Auto Dealers Be Prepared: Wisconsin DFI Audits on the Rise
Over the past several years, we have noticed a significant increase in the number of records examinations (sometimes referred to as audits) of Wisconsin automobile dealerships conducted by the Wisconsin Department of Financial Institutions, Banking Division (“DFI”). All dealers, by virtue of transacting retail installment contracts and consumer leases (collectively, “credit transactions”), must be licensed both as dealers and sales finance companies. DFI has authority pursuant to The Wisconsin Motor Vehicle Dealer Law (Wis. Stat., § 218.0101, et seq.) to conduct such audits and charge dealers for the costs of those audits, and dealers are obligated to comply with the audit request in a timely manner.
The audit process often involves the dealer providing DFI with a randomly-selected number of deal files relating to credit transactions, as well as other documents relating to consumer credit transactions. The period of the examination often covers multiple years, reaching back as far as than six years. An issue we frequently see is that dealer record-keeping may not be comprehensive for the entire time period, and dealers are faced with additional expense and employee hours devoted to collecting required documents from multiple sales finance companies to which the dealer has assigned its credit transactions. Dealers should make sure they retain the required documents in an organized fashion and for the time periods required by law so they are readily available.
Areas of examination include, but are not limited to, the following:
Use of forms compliant with applicable Wisconsin and law;
Proper completion of transaction documents;
Proper disclosures relating to fees, interest rates, and other terms of sales, including for sales of GAP and other credit insurance;
Proper maintenance of GAP and other credit insurance logs;
Proper and timely processing of GAP and other credit insurance refunds;
Other compliance issues relating to credit transactions and related sales of GAP, other credit insurance, and related add-on products; and
Proper notices, processing, and execution of the dealer’s exercise of any rights and obligations resulting from consumer defaults.
DFI may require that dealers issue refunds due to failure to make proper disclosures, use of non-compliant documentation, or improper processing of credit transactions. DFI may also assess forfeitures for compliance mistakes. In addition, if compliance errors are discovered during DFI’s review, dealers are generally required to “self-audit” all records for a specified time period. Self-audits will often increase a dealer’s audit exposure further if errors are systematic.
Although compliance mistakes may amount to just a few hundred dollars or so for a given individual transaction, in cases where a dealer’s sales processes include noncompliant forms or practices such mistakes can add up over time to result in large unexpected refunds and forfeitures.
Record-keeping for credit transactions involving sale of GAP and other credit insurance is of particular concern in DFI examinations. Upon early termination of credit transactions where GAP or other credit insurance has been sold, customers are usually due rebates for unearned premiums. Dealers are ultimately responsible for such rebates, and must know how each lender to which they assign credit transactions notifies dealers of prepayments and processes rebates. Dealers are required to document in their GAP and credit insurance logs both the date of prepayment, and the amount and date of each rebate issued. You can find more information about premium rebates and record-keeping requirements in Chapter DFI-Bkg 76 of the Wisconsin Administrative Code.
Dealers should make a regular practice of reviewing their transaction forms, logs, and other record keeping practices, as well as their sales processes, to reduce the possibility of costly compliance problems, and should consider consulting with competent attorneys familiar with dealership regulations and practices to determine whether or not their documents and processes comply with current law.