The Cost of Compliance

Since July 2010, the Consumer Financial Protection Bureau (CFPB) has made significant waves in the auto finance space. In 2013, they issued their bulletin titled “Indirect Auto Lending and Compliance with the Equal Opportunity Act” stating that they would regulate lenders on unanticipated discriminatory practices. With very little guidance on how to be compliant, lenders and dealers scrambled to revamp their anti-discrimination practices to little avail.

Between 2013 and 2016, the CFPB filed 13 enforcement actions totaling upwards of $165.17 million against auto financiers, such as:

• Toyota Motor Credit Corporation
• Fifth Third Bank
• American Honda Finance Corporation
• Wells Fargo Bank, N.A.
• JPMorgan Chase Bank, N.A.
• DriveTime Automotive Group
• First Investors Financial Services Group

Beyond the restitution and civil penalties leveraged against lenders, the increased compliance oversight also had direct impact on dealer profit margins, consumer prices, and the national GDP.

According to a 2014 study of the auto finance regulatory environment by the Center for Automotive Research (CAR), regulations pertaining to employment, accounting and vehicle financing made up more than 63 percent of all estimated federal regulatory compliance costs. The administration of vehicle financing alone accounted for 71 percent of all vehicle finance compliance costs and 26 percent of total dealership compliance costs.

In 2012, a typical U.S. dealership with $38 million in revenue incurred $182,754 annually in federal regulatory compliance costs, which amounted to:

• 7 percent of the average dealership’s before-tax net profits
• $2,371 per dealership employee
• 106 vehicle sales
• $100 mean cost per vehicle

This totaled $3.2 billion in compliance costs across all U.S. light vehicle dealerships, representing a 3.7 percent increase in dealership expenditures and a 26 percent net profit decrease.

Even before the CFPB ramped up their compliance oversight, dealers were implementing every possible avenue of increasing dealership income by 3.2 percent to account for the compliance costs they were already undertaking, including:

• cutting their labor force;
• raising vehicle prices where possible;
• increasing unit sales volume; and
• increasing their F&I product penetration rates.

In 2012, the average dealership lost an estimated $441,332 worth of net business & economic activity due to federal regulatory compliance costs. This resulted in an estimated economic cost to light vehicle dealerships of $7.7 billion, and 10,550 direct dealership jobs 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.

With even greater CFPB and DOJ oversight in auto finance, one can infer that compliance costs increased, helping to further constrict dealership profit margins. The fact is compliance isn’t going away. However, there are steps dealerships can take outside of increasing vehicle prices to recoup their lost profit. After all, dealers still need to be competitive and can’t raise prices beyond what the market dictates.

First, evaluate how to make your dealership more efficient with its compliance processes.

• Are all deals finalized with all the correct paperwork the first time?
• Are all consumer notices and signatures taken care of when the customer is in the dealership?
• How many deals submitted to accounting are actually fundable?

Train your F&I department to instill consistent processes that ensure all deals are fundable and filed correctly with all pertinent paperwork included the first time. Consider implementing a deal checklist and training your team to make sure every item is checked before sending any deal to accounting. By taking an extra three minutes to ensure their paperwork is correct, F&I managers save office workers 10 minutes per deal reconciling the documentation, and themselves enumerable hours of chasing down paperwork to finalize contracts in transit.

By training your managers to take ownership and accountability for their deal documentation, you have the potential to save 30 percent of your team’s time to focus on increasing dealership profitability instead of on compliance paperwork. Holding F&I managers accountable also gives you greater control in making sure all deals are finalized in a compliant manner.

Take this mindset of driving efficiency and apply it to all your compliance processes to get your dealership on the path to operating in a profitable and compliant fashion. In addition, look for other ways to immediately increase dealer profit, such as with your consumer protection products.

I am by no means saying to jack up the prices on the products, but rather, look at your penetration rates and determine what you can do to increase them. After all, the last thing you want is to see chargebacks increase because your F&I products are priced too high, resulting in higher rates of consumers refinancing their auto loans.

First, consider whether the products you are offering are the right ones for your customer base. Discuss with your service managers the breakdowns they see the most, and compare that with the products you provide. Then, determine two to three core products and tie them to your team’s pay plan based on penetration benchmarks.

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

With 40 years of experience helping dealerships achieve their profitability goals with in-depth engagement that spans compliance, training, and product development, EFG Companies knows how to fortify your dealership’s profitability as compliance costs go up. Contact us today to find out how.