The Anatomy of F&I Compliance

by: Brett Richardson

RV dealers face two relatively new federal F&I regulations passed in the last five years that require a written compliance plan. The Safeguards Rule, in effect since 2003, and the Red Flags Rule, taking effect May 1, both require dealers to establish, maintain, and test a written compliance program. The Safeguards Rule requires that dealers protect consumers’ personal, non-public information from identity thieves. The Red Flags Rule requires dealers to scrutinize every transaction to help detect and prevent identity theft.

You Must Have a Written Plan in Place
“Let’s face it, nothing is less motivating than sitting your sales and finance teams together in a room and unloading on them hundreds of practices that can get them fired or thrown in jail,” says Rob Cohen, an attorney with Californiabased Auto Advisory Services. Cohen helps dealers comply with the federal rules, rather than dealers simply handing them a “policy” that sits on the shelf. He recommends dealers address compliance through moderation, “I strongly believe that it is counterproductive to assume that dealership personnel can turn into compliance experts overnight,” he said. Compliance needs to be a continuous theme at the dealership, and introduced over time.

Individual compliance obligations for an RV dealer do not follow a one-size fits all formula. Instead, the Federal Trade Commission (FTC) bases its compliance requirements on a sliding scale, meaning that a small operation does not need to go into as much depth and detail as a heavy volume, multi-line, multi-location dealership. While the road to compliance is simple to map out, the associated costs are unknown. Training and retraining are definitely part of the costs, especially when it comes to employee turnover. Dealers also need to consider technology and legal fees. Many dealers chose to use thirdparty solutions to assist their compliance needs. Although there are electronic solutions, the regulations specifically say businesses cannot outsource their entire compliance.

Let the Government Provide Templates
For dealerships that establish in-house programs, let the Safeguards and Red Flags rules establish your minimums. Five of the six required components of the Red Flags Rule are identical to your current requirements under the Safeguards Rule. The government template for the Safeguards and Red Flags rules are as follows:

1. Name a compliance officer: Put a trusted, senior management employee in charge. Depending on your size, you can place the additional responsibility on the person already responsible for your risk management functions, or you can create a new position, which is an increasing trend. Either way, make sure someone is responsible for developing the processes and policies, testing the procedures, and reporting to you on a regular basis.

2. Conduct a risk assessment: Figure out where your compliance program exposes the dealership to risks. It could be an inconsistent method for marking-up retail installment sales contracts that may be discriminatory, the inconsistent use of menu-selling, or the inconsistent completion of forms. It could be a lack of safeguarding consumer information, or the lack of a crosschecking process to detect employee fraud. The compliance officer should conduct a thorough risk assessment to determine your risk.

3. Develop a policy and procedure manual: After your compliance officer determines your dealerships risks and the processes for counteracting those risks, he or she must develop policy and procedure manuals for sales and F&I. These manuals must define and describe the organization’s expectations on how an employee should complete certain tasks.

4. Provide employee training: Now that you have a manual addressing expectations for your employees, teach and then confirm that they understand your policies. Give them a copy of the manual a week before starting the training so they have ample time to review the material. After the training, have your employees date and sign a form certifying they have read the material, and agree to act within the law.

5. Conduct periodic audits: This is a trust but verify situation. The dealer and/or general manager must treat these steps as a process, rather than a program. If you treat these audits as a program, then your employees will put it on the shelf with their best intentions, only to forget a few months later. These dealership processes must be continually monitored and refined as new information becomes available. You must conduct periodic audits and document any shortcomings and corrective actions, including disciplinary actions. You must also refine your policy and procedure manuals to reflect your process if the employees find a better way to do something.

6. Board Approval and an annual written report on the program’s effectiveness (Red Flags only): The sixth component, involves board approval and the submission of an annual written report to the owner of the dealership. Your board of directors, or appropriate board committee, must approve your initial Identity Theft Prevention Program. The board, a board committee, or a senior management level employee must be involved in the oversight, development, implementation, and administration of the program. That board, committee, or person is then responsible for ensuring your employees have appropriate training to implement the program, and the program includes appropriate oversight of service provider arrangements.

The Safeguards and Red Flags rules are in addition to numerous other federal, state, and local F&I compliance obligations. Other well known F&I compliance obligations include Form 8300 cash reporting and Office of Foreign Assets Control (OFAC) list checks. Although the cash reporting and OFAC rules do not require written compliance programs, having a program in place may give dealers some protection in case of an unintentional reporting oversight. Dealers need to establish a culture of compliance and need to emphasize compliance at every opportunity. Nobody has more to lose from a federal compliance audit than the Dealer/General Manager.

Consistency
Smart dealers will incorporate these same elements into every compliance program at the dealership, since consistency leads to familiarity and adoption. Moreover, it is difficult for the government to argue that following its suggested compliance outline was inadequate.

Naomi Lefkovitz, an attorney for the FTC says, “We’re not looking for perfection, we’re looking for reasonable efforts in implementing procedures, the [Red Flags] guidelines track all the components of the regulation itself, and they provide more guidance as to how each entity should implement those components.” Legal analysts add that compliance will provide dealers with another layer of protection against lawsuits.

Priority
Cohen, suggests dealers prioritize compliance issues, since not all involve the same risks. Some regulations are only enforced by the federal government, and do not allow private lawsuits. Some rules directly provide for attorney fees. Dealers need to pay attention to the trial attorney trick of turning certain federal violations into state court claims of unfair and deceptive trade practices because state statutes allow judges to award attorney fees. Cohen suggests the following guidelines for establishing a compliance program:

1. Dealer principals must prioritize compliance issues in the sales and finance departments.
2. Dealers should deliver compliance, like most medications, in measured doses and continuously. Recognize that technical compliance information may be difficult to absorb for some of your personnel. Administer the information slowly but repeatedly. Provide material for employees to read and give them time while “on the clock” to study.
3. Establish a timeline. For example, introduce a new compliance topic each month.
4. Keep track of who has learned what. If you can’t prove the employee’s training on a topic, then it is difficult to impose discipline for a violation. More importantly, if you don’t have proof that employees “knew better,” the dealer’s exposure is far greater, during a lawsuit.

For more information on any of these topics, visit the government relations section of www.rvda.org.