Minimizing the Rising Cost of Compliance

It’s nothing new that the Consumer Financial Protection Bureau has made significant waves in the auto-finance space.

In 2013, the agency’s “Indirect Auto Lending and Compliance with the Equal Opportunity Act” bulletin stated it would would regulate lenders on unanticipated discriminatory practices. As a result, lenders and dealers scrambled to revamp their anti-discrimination practices with little guidance on how to comply.

From that time through 2016, the CFPB filed 13 enforcement actions totaling upwards of $165.2 million against a number of well-known auto financiers. In addition to the restitution and civil penalties these lenders received, the increased compliance oversight directly impacted dealer profit margins, consumer prices and the national GDP.

According to a 2014 study of the federal auto-finance regulatory environment by the Center for Automotive Research, rules related to employment, accounting and vehicle financing comprised more than 63% of all estimated compliance costs. Administrating vehicle financing alone accounted for 71% of all vehicle-finance compliance costs and 26% of total dealership compliance costs.

Also, looking back to 2012, the average dealership lost an estimated $441,332 worth of net business and economic activity due to federal regulatory compliance costs. The estimated overall economic cost to light-vehicle dealerships was $7.7 billion, and 10,550 direct dealership jobs were lost. Overall, the impact to the U.S. economy is estimated at $10.5 billion in lost economic output and more than 75,000 fewer jobs in 2012.

These dealer losses occurred before the CFPB ramped up its compliance oversight. Dealers already were implementing every possible action to increase dealership income to account for the necessary cost of compliance at the time, including:  

It’s easy to conclude that with even greater CFPB and U.S. Department of Justice oversight in auto finance, compliance costs have continued to grow, further constricting dealership profit margins. The fact is, compliance isn’t going away. However, there are simple steps dealerships can take to recoup lost profits without increasing vehicle prices.

First, evaluate how to make a dealership more efficient when it comes to compliance by asking:   

Training the F&I department to instill consistent processes can ensure all deals are fundable and filed correctly the first time, including all pertinent paperwork. Creating a checklist to make sure every item is complete before sending a deal to accounting also can help.

Just taking an extra three minutes to ensure paperwork is correct can save 10 minutes per deal for office workers who are tasked with reconciling documentation and otherwise spending hours chasing down paperwork to finalize contracts in transit.

Training managers to take ownership for deal documentation has the potential to save 30% of the team’s time to focus on increasing profitability instead of handling compliance paperwork. Holding F&I managers accountable also fosters greater control in making sure all deals are finalized in a compliant manner.

Take this mindset of driving efficiency and apply it to all compliance processes. The store will be on the path to operating in a profitable and compliant fashion. Doing it right also goes a long way in advancing consumer confidence and the customer experience.   

In addition, look for other ways to increase dealer profit, such as with your consumer-protection products. Review penetration rates and determine what can be done to increase them. But be careful: The last thing a dealer wants is to see chargebacks increase because your F&I products are priced too high, resulting in higher rates of consumers refinancing their auto loans.

Assess whether product offerings are the right ones for the customer base. Learn what service managers see, and compare their feedback with products the dealership provides. Then, determine two to three core products and tie them to the team’s pay plan based on penetration benchmarks.

Once benchmarks are set, empower the team to meet them and provide training the management team supports. This will bring lasting results by enabling managers to set stair-step goals and help the team reach their pay-plan benchmarks. They will also be better equipped to provide ongoing one-on-one sessions based on lessons learned in the classroom.

John Stephens is executive vice president of Dealer Services at EFG Companies. He can be reached at 972-445-8910 and [email protected]