Striking balance between compliance and profit

Even though the Consumer Financial Protection Bureau no longer regulates auto finance as aggressively as it did a few years ago, dealership compliance hasn't hit the back burner. But as dealers work harder to turn a profit, striking the right balance between compliance objectives and profit goals could become more challenging.

"I don't think compliance is brushed under the carpet," said Gerry Gould, president of F&I training company Gerry Gould & Associates. "Everybody wants to be compliant, especially today, with customers getting the information at ease."

Still, in the middle of this decade, compliance was much more of a buzzword. In 2014, the National Automobile Dealers Association rolled out a policy recommendation that dealerships adopt a set method to determine dealer reserve — the retail margin that stores earn for arranging a loan. In 2015 and 2016, compliance was the overarching theme of conferences and conventions and the center of dealers' business conversations.

"They were running to their agent partners; they were running to NADA; they were running to all the compliance companies out there," said Gould. "In 2019, it's not an afterthought, but it's not the first thing on a dealer's mind as it was in 2016."

Today, profit is a bigger buzzword. Some fear that, as dealership profits continue to narrow, dealers' attention may turn away from compliance as they put more emphasis on reducing costs and creating new profit centers.

"When you're selling less cars and you're making less money, then compliance conversations tend to kind of get put to the back in terms of meetings and things like that," said Shannon Robertson, executive vice president for the Association of Finance & Insurance Professionals, a nonprofit group that offers a compliance certification program for dealership personnel.

Despite that worry, Robertson says dealers are still focused on compliance, and the association's number of certifications has remained consistent since 2016.

In a Cars.com-Automotive News survey of 62 dealers, the biggest share of respondents, 39 percent, said their stores' compliance practices have changed a moderate amount over the last four years.

Vane Clayton, former CEO of KPA, a compliance vendor for dealerships, said that in the 34 years KPA has been in business, compliance has ranked high among dealers' priorities. When dealers have faced business challenges, compliance solutions have been "the last one that gets shut off … because on average, they want to make sure that they're compliant all the way through," said Clayton, who is now on KPA's board of directors. "It's not a big line item that they're concerned about relative to other things that they may be able to cut back on."

Within the last year, as U.S. new-vehicle sales declined, KPA has heard from more dealers interested in improving their compliance efforts, Clayton said. Some of that may have to do with state and local authorities cracking down.

"A typical dealer is concerned. As an owner, as a general manager, you've got a lot of employees working for you. You hope that they're doing the right thing," said Clayton.

But at some dealerships, because of the profit pressure, compliance mishaps are already becoming unconscious behaviors, said Gould. The profit squeeze, sales decline and competition "force people to make sacrifices and overlook some issues of compliance," he said.

For example, Gould said, many sales associates quote payments to customers without disclosing interest rates. Others quote payments with F&I products rather than first showing the payment without the addition.

"It's often a misleading tactic, and it doesn't allow an F&I manager to consistently follow a process because deals are coming in so erratically, in different ways," he said. "That's where it becomes an unconscious behavior. Now the F&I manager sees an advantage, and because they don't want to upset the gross of the deal, they kind of go along with it. They find a way to keep it the way it was rather than just full-blown transparency."

The entire F&I process is not as transparent as it should be, Gould said. While the paperwork is usually compliant, the F&I manager or sales associate often neglects to make verbal disclosures, he said.

"Dealers since 2016 have put things in place to protect themselves — paperwise. In other words, documentation in the deal jacket is protecting them, but the process has not been fully compliant," Gould said. "The way they do business hasn't changed. What's changed is the deal jacket."

General managers also often struggle to meet the dealer's profit expectations and the dealership's compliance standards. When dealerships have compliance officers, which is rare, the dealer, general manager and compliance officer sometimes have conflicting priorities, Robertson said.

"The biggest battle that I'm finding is trying to get all three of them on the same page," he said. "How do we get to what the dealer principal wants in terms of incentives and sales and growth? What does a compliance officer feel like they need to have in place for procedures for protection? And how does a general manager meet both of those expectations?"

Most compliance officers implement effective processes, Robertson said, but those processes vary within the dealership group. And with different general managers at each store, they aren't always executed consistently.

"That's where you get that triangle of how does the general manager take the compliance, take the dealer principal expectations and meet both of those?" Robertson said. "Which one gets more focus — is it the profit or the compliance?"