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Five Critical Annual Training Requirements

Five Critical Annual Training Requirements

“Dec. 7, 1941 a date which will live in infamy.” — Franklin Roosevelt

“Dec. 7, 2017 a watershed moment in American culture.” Me.

Pearl Harbor was bombed in 1941, effectively bringing America into World War II. Former Sen. Al Franken (D-Minn.) resigned his seat on Dec. 7 of this year, joining a list of 100 or so men (to this point) who have been publicly accused of sexual harassment. The revelations of sexual harassment charges have hit a broad spectrum of professions, including politics, entertainment and news.

Some of the accused in Congress are facing ethics hearings. Men in other professions are facing public humiliation and the loss of business or careers.

This is not an article about the politics of sexual harassment. Nor am I taking any side about accuser and accused. Rather, it is an article about one of the very real requirements for businesses, including your dealers and your agency, to annually provide ongoing training in five critical areas: sexual harassment, ethics, discrimination, Safeguards and Red Flags.

Sexual Harassment

Sexual harassment is against the law. It has no place in a dealership or an agency. Employees, managers, customers and vendors could be victims of sexual harassment.

The two specific types of sexual harassment are “quid pro quo” and “hostile environment.”

Quid pro quo is the type of sexual harassment that is generating today’s headlines. It simply means that someone in a position of power over another person engages in unwelcome sexual advances, requests for sexual favors, and other sexually related conduct in exchange for a job or other benefits. It can be man on woman, man on man, woman on man, or woman on woman.

Sexual harassment also exists if the conduct creates a hostile work environment or intolerable working conditions. Examples include posters, jokes, suggestive music and wolf whistles.

Engaging in sexual harassment can result in discipline, public embarrassment, or termination, and expose a dealership or agency to legal liability. If you become aware of, or even suspect, any form of sexual harassment at a dealership or your agency, it should immediately be reported to management or owners.

To provide the underpinnings of a potential defense against charges of sexual harassment, your agency or a dealership should document that initial and annual sexual harassment training has been completed for all employees.


Ethics really boils down to the Golden Rule: Do unto others as you would have them do unto you. For example, if you would be comfortable with a sales manager packing the payment on your grandma’s next vehicle purchase, you might have a problem with your moral compass. Or Grandma can’t cook.

Just like sexual harassment, ethics seems so simple, yet is very complex. Documentation of annual training on ethics may help provide a defense against potential claims.


The law prohibits not only intentional discrimination (disparate treatment), but also neutral job policies that disproportionately affect persons of a protected class and that are not related to the job and the needs of the business (disparate impact).

The law also prohibits employment decisions based on stereotypes and assumptions about abilities, traits or the performance of individuals of certain groups.

It’s illegal to discriminate against any individual regarding employment. Agencies and dealerships should adopt policies to reduce the likelihood of discrimination, such as:

  • If racial information is needed, to simultaneously guard against discriminatory selection, use separate forms or otherwise keep the information about an applicant’s race separate from the application.
  • Hostile work environments or harassment on the job are prohibited.
  • Agencies and dealerships are required to take appropriate steps to prevent and correct unlawful harassment.
  • Those who witness it are responsible for reporting harassment at an early stage to prevent its escalation.

As with sexual harassment, documentation of annual training of all employees on the agency’s or dealer’s discrimination policy could help defend or deflect charges of employee discrimination.

Safeguards Rule

The federal Safeguards Rule is all about treating customers’ nonpublic personal information (NPI) as if it were your own information. Chances are, with all the recent security breaches, your information is already on the Dark Web. As an agency, you have lists and other consumer NPI from dealers that you are responsible for safeguarding.

You dealer customers must have an active Safeguards program. To prove it is a robust program, a dealer must be able to prove that they have:

  • Designated a program coordinator (a.k.a. compliance officer).
  • Conducted a risk assessment.
  • Designed and implemented safeguards to control the identified risks.
  • Overseen service providers.
  • Periodically reevaluated the program.

Agencies are considered service providers and, as such, you could be called upon by your dealer clients to demonstrate that your agency has a robust program to safeguard consumer information supplied by the dealer.

An annual training program for all employees in the agency’s and dealer’s Safeguards programs should be part of the program’s guidelines.

Red Flags Rule

According to the Federales, a Red Flag is a pattern, practice or activity which signals the potential risk of identity theft. Some examples include:

  • Altered or forged identification documents
  • Address discrepancies
  • Social Security discrepancies
  • Alerts in credit bureaus
  • Driver license descriptions that don’t match the appearance of the person presenting it

The Red Flags Rule requires the similar components outlined in the Safeguards Rule discussion above. It requires an annual report to the owner of the business regarding the sufficiency of the business’ Red Flags program. Part of that annual report should be certification that annual training has been provided to all employees on the business’ Red Flags Program.

Many human resource managers are aware of the need to provide annual training in these critical areas. We believe that it is so critical to a dealer’s or agency’s defense against potential claims that these five components are required modules in the ACE certified practitioner’s annual recertification.

Good luck and good selling.

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Modernists vs. Traditionalists: Morphing Into an Edealership

Modernists vs. Traditionalists: Morphing Into an Edealership

As the sales and F&I processes are morphing from a traditionalist (paper) documentation of the processes to a modernist (digital) documentation, it is helpful to step back to see where the change is taking place.

The battle between a modernist and a traditionalist is evident in the world outside of automotive retailing. For example, the modernist is more likely to be a fan of UFC where a traditionalist still watches the boxing matches on HBO.

Benefits and Risks

Each process has its own benefits over the other, and a different set of risks in accepting the approach to use. For the traditionalist, employees are already trained in the paper process, controls are in place and it is easier for an absentee owner to oversee the operations.

The modernists believe they are catching the wave now and are meeting consumer demands while building efficient processes. The modernists also believe a digital process will help flip the consumers’ perception of car dealerships and the dealer will have easier access to data while having the ability to expand its footprint.

On the flip side, staying with the traditionalist approach means the industry can pass you by, that the consumers’ negative perception continues to perpetuate, ignoring that millennials prefer digital to pulp and a larger data storage and safeguards risk. Pursuing the modernist processes can border on the bleeding edge of technology. It requires staff retraining and trying to convert old timers on the new approach. The modernist has to review its controls, backup retention of data and a risk of a large data breach.

The Hybrid Edition

Daryl Hall of Hall and Oates may have said it best when he wrote this classic line in one of their songs: “If two can be one, who is the one two becomes?” My belief is that, ultimately, the dealership sales and F&I model may be a hybrid of the modernist view and the traditionalist preference.

Some dealerships may have customers who prefer a paper process while other dealers have customers who may insist on a digital approach. This may drive the dealer’s ultimate decision.

Further, some processes are better executed using pulp and other processes lend themselves to electrons. Here is a look at some of the processes under review by dealerships in their decision between traditionalist or modernist:

  • Credit applications: Two critical compliance concerns related to credit applications help drive the decision between paper and digital: First, a dealer must show consent to pull a credit report. While a signature is not required, it is the best evidence to prove permission if the customer signed a credit application. Therefore, in a compliance review, you should review the timing of a signed credit application versus the timing of the credit pull.

The second compliance concern is the ability to prove to a finance source that the credit information you provided is consistent with the credit information provided to you by the consumer. A signed source credit application to compare to the submitted credit application serves as this evidence.

Some dealers are obtaining and retaining a paper credit app signed by the customer while other dealers are accepting an online credit app digitally signed. Other dealers are entering the customer information directly into a kiosk or the CRM and printing a copy for the customer to sign before pulling credit.

All of these approaches are compliant.

  • Desking: Many dealers still using a Sharpie and a four-square will likely have compliance issues with their desking process. These issues can include payment packing or discriminatory pricing. While some edesking solutions can still allow payment packing or discriminatory pricing, it is easier for you to catch in a compliance audit and know whom to hold accountable.
  • Menu: Like desking, many dealers who use a manual menu and a Sharpie may be committing deceptive practices like payment packing or trading rate for product. Using an emenu with industry standards  will help with a compliant menu process. It also documents many of the customer’s purchase decisions and is the most important piece of paper from a compliance perspective in the deal file.
  • Contracting: Truth in Lending Act (TILA) issues flare up when an impact printer is used to print the contract. Leveraging econtracting not only minimizes potential TILA claims, it also helps with contracts in transit funding.
  • Deputy Dawg duties: The Federales require auto dealerships to conduct some vetting on each transaction to help in the fight against terrorism and identity theft. These two problems are certainly on many consumers’ lists of things to worry about in America, and we are required to do our part.

To comply with terrorism vetting (OFAC) and identity theft deterrence (Red Flags Rule), a dealer must check some lists or other data to decide on whether to move forward with the transaction. Trying to manually conduct these reviews is time-consuming and likely fraught with errors or omissions. If there are processes within the sales and F&I processes that truly lend themselves to a digital solution, it is OFAC and Red Flags.

  • Adverse action notices: Under this requirement, a dealer sends an adverse action notice as necessary. Many dealers take the conservative approach and send an adverse action notice to anyone who provides a credit application and the dealer does not sell a vehicle to.

Manually completing and mailing a mass number of letters is inefficient. A digital approach is really the only way to ensure compliance with this process.

  • Out-of-area deliveries: This process ties directly into identity theft. Some dealerships are experiencing identity thefts from rings of nefarious, smart criminals. Many of the identity theft cases I’ve been involved in have some common characteristics and should be considered in your Red Flags process: Customers who are from outside the area, have never done business with the dealership before, may have passed over numerous dealerships for the vehicle, and don’t bother to negotiate the price or products should be regarded with suspicion.

Some dealerships have adapted a rather robust process to help mitigate the likelihood of an identity theft from an out of area customer. Among the additional steps:

  • The dealer will ask the out-of-wallet questions before proceeding with the deal.
  • Use Skype or Facetime to present the F&I products.
  • Run a Google Earth search on the given address.
  • Leverage a notary service or require a notary involvement in the document signing.
  • Send the customer to an affiliated dealership in the customer’s town.
  • Conduct a social media search to see if the pictures match the picture on the driver’s license.
  • Instruct the delivery company to deliver to the address only with no diversions allowed.

Continued good luck and good selling.

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Three Cs, Key Credit Determinants and Urban Legends

Three Cs, Key Credit Determinants and Urban Legends

Quickly advancing in the risk rearview mirror for a dealer is the risk of an investigation for bank fraud.

As the trusted advisor to your dealer, identity theft and the risk it presents to dealers remains a very real and present danger. The threat is usually an external one. Sure, there are instances of inside identity theft jobs in the industry. But most of the time, the agent and their dealers are in a defensive position, fighting off potential identity thieves.

Quickly advancing in the risk rearview mirror for a dealer is the risk of an investigation for bank fraud perpetrated by that inside ring of employees in a dealership. I have worked in litigation support for a dealer accused of bank fraud where we were able to show that the consumer was the one who provided the bogus documentation. And there are fake paystub and fake stips websites that consumers can access to provide fake stips and POI. Again, the agent’s dealer and its employees are in a potential defensive position to ensure the documentation provided is accurate and correct.

The risk that dealers should fear is that the managers of their sales and F&I processes are the ones manipulating the credit application information being provided to the finance sources — under the dealer’s logo.

Three Cs of Credit

Other industries have a cherished “three ‘C’s,” such as the diamond industry (clarity, cut and carat). In the credit industry, the three Cs are character, capacity and collateral. The 3Cs are the three legs of the stool that every finance source leverages to develop its underwriting guidelines.

“Character” refers to stability and measures the intent to repay the debt. It is measured by time on the job, time at the address, occupation and credit history. “Capacity” is the ability to repay the debt. It is measured by payment to income ratio, total debt to income ratio, and disposable income. “Collateral” looks at the potential loss position if the consumer defaults on the debt and the finance source has to liquidate. Loan to value is the common measurement.

Finance sources take different approaches to developing underwriting guidelines. Superprime finance sources tend to focus on character more than the other two. Subprime finance sources usually require a stronger capacity or collateral position to overcome the character shortcoming.

Five Key Credit Determinants

Finance sources are focused on five key credit determinants on the credit application: income, housing expense, time on the job, time at the residence, and what the customer does for a living.

From a three Cs perspective, these five key credit determinants help the finance source to measure character and capacity. Any enhancements or improvements to one or all of these five determinants could be considered credit application fraud.

Urban Legends

Through discussions with many finance sources and some of my consulting competitors, I’ve developed a list of common urban legends that the finance sources consider to be credit application fraud:

Urban legend: “It is acceptable to split the rent or housing expense.”

Finance source rebuttal: “It is not acceptable. We want, and expect the dealer to provide, the amount the consumer is obligated to pay through an agreement, whether a rental agreement or mortgage. The dealer employee can put a note on the credit application that states the consumer has a roommate and only pays half of the rent. It is then on the finance source to make the adjustment. We are required to file a suspicious activity report if we suspect credit application fraud.”

Urban legend: “Everyone manages some part of their job, so we make everyone a manager. For example, a Walmart greeter is really a ‘customer relations manager.’”

Finance source rebuttal: “Nice try, Mr. Wordsmith. Elevating a consumer’s perceived job status by making her or him a manager is credit application fraud.”

Urban legend: “Self-employed people have a trade or manage their business. It is OK to show them as a mechanic or a manager.”

Finance source rebuttal: “The majority of small businesses fail within five years. We want to know if someone is self-employed and will sometimes stip the approval for three months’ bank statements or tax returns. Trying to circumvent that stipulation is credit application fraud.”

If you provide credit application training for your dealers, make sure to clear up these urban legends. Good luck and good selling!

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How to Answer Dealers’ Compliance Questions

How to Answer Dealers’ Compliance Questions

As trusted advisors to dealers and the dealerships they own, they look to us to provide expertise in a number of areas. We are smart enough to know what we know and how to look for help for those things we do not know.

For example, if a dealer asks me to help with OSHA compliance, I know enough to know I don’t know enough to provide the level of expertise the request deserves. I set up a referral.

Likewise, when you are asked to be the compliance cop for a dealer, you suggest that your expertise is in helping to run a profit center profitably. You want to be the compliance monitor, not the compliance cop.

Still, it never hurts to learn a little bit more so you can help with an informed referral. To that extent, here are the hottest compliance concerns dealers face today, who is driving the issue, and what a dealership should do to protect itself.

Identity Theft

We have been saying for the last decade that identity theft is the fastest-growing crime in the United States, and it remains so this year. You would think that, after a decade, the law of mathematics would catch up and slow down annual double-digit growth, but it hasn’t slowed down.

Dealers have a statutory obligation to confirm the identity of the person they are selling a vehicle to. The Red Flags Rule, for example, requires a dealership to have a robust program to vet the identification being used by the purchaser and to document the clearing action used to demonstrate it performed this task.

I am receiving too many calls from attorneys and insurers looking for an expert witness to help defend a dealer in actions brought by consumers whose identity has been stolen and used to finance a vehicle.

If you get the same call, or have a dealer who is not sure if a sufficient identity theft program is in place, review these questions with the dealer:

  • Who is your compliance officer and do the employees know that?
  • Do you have a written identity theft policy?
  • Can you demonstrate you provided training to your employees on the policy?
  • What were the results of your last audit?
  • What changes were enacted to your policy as a result of your last audit and can you document how you shared that with your employees?

Finally, review last month’s Red Flags report in the software used to vet Red Flags, and look for sold units that still show uncleared or incomplete alerts.

Credit Application Fraud

Every day, it seems like there is a new breaking news case of a dealer or a manager or both either accused or convicted of credit application fraud. Yet many people in the industry still believe credit application fraud is a victimless crime.

The Federales are putting pressure on the finance sources we do business with to enforce the representations and warranties of the lender agreements a dealer must sign with every indirect finance source. So to pass their regulator audits, they have to show they are enforcing those agreements.

When your dealer has an epiphany that he doesn’t look good in orange and is concerned about credit application fraud, you are a likely resource to help assuage their fears.

Your conversation with the dealer should include:

  • The finance sources are focused on five key credit determinants on the credit application: Income, housing expense, time on the job, time at the residence and what the customer does for a living.
  • Any enhancements or improvements to one or all of these five determinants could be considered credit application fraud.
  • You need to retain the credit application the customer gave you to show the finance source what you were told.
  • You need to retain the credit application you submitted to the finance source.
  • You need a process to compare a sampling of source to submitted credit applications to ensure the information is consistent or that differences are documented in the file.

Payment Packing

Payment packing has been taking place since payments were first quoted in the sales process. In the late ’90s, the National Association of Attorneys General passed a resolution calling it a “deceptive sales practice.” Essentially, this organization of regulators set the standard that a customer has the right to a payment quote that accurately reflects the deal being contemplated at that time.

This is where your expertise can shine for your client. You know how to desk deals the right way. You simply need to assist your dealer in desking deals in a transparent fashion with no indications of payment packing.

As an aside, it is my experience that deals using old-fashioned four-squares and Sharpies are more likely to exhibit traits of payment packing than those deals desked using an edesking software package.

Discriminatory Pricing

Finally, some of the Federales have been rattling sabers about F&I product pricing. Some states have filed or regulated rates on one or more products. Some dealers go one step further and have established a one-price policy for F&I products.

While I am agnostic to one-pricing, I am a firm believer that a dealer must establish a product pricing guideline if the state it operates in is silent on product pricing. I’ve developed an industry standard for these products based on what I have seen in the marketplace.

If your dealer is asking about a product pricing guideline, feel free to drop me a line and I’ll share my thoughts with you, product by product.

Good luck and good selling!

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How to Establish Product Pricing Guidelines

How to Establish Product Pricing Guidelines

Most of our clients have established a product pricing guideline to help the F&I manager in pricing decisions and processes. Using this internal guideline helps a dealer to sell products, make a fair profit and, hopefully, establish a defense against price gouging.

But establishing a pricing guideline takes some thought and an understanding of state requirements, finance source limitations and industry standards.


There is not a national regulatory pricing guideline. As a substitute for a national pricing guideline, dealers rely on one of three sources to establish an internal pricing guideline: state statutes, finance source limits and industry standard.

In establishing a pricing guideline, agents and dealers should start with any pricing guidance from the state in which the dealer operates. Some states provide pricing guidance for some of the products an F&I manager sells. Florida, for example, requires dealers to file the rates at which it sells a variety of service contracts. Florida dealers, therefore, have set guidelines for service contract pricing, but are free to establish transactional pricing for maintenance or surface protection products. A declining number of states are dictating the pricing for GAP, while all states determine the pricing for credit life and A&H.

The second consideration in establishing a pricing guideline is the finance source. The most common pricing limitations from finance sources are with rate markup on GAP and vehicle service contracts. Understanding the finance source limitations helps establish a pricing guideline on a portfolio basis, but it can be modified by a transactional credit decision. When establishing a pricing guideline, focus on the portfolio finance source limitations.

The final consideration, in the absence of state regulatory pricing or finance source limitations, is the industry standard. This is an important consideration as a potential defense against price gouging claims. A judge or attorney general is not necessarily impressed if one of your competitors has similar pricing, but they do pay attention if your pricing is in line with your industry. Being able to label a pricing guideline as consistent with the industry standard requires some background work from the agent who is helping a dealer establish a pricing guideline.

Other Considerations

A few other considerations must be taken into account before starting down the path of developing a pricing guideline. The first consideration is whether to establish a pricing guideline by using a maximum retail price for the product or using a cost plus allowable profit model.

If the retail price of etch, for example, is $399, and the cost plus allowable profit is $250, this tells the F&I manager that the maximum selling price is either (a) $399 or (b) department cost for etch plus $250 profit.

Whenever possible, I prefer to use the cost plus allowable profit model. The pricing guideline must be constantly monitored and revised as prices change. Using the cost plus allowable profit model provides the flexibility to adjust product pricing without the need to generate a new pricing guideline.

Another consideration is establishing a pricing guideline for dealer groups with multistate locations. The group should have a consistent pricing guideline, but the guideline must be flexible enough to accommodate state-mandated pricing restrictions.

The same thought process exists for dealer groups with a mix of luxury and non-luxury franchises. Some of the same products at these two franchise types can have vastly different wholesale pricing and consumer pricing elasticity.

Here is a sample of what a pricing guideline can look like:


Hope this helps! Good luck and good selling.

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How to Prove Every Customer’s Identity

How to Prove Every Customer’s Identity

Occasionally, even the seemingly simplest tasks become fraught with minutiae that encourage some to make it more difficult or cumbersome than necessary. The latest example of this idiom surfaced in a dealer’s quest to sell and finance a vehicle to an individual who could not provide a government-issued photo identity to prove she was who she said she was.

This customer presented a driver’s license without a photo. Instead of a photo, there was a state seal and the words “Valid without photo.” Her explanation was that she was a Department of Defense employee and this was a valid ID.

The dealer’s Red Flags policy is very straightforward: Each customer must provide a valid, current, government-issued photo ID. Similar requirements to confirm a customer’s identity are resident in finance source agreements, the USA PATRIOT Act and good risk-management practices.

Her ID and the dealer’s identity-confirmation policies are at odds. How is the dealer supposed to sell a vehicle in instances such as this? How about another recurring scenario in which a customer presents a driver’s license with the phrase “Not valid for federal identification.”

Thankfully, there are options.

Behind the ID

There is not a nationwide ID card issued by the United States, and the state driver’s license is the de facto ID. A few reasons complicate the ability to confirm a customer’s identity:

  • Customer does not drive
  • Customer is active-duty military in a state that does not require a current state driver’s license
  • Customer has recently applied for a driver’s license and has a temporary ID without a photo

In these cases, an alternative form of photo ID must be obtained as identity confirmation. A few federal laws also play into the scenario of alternative IDs. One law prohibits anyone from making a photocopy of a military ID except to be used for the customer’s benefit. Applying for a military rebate does not quality as a reason to make a photocopy of the ID.

The REAL ID Act also applies. Passed in 2005 but not fully enforced until 2020, this law requires anyone who wants to board a plane or enter a federal facility to provide an ID which conforms to the standards provided under the act. Forty-five of the 50 states have a vetting process to issue driver’s licenses and state IDs that meet these standards, and if a consumer is unable to provide the full documentation necessary, she or he receives an ID with the phrase “Not valid for federal identification.”

An Agent’s Responsibility

As an agent, if you have any interest in keeping your clients on the right side of these laws, you must encourage them to apply the same standards to confirming an identity as the standards found in other identity-vetting programs. Banks are required to confirm the identity of anyone opening an account. The TSA is responsible to identity anyone flying on a plane. State DMVs must ensure anyone receiving a driver’s license or state ID is who he says he is.

In those small percentage of times when the customer is unable to provide a valid, current, legible photo driver’s license or state ID card, your dealers must obtain an alternative form of photo ID. Some examples include:

  • Military ID (with the aforementioned caveat against making unauthorized photocopies)
  • Department of Defense Common Access Card (to which the photocopying standard also pertains)
  • Passport issued by the United States or foreign nations
  • U.S. passport card
  • Global Entry or NEXUS ID card
  • Gun or concealed weapon license that includes a photo (in states that issue them)

Ultimately, a dealer’s responsibility is to confirm the person purchasing a vehicle is not an identity thief, and this starts with vetting the identity provided. When using a military ID as an alternative form of ID, have the salesperson complete the following statement and sign it:

“I certify I reviewed a military ID or a CAC for [name of customer]. I confirmed the photograph is the same as the person providing the ID. I confirmed the height and eye color are consistent with the person providing the ID. The ID was issued on [date] and expires on [date].”

They should also confirm that the information on the credit application matches the story provided by the customer and use an internet search engine to confirm what the alternative form of ID should look like. Finally, they must verify the driver’s license number or state ID number with the state DMV and retain documentation.

Good luck and good selling.

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