

GOVERN YOURSELVES ACCORDINGLY

This article was written by:

- has written 19 posts on P&A Magazine.

Terry O'Loughlin is the director of compliance for Reynolds & Reynolds. Prior to joining Reynolds in 2006, he was employed by the Office of the Attorney General, State of Florida, from 1990, in the Economic Crimes Section. For most of those years he was involved in the investigation and prosecution of automobile dealers, manufacturers and finance and leasing companies. He was also the mediator of Florida’s Motor Vehicle Lease Disclosure Act, a statute that he assisted in drafting. He has served as a consultant to the Federal Reserve Board’s Leasing Education Committee, an observer/advisor for the Uniform Consumer Leases Act Committee, and has been a consultant to “PrimeTime Live,” “Dateline” and various other media and publications. In addition, Terry routinely assisted numerous states agencies nationally regarding motor vehicle fraud. In 2010, he was elected to the Governing Committee of the Conference on Consumer Finance Law.

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The views expressed by the authors and those providing comments are theirs alone, and do not necessarily reflect the views of P&A Magazine or any employee thereof.

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