Think Compliance Isn’t Your Problem? Think Again

News broke recently about 5 dealership employees that were arrested and face federal charges of conspiracy, bank fraud, wire fraud, and aggravated identity-theft. This brings the total to 7 employees at the same dealership who have been indicted so far this year. Not very pretty.

Now you may be thinking that these folks must have engaged in really outrageous behavior to get arrested, especially by the feds. You’re likely also thinking that this could never happen to you – and you may be right. But before you ignore this as something that only happens to people in other dealerships, you might want to read on.

For a number of reasons I’ll get into shortly, my take on this latest government action is that there’s a profound change occurring in the car business legal environment – not only for dealers, but for everyone who plies their trade selling cars. I know, I know - you’ve heard this all before – but please stay with me for a little bit.

It’s no secret that for the last few years federal and state regulators have sent a clear signal that they’re fed up with what they consider to be deceptive practices in the auto industry -- and they’ve placed a bulls-eye squarely on the backs of car dealers. But where the game is changing the most is that instead of just hitting up dealers with their typical arsenal of fines, lawsuits and consent decrees, the Powers-That-Be have apparently decided to go directly after dealership staff. Eye-opening to say the least.

Since it’s likely that you don’t go to work every day with the intention of getting charged with a crime, you might want to hear about some significant takeaways from this recent action as I see it:

The indictments resulted from practices that have been around for many years and still are common in some dealerships – The charges included creating or altering documents to submit to financial institutions to show inflated income, misrepresenting proof of a customer's residency, unlawful use of a customer's personal identification, listing accessories not actually included on a vehicle so a financial institution would increase its loan amount, utilizing straw buyers, and quoting customers an inflated monthly vehicle loan payment so that a finance manager could add a service contract and GAP insurance without the customer realizing it. In carspeak, that’s kinking credit apps and stips, power booking, straw purchases, and payment packing – sound familiar?

Virtually all positions in the sales department were caught up in the operation – Sales managers, a finance manager, a GSM, and 3 salespeople were indicted. So if you’re involved in any aspect of selling a car, you could be at risk.

The idea that only employers are responsible for any illegal activities that occur at their dealership is simply not valid - There’s no indication in the media stories that the dealership owners were named in the indictment – just the employees (although news that 7 of your employees were arrested can’t be good for business).

Multiple law enforcement agencies were involved – The U.S. Attorney’s office, the FBI and the IRS all participated in this operation. Thought you only had to worry about the CFPB and FTC looking over your shoulder?

It’s easier than you think to get caught – According to media accounts, a confidential informant who had previously worked at the dealership “provided multiple volunteered audio recordings regarding the loan fraud, documented proof of the loan fraud, and miscellaneous documentation he acquired during his employment at dealership” to the FBI. So not only are dealership employees at risk of exposure for illegal practices from disgruntled customers, their co-workers could also implicate them.

The potential penalties are very real and quite devastating - According to the media stories, the maximum penalty for conspiracy is five years in prison and a $250,000 fine. The maximum penalty for bank fraud is 30 years in prison and a $1 million fine. The maximum penalty for wire fraud is 20 years in prison and a $250,000 fine. The minimum penalty for aggravated identity theft is two years in prison. And if those numbers aren’t bad enough to shake you up, here’s something else to think about: even if these employees are found not guilty - was it worth being criminally charged, having their reputations ruined, paying legal fees, losing their livelihood and likely having to change professions?

Quite frankly, many dealership employees get caught up in risky behavior not because they’re bad people, but because they simply don’t know any better. In many cases the old-timers have taught the new hires the “old school” way of doing business. It’s not unusual for dealership employees who have never been properly trained to simply rely on doing business the way it’s always been done.

Obviously, compliance training is vital for all dealership personnel, but it goes beyond that. The missing element in most compliance programs is that employees are taught what not to do but given no guidance on how to be successful doing things the right way. Let’s face it, sales department staff members are put under tremendous pressure to “make the numbers”. In the absence of proper knowledge and skills, this can lead to the temptation to step over the line legally and the rationalization that “everyone else is doing it that why, why shouldn’t I?”

The answer is complete education. When dealership personnel learn skills like loan underwriting guidelines, subprime financing and proper deal structuring, it eliminates the need for kinking credit apps, power booking and straw purchases. This goes hand-in-hand with superior sales training to teach employees how to build relationships with customers so that they can land them on the right vehicle that fits their budget and credit profile – again eliminating the need to “fudge” things because the customer “needs more income” or doesn’t have enough down payment. Next, when F&I personnel become better at selling products, there’s no longer the need to “pack payments” in order to increase their numbers.

In my humble opinion, it’s really pretty simple. By becoming better educated on doing things the right way, you’ll not only be far more successful, but you’ll sleep better at night. Sounds like a win-win to me.

Good luck and good selling!

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Comment by Reid Rubenstein on November 25, 2014 at 1:07pm

Thanks Jim. Every dealership/car lot should require every employee to read your post. 

Comment by Jim Radogna on November 22, 2014 at 12:15pm

Sorry, that's jim@dealercomplianceconsultants.com.

Comment by Jim Radogna on November 22, 2014 at 12:13pm

Thanks Brian for your kind words and very entertaining feedback! You make a good point about the "old" school perhaps not really being that "old".

I see you're a SoCal guy like myself. Not a bad place to be this week! I'd love to hear more about what you do. Drop me a line sometime at jim@ealercompliianceconsultants.com.

Comment by Jim Radogna on November 22, 2014 at 12:05pm

Thanks Tom. You're so right. Back in my dealership days, I too unwittingly participated in a number of nefarious activities for exactly the reasons you pointed out. In fact, as a sales manager in the late 90s, our Finance Director offered a $500 spiff to the desk man who had the highest average "leg" in his deals each month. Yikes!

Happy Thanksgiving to you and yours my friend!

Comment by Tom Gorham on November 22, 2014 at 10:41am

Great post, as usual Jim.  Rather chilling for those who think they are just doing their job as told to them by their managers or "trainers" and those who say "Every one else does it, why shouldn't I?"  As the saying goes, "Ignorance of the law is no excuse." 

Comment by Brian Bennington on November 21, 2014 at 9:17pm

Howdy President Jim,  (Saying that to myself, it sure has a better ring to it than "President Barack.)  After reading a post and before commenting, I usually go to the author's bio and that's where I learned you were the "Head Monkey" at Dealer Compliance Consultants Inc. in San Diego which, considering the meat of your post, is genuinely believable.  (Please don't be offended by the "Head Monkey" moniker.  Where I work, my first really big title was CEO, then I was promoted to President, after that Head Monkey, and just recently I was named "Emperor."  Now tell me this isn't a great country!)

Seriously though, I'd say you're in a big growth business.  I do think a paragraph preceding your post about what your company does would have lent a little more upfront credibility to your presentation.  I'm a big believer in my fellow DE members hustling their products/services, providing they keep it interesting and pithy, and your post is both.  (There is an exception to that and that's any form of 24/7 customer "chat."  There must be at least a 100 DE members doing it and no one's "breaking new ground" on how they present it.)  Reading someone with your savvy can be a real crash course in what you're offering.  As to your post, it should be mandatory reading for everyone who is in, or aspires to be in, dealership management.  Considering your content was classic and truly effective "Back the hearse up, open the doors, and let 'em smell the flowers," you really should have added some contact info.  (It's almost like you overlooked "the close.")

My only disagreement is your referencing "old timers" from that often acknowledged, but never quite identified, "old school" (hey, for all I know it could be Harvard) as a source of bad business practices.  Really, that's pretty two-dimensional thinking.  I started selling over 45 years ago and there are no less charlatans and deceivers now than there were than.  Actually, with all of the cheating that's been uncovered at our so-called "preeminent learning institutions" and God knows everywhere else, you might say that defective moral compasses are becoming a craze.  (On the other side of that coin, I've always believed that "youth and enthusiasm is never a match for age and treachery.")  Again, a great post and I hope you can cash in on it a little.  I'd respond more, but I don't want to be late for my appointment at the tattoo parlor.               

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