FUBAR is a technical term my Air Force dad used to describe something that was “F’d Up Beyond All Recognition.” FUBAR stories and challenge coins are two things service members, active or retired, can share over cocktails.
We generate a compliance scorecard with every compliance review we conduct, including risk assessments. The scoring ranges from “pass” on the top end to “FUBAR” at the garbage end.
In nearly a quarter-century of conducting compliance reviews, we have had a handful of FUBAR scores. None of these dealers remained a client, largely because the owners didn’t see a need to change their processes to be compliant.
Conducting a risk assessment is the only way to know if your dealership is a passing dealership or a FUBAR dealership. Here are three questions to get you started:
1. What is a Risk Assessment?
Every dealership should have a robust compliance management system in place as a defense strategy against Dark Side claims and attacks.
The first step in such a system is to assign a compliance officer. The second step is to conduct a risk assessment to see how the documents executed in the dealership’s processes demonstrate compliance with regulatory requirements and best practices.
2. What Should I Look For?
Auto dealerships are arguably one of the most regulated and scrutinized industries in America. The National Automobile Dealers Association publishes “Regulatory Maze: NADA’s Annual Update on Federal Regulations,” downloadable from NADA.org.
This annual report provides a listing of regulations applicable to each department within the dealership and a brief overview of each regulation. This is an excellent place to start the list of regulations your risk assessment must address.
Regulations that affect sales and F&I are a good place to start your list of items to review. But you will find that some such regulations are not referred to specifically by name.
For example, the Federal Trade Commission’s Red Flags Rule requires dealerships to create and maintain an identity theft-prevention program, aka, red flags policy procedures, which falls under the Fair and Accurate Credit Transactions Act.
Identity theft is one of the three biggest risks dealers face in today’s environment, credit application fraud and deceptive sales practices being the other two.
Finally, include some processes not included in the regulatory maze. Examples include the menu process, state requirements and Office of Foreign Assets Control checks.
3. How Do I Audit for Issues?
You must understand the dealer’s requirements for each component on your list. You must then determine whether the dealership documents compliance with the requirements.
Let’s take deceptive sales practices as an example. These can include payment packing, trading rate for product, stuffing products, and power-booking, to name a few.
Payment packing is broadly defined as quoting a payment higher than the actual payment the structure of the proposal calculates to at that specific point in the proposal.
Examples of payment packing include:
Using an annual percentage rate above state max or an APR higher that the customer’s credit score would support
Not using the APR from the dealer’s first pencil rate matrix without documenting the reason for the exception
Using an excessive number of days to first payment (usually more than 45 days)
Using an undisclosed short term
Disclosing a payment spread greater than $5
The old-school sales tax bump, or simply adding “leg” to the payment
To audit for payment packing, you review every pencil in the desking software and record the time stamp so you know if the credit score or approval was known at the time of the pencil.
An audit of a deal for payment packing requires a review of every pencil. Assume that every printed pencil was presented to the consumer, even if a copy is not retained in the deal file. In this order, validate that the:
APR is within the state max and is consistent with the dealer’s rate matrix
Number of days to first payment is 45 days or less unless there is an extended days-to-first-payment program available with a specific finance source
Printed pencil discloses the term
Payment spread is $5 or less
Sales tax is correct
Payments calculate consistently and there is no leg added to the payment
Rinse and repeat for each process on your list.
Don’t be a FUBAR dealership. I’ve been doing this for quite a while. Let me know how I can help.
Continued good health, good luck, and good selling.
Gil Van Over is executive director of Automotive Compliance Education (ACE), founder and president of gvo3 & Associates, and author of “Automotive Compliance in a Digital World.”
