Compliance issues that you should know
March 1, 2013
Filed under Features
Wolters Kluwer officials provide financing updates
Powersports Business Editor in Chief Dave McMahon recently spoke with Wolters Kluwer Financial Services about dealership compliance issues. Brad Fleener, Director of Indirect Lending, and Chip Zyvoloski, Senior Attorney, Indirect Lending, offered their insights into some of the challenges facing F&I departments today.
The company’s powersports growth has been steady over the past four years, and it offers products that can drive profitability to your dealership. AppOne, their dealership one-stop compliance and workflow platform, for instance, saw more than 30 percent year-over-year growth in the powersports/recreational space last year.
PSB: What are some of the compliance issues that have recently been enacted that powersports dealers need to know about?
WKFS: We’re not seeing one particular regulation across the board that’s impacting all dealers across the nation, but we can point to three things that dealers should be aware of. There’s a heightened level of state regulators paying more attention to dealers and their compliance with the required laws and regulations. The second point, which is more of a legal issue, but it does have broader implications, is the use of arbitration and the ability to arbitrate disputes between consumers and dealers and lenders. The third and most compelling one is the heightened interest or heightened level of state regulators paying more attention to and scrutinizing consumer credit documentation.
PSB: What are some of the legal and/or business implications that those points bring, as it relates to dealers?
WKFS: One of the interesting things about the Dodd-Frank Act was that auto dealers were getting a lot attention for having a special auto dealer exemption. The Act essentially says everyone’s regulated by the Consumer Financial Protection Bureau except for some motor vehicle dealers. The exception is that if you’re holding your own paper, if you’re a Buy Here, Pay Here auto dealer, you look more like a financial institution and are within the scope of CFPB’s regulatory authority. That’s who your regulator is. But if you’re a dealer and you’re assigning your paper to someone else, selling the paper soon after it’s written, then you don’t look as much like a financial institution and the Federal Trade Commission is your regulator instead. There was a lot of negotiating about that exception. The larger dealers were the ones who were pushing for some kind of exception and got it.
PSB: Dealers are probably wondering, ‘OK, so what does that mean for me?’
WKFS: The thing that doesn’t get much attention, even with the Dodd-Frank Act exception, even though it refers to auto dealers in the title, it defines motor vehicles and motor vehicle dealers, then, in a very broad way. It’s defined to include motorcycles, recreational vehicles and marine. So in the motor vehicle dealer arena, we’ve had discussions about be careful what you ask for, you just might get it — this split of authority, the CFPB regulating some and FTC regulating others, but they are both watching over the industry. You may end up with two sheriffs in town, instead of one. Because of the way the definitions worked, it applies to the powersport market as well, so that some powersport dealers are going to be regulated by the CFPB and others by the FTC. You end up with this more complex regulatory environment than maybe was intended or hoped for.
PSB: I would imagine more than a handful of dealers could be caught unaware with the motor vehicle language.
WKFS: I’m not certain that powersports dealers understand the definition that’s been applied in Dodd-Frank. They’re thinking ‘I’m not hearing anything,’ or ‘I’m not an auto dealer.’ But guess what? The way it’s defined, they do need to be educated on this and be aware of it. Having two sheriffs in town means that the reality is that both regulators are going to be looking at the same marketplace and motor vehicles. Both will have their own ideas and agendas. You really have to keep an eye on both regulators with their compliance requirements.
PSB: Moving on to the second point, are you seeing arbitration in use more?
WKFS: Arbitration seems to have become over the course of the last 20 years the most popular alternative dispute method. It gets a lot of negative attention because dealers will often view its most important characteristic to them, which is to avoid class action lawsuits. It can be used to resolve your dispute, but one of the deals is the parties are agreeing in advance: If we arbitrate this dispute, that means no one is running to the courthouse and no one is joining a class action lawsuit. That provides a great deal of comfort and protection to the dealer for disputes that are of minimal dollar value. They can be dealt with privately, not in the newspapers and also not have this multiplier effect where lots and lots of customers who didn’t have an issue before are all of the sudden notified and now have an issue. So arbitration has received a lot of negative attention by policy makers focused on it solely as a way to prevent class action lawsuits. Dodd-Frank required the CFPB to study the use of arbitration provisions in consumer contracts. Some think that the result will be a ban on such provisions. We don’t know what the future will bring, but for now, we think dealers should continue to look at arbitration as a reasonable business alternative to how they structure their financing, and to not think that it’s dead on arrival.
PSB: What about these state regulators that you mentioned. They sound like folks that a dealer certainly needs to be aware of.
WKFS: We read a lot in the press about regulatory changes, but a lot of those changes and enforcements have been on the mortgage side. When we look at the state level at what’s going on in the consumer credit market, there’s a lot less happening. It may be the calm before the storm. There’s a lot less in terms of new regulation and oversight. What we are seeing is more attention by state regulators on laws that already exist, and greater attention in the licensing process to documentation and consumer compliance. Oftentimes when a dealer is applying for a license or renewing its license or expanding to a new location, it becomes a licensing application event, then the state is not only looking at who they are and their financial wherewithal, but looking at consumer credit documentation and disclosures. They likely have been doing that all along, but it seems like it’s getting more attention now and it’s getting greater focus than before.
PSB: How important is it for dealers to stay apprised of compliance issues?
WKFS: Dealers want to make sure they have happy satisfied customers, whether it’s the product or the service or all the aftermarket products they can buy, they want to build up that relationship. But the financing transaction is also a key component to happy customers. It includes the dealer’s ability to get clean, compliant financing transactions for the customers. It’s important for dealership owners and their staff to understand who is regulating our industry and what laws and regulations apply to their business. Not only does it help ensure they remain in compliance, but it also conveys to their customers that they’re educated and that they have the right partners to allow them to focus on running their dealership and ensuring that happy customer experience.