Author Archives | Jim Ganther

Requiem for a Guidance

Requiem for a Guidance

In order to make any sense of what’s going on at the CFPB, we need to start at the beginning — in this case, the 2008 financial crisis and its aftermath. While economists may argue over specifics, the conventional wisdom explains the financial meltdown as a result of aggressive lending in the subprime mortgage market. When the balloons came due on those mortgages, the homeowners couldn’t make their payments and defaults became widespread.

In a new wrinkle, subprime mortgages were bundled, securitized, derivatized, and traded. Major investment banks that should haveknown better — think Lehman Brothers and Bear Stearns — were overexposed to these securities and collapsed. When Lehman Brothers filed for bankruptcy in September of 2008, worldwide markets tumbled and took years to recover.

Note one thing: Retail automotive and its finance function are not in the chain of events brining about the crisis. That’s for one obvious reason: No one buys a retail installment sale contract thinking the value of its collateral — a car — is going to keep rising over time. Yet car dealers felt the brunt of the crisis, as retail sales dropped like a stone. What came to be called “The Great Recession” for the rest of the economy was a true depression in the automotive market. About one in five dealerships closed their doors in the two years following the collapse of Lehman Brothers.

Insult to Injury

Never one to let a good crisis go to waste, our government enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. Despite the term “Wall Street Reform” in its title, Dodd-Frank was far broader than its title suggested. Amongst other goals, the bill promised to “protect consumers from abusive financial services practices,” and those practices weren’t limited to subprime mortgages.

Senator Sam Brownback of Kansas succeeded in inserting what came to be known as the Brownback Amendment to the Dodd-Frank bill, exempting retail automobile dealerships from its scope. The industry heaved a great sigh of relief. But, to quote Lee Corso, “Not so fast, my friend.”

Although the Brownback Amendment legally took retail automotive outside the scope of Dodd-Frank, the devil is in the details. Even the bill’s co-sponsor, former Sen. Christopher Dodd (D-Conn.), admitted the American people were essentially buying the proverbial car without a test drive when he said, “No one will know until this is actually in place, how it works.” There was room for things to change, and they did.

One of the things Dodd-Frank did was establish the Consumer Financial Protection Bureau, or CFPB. And while the CFPB did not have the legal right to oversee and regulate indirect automotive financing, it certainly had the right to regulate the banks and captive finance companies that bought installment sale contracts and lease contracts from dealers.

The initial head of the CFPB, Richard Cordray, soon proved he was willing to do indirectly what his agency was prohibited from doing directly, namely, tell dealerships what to do.

In 2013, the CFPB issued its Automobile Dealer Participation Guidance. In that short document, the CFPB alleged that bank policies that allowed dealerships to mark-up interest rates above the buy rate resulted in discrimination against women and minorities. Please note that there has never been any credible evidence presented to prove this allegation.

To prove the folly of the CFPB’s approach, consider these two transactions involving the exact same vehicle and MSRP.

In the first deal, the dealership discounted the MSRP by $2,000 and offered a trade allowance of $8,000, for a total amount financed of $18,000. Assume for the purposes of this exercise that the buy rate was 4%; the dealership marked it up by 175 basis points for a retail APR of 5.75%. On a 60-month note, that works out to a monthly payment of $346.

In the second deal, the dealership discounted the MSRP by $1,500 and offered a trade allowance of $6,500, for a total amount financed of $20,000. The dealership marked up the buy rate by only 150 basis points for a retail APR of 5.50%. On a 60-month note, that works out to a monthly payment of $382. Which is the better deal?

That’s right — the first one, with a higher APR. And yet the CFPB believed the first example demonstrates discrimination and should not be allowed. That’s because the CFPB only saw one variable — interest rate — when real automobile finance transactions have numerous variables: discount, trade allowance, term, down payment, APR, F&I products, rebates, and so on. Regulations that are divorced from reality rarely work out well. This one did not.

The Move Toward Flats

The CFPB suggested three solutions to this perceived problem. One was to prohibit dealer participation entirely and require banks to offer uniform compensation, commonly called “flats.” Another was to limit dealerships to a uniform — and modest — markup. And door number three was to adopt internal policies that would prevent discrimination in the F&I box.

These options were not warmly received by the dealership community, who uniformly rejected the notion that discrimination was widespread in the industry. And given that car dealers legitimately try to maximize their return on every single transaction, regardless of the race or sex or the customer, that’s easy to believe.

In response to the CFPB’s Automobile Dealer Participation Guidance, the National Automobile Dealers Association issued its Fair Credit Compliance Policy and Program in 2013, in conjunction with the National Association of Minority Automobile Dealers and American International Automobile Dealers. Under this policy, which many dealers adopted, dealers would establish a single “Standard Dealer Participation Rate” by which it would mark up all buy rates. That Standard Dealer Participation Rate would be applied to every deal, except when it wasn’t. When it wasn’t, the dealer had to document the precise non-discriminatory reason why the Standard Dealer Participation Rate was reduced in that particular deal. The Standard Dealer Participation Rate could not be increased.

Every single deal had to be audited within two days of the sale to ensure that the policy had been properly followed. No one really appreciated the extra paperwork and, if anecdotal evidence is believed, most dealers did nothing and hoped for the best.

The Automobile Dealer Participation Guidance was in the nature of a federal rule, and federal rulemaking has to follow a consistent and transparent process. A rule is proposed, and then there is a 60-day comment period where interested parties can file their comments or proposed changes. Then a final proposed rule is issued, which itself can be stopped under certain circumstances. The process can be lengthy and involved, but it is transparent and democratic.

What the CFPB did with respect to the Automobile Dealer Participation Guidance was to issue it without notice or the opportunity to comment, effectively removing it from the democratic process. The Guidance came on the heels of the CFPB’s enforcement action against Ally Financial, in which the CFPB alleged Ally permitted discrimination by the dealerships from which it purchased paper. This process is called “regulation by enforcement.” For its own reasons, Ally settled and paid a hefty fine. The result of the process was the <ital>de facto<ital> establishment of a rule that prohibited dealership discretion in the markup of buy rates.

A Bureau by Any Other Name

This brings us — finally! — to the topic of this article, the repeal of the CFPB’s dealer participation guidance. The Senate voted to repeal the Guidance on April 18, 2018, and the House followed suit in May. On May 21, 2018 President Trump signed the resolution and the guidance was officially revoked. What does that mean for dealers?

A couple things, all-important. The first is, literally, symbolic, but important all the same. The CFPB got a new name and a new official seal. Actually, the new name — the Bureau of Consumer Financial Protect — is the name designated in the Dodd-Frank Act that established the bureau in the first place.

In addition to the new name is the new official seal. Most official seals of federal agencies display only one year: the year the agency was established. This seal, however, has three: 1776, the year the United States declared its independence from Great Britain; 2010, the year the agency was established; and 1787, the year the United States Constitution was drafted.

Taken together, the new bureau name and the new seal, stressing the importance of the Constitution, tell the world that there is a new sheriff in town with a new attitude.

But that does not mean that dealers are now free to discriminate, in finance or anything else. Attorneys General from several states have declared they intend to continue to enforce the dealer participation guidance. Dodd-Frank specifically allows state attorneys general to enforce the terms of the Dodd-Frank Act. But because the Automobile Dealer Participation Guidance has been repealed, there is technically no guidance to enforce.

State attorneys general are free to enforce anti-discrimination laws — they always have been — and they are certainly welcome to do so. Discrimination is a bad thing and should be prohibited. But repeal of the dealer guidance means they must actually <ital>prove<ital> discrimination rather than merely allege it. This is progress.

And then there’s the Federal Trade Commission. The FTC had, and has, enforcement authority with respect to interstate commerce, which covers the activities of car dealerships. Any unfair or deceptive acts or practices (UDAP) that involve the automotive finance function remain illegal, and subject to FTC enforcement action.

The Equal Credit Opportunity Act remains the law of the land. In other words, UDAP and ECOA violations, which involve actual discrimination in the dealership environment, are still illegal, as they should be.

Sage advice to dealerships is what it always has been: Do the right thing. Treat everyone fairly. Don’t gouge on rate. Do the right thing and you don’t need to worry about state attorneys general, or the FTC, or the local plaintiff’s bar. Or a government agency focused on consumer financial protection, by whatever name.

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You Don’t Know GAP

You Don’t Know GAP

For those who are involved in the world of F&I but were sleeping beneath a rock for the last few months, the U.S. Department of Defense issued a reinterpretation of the Military Lending Act last December. Under that new interpretation of the MLA, the exemption of automobile financing from the scope of that law is in danger.

As DoD now interprets the law, the automobile financing exemption is still in place unless the financed transaction includes “cash-out,” or … Well, before I go any farther, let’s pause on this wrinkle.

Don’t Make Personal Loans

“Cash-out” deals are those where, say, a $28,000 deal is financed for $35,000 and the customer takes home a check for $7,000. What’s wrong with such a transaction? Let me count the ways.

First, it is likely that, in order to support a $35,000 extension of credit, the value of the collateral is overstated by $7,000. That could be considered bank fraud and wire fraud.

Second, such an overfinancing probably violates the terms of the agreement — commonly (and incorrectly) called a “lender agreement” — between the dealership and the finance source that buys the retail installment sale contract (RISC). If things go sideways, you may assume the RISC becomes recourse paper and the dealership owns the deal.

Third, such an overfinancing could be characterized as a personal loan disguised as a RISC. Personal loans and RISCs are treated differently under state law. The former often requires a license, for example. Writing personal loans without a license is frowned upon.

And finally, while automotive finance should be exempt from Consumer Financial Protection Bureau oversight pursuant to the Brownback Amendment, that exemption doesn’t apply to entities offering personal loans. Backing into CFPB oversight is not something most dealerships would willingly entertain.

Bottom line: Cash-out deals are a bad idea and should be avoided. If that’s all DoD said in December, you wouldn’t be reading this article. Yet here we are.

GAP, Credit Insurance, and Covered Borrowers

DoD’s December reinterpretation also removes from the warm and friendly embrace of the automotive finance exemption deals that finance GAP or credit insurance. (To save syllables, I’ll refer to both, collectively, as “GAP.”) Because of that unfortunate fact, many dealerships are simply not selling GAP until sanity returns to the Pentagon and a more reasonable interpretation is issued. But is that enough?

Unfortunately, no. Even if a dealership avoids selling GAP to “covered borrowers,” as the MLA defines that term, the CFPB still has something to say.

Back when the automotive finance exemption covered deals with GAP, the retail automotive world didn’t worry about what the CFPB thought of the MLA. Now we do, and it turns out they have made their thoughts known.

In September of 2016, the CFPB issued “Interagency Examination Procedures” with respect to the MLA. Largely ignored at the time, they now need to be read and taken seriously. Even if a dealer elects not to sell GAP to covered borrowers, they should still take the following steps:

Step 1: Have a written MLA policy. If your dealer’s policy is to not sell GAP to covered borrowers, put that in writing. Also record the process they will follow to ensure that they don’t.

Step 2: Train employees on the MLA policy. That training can be written, online, or in-person, but be sure that you document the process and that you can prove your dealer client’s employees actually learned what was taught.

Step 3: Check all GAP and credit insurance customers for covered borrower status. You can do this through your CRAs when you pull a credit report, or by using the DoD MLA website: Whichever method you use, be sure to print and retain documentation of the result. And if the results indicate a customer is a covered borrower, don’t sell GAP to that customer.

Step 4: Establish an audit process. The CFPB has published their own audit process for MLA compliance. At the top of their checklist:

  • Existence of written policies
  • Extent and adequacy of training
  • Documentation of covered borrower status checks

Is there a way to avoid this new paperwork and procedural burden? In a word, no. Under the current interpretation of the MLA and its implementing rule, it is safer to not sell GAP to covered borrowers than to take the risks inherent in doing so. But the only way to ensure you aren’t is to confirm the status of every GAP customer. That requires a written policy, training, a process for checking covered borrower status, and a method of auditing compliance.

Unfortunately, sleeping under a rock is not a viable MLA compliance strategy.

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Free at Last

Free at Last

There’s an old joke about my Uncle Murray the dressmaker. He sold dresses for $10 that cost him $15 to sew, but figured he’d make it up on volume. He had a great Christmas and it put him out of business!

There’s something attractive about making money by giving a product away. In the car business, it can look like preloads — products included in the price of the car to create a sense of value or set up more profitable sales of additional amounts of the product in F&I. For example, a dealer might provide one year of prepaid maintenance for free with every vehicle purchased. Then, in the F&I office, the customer is offered the opportunity to extend that benefit for, say, another four years. Done right, it can even be legal. But oftentimes it is not.

Addendum stickers list all the good things the dealer is providing to demonstrate its superior value proposition. Prepaid maintenance, oil changes, identity theft recover, VIN etch, warranty for life, nitrogen-filled tires, car washes and tanks of gas — all have been used to increase the front-end price of a vehicle and, dealers hope, the bottom line.

But there are dangers to “free.” First of all, the Federal Trade Commission doesn’t like that word when used in connection with a product whose price is typically negotiated. That guidance was published in 1971, and still applies. Part of that guidance (16 CFR 251.1) reads:

“(g) Negotiated Sales. If a product or service usually is sold at a price arrived at through bargaining, rather than at a regular price, it is improper to represent that another product or service is being offered ‘Free’ with the sale. The same representation is also improper where there may be a regular price, but where other material factors such as quantity, quality or size are arrived at through bargaining.”

The above fits the way most retail vehicle transactions are conducted, so using the term “free” in the addendum sticker would constitute a violation. What’s a dealer to do?

One approach might be to use a similar term … except that the FTC has already thought of that too:

“(i) Similar terms. Offers of ‘Free’ merchandize or services which may be deceptive for failure to meet the provisions of this section may not be corrected by the substitution of such similar words and terms as ‘gift,’ ‘given without charge,’ ‘bonus,’ or other words or terms which tend to convey the impression to the consuming public that an article of merchandize or service is ‘Free.’”

So what, you say? For that, we turn to 16 CFR 17: “Failure to comply with the guides may result in corrective action by the commission under applicable statutory provisions.” What, pray might those “applicable statutory provisions” be? The FTC guidance itself gives us a clue:

“(2) Because the purchasing public continually searches for the best buy, and regards the offer of ‘Free’ merchandise or service to be a special bargain, all such offers must be made with extreme care so as to avoid any possibility that consumers will be misled or deceived.”

Catch those last two words? Protecting consumers against being “misled” or “deceived” leads us to Section 5 of the FTC Act, which prohibits unfair and deceptive acts and practices. And what’s the penalty for violating Section 5? Following the FTC’s 2016 adjustment for inflation, the maximum penalty is now $40,000.

To be fair, the maximum fine is usually limited to violations of a final consent order, meaning the offending dealer has already been slapped on the wrist at least once. Initial fines can be much lower, but they can be assessed per violation. Each misuse of the term “free” can be considered a violation. How many stickers are on a dealer’s lot?

Where does that leave a dealer who wants to highlight a bundle of benefits? One safer approach would be to list each included benefit and its value. But be warned: The stated value had best bear some relation to reality. If not, we’re back to Section 5 of the FTC Act. Listing nitrogen-filled tires as a $6,250 value is not a best practice. Listing “values” that can be related to actual retail sales of substantially similar products or services is a best practice.

Another approach is to use the term “included” instead of “free.” While there is little caselaw to guide us, the assumption is that “included” — in the price — is the opposite of “free” (independent of the price paid).

Why should providers care about how a dealership prices or sells its products? The practical answer is that providers generally have deeper pockets than individual dealerships, and plaintiffs’ lawyers are trained to look for deep pockets. If the provider — or its agent — knew or should have known of the dealer’s deceptive sales practice, a good lawyer will find a way to bring the provider to the party. Even worse is when the provider — or its agent — encourages the “free” preload as a sales tactic. That’s when the provider finds out that free really isn’t.

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Providers’ Responsibility for Dealer Compliance

Providers’ Responsibility for Dealer Compliance

I was in the office of a large and successful F&I agent not long ago, and he bemoaned the need to take on duties related to dealer compliance. “I know I have to do it because all of my competitors are doing it. I need to do it to compete. But when did it become my job?”

A good question, and one deserving an answer. And more to the point for readers of this particular magazine, do providers and administrators have a responsibility for dealer compliance?

The answer, I believe, is yes, for at least three reasons: There is a legal responsibility, a moral responsibility, and a prudential responsibility. I will address each in turn. Stick around for the last reason — it’s where things get really interesting.

The Legal Responsibility

What is the basis of a legal responsibility for providers and administrators to ensure the legal compliance of their dealership clients? Put another way, how could a provider get sued by a dealer or an end user of the provider’s products?

One way is to fail to meet existing legal obligations. For example, providers and administrators receive, use and store customers’ nonpublic personal information (NPI). That makes those entities “service providers” under both the Safeguards Rule and the Red Flags Rule. This means that providers and administrators must protect that NPI and comply with the Red Flags Rule to the extent it applies to their duties.

Beyond the statutory requirements of those two rules, providers and administrators must avoid negligence in their dealings with dealers. For example, if the provider offers F&I training, that training must be accurate. I have seen F&I training that advocated what, in my opinion, constituted bank fraud. A provider would do well to have its training materials reviewed by an attorney familiar with car law every now and then.

Beyond that, providers need to be aware that plaintiffs’ lawyers are always on the prowl for “deep pockets,” and providers probably count as such. Whoever profits from an alleged fraud can reasonably expect to be in the chain of liability. Knowing this, what elements of dealer compliance should a provider be concerned about? Certainly the content of training, but also the proper use of F&I menus and the paper trail surrounding the sale of their products.

This, in turn, suggests the desirability of periodic deal jacket audits, but that’s a big topic (maybe next issue).

The Moral Responsibility

You don’t have to go to law school to understand the concept of moral responsibility. It’s the notion of doing the right thing. If you make money from a dealer’s F&I department, you have some moral obligation to make sure your products are being sold in a legally compliant manner. That implies honesty, accuracy, and transparency.

The process of training and audit described above apply here as well, not because Uncle Sam or the plaintiffs’ bar say so, but because it is the right thing to do.

The Prudential Responsibility

As promised, this is where things really get interesting. The two prior bases for responsibility for dealer compliance arise in some measure from the notions that you either <ital>gotta<ital> or you <ital>oughta<ital>. Some sense of compulsion underlies them both, and as human beings, we don’t like being told what to do.

A prudential basis for responsibility for dealer compliance is more appealing, for it reduces to enlightened self-interest, and we’re all good at that.

A simple thought exercise illustrates this point. Imagine a dealer surrounded by four providers eager to earn his business. The dealer’s pants catch fire. Three providers try to outshout each other with the same message: “Your pants are on fire!”

The fourth pulls out a fire extinguisher and puts out the fire.

Whose products will the dealer sell?

There are at least three fires that are certain to impact dealers in the near- to mid-term. Why am I so certain? For that, let us turn to novelist Tom Clancy.

In his 1991 bestseller, “The Sum of All Fears,” Clancy spins the tale of our worst collective nightmare: Islamic terrorists obtain and detonate a nuclear weapon. On Pages 615–619 of my copy, Clancy painstakingly describes the carefully choreographed series of events that must transpire within a weapons package to initiate a nuclear reaction. All of them take place, in order. He then sums up the result:

“As yet no perceptible physical effects had even left the bombcase, much less the truck. The steel case remained largely intact, though that would rapidly change. Gamma radiation had already escaped, along with X-rays, but these were invisible. Visible light had not yet emerged from the plasma cloud that had only three “shakes” before been over a thousand pounds of exquisitely designed hardware … and yet, everything that was to happen had already taken place. All that remained now was the distribution of the energy already released by natural laws which neither knew nor cared about the purposes of their manipulators.”

In other words, the bomb blast and mushroom cloud that we all associate with a nuclear explosion are not really the explosion. They’re just the natural and visible results of the nuclear reaction. If you know the elements of the detonation took place, predicting the bomb blast and the mushroom cloud is no great trick.

The elements of at least three such “explosions” have occurred, or are occurring. Predicting their result is no great trick, either.

The first is data security or, more properly, consumer awareness of data security as a risk that impacts them in a very real way. The recent Equifax breach impacted approximately 145 million Americans, myself included. (To find out if you were affected, go to and follow the instructions there.) Friends who were also impacted by the Equifax breach have already had their bank accounts drained, and they are angry.

Dealers have a ton of their customers’ nonpublic personal information in their paper files and, more to the point, in their computer network. If a major credit reporting agency can’t protect such data, what are the odds the average car dealer will? Exactly.

The first obligation of a dealer intent on protecting customer NPI is to conduct a network vulnerability assessment, or “NVA.” The NVA is the first step in determining what vulnerabilities exist within a network that could make an unauthorized loss of data more likely. If your firewalls aren’t properly configured, or if you lack intrusion detection software, the NVA will let you know and lead to corrective recommendations.

Conducting an NVA is not an optional extra; it is an express requirement of the Safeguards Rule. And while this falls outside of the provider’s “zone of compliance,” a prudent provider would be wise to find a reliable vendor or vendors for this service, use its volume potential to negotiate a reasonable cost, and make that service (and discount) available to its dealers.

Along those same lines is identity theft recovery service. The Red Flags Rule requires dealers to mitigate the impact of identity theft, but it doesn’t say what “mitigate” means. Identity theft recovery service, by definition, should help satisfy that requirement. And since identity theft recovery can (in most states) be provided as a blanket benefit to customers and additional years upsold in F&I, this is actually a product that fits neatly into the provider’s wheelhouse. Compliance is a lot more fun when you make money promoting it.

The second detonation is still in progress, but if all of the steps take place, the results will be game-changing. This one also involves data, but instead of security the operative concept is usage.

Right now, a dealer might have a desking program, an F&I menu program, and a finance portal, all of which operate on top of a proprietary dealership management system (DMS) but don’t talk to one another.

But what if they could, at an affordable price? Then the dealer could require the first pencil to be based on a standard APR; the final pencil could be based on the customer’s actual credit score (and not generated until the bureau had been pulled, after actual authorization had been obtained and recorded); the final pencil would flow into the top of the F&I menu; all products would be consistently offered; the results of the menu negotiation process would be documented and signed; those results would flow into the buyer’s order and installment sale contract; and all of the chosen products would be backed up by signed contracts with matching prices.

In short, much of the room for deceptive trade practices could be made impossible. And when a consumer protection like that becomes possible, it will soon become mandatory. The prudent provider will anticipate that development and have the software ready when the dealer asks.

The third reality generating a predictable reaction is the consolidation trend in the F&I industry. This is certainly obvious amongst agents and agencies. As first-generation F&I agents want to retire, they need to sell their agencies. These are being gobbled up by providers seeking to lock up their distribution or by other agencies growing in order to survive.

As the number of agencies declines, the size of those that remain must increase. And as they increase, they must demonstrate benefits to their dealers of that scale. Big for its own sake is not a winning value proposition.

And so we see providers and larger agencies expanding their service offerings. In addition to products and training, we see the innovative providing HR/recruiting assistance, reinsurance consulting, marketing/branding campaigns and — you guessed it — compliance services. Providers literally from A to Z already provide such services to their dealers at no cost or at deep discounts. One less reason to change providers.

Not long ago, former studio head Harvey Weinstein was exposed for being a Hollywood sexual predator and all-around creep for at least three decades. The real story, however, was that everyone seemed to know — especially those who profited from Weinstein’s business activities. Whether for legal, moral or prudential reasons, providers and administrators need to take an interest in the compliance of their dealers’ operations. Weinstein demonstrated the price we can pay for looking the other way.


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Lawn Mowers, Kill Switches and the Future of Compliance

Lawn Mowers, Kill Switches and the Future of Compliance

The easiest way to predict the future accurately is to wait until it happens and be the first to announce it. This is aided, in part, by the fact that homo sapiens, as a species, don’t have an impressive track record when it comes to learning from the past. This means that history tends to repeat itself. So to predict the future of compliance, I will first discuss the history of lawn mowers and product liability.

Mind the Blades

Lawn mowers are pretty simple devices. All you need is a sharp blade and a way to make it move at a rate high enough to cut grass. In the beginning, lawn mowers got their power from the people operating them. Push mowers connected curved blades to the drive wheels and presto! — neatly mown lawns.

Then came power mowers. Whether walk-behind or riders, they incorporated gasoline engines and rotary blades. The combination was much more powerful, much more effective, and much more dangerous.

The increased danger led to injuries, lots of them, and most of them horrific. Until the 1960s, the law did not favor plaintiffs in this area. The law of negligence was not much help, as the duty of due care was usually breached by the victim or a close family member. And product liability law didn’t help, as the product generally worked just fine as designed and built — it was that very fact that made the injury possible. What was a plaintiff’s lawyer to do?

Then came the Restatement (2nd) of Torts in 1965. The Restatements of the Law are published by the American Law Institute as a general summary of the common law to guide judges. For those of you who didn’t go to law school, there are two broad areas of law: statutory law, meaning written laws passed by the appropriate legislature, and common law, meaning the interpretations of law by judges. In case of a tie, statutory law is supposed to win. But it’s the common law-creating judges who determine what constitutes a tie. So while the restatements aren’t themselves binding precedent, they are considered very, very persuasive.

Restatement (2nd) of Torts brought about a revolution that transformed products liability law. In section 402A, the Restatement offered up a new principle: Manufacturers could be held liable for unsafe aspects of their products if a means of preventing that unsafe aspect was available and not unreasonably expensive. This meant that Toro, say, could be held liable for a perfectly well-made lawn mower if an inexpensive kill switch was not incorporated into the design.

This notion became known as the “risk-benefit test.” The crucial question was whether the risks of a particular design were outweighed by its benefits. Courts considered “the likelihood that the product will cause injury, the gravity of the danger posed, and the mechanical and economic feasibility of an improved design.”

So every time your lawn mower turns off when you let go of the kill switch beneath the push bar or get off the seat or a rider, or if the blade disengages when you put the rider in reverse (No Mow In Reverse — “NMIR” — is a thing), think of the Restatement (2nd) Torts. Lawn care is safer because of it.

Injury Potential

All of which brings us back to the future of F&I compliance. Consider the state of products liability jurisprudence and substitute “service” for “product.” Let us assume that a consumer can be injured in the process of financing a vehicle, and that the monetary injury can be severe. Is it possible for players in the finance process to prevent such injuries?

At first blush, the answer would seem to be “No.” Deceptive practices can be perpetrated when there is no method of recording:

  • What was said to a customer and when?
  • What was the basis for quoted payments?
  • There was no leg in the payment quoted.
  • No variance in APR was attributable to race or other impermissible reasons.
  • The final pencil information flowed seamlessly into the menu presentation.
  • The initial and final payments through the menu process were accurate.
  • The deal terms reflected at the end of the menu presentation flows into the buyer’s order.
  • The information on the buyer’s order is reflected in the retail installment sale contract.
  • The product prices on the RISC match those on the product contracts.

And at second blush, the answer would still seem to be “No.” After all, dealers may have a desking tool provided by one vendor, a menu system from a different vendor, and a third-party DMS. None of those functions talk to the others.

But what if there was a system that tracked and recorded every step of the vehicle finance process? What if every representation made to a customer was recorded and time-stamped? What if all the math had to add up? The injury from deceptive practices could be drastically reduced, or eliminated altogether.

In fact, such a system does exist and is already on the market (and no, I am not an employee, agent, or investor). And if one company can do it, others can as well. The state of the art proves that transparency can be dramatically enhanced and fraud drastically reduced. A court’s analysis could move on to consideration of the risks of noncompliant systems versus the benefits of maintaining such a system. Any bets on how a court would come down on that question?

So what is the future? It’s the present: using existing technologies to make fraud nearly impossible. All that remains is for a court (I’m guessing in California) to decide that what can be done to protect consumers must be done.

The providers and administrators that make that technology available first will not just profit in the future, they’ll help create it.

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Cover Your Acetabulum

Cover Your Acetabulum

If you’re old enough to read this article, you know what “CYA” means. For those of you who aren’t, it stands for “cover your acetabulum.” (That’s the large bone that contains your hip socket.) If you thought it meant something else, shame on you.

But for purposes of this article, CYA stands for “certify your associates,” and it’s closely related to the other definition. To explain how certification can accomplish the cover function, I need to go way, way back to when I was in law school — and that was so long ago, there were only six commandments.

The Law of Evidence

One of the things you learn as a 1L (first year law student) is the law of evidence. There are four general types of evidence: demonstrative, documentary, real and testimonial. When you’re trying to make your case or prove your defense, you want all the admissible evidence you can muster.

Admissible evidence needs to be both relevant and reliable. Relevant evidence is that which tends to prove the point for which it is offered and does not carry with it the infirmities that render evidence inadmissible, such as hearsay, unnecessarily prejudicial, privilege, and so on.

Reliability runs to the trustworthiness of the evidence offered. Are there enough points on the fingerprint to make a reasonable identification? Can the document be authenticated? Does the witness have an obvious bias?

What difference does all this make to an F&I provider? A great deal of difference if you’re ever sued. Consider the law of negligence: Negligence arises when one party breaches a duty to another and damage results.

An F&I provider owes a duty of care with respect to the content of its training. If the provider’s employees offer training to dealership personnel, it needs to be accurate. If it is inaccurate, and the poorly trained F&I Manager misrepresents the features and benefits of the product to a customer and the dealership gets sued, you can bet the provider will get sucked into the litigation. And then the law of evidence becomes you best friend — or your worst enemy.

Consider a provider whose employees regularly train dealership F&I personnel by going over each product contract in person, line by line. Sounds good, right? The testimony of the provider employee would support the theory that proper training occurred. … At least until the F&I manager takes the stand and contradicts everything the provider employee said. Both witnesses would have obvious bias. It’s what we call a he said/she said situation, and that’s not a good position to be in.

But what if the provider had a system in place of certifying that every F&I manager who pitches its products to the car-buying public was trained on the terms of each product contract? That type of documentary evidence goes a long way in supporting the testamentary evidence of the provider’s employee.

Get Prepared

So how does one go about creating a certification program? The first step would be to develop the content. That means finding an engaging way to explain all of the salient points about each of your products, pulling those points directly from the contracts that embody them. From long experience, I can testify (relevantly and reliably) that this is the hardest part.

Once the content is developed, step two is to present it. That can be done in a “live” format, either onsite at the dealership or at the provider’s home office, or at some neutral site, such as a Holiday Inn Express. Or it can be presented online. Each method has its advantages.

Live presentations – especially those at the provider’s home office or some other location away from the dealership – ensures that the instructors have the students’ undivided attention. Online presentations are generally less expensive and can be completed at the student’s convenience.

But whichever method of instruction is used, an examination that covers the material terms of the product contracts is essential. That’s the third step, and it is vital. You’ve got to be able to prove what it is that you taught and that the student actually learned it. For that, you need a test.

What should be the minimum passing score? Seeing that you are entrusting your company’s reputation to the F&I managers that take your training, I strongly suggest 100%. In a court of law, “80% compliant” is not a position of strength.

And once all three of these steps are completed, embody the accomplishment with a document that testifies (there’s that word again) to the student’s accomplishment. Present a certificate, suitable for framing (or better yet, framed). Require any dealership employees who want to represent your products to be certified before they are granted that privilege.

If these steps are taken, if the quality or content of your company’s training ever come into question, the appropriate employee (“custodian of records in the ordinary course”) can testify that the F&I manager in question was certified to sell your products, and explain what that certification entails. The records custodian can also produce the test records that confirm the F&I manager understood the content of your training.

Want to take your certification program up a notch? Make the certified F&I managers recertify annually. This doesn’t necessarily mean running them through the entire training program again, but it certainly means requiring a test that confirms they haven’t forgotten what they learned. And if the terms of any of your product contracts changed since the initial certification occurred, that information needs to be conveyed and tested before the new contracts get offered to the public.

All of this discussion surrounds the concept of a provider-specific certification program that revolves around product knowledge — a very good thing. But that is not the only thing that would profit from being certified. Another fine topic for certification is a working knowledge of the laws that govern dealership operations.

Providers are subject matter experts on their own products. They are unlikely to be experts on the law, as most of their executive teams had the good sense to avoid law school. So for this certification you need to look outside.

Fortunately, there is no shortage of certification programs to meet this need. So which one is best? To decide, consider the following:

  1. What does the program cover? There are some excellent certification programs, for example, that address Fair Credit issues in great depth. But “a mile wide and an inch deep” is not the best approach for the F&I industry. A meaningful compliance certification also should address such items as cash reporting, conditional delivery, the Equal Credit Opportunity Act, Red Flags, Safeguards, Magnuson-Moss, Regulations M and Z, and unfair and deceptive trade practices, among others.
  2. Who wrote the content? What are the authors’ credentials? Is the certification developed by attorneys or former dealership personnel? Whom would you trust more?
  3. How does it keep you current? You always want the F&I personnel who represent your product to use the current form and promote the current benefits. Guess what? Laws change, and it’s the current ones that need to be taught. Confirm that any certification program has an affordable mechanism to keep its participants abreast of the changing legal environment.
  4. How easy is it to deploy? Is the certification offered online, or must candidates attend offsite training? Can the candidate access the content at his own pace and convenience, or at someone else’s?
  5. How much does it cost? Not to put too fine a point on it, but if it costs so much that no one wants to pay for it, what’s the point? Does the certification program provide discounts (or commissions) to the providers or their agents?

Regardless of who occupies the White House, retail automotive and its supporting ecosystem will remain a highly-regulated industry. Training F&I personnel on the specifics of the products they sell and the laws that govern their activities, and certifying that those training initiatives have taken place and been effective, is in everyone’s best interest.

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