Article

The Cost of Compliance

A new study found that U.S. dealers spend more than $3 billion per year to keep up with federal regulations, but the total cost of compliance is undoubtedly much higher.

July 2014, Auto Dealer Today - Feature

by Tom Hudson

We are frequently asked about the cost of dealer compliance with federal and state laws that regulate the sale, lease and financing of vehicles. Usually these questions come in the form of requests for fee estimates for compliance work, but sometimes the questions are broader than that.

The answer to the question depends, of course, on how much of a compliance effort the dealer is willing to make or can afford. The answer also is different for the 30-car-per-month dealership and the 300-car-per-month operation.

If the dealership asking the question is a mid-sized, independent (non-franchised) dealer, I’ll usually estimate $25,000 to $50,000 as an initial annual compliance budget. My estimate isn’t much more than an educated, experienced guess, and it is easy to spend a lot more than that for a real crackerjack compliance effort.

A franchised dealership with any volume, or a multirooftop franchise operation would, of course, need an even bigger compliance budget. Just hiring and training a compliance officer, monitoring legal developments, developing and maintaining a compliance management system, and subscribing to Spot Delivery (sorry, couldn’t resist) could drive the budget into six figures. But so far, all we’ve been able to offer is “guesstimates” when we’re asked about compliance costs.

Now comes a study on compliance costs from the Center for Automotive Research (CAR) in Ann Arbor, Mich. The study, commissioned by the National Automobile Dealers Association (NADA), concluded that franchised new-car dealers in the U.S. spent a combined $3.2 billion in 2012 to meet federal regulations. The study looked at one dealership in Maryland and seven in Michigan and Ohio. Dealers were asked to estimate costs and were “encouraged to substantiate costs, where appropriate,” according to the study.

When we worry about compliance costs, we focus on the couple dozen federal laws that regulate the sales and F&I process. The CAR study was broader, however, covering 61 major federal rules. CAR concluded that consumers paid more for their cars and that the U.S. economy also paid in the form of 10,550 fewer dealership jobs, 75,000 fewer total jobs and $10.5 billion in lost economic output.

CAR says that in 2012, the average dealership spent $182,754 to comply with federal mandates governing employment, business operations, vehicle financing, sales, marketing, vehicle repair and maintenance. The regulatory costs equaled about 22% of the average dealership’s pretax profits, or about $2,400 per dealership employee. The average dealership needed to sell 106 vehicles in 2012 to recoup its regulatory compliance costs, the report concluded.

Regulations on employment, accounting and vehicle financing made up nearly two-thirds of the estimated federal regulatory compliance costs, the study said.

The study did not analyze the cost of mandates, such as fuel economy and safety rules, on manufacturers, nor did it include in the estimate the compliance cost associated with the Affordable Care Act. It also did not study state and local regulatory mandates.

The CAR study produced compliance cost estimates that would make any dealer frown, but we think those cost estimates are on the low side. In just the short period of time between the period addressed by the study and today, the Consumer Financial Protection Bureau, the Federal Trade Commission and the Justice Department all have been active in the dealership space. That has led to increased compliance efforts at most dealerships, and we suspect an identical study based on 2014 data would produce higher numbers.

Comment

  1. 1. Rebecca Rosenberger [ July 23, 2014 @ 01:15PM ]

    I have been BDC in Charge of Compliance at Dealerships. I understand the high cost of compliance. One item of concern I have is the amount of salespersons without a updated sales licence and the unwillingness of GM's and GSM's to enforce the need for updated sales licenses. It is a matter of concern to me as to why this is not of much importance to them. Has anyone any insight as to why?

  2. 2. D Pulver [ August 11, 2014 @ 06:53AM ]

    A couple reasons. 1. They do not know that they need one in the first place. 2. They do not see the importance of having one. 3. They feel it is just one more step in the wrong direction of the compliance control mandates. 4. They have been sitting in dealerships for 20 or 30 years only to run tens of thousands of OFAC and Drivers License. To never have one be anything. If a police officer pulled over 10,000 vehicles and not 1 of them ever had a problem. He would stop pulling people over. I do not believe that all states require salespeople to be licenced.

 

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