Tag Archive | "Terrence O’Loughlin"

Regulators Will Strike Back!

At the Consumer Bankers Association (CBA) Conference earlier this year, an informal poll was taken from the several hundred bankers in the audience as to the major concerns they had for their industry. For the past six years, compliance was substantially the greatest concern and ranked first. However, in the 2017 poll, compliance declined to the fifth tier of concern with the change in the regulatory climate. The Trump administration and a Republican House and Senate have clearly posited that regulation should be reduced and markets should be allowed to work. Passage of the Choice Act in the House is a good example of this deregulatory zeal.

But are the bankers correct? Should dealers celebrate a defanged CFPB and an announced deregulatory posture?

The answer is a muted one. If the CFPB is disciplined, and its authority is significantly lessened, franchise and independent dealers should take a modicum of solace in this outcome. Issues such as disparate impact, new ancillary product rules, and less supervision of financing sources will lessen regulatory burden for dealers.

However, due to political pressure from certain senators and congressmen, as well as numerous consumer advocacy groups, the federal agencies, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Federal Reserve Bank (FRB), National Credit Union Administration (NCUA), Department of Justice (DOJ) and the Federal Trade Commission (FTC), will be emboldened to continue certain CFPB policies and add to them. These agencies have a mandate which they can’t ignore and possess powers which they seldom exercise. They also collect consumer complaints.

A sinister emerging issue which could force these agencies to act would be the apparent growing bubble regarding vehicle financing fraud which parallels the housing bubble.

Point Predictive, analysts of risk management in the financial sector, has concluded that as many as 1% of vehicle credit applications include some type of material misrepresentation which is similar to the percentage in the housing bubble around 2009. The losses which financing sources experience from deception may double this year to $6 billion which is twice what it was in 2015. Remarkably, only 3% of dealers can be responsible for all of a financing source’s fraudulent applications.

As would be anticipated by anyone who has observed miscreant dealer behavior, the common types of credit application fraud include misrepresenting years employed and income, creating false paystubs, indicating nonexistent vehicle options (powerbooking) and overstating the value of the vehicle. Deception of this nature can be attributed to the consumer or dealer or both.

If such an economic systemic problem emerges, agencies would have no choice but to prosecute and add regulatory burdens to financing sources and dealers, which has already been somewhat exhibited.

In addition, there is growing interest by both federal and state regulators in alleging deception against creditors for extending credit to consumers who are not truly credit worthy and who will default on their retail installment sale contracts or lease contracts early in the contractual term. Dealers need to be reminded that they are considered creditors under the law. This problem is further addressed below.


DAGA stands for the Democratic Attorney General Association and its statements on its website are strident and defiant in reaction to the Trump administration:

“Our Democratic Attorneys General provide crucial checks and balances on a new federal administration that often refuses to follow the rule of law.”

“Democratic Attorneys General Are The First Line Of Defense Against The New Administration.”

Democratic attorneys general are planning to maintain many of the policies of the CFPB should it be reduced in power. For example, California is considering its own disparate impact enforcement.

Consider, as well, what actions DAGA members have taken against dealers in the past few years:

  • New York: Attorney General Eric Schneiderman has prosecuted and settled with dealers for over $15 million in the past three years and has convicted a dealer of felony charges regarding the burial of hazardous waste.
  • Massachusetts: The Massachusetts attorney general entered into a $13 million settlement regarding GAP.
  • Washington: The Washington AG sued and settled with a dealer for discriminating against Spanish speakers, misrepresenting finance terms, interest rates, title branding and warranties. The dealer had to pay $250,000 in its settlement and provide Spanish translated contracts in the future. Unusually, it was a civil rights case.
  • Delaware and Massachusetts: The attorneys general of these two states settled with a major financing source for $26 million regarding purchasing retail installment sale contracts from thousands of consumers who could not afford them.

The corresponding organization to DAGA is the Republican Attorneys General Association or RAGA. It is fair to report that the members of RAGA are generally supportive of the Trump administration. But all attorneys general must discharge their legal responsibilities and will be forced to respond to consumer complaints.

Attorney General Complaints

Many of the state attorneys general priorities are based upon consumer complaints. Dealers should remember that the Consumer Federation of America (CFA) and North American Consumer Protection Investigators (NACPI) have tallied consumer complaints every year for the past 30 years. Consumer complaints regarding vehicle transactions have almost been the No. 1 complaint every year for the past three decades.

Various state statistics in 2016, regarding vehicle complaints filed with the state attorney general, support this conclusion of the CFA and NACPI:

  • Illinois: There were 2,783 complaints which made these complaints No. 1 collectively.
  • New Jersey: These complaints returned to No. 1 as the most common complaint.
  • Michigan: Vehicle complaints were No. 3.
  • New York: There were 3,437 complaints filed, which meant that they were No. 2 on the list.

New Risks to Dealers

Regulatory action could also be manifested in new ways:

  • Autonomous Vehicles and Franchise Dealers: Autonomous vehicles have been attracting a great deal of attention from companies not traditionally affiliated with the automobile industry: software companies. A number of these companies are attempting to fashion artificial intelligence, which will drive vehicles without the need of a human driver.

It is also rumored that these software companies are quietly lobbying Congress to enact legislation, which would allow them to bypass franchise law and sell these futuristic vehicles directly to the public. The FTC has already welcomed this idea. If Congress enacted such a law it would probably override state franchise law pursuant to the commerce clause of the Constitution.

  • An “All In” 36% APR: In November 2016, South Dakota voters approved a referendum which bars licensees from contracting for or receiving greater than a 36% maximum finance charge on financing. The finance charge calculation, as in the Military Lending Act APR calculation (MAPR), is an “all-in” calculation, and would include all interest, fees, and charges, including any ancillary products or services.

A violation of the 36% finance charge cap would be deemed void and uncollectable, and the financing source could face a misdemeanor charge, a serious consequence, indeed. Adding products such as GAP, service contracts, and other ancillary products very quickly would increase the interest rate beyond the 36% cap. What this means, quite simply, is that dealers will have less opportunity to sell ancillary products to their customers. Profit opportunities will be lost and consumers will have fewer options.

  • Creditor Liability in Underwriting: As the Delaware and Massachusetts case demonstrated above, regulators may be targeting creditors for not denying credit to those consumers who will, most likely, default on their retail installment sale contracts or lease contracts.

Dealers should recall, once again, that they are creditors by law and share in this potential liability. In other words, dealers and financing sources may be liable for advancing sales when the consumer’s ability to discharge their contractual obligations is limited. The law used for these prosecutions is the ubiquitous unfair and deceptive trade practices act (UDAP), which grants federal and state regulators great leeway and flexibility.

Remedies for Dealers

Compliance is here to stay. To paraphrase the ancient Roman, Vegetius, “In Times of Peace Prepare for War” — or as the Boy Scouts say “Be Prepared.” Dealers should remain diligent in protecting their interests.

If dealers don’t have a sound compliance program they should implement one. If they have a good program they should maintain it. Dealers need to continue to include compliance as simply part of their business regimen.

If dealers don’t have a sound compliance program the place to start is to appoint a Compliance Officer and grant him the appropriate authority. Dealers should be encouraged to craft a compliance management system.

Many of the new threats to dealers can be challenged by trade associations. The NADA, NIADA, and state ADAs all lobby lawmakers and agencies. Dealers should enthusiastically support these associations so that they can protect dealer interests. For example, the Choice Act is pending before the Senate and the passage of it would lesson regulatory burdens substantially. Dealers should support their dealer associations in this highly significant deregulatory bill.

Dealers should also police their own. If they are aware of another dealer’s fraudulent activities regarding credit applications they should report them to the AG’s office anonymously before the problem grows. This reporting should apply to other infractions as well. Honest dealers suffer unfairly when deceptive practices are employed since it gives advantages to disreputable dealers.

In my days of service at the Florida Attorney General’s Office, dealers often reported deceptive practices to me anonymously. It improved the business climate as action was taken against these dealers’ infractions. The vast majority of dealers operate honestly but a very small percentage tarnishes the industry’s reputation and invites regulation.

Finally, please note: The “general” part of the term “attorney general” is what is defined as a postpositive adjective. In other words, an attorney general is really a general attorney of the jurisdiction. Consequently, the plural of attorney general becomes attorneys general since the noun is the attorney part. It can be confusing.

Govern yourselves accordingly!

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A View from the Dark Side

Car dealers and the industry, in general, are savvy, creative entrepreneurs and possess great common sense. But, they have an enormous blind spot as it relates to how they are perceived by the regulating community. Federal and state agencies, consumer protection organizations, and private plaintiffs, the Dark Side, are openly hostile to the industry of which dealers are unaware. This hostility precipitates regulation and litigation.

This failing was underscored, recently, as I listened to an excellent presentation made by an assistant attorney general of my acquaintance, at a conference I attended. He outlined the powers of the state attorney general and the issues which the attorney general was prosecuting against dealers in the present day. His remarks could have been made in 1995, as opposed to 2014, since the consumer complaints remain unchanged. Advertising, spot delivery, payment packing, and so forth continue to be the focus. These are the same complaints against dealers, which affect how regulators and the public view the automotive industry. And this perspective remains static.

The National Association of Attorneys General (NAAG), Consumer Federation of America (CFA), and the National Association of Consumer Protection Investigators (NACPI) annually rank industries based upon consumer complaints. In the past twenty years, in almost every listing, automotive complaints are at the top of the list.

For example, here is the consumer complaint list from the CFA for 2013:

  1. Automotive
  2. Home Improvement/Construction
  3. Credit/Debt
  4. Utilities
  5. Services
  6. Home Solicitations
  7. Landlord/Tenant
  8. Internet Sales
  9. Household Goods

These listings affect how regulators are deployed to police consumer affairs. Never mind the fact that all complaints related to the automotive industry are swept into one category, which creates a biased result.

An equally unsettling Gallup poll released in 2012, for “Honesty and Ethics in the Professions” places car salesmen last in the ranking of 22 professions. Gallup has been releasing this poll for many years and car salesmen have had a lock on the last place for the past decades.

  1. Nurses
  2. Pharmacists
  3. Doctors
  4. Engineers
  5. Dentists
  6. Police Officers
  7. College Professors
  8. Clergy
  9. Psychiatrists
  10. Chiropractors
  11. Bankers
  12. Journalists
  13. Business Executives
  14. State Governors
  15. Attorneys
  16. Insurance Salesmen
  17. Senators
  18. HMO Managers
  19. Stockbrokers
  20. Advertising Practitioners
  21. Congressmen
  22. Car Salesmen

Why the list only posts 22 professions is unclear. Remarkably, attorneys have been moving up this list as they were previously ranked nineteenth. Certainly the automotive industry can do better if the legal profession can move up this list.

Federal Trade Commission Roundtables

A couple of years ago the FTC hosted a series of roundtables where industry and consumer interests were presented. I had the pleasure of appearing on two of these panels. Two of the remarks from the consumer interest panelists were truly remarkable:

  1. “Never finance a vehicle through a dealer.”
  2. “I’ve never seen a spot delivery which wasn’t fraudulent.”

Dealers certainly offer competitive, if not better rates, than other finance sources. And, they may be able to finance consumers banks would reject. Moreover, a zero interest rate is only available through a dealer.

There are hundreds of thousands of spot deliveries. If they were all fraudulent there would be economic chaos. The truth is that only a miniscule number may be actionable.

Other Hostile Statements

Some of the other remarks I’ve heard over the years also indicate great hostility and distrust of the industry. For example, I heard an assistant attorney general from California comment that her office always investigates profit in vehicle transactions. From any legal perspective, profit is irrelevant as it relates to a legal infraction. It is not the business of government to investigate such matters.

I was a speaker at a consumer rights conference many years ago and I opined that spot deliveries did not violate the Unfair and Deceptive Trade Practices Act (UDAP). I was roundly booed for expressing my legal opinion, which remains the correct legal conclusion.

In view of the current disparate impact issue, increased dealer regulation, and the NADA’s legally valid and resourceful response to the disparate impact issue, an attorney from the Department of Justice, recently stated at a conference that he would be concerned if the cost of credit would increase due to these recent regulatory government actions. It is axiomatic that increased regulation ultimately increases costs to the consuming public. It is naïve of any regulator to believe otherwise.

Consumer interest attorneys often don’t think that the attorney general is aggressive enough. The attorney general for whom I worked at that time, was accused of “being in the hip pocket of the automotive industry.” It was an erroneous and defamatory remark. Nevertheless, it indicated outright antagonism to car dealers as this angry consumer attorney wanted more action.

Some Simple Solutions

Consumer Complaints

Dealers can control many consumer complaints before they are filed with government agencies or with a consumer attorney by addressing them at the dealership level. As presented in this column recently, a good consumer complaint protocol should be implemented.

Goodwill Efforts

Continued goodwill outreach efforts would improve the industry’s profile but these efforts need to be advertised. For example, dealers contribute to charity, sponsor many events in their communities, such as little league baseball, but rarely receive fair credit for their efforts. Marketing these goodwill efforts may help. For those dealers who aren’t involved in these ways of being generous corporate citizens, they may wish to begin doing so.

It is also remarkable as to how much sales tax dealers pay into the state coffers and how much other commerce benefits from dealers. These should be highlighted.

Consumer-Friendly Sales Efforts at the Store

Why the sales and financing process is viewed by the public as such a struggle is unnecessary. Efforts should continue to be made by dealers to improve this process.

It should also be underscored that programs, such as AWARE (Americans Well-informed on Automobile Retailing Economics), and the availability of the details of the vehicle purchase, allows more transparency than you get when purchasing almost any other product.


By improving the public’s perception of the industry there might be less reason for regulators to focus on the automotive industry. In addition, consumers would be less likely to seek redress by filing complaints with governmental agencies or their attorneys. This result would be a wonderful change to the present.


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The Compliance Officer Cometh

With apologies to Eugene O’Neil and his play, The Iceman Cometh, the need for every business organization, including dealerships, to have a compliance officer is a simple business fact. Earlier this year, the Wall Street Journal featured an article that flatly stated that compliance officers are the fastest growing occupation in American business. The reason is simply that American business continues to be more regulated by the year. Failure to observe these regulations has cost many enterprises substantial sums of money in damages and fines.

It has already been established that operating a car dealership is one of the most regulated industries in the U.S. The cost of federal compliance is staggering as indicated in a study commissioned by the NADA entitled “The Impact of Federal Regulations on Franchised Automobile Dealerships.”

It logically follows that every dealership should have a compliance officer because of the need and the fact that a good compliance officer can reduce these costs and liability. And, as is strongly recommended in this column, every dealer should implement a Compliance Management System which requires a compliance officer to be appointed.

A Compliance Management System would include the following:

  1. Establish a compliance program
  2. Establish a board with management oversight
  3. Appoint a permanent compliance officer who reports to that board
  4. Respond to consumer complaints with a protocol
  5. Have routine audits examining how the program is functioning and can be improved.

This article only addresses the appointment and training of a compliance officer as it relates to the various issues in the finance and insurance department. Unfortunately, there are many other compliance areas of which dealers of must be cognizant.

At this point, every franchise, independent, and BHPH dealer, if it hasn’t done so already, should immediately appoint a compliance officer.

The Present State

Presently, dealers should already have written privacy and safeguards programs with an appointed Privacy and Safeguards Compliance Officer. The compliance officer should discharge these privacy and safeguards duties.

Selecting a Compliance Officer

The person selected for the role should be a relatively high-ranking employee of the organization and would report to either the general manager or dealer principal. This person must understand the car business and have the intellectual capacity to understand laws and regulations. This person will need to be educated presently and engage in on-going education as the regulatory environment is dynamic. In addition, this person will be required to draft policies for the store and educate dealership employees. Unless a new person is hired or selected, most stores should select the general manager, sales manager, or controller for this role as an addition to their present duties depending upon the size of the business operation. The compliance office may need a support staff as well.

This person will also need a budget for these procedures. There are ways to control this budget as this article will suggest.

Selecting a Dealer Attorney

As a corollary for selecting a compliance officer, dealers should evaluate their legal counsel. The compliance office will be working with the dealership’s attorney directly. In my attorney general days, dealers were, at times, represented by attorneys who didn’t understand the car business. In one deposition, in particular, a large store was represented by a prominent defense attorney who, through his own ignorance, implicated his client in civil infractions in the deposition. In another case, an attorney caused his dealer client to pay a substantially higher damages amount through his lack of understanding of F&I. Dealers should be certain that the attorney who represents them knows their business. If a dealer attorney is not a member of the National Association of Dealer Counsel (NADC) a dealer should ask why. If a dealer needs an attorney it should seek a member of the NADC. In the alternative, dealers need to educate their attorneys regarding dealer operations.

Education of a Compliance Officer

A compliance officer should have a two-tier track for education. He should avail himself of all the free information in the market place. Secondly, he should consider some form of formalized training.

There is a rich abundance of free materials that a compliance officer should either subscribe to or review.

Free Training Materials

There are many freely available training materials. All dealers and dealer compliance officers should take full advantage of the following:

  • Free industry publications such as this publication
  • NADA and state ADA websites
  • Federal Trade Commission- The FTC provides a number of helpful articles.
  • Federal Reserve Board- The FRB has an excellent in-depth explanation of leasing in its publication, “Keys to Vehicle Leasing” to which this columnist contributed.
  • Consumer Finance Protection Bureau (CFPB)
  • State DMV websites
  • State attorneys general websites- These websites can be especially helpful outlining advertising rules.
  • AWARE (Americans Well-informed on Automobile Retailing Economics)- AWARE is an organization dedicated to educating the public about vehicle finance. It offers excellent articles and is a resource for both dealers and consumers. http://www.autofinancing101.org/learning_suite/index.cfm
  • Vendors- Dealers shouldn’t hesitate to ask their vendors for any compliance materials they may offer. Some vendors have developed excellent materials.

Modestly Priced Materials

In addition to the free legal resources, there are reasonably priced books and manuals worth every penny.

F&I Legal Desk Book

This book is written by the attorneys at Hudson Cook and should be on the bookshelf of every dealer in the U.S. It is written in a question and answer format addressing the most common questions practitioners would ask about F&I compliance. It is the training manual for AFIP.


The NADA produces various guides for franchise dealers which are available for modest cost. They are written by legal experts who are extremely conversant with dealer operations and demystify the legalese.

Auto Dealer Law (ADL)

This organization produces an excellent comprehensive dealer manual which addresses all phases of the store. It is not inexpensive. However, it is quite thorough and written by automotive compliance legal experts.

Training Organizations

There are various training programs offered for dealer compliance purposes. Some are excellent and others, not so much.

AFIP Certification

The Association of Finance and Insurance Professionals, a non-profit organization, has been training dealer personnel for many years. I have personally participated in assisting in this training in two of its modules. I became aware of AFIP in the early 1990’s when I was with the Florida attorney general’s office and recommended it then as a possible licensing mechanism for dealerships. It is an excellent training program.

AFIP’s commitment to compliance officer training continues as a dealer resource with its new Association of Dealership Compliance Officers (ADCO). This new organization promises to help compliance officers discharge their obligations.

Consumer Credit Compliance Certification

The National Automotive Finance Association (NAF) offers this new in-depth program for training and it is designed by leading national attorneys who specialize in these areas.

Mosaic Compliance Services

Mosaic offers training modules and programs regarding dealer compliance.

There are certainly other merit-worthy organizations which offer training programs. However, there are others which are not especially competent. Dealers should investigate any of these training organizations carefully. What experience and training do these organizations offer? Are they current?

A Beginning Checklist of the Laws the Compliance Officer Must Understand

Compliance officers should acquaint themselves with the following list of laws and regulations. Some of them are quite complex but, nevertheless, compliance officers should print these laws from the internet and place them in a folder or binder. As a compliance officer’s understanding progresses he will be able to identify the relevant sections of these laws. The many resources indicated above will translate these laws into more humble and understandable language. A future article will provide further details about developing a checklist or self-audit.

Federal Law

  • The Truth in Lending Act and Federal Reserve Board Regulation Z
  • The Consumer Leasing Act and Federal Reserve Board Regulation M
  • The Equal Credit Opportunity Act and Federal Reserve Board Regulation B
  • The Fair Credit Reporting Act (including the “Red Flags” Rule)
  • The Federal Trade Commission’s Used Car Rule
  • The FTC’s Preservation of Consumer Claims and Defenses Trade Regulation Rule
  • The FTC’s Credit Practices Regulation
  • The Magnuson-Moss Warranty Act
  • The Federal Odometer Act
  • The Gramm-Leach-Bliley Act and the FTC’s Privacy Regulations (including the Safeguards Rule)
  • The Internal Revenue Service’s Cash Reporting Rules
  • The Treasury Department’s Office of Foreign Assets Control (“OFAC”) “Specially Designated Persons” List Requirements;
  • The FTC’s Do-Not-Call and Do-Not-E-mail Rules
  • The Federal Communication Commission’s Telephone Rules

State Law

  • Unfair and Deceptive Acts and Practices (UDAP)
  • Advertising
  • Retail Installment Sales Acts
  • Motor Vehicle Leasing Disclosure Acts
  • Titling and Licensing Statutes
  • Insurance and Ancillary Products
  • Document Storage and Destruction
  • Documentary Fees


Compliance efforts can seem daunting, intractable, and impossible. They are not. They can be managed and managed with reasonable cost. A compliance officer has many options to enable him to protect dealer interests thereby controlling costs and, most significantly, avoiding liability. No matter the size of a store, there should be an organized, educated compliance officer serving as protection to the dealership’s interests.

Govern yourselves accordingly.


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Looking Forward to The P&A Leadership Summit

The P&A Leadership Summit (PALS) will debut at Industry Summit in Las Vegas at the Paris Las Vegas Hotel on September 16. It will replace the Vehicle Service Contract Administrators Conference (VSCAC) conference – the scope of that event had widened enough to warrant a new name and a new focus. PALS is co-sponsored by P&A Magazine and F&I and Showroom magazine, and the aim is to provide a comprehensive overview of the state of the F&I product segment, including technology, innovation and compliance issues.

One of the highlights of the one-day event will be the featured speakers and keynotes – there are three lined up, each a show-stopper in it’s own right. First will be a look back at the U.S. Fidelis debacle, and what the industry can learn from it, to ensure it never happens again. Featured speakers from Amherst Partners’, Scott Eisenberg and Terry Keating, will lead the discussion; Eisenberg was the chief restructuring officer and part of the independent team assigned to manage U.S. Fidelis after it filed for bankruptcy, and Keating is the managing director of the investment banking, corporate restructuring and management advisory firm.

The first keynote will feature Terrence O’Loughlin, director of compliance for Reynolds and Reynolds. O’Loughlin has spent the last few decades as a practicing attorney, and will bring a fresh outlook to the topic of compliance and regulations. He believes that while recent moves from Washington D.C. have added new complexities, the essential issues remain the same – unfair and deceptive practices, document fraud, and false or misleading advertisements. There are a few simple steps dealers can take to protect themselves, and he’ll cover them in this session.

David Westcott, chairman, NADA, will give the last keynote, which will close out the show. He’ll take a closer look at the indirect automotive financing model, and examine why it’s so important to maintain a healthy industry.

Beyond the keynotes, PALS will feature two panel sessions packed with industry heavy-weights. A panel on technology will be moderated by Greg Arroyo, editorial director, F&I and Showroom and Auto Dealer Monthly, and will feature Brent Allen, president, StoneEagle; Robert Hymen, president, Service Payment Plan; Kumar Kathinokkula, COO, F&I Administration Solutions; Kelly Price, president, National Automotive Experts (NAE); and Christina Schrank, president, NAC. They will examine how technology is changing the F&I industry, and what providers, agents and dealers can do to stay ahead of consumer demands.

The second panel will be moderated by David Trinder, CEO, F&I Administration Solutions, and will look at key developments in the agent sector. Panelists include John Braganini, principal, Great Lakes Companies; Randy Crisorio, president and CEO, United Development Systems (UDS); Linda Fisher, partner, Dealer Assurance Group (DAC); and Glen Tuscan, president, Dealer Commitment Services Inc. They will take a closer look at how the expectations of providers and administrators have changed in the last several years, with a focus on how both sides can come together to form lasting relationships with dealers.

All in all, this is a show you won’t want to miss. If you haven’t already added the P&A Leadership Summit to your Industry Summit agenda, start making plans to attend now; it can be added on to your registration for an additional $395. For more information, including speaker bios and a detailed agenda, visit www.pa-leadershipsummit.com.

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