Flying Under the Radar

My client was a buy here pay here dealer. I was auditing his dealership – at his request – and had just finished telling him why the way he financed repairs violated state and federal law. I also told him what he’d have to change in order to continue the practice without breaking the law.

He was quiet for a long moment and then scrunched up his face in something between a frown and a scowl. He clearly wasn’t happy.

Finally, he spoke. “I think we’ll just keep on flying under the radar on that one. After all, we aren’t charging our customers any interest on the cost of the repairs. We’re really doing them a favor, when you think of it. I can’t imagine anyone coming after us for that. And anyway, we’ve never been sued.”

That got me thinking about the phrase “flying under the radar.” In this over-regulated world, a dealer who seriously tries to comply completely with every law and regulation that applies to the business of selling and financing vehicles needs to go to law school before attending his first dealer auction.

Most dealers don’t do that, nor do most dealers have a compliance lawyer on staff or on retainer. Most dealers make some effort to comply; then by being mostly compliant, they hope to fly under the radar (avoiding big lawsuits and heavy-handed regulator action) through luck and good customer service.

I can’t tell a client to fly under the radar or condone it when he does. All I can do is tell the client what the law is and advise him about whether his practices are legal. It’s up to the client to heed or ignore my advice.

The scope and complexity of the regulations applicable to the sale and financing of cars lead to a sort of risk triage, a process in which the dealer does some mental calculus (price of compliance minus risk and cost of legal action versus ability to serve customers plus ability to make money) and determines that, given the likelihood of liability, it makes more sense to ignore some laws than to comply with them. Viewed like this, flying under the radar can make a lot of business sense. If I were a car dealer, I might be tempted to push the stick forward and lose a little altitude myself.

But (and you knew there was a “but” coming), flying under the radar requires some knowledge of the terrain, lest you wind up crashing nose-first into the side of a regulatory mountain. Putting it another way, taking risks when you know the potential for disaster is one thing, but taking risks when you don’t know the odds is stupid.

Here are a few things you might want to ask yourself when you are tempted to fly under the radar.

Are there criminal penalties for your proposed conduct? It’s one thing to do something that constitutes a breach of contract for which your customer could sue you. It’s something else to commit a crime that could expose you to the loss of your dealership, large fines and perhaps even prison time. And those criminal penalties can be found in some unexpected places. I’ve never heard of anyone going to jail for violating the Truth in Lending Act, but TILA has criminal penalties for some violations.

How frequently will you engage in the low-flying activity? If you finance repairs a couple of times a year, that’s one thing, but if you are illegally charging some fee on every deal you do, that’s another thing entirely. The radar’s a lot more likely to pick you up if it has a lot of opportunity to do so.

Will the “I’m being nice to my customers” defense save you? You may think a particular practice is so beneficial to your customers and that they will be so abjectly grateful for the help that they couldn’t possibly file a lawsuit against you. Alas, that’s not how the legal world works. You might have helped your customer, but when she later defaults and you repossess her car, she won’t remember the help, but instead will remember the repossession. And when she visits her lawyer, he will be combing through all your documents looking for any violations, no matter how benign, that will support his demand for a big settlement check. And if instead of facing your customer, you are the target of an investigation by a state or federal agency, you can bet that the look-how-nice-I-was defense won’t fly if the investigation turns up violations. “Nice” doesn’t keep a regulator from ordering restitution, compelling fines or worse, pulling your license.

Can you really avoid being detected by the radar? For the last few decades, we haven’t seen a lot of enforcement activity against dealers by their principal federal cop, the Federal Trade Commission. The Dodd-Frank Act split the regulation of dealers, with some still answering to a beefed-up Federal Trade Commission and others answering to the new Consumer Financial Protection Bureau, which calls itself the “new cop on the beat.” Odds are that enforcement activity will pick up dramatically. In other words, the radar’s getting stronger, and right now we have no radar detector, so we don’t know where the CFPB or the FTC will strike first.

The next time you are tempted to push the nose over and head for lower altitude in an effort to avoid doing what the law requires, pull this article out and give some thought to these questions. As they say, “Don’t do the crime …”