CARY, N.C. -

For both dealers and finance companies, the cost of being compliant is on the rise. Recent reports and reprimands are giving concrete financial figures to what making installment loans attached to vehicles entails nowadays.

Before getting into those numbers, Rick Hackett touched on the reason why compliance is such an important — and consequently costly — part of doing business. Hackett spent about two years at the Consumer Financial Protection Bureau before returning to private practice by joining Hudson Cook in March.

Hackett’s responsibilities at the bureau included advising all of the regulator's divisions with respect to market information and policy issues in the installment and specialty lending areas, including vehicle finance, student lending and payday lending

Hackett described the “long, evolving process” that’s unfolding in indirect auto lending.

“It’s the first time you’ve had a federal regulator focused on the finance space strictly in consumer and with concern only for consumer protection, not for other sometimes conflicting issues like safety and soundness,” Hackett said. “The federal financial regulators have done a lot of work on consumer protection but they also have a bunch of other hats to wear. The Federal Trade Commission has done some great work in consumer protection, but they have many markets other than consumer finance to deal with.

“I think there will be growing pains for quite some time as the industry gets used to dealing with a regulator that’s solely focused on consumer finance and no other hats to wear. That’s just what Dodd-Frank said should happen. I think that also explains why so many people would like it to go away,” he went on to say.

“But over time, I think the bureau’s focus on getting everyone to have an appropriate compliance management system, appropriate to their size and complexity, if lenders spend the resources and bandwidth on compliance, they’ll find that’s it not more complex than making sure your mechanics can deal with whatever vehicles they have to work on,” Hackett added.

Dealer Cost for Compliance

And how much resources are dealing expending on compliance? Here are they numbers showing just how much of a bite regulatory compliance is taking out of franchised dealers’ profitability apple — especially for what it takes to legally operate the F&I office.

A new report released by the Center for Automotive Research in May showed U.S. franchised dealers spent $3.2 billion in 2012 to comply with 61 major federal rules, resulting in higher prices for dealership customers and the loss of an estimated 10,500 dealership jobs.

According to the report titled, “The Impact of Federal Regulations on Franchised Automobile Dealerships,” the average dealership incurred $182,754 in costs to comply with federal mandates governing employment, business operations, vehicle financing, sales, marketing and vehicle repair and maintenance. These regulatory costs equated to 21.7 percent of the average dealership’s pretax net profits — or about $2,400 per dealership employee.

The National Automobile Dealers Association commissioned the report produced by CAR, which is based in Ann Arbor, Mich. Analysts indicated cost estimates are for 2012 and are based on interviews in 2013 and 2014.

“The additional cost for new-car dealerships to comply with federal regulations are passed along to our customers in the form of higher prices, which results in lower vehicle sales and reduced employment at dealerships,” said Forrest McConnell, III, NADA chairman and a Honda/Acura dealer in Montgomery, Ala.

Drilling deeper into the report uncovered just how much F&I compliance is costing dealerships. Analysis of the mean values of compliance costs revealed that the dealership financial burden is greatest for the regulations included in the vehicle financing category, which includes items such as compliance with the Equal Credit Opportunity Act, the Fair Credit Reporting Act and the Truth in Lending Act.

In fact, more than 37 percent of that average cost increase stemmed from the necessities of compliance with federal rules involving the F&I office.

“It can be challenging for dealers to identify all costs associated with federal regulatory compliance. Some activities are spread among many facets of the business and accounting conventions do not support simple cost analysis. Other cost centers represent activities the dealers themselves admit they would do even if not regulated to do so,” the report said. “However, the data are clear that federal regulatory compliance costs are present and meaningful at all levels of the dealerships’ organizations.”

CPS Fined by FTC

Meanwhile, the cost of not being compliant with federal regulations can be steep, too.

The Federal Trade Commission said that Consumer Portfolio Services will pay more than $5.5 million to settle charges that the subprime auto finance company used “illegal tactics” to service and collect consumers’ loans, including collecting money consumers did not owe, harassing consumers and third parties, and disclosing debts to friends, family and employers.

According to regulators, CPS agreed to refund or adjust 128,000 consumers’ accounts constituting more than $3.5 million and forebear collections on an additional 35,000 accounts to settle charges the company violated the FTC Act.

The FTC also indicated CPS will pay another $2 million in civil penalties to settle FTC charges that the company violated the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA)’s Furnisher Rule.

The order settling the charges requires CPS to change its business practices to comply with the requirements of the appropriate laws. In addition, the company is required to establish and maintain a comprehensive data integrity program to ensure the accuracy, integrity and completeness of its loan servicing processes, and the data and other information it services, collects or sells.

CPS must also provide the FTC with periodic independent assessments of its data integrity program for 10 years.

CPS president and chief executive officer Brad Bradley issued a statement after the final settlement with the FTC was announced in May.

“We are pleased to have resolved the matter with the FTC,” Bradley said. “We cooperated fully with the FTC during their inquiry and made several system and procedural changes related to their comments. Furthermore, we are pleased that the final settlement is consistent with our expectations.”

Editor's Note: This story is part of the annual Used-Car Market Intelligence Report included in the July 1 print and digital editions of Auto Remarketing. To see the complete report — which includes analyses of digital marketing trends, leasing, dealership employee turnover and more — check out the digital edition that was published Tuesday morning.