Ethics and F&I compliance go hand in hand

Editor’s note: This story will be part of a special section on ethics in dealerships’ F&I departments, to be published in the Dec. 10 print edition of Automotive News.

When a dealer learned his lucrative finance and insurance department was making some of its cash charging customers $3,000 for a year of free car washes — a cost exorbitantly higher than the $199 retail price — he asked F&I trainer Ron Reahard if that was a problem.

It was.

"It's just not ethical," said Reahard, president of F&I training company Reahard & Associates in Soddy Daisy, Tenn. "That's where dealers get themselves in trouble, pressuring too much on 'How do I make more money?,' and focusing on the dollars without paying attention to how those dollars are being made."

F&I personnel are trained about compliance, but what about ethics? While compliance is tied to a hard set of regulations that are enforced, ethics are typically related to values that are declared or at least implied by dealership management to employees, with varying degrees of success.

The relationship between compliance and ethics is especially acute in the F&I department, where regulatory hurdles are abundant but the possibility of making more money is often a focal point.

Reahard said dealers should pay attention to where the money is coming from and limit how much profit is made on F&I product sales and dealer reserve.

Too often, dealers don't stay within a healthy limit. "Unfortunately, a crook is going to be a crook," he said. "Some of the finest people I've ever met are in the car business, and some of the worst people I've ever met are in the car business. We have a pretty big spectrum, unfortunately."

Rebecca Chernek, an F&I trainer with Chernek Consulting in Cumming, Ga., said that when it comes to compliance and ethics, dealers are often more reactive than proactive.

"I see that dealers are almost evolving back to where we used to be," she said. "When we talk about digital menu, I see dealers using step-selling methods that don't disclose base payments."

The Association of Finance & Insurance Professionals has a list of "Seven Deadly Sins of F&I" that cite some of the bad practices that can land dealers in hot water with regulatory officials, litigation or the media.

The association advises dealers, for example, to never use the word "best" when quoting finance charges because there's typically a markup over the buy rate.

It instead instructs dealers to say that the rate is "competitive."

The markup should be within acceptable margins, the group says, and recommends implementing the NADA Fair Credit Compliance Policy & Program.

It also warns against more obvious bad practices, such as forging signatures, overstating customers' incomes and packing payments.

Rob Warmack, CEO of Compli in Portland, Ore., said a dealer's ethics or lack thereof typically start with how its culture is established. Compli, which has been in the dealership sector for about 12 years, works with about 400 U.S. dealerships, providing work force program management across all of the stores' departments.

Ethical training, while not broken out specifically, can be found in the training for various departments, such as human resources, as well as in dealers' codes of conduct.

"Compliance is a big part of what we do, obviously, but it really is establishing the culture," Warmack said.

Compli starts with sample content on which dealers can build. The content is rooted in regulatory compliance. Its F&I content is authored with an up-to-date legal framework by Hudson Cook, a law firm that focuses on consumer financial services.

Dealerships also can modify the nonregulatory sample content, such as the code of conduct, to customize it for their operations, "and we encourage that," Warmack said.

Reahard has a code of conduct, too, which most dealers use and some customize. "It sets a clear line in the sand that we want to do things the right way at this dealership."

Warmack said compliance with regulations can often get rolled together with ethics. As an example, he points to the Equal Credit Opportunity Act, which prohibits dealers from discriminating against customers based on their race, religion, national origin, sex, marital status or age.

"So the ethic behind that is you treat everybody fairly," Warmack said. And the dealer's set of rules or code of conduct should reflect that. "There's ethical behavior and there are regulations to ensure ethical behavior," he said.

They go hand in hand, Warmack said. "If you're operating ethically, you don't have to worry about the regulations."