The Critical Role of Deal Jacket Audits

What is a Deal Jacket Audit?

Deal “jackets” are comprehensive files containing all documentation related to a vehicle sale or lease, and they serve as the primary record of each transaction. These are essential records of a vehicle sale or lease, and they tell a story of compliance and of process. These files contain disclosure documents, contracts, registration and titling information, financial information, receipts, and other records of the transaction, and can easily run into the hundreds of pages.

Many dealerships conduct audits of these deal jackets for a variety of reasons. This means that they will (either themselves, or more likely with the assistance of an outside expert) review a selected number of deal jackets, and review them in detail to look for compliance, business, and other issues. Why only a select few? Because deal jacket audits are complicated, time-consuming, and difficult to do properly. Ideally, dealers would review each deal jacket carefully, but as a practical matter, there has never been time to do so (until now).

Why Audit Deal Jackets?

Auditing deal jackets is essential for several reasons:

1. Compliance Verification: Regular audits ensure that all required documents are present and properly completed and signed, demonstrating dealership compliance with state and federal regulations.
2. Fair Lending Documentation: An audit can ensure that dealers properly document steps taken in the sales and leasing process to ensure fair lending practices.
3. Risk Mitigation: By identifying and correcting errors or omissions early, dealerships can reduce the risk of costly penalties and legal actions. By addressing issues like Red Flags compliance and identity verification, dealers can also address potentially costly business risks from identity theft and other fraudulent activities.  
4. Process Improvement: Audits can reveal inefficiencies or recurring issues in the sales and F&I processes, allowing for targeted improvements. It can also help identify issues with lender requirements, stips, or errors that will delay payment from a lender.
5. Customer Protection: Ensuring all disclosures and agreements are properly executed helps protect both the dealership and its customers from potential disputes. By identifying and addressing issues such as missing signatures, incorrect consumer disclosures, or improper versions of documents, dealers can ensure customer satisfaction and reduce the likelihood of consumer litigation.
   
   

The Complexity of Deal Jacket Audits

Conducting thorough and effective deal jacket audits is a complex task that requires a unique and comprehensive understanding of the applicable state and federal law, dealership operations, F&I products, and practical requirements. Deal jackets must be thoroughly reviewed for dozens and dozens of separate legal and regulatory issues.

To be done correctly, you must ensure you are working with a company that has:

1. Expertise in Dealership Operations: A thorough understanding of the entire vehicle sales process—from the initial customer contact through to final delivery, as well as post-delivery matters like financing and titling issues—is essential for identifying potential challenges.
2. Knowledge of State and Federal Laws: Auditors must be well-versed in the myriad regulations governing automotive sales, including:
   • Truth in Lending Act (TILA)
   • Equal Credit Opportunity Act (ECOA)
   • Fair Credit Reporting Act (FCRA)
   • Used Car Rule
   • Privacy Rule
   • Unfair and Deceptive Acts and Practices Laws (UDAP)
   • State-specific laws and regulations 
3. Attention to Detail: Each document in a deal jacket must be scrutinized for accuracy, completeness, and compliance with current regulations.
4. Understanding of F&I Products: Knowledge of various finance and insurance products, their documentation requirements, and associated regulations is essential.
5. Familiarity with Evolving Regulations: The regulatory landscape is constantly changing, requiring auditors to stay informed about new rules and interpretations.

Given that the average deal jacket consists of hundreds of pages of complex and detailed documents, it is no small task, even for a seasoned expert, to conduct a thorough and useful audit that will produce results helpful for the dealer. Manual deal jacket audits, conducted by experienced professionals, can easily take several hours to complete. 

Recent Regulatory Action Highlights Audit Importance

The significance of thorough deal jacket audits has been underscored by recent regulatory actions. In a notable recent case filed in August 2024, the Federal Trade Commission (FTC) brought an enforcement action against one of the largest dealership groups in the United States, for alleged violations related to F&I practices.1

The FTC’s complaint alleged several issues, including:

• Charging consumers for F&I products without their consent
• Misrepresenting the cost and coverage of F&I products
• Discriminatory pricing practices

Importantly, the FTC discussed the fact that dealerships in this group conducted deal jacket audits, but criticized their scope and adequacy – and the follow-up related to those reviews. This enforcement action serves as a stark reminder of the potential consequences of insufficient internal controls and highlights the critical role that thorough audits play in maintaining compliance.

Best Practices for Effective Deal Jacket Audits

To ensure the effectiveness of deal jacket audits, dealerships should consider the following best practices:

1. Establish a Regular Audit Schedule: Conduct audits on a consistent basis, not just in response to identified issues. It is only by looking for issues over time that patterns will be revealed.
2. Audit a Range of Personnel and Issues: You should also ensure that you are getting a sampling of different stores, deals with different sales and F&I managers, and different types of deals (new, used, finance, and lease) to ensure you are checking for a full array of issues. 
3. Use Comprehensive Checklists: Ensure that anyone that conducts an audit on your behalf has developed and maintains detailed checklists that cover all aspects of compliance and documentation requirements at both the state and federal level.
4. Leverage Technology: Engage experts that are utilizing the latest technology, systems, and specialized audit software to streamline the process and improve accuracy.
5. Engage External Experts: Consider periodic third-party audits to provide an objective assessment and identify potential blind spots.
6. Foster a Culture of Compliance: Emphasize the importance of accurate documentation and regulatory compliance throughout the organization.
   
   

Can I Utilize Technology to Help?

Deal jacket audits are an essential component of a dealership’s compliance and risk management strategy. You can accomplish this critical task efficiently and cost-effectively with ComplyAuto’s new Guardian tool. With Guardian, ComplyAuto has developed patented technology and tools to deliver the first AI-based deal jacket review software, Guardian is faster, more thorough, and far more cost-effective than even the best human auditors. It not only looks for more issues, but it provides you with incredible insight through reporting, dashboards, automated mitigation, and more. 

By strengthening audit procedures and creating a culture focused on compliance, dealerships can safeguard against regulatory risks, enhance their day-to-day operations, and earn greater trust from their customers. In light of recent enforcement actions, the importance of these audits cannot be overstated, making them an essential practice for modern auto retailers. Contact ComplyAuto today to learn more about how to leverage ComplyAuto’s experience and expertise, along with the power of AI by deploying Guardian today.

¹ To be clear, these are merely unproven and unsupported allegations. Simply because this dealer, or any other dealer is on the receiving end of such an action does not mean they engaged in any wrongdoing – even if they settle the action.

Author: Brad Miller, Chief Compliance/Regulatory Officer, Head of Legal, ComplyAuto
The original article is available here.