Dealers cry foul as U.S. regulations create more F&I paperwork, costs

Deal jackets are getting fatter all the time.

Group 1 Automotive Inc. CEO Earl Hesterberg only scratched the surface when he complained in a speech at the Automotive News World Congress in January about the mounting paperwork dealerships face as a result of tougher federal rules.

Hesterberg said Group 1 -- the nation's fourth-largest auto retailer based on new-vehicle sales -- sends out 9,000 "adverse action" letters every month to customers who have been turned down for a loan.

The letters, required by 2010's federal Dodd-Frank Wall Street Reform and Consumer Protection Act, are only one example of a growing paperwork load in finance and insurance that costs dealerships time, effort and money.

"The paperwork burden has really grown exponentially, and it's difficult for dealers to keep track of," said Paul Metrey, chief regulatory counsel for financial services, privacy and tax, for the National Automobile Dealers Association.

In the past decade, government regulators have come up with dozens of new rules and have updated existing ones, Metrey said. The pace of new rules has picked up in the last few years, he said.

Examples include rules governing identity theft, cash transactions and money laundering, the use of credit scores, maintenance and disposal of customer information, consumer disclosures on loans and leases, and nondiscrimination. The list goes on, and each regulated area generates its own paper trail.

Some of the newest rules create paperwork requirements coming or going.

When customers apply for a loan and get turned down, based at least in part on a credit report, they get an adverse action letter to explain why they got turned down. When they're approved, they get a "risk-based pricing" notice to explain why they didn't get the best rate, or else a "credit score disclosure exception notice."

The latter provides the customer's credit score and puts it in context, by showing how the individual's score stacks up against the possible range of scores. Those requirements kicked in last year.

NADA recommends that dealerships meet the requirement by giving all customers an exception notice, rather than trying to decide which customers should get a risk-based pricing notice.

Some of the dealers and F&I managers who responded to a recent unscientific online Automotive News survey on F&I topics vented about the paperwork burden.

Martin Gubbels, dealer and general manager of Big Sky Ford in Torrington, Wyo., said that he's "very scared" of government regulation of F&I.

"Every year it seems like [there's] more and more competition, regulation, government intervention, and less and less F&I gross. When does it stop? Pretty soon I will be profit-proof in F&I, and my manager of 11 years will just be a salaried paper-pusher, and not a revenue source," he said.

"We have customer comment that there is now more paperwork involved with buying a car than there is buying a house," said Aaron Masterson, general manager of CarCorp Inc. of Columbus, Ohio. "We know that isn't really true, but the average customer doesn't buy that many houses." CarCorp has two Hyundai stores and a Kia dealership, plus service points for Isuzu and Suzuki.

Masterson guessed that the cost to keep the group's financial transactions running and in compliance has increased more than $100,000 annually in the past five years.

"We are in the process of installing a CRM [customer relations management] system with an eye toward compliance as much as customer interaction," he wrote in an e-mail.

A system that covers the Red Flags Rule, disclosures, identity protection, adverse actions and the paperwork associated with credit inquiries will cost more than $80,000 in the first year, Masterson said.

"If one were to add all costs to the various actions to be in compliance and conduct financial interactions with consumers over and above what it cost just five years ago, it would easily eclipse the $100,000 mark on an annual basis," he said.

Phil Riordan of Sunset Automotive Group in Sarasota, Fla., questioned why dealerships have to get multiple signatures. In F&I, he says, "all other questions are irrelevant" compared with the amount of paperwork.

"Why does it require five signatures on a buyer's order?" he said. "Why does it require three to five signatures on a RISC [retail installment sales contract]? Why does it require signed forms to acknowledge signed forms and disclosures? Attorneys, banks, and printing companies are making a lot of money at our expense. It's to the point of ridiculous."

Riordan added: "Work needs to be done to repeal some of these ridiculous paperwork and signature requirements."

Hypothetically, the federal government is committed to reducing unnecessary paperwork. That effort is codified in the 1980 Paperwork Reduction Act. The act had an update in 1995.

There's also the Small Business Paperwork Relief Act of 2002, aimed specifically at reducing the burden of federal paperwork on small businesses. President Barack Obama gave the effort another shot in the arm with an executive order in January 2011.

Obama called for "getting rid of absurd and unnecessary paperwork requirements that waste time and money."

As part of the rule-making process, NADA's Metrey said the dealer group routinely submits comments on new regulations or overhauls to existing regulations, in part to ask for relief from excess paperwork.

"When there's a new paperwork requirement that is proposed or when a review is ordered under the Paperwork Reduction Act, they [regulators] will seek comments and we will talk about the paperwork that is required," Metrey said.

But in the end, a Congress demanding action usually wins out over concerns about the paperwork burden. "We appreciate the opportunity to comment," Metrey said. "But when there's a direct mandate ... dealers are going to have to comply."