Author Archives | Terry O'Loughlin

The Ghost of Disparate Treatment Past

The Ghost of Disparate Treatment Past

Pricing products and services would appear to be neither science nor art. Although the bespectacled accounting profession can provide some indication as to what prices to charge so that a business doesn’t lose money it may not be so accurate when it comes to what to charge to maximize profits.

The three basic rules of pricing — what it costs to produce, what the competition charges are, and what the market will bear — appear to be logical, but if a business can charge an extremely large retail margin, and customers agree to pay that price, is this a matter which should be regulated? Of course not, unless you are Karl Marx or one of his adherents.

As Jackie Gleason once remarked, “No one is overpaid if someone is willing to pay it.” Fundamental contract law is not concerned with the exchange of value between the two contract traders unless it is a special circumstance such as a fiduciary relationship.

Secondly, does everyone pay the same price for the same item on a routine basis? And should everyone pay the same price for the same item? The answer to these two questions is obviously “No” — if it’s a free market. Merchants and customers can sell and buy items as they wish. Such a system should ultimately produce a fair exchange between the two parties.

Third, it is illegal to intentionally discriminate against what courts call “discrete and insular minorities” in commerce. Dealers who intentionally discriminate should be prosecuted. However, if there is no intention to discriminate but a particular minority, on a national basis, appears to routinely pay a higher price for particular products, should there be a cause of action? Or should the law be changed to protect against this result?

For example, if Hispanic consumers pay more than white consumers for GAP on a national basis at franchised dealerships, should Hispanics be able to file a class action, or should a new law be passed to protect them? These are broad policy issues, which would seem to be more rhetorical than otherwise.

The recently discredited disparate impact actions by the Consumer Financial Protection Bureau are illustrative on this point. Is there any accurate methodology which can ascertain this alleged disparity between Hispanics and white consumers? The proxy method has certainly been discredited. Could it be reasonably argued that Hispanics are disadvantaged due to educational, cultural, or language disparities which may produce this result, if the pricing disparity is true? And will this disparity disappear over time, absent legislation, as Hispanics become further integrated into society? These questions imply their own answers.

‘Markup’ vs. Retail Margin in Pricing

The varying levels of pricing along the commercial conduit are cost, wholesale price and retail price, which shouldn’t be a surprise to anyone. The producer of the product sells the product to an intermediary, or middleman, who then sells it to the retailer at wholesale. The retailer, as one would expect, sells the product to the consumer at the retail price.

That retail price is the wholesale price plus the retail margin or profit margin. It is not the pejorative “markup.” No one along this path of commerce is going to sell a product and not enjoy a profit. If such a party did, it would not survive economically, and the availability of goods and services would disappear to the consuming public.

Detractors of the automotive industry decry this retail margin as often unfair and a deceptive “markup.” It is not. Dealers should avoid using the term “markup” because it is depreciatory and arms industry critics.

Auto Add-Ons Add Up

Ever wondered how dealer discretion purportedly drives excessive, arbitrary and discriminatory pricing? The National Consumer Law Center (NCLC), a consumer advocacy group, has produced a studyentitled “Auto Add-Ons Add Up,” which asserts that the sale of certain ancillary products leads to inconsistent pricing and discrimination. The study urges investigations and legal redress of what the NCLC considers arbitrary and discriminatory pricing.

The NCLC study is not sympathetic to the ancillary product industry as it asserts that “many have questioned the value of these products.” The study analyzes approximately 1.8 million transactions and reaches certain conclusions and recommendations.

The study reached four conclusions, which are not compelling:

  • Ancillary products are sold at far higher prices than dealer costs. One could easily recast this assertion as it relates to jewelry, pharmaceuticals, or many other products. Is this a remarkable finding?
  • The pricing of ancillary products is inconsistent (at the same dealer or from dealer to dealer): The pricing of all products is inconsistent and it is a matter of degree. One need only contrast the cost of gasoline, milk or mushroom soup from retailer to retailer to reach this conclusion. At the same Chevrolet dealership, the price of an Impala, for example, will differ from one customer to another. Is it wrongful for dealers and consumers to negotiate differing prices?
  • Inconsistent ancillary product pricing produces pricing discrimination. Intentional discrimination is illegal and should be prosecuted. But inadvertent results — where neither the dealer nor the financing source is aware of the result — should not be actionable under present law. Moreover, F&I managers negotiate with everyone, race or ethnicity notwithstanding, and attempt to maximize profit. It is the American way.
  • Financing sources allow for “excessive and discriminatory markups of auto add-ons”: This is one of the central assertions which led to the CFPB’s ill-advised disparate impact actions. How can a financing source be held accountable for results which cannot be known at the time of contracting and underwriting? And what is excessive pricing?

The Study’s Recommendations and the Author’s Response

The study’s recommendations are not, altogether, draconian. The study’s first recommendation is that ancillary products and their non-negotiable prices should be posted along with the Monroney label. These prices should be the same for all customers.

My response to the first recommendation is that it is impractical. Dealers should follow the 300% rule by disclosing 100% of all available products to 100% of their customers 100% of the time. Secondly, in cases where ancillary product pricing is flexible, dealers should have latitude in pricing to fit the product to the customer’s needs.

Menu selling, where the base price is clear, will provide helpful disclosures to customers. It is recommended that all menus be signed and a menu log be maintained. It would also be a sound practice to have a protocol where flexibility in pricing is limited to a certain percentage. It would be a defense to allegations of discrimination.

The study’s second recommendation is that the Equal Credit Opportunity Act should be amended to require the customer’s race and national origin to be documented. My response is that this is a national public policy decision. It will lead to prosecutions, litigation and class actions for the purpose of rooting out alleged classwide discriminatory results. It is the current law in mortgages, but should it be the same for vehicle transactions?

The study’s third and final recommendation is that federal and state regulators should investigate and prosecute ancillary product pricing discrimination. My response? There is no justification for intentional discrimination and it should be prosecuted.

The good news is that the NCLC study will probably not have much impact in the present political climate. However, should the political environment change, it could be otherwise. On Wall Street, the adage “Pigs get fat and hogs get eaten” is applicable here. Allowing F&I managers to be too aggressive in pricing ancillary products may lead to regulatory reprisals. Dealers should be provident. Govern yourselves accordingly.

Finally, a personal note: I have appeared as a speaker on several occasions in the past for the NCLC and participated as an active member of the NCLC’s auto fraud list serve during my tenure with the Florida Attorney General’s Office. I have the highest respect for the NCLC’s motives, its series of consumer law manuals, and the professionals who work there. With that said, however, I strongly disagree with this particular study.

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Regulators Take a Grim View of Ancillary Products

Regulators Take a Grim View of Ancillary Products

It is truly a remarkable phenomenon that an industry of such size and breadth, the automotive ancillary product industry, has engendered the scorn of both government and consumer organizations when these products have provided true benefits to consumers when called upon. This grim view has consequences in the form of legislation, rulemaking, investigations and enforcement.

Industry Size

In an April 2016 report, investment bank Colonnade estimated the F&I products market to be a $77 billion industry, with retail sales of vehicle service contracts estimated at $28 billion in 2014. Another source puts the VSC industry totals at $29.4 billion at retail. According to the NADA, 41.9% of new vehicles sold have a VSC attached to the deal. Surprisingly, over 20,000 offshore ancillary product companies are headquartered in the Caribbean, serving the automobile industry.

In legal parlance, an ancillary product is one which aids, or is attendant upon, the principal product, which, in this case, would be the motor vehicle. The product is subordinate in nature to that vehicle. “Add-on products” is also a commonly used term which, in some quarters, is used pejoratively.

It is estimated that there are over 5,000 different variations of ancillary products depending upon their various terms and conditions. The term also includes such diverse products ranging from extended service contracts and auto club memberships to mud flaps and fabric protection.

Government and Consumer Advocates’ Commentary

It is readily apparent that the CFPB does not accord ancillary products much respect. A recent CFPB request for information relating to ancillary products was stated as follows:

“Among other practices and concerns, the Bureau has found or alleged that some companies offering ancillary products failed to accurately describe those products, [and] offered products that provided little or no benefit to consumers without disclosing this fact … ”

The Consumer Federation of America (CFA) and the North American Consumer Protection Investigators Association (NACPI) have, over the past several decades, produced a report based upon consumer complaints to state agencies. For almost every year that it has been produced, automobile complaints have been the No. 1 type. As part of the report, in Appendix B, the report provides “Tips for Consumers from the 2016 CFA/NACPI Consumer Complaint Survey Report.” Under the Auto category, it castigates ancillary products as it states:

“Resist pressure to buy extended warranties or other expensive add-ons when you purchase a car. They’re usually not worth the cost and don’t provide much more protection than you already have under the warranty and your insurance coverage.”

Edmunds is also not a proponent of ancillary products, as its website puts it bluntly: “Not every extended auto warranty company is out to rip you off, but over the course of our research, we found that the honest ones are few and far between.”

In 2016, Consumer Reports once again dismissed extended warranties as it recommended that it would be more prudent for consumers to put money aside for vehicle expenses rather than purchase extended warranties.

There are certainly other such examples.

A Stark Example of Potential Government Regulation

The Federal Reserve Board has been a highly reasonable overseer of consumer protection over the years and has promulgated rules and commentary, which has been quite fair to the public and industry alike. Regulation M, for example, is such a model of equanimity. However, it proposed in 2010 an almost <ital>in terrorem<ital> notice to be included in retail installment sale contracts and lease contracts which would cause almost anyone to seriously reconsider purchasing an ancillary product. The term, <ital>in terrorem<ital>, is as menacing as it sounds, and is Latin for “into or about fear.” It is usually provided with the hope of compelling someone to act in some way.

Here are the extracts of this warning:

As one can see, this notice is not neutral and implies that the consumer needs to reflect upon his contemplated purchase. Fortunately, it was not effectuated. Such regulatory oversight is now within the ambit of authority of the CFPB. But, as indicated above, the CFPB would not disagree with this type of notice.

Threats to Ancillary Product Sales

Under the Truth in Lending Act, retail installment sale contracts contain certain key terms such as the “annual percentage rate” and the “finance charge.” They are conspicuously presented in the “Fed Box”:

The finance charge is the cost of credit expressed as a dollar amount. Certain third-party charges, such as credit insurance, can be excluded from the finance charge if other disclosures are provided to the consumer.

This is significant, since the greater the finance charge, the higher the APR. The APR can be increased substantially should all these third-party charges be included in the finance charge. There is a legislative movement to force creditors to include these charges in the finance charge. This is what is termed an “all-in rate cap.”

Coupled with a statutorily limited percentage rate, there could be a significant limitation on the availability of consumers to purchase ancillary products. Moreover, increasing the APR will chill sales of vehicles generally. There has been a trend towards this type of legislation as tracked by the American Financial Services Association (AFSA):


State Attorneys General and Memories of US Fidelis

In 2010, US Fidelis declared bankruptcy and was then sued by various state attorneys general for over $20 million in 2012 for routinely defrauding consumers regarding service contracts.

The Latin legal maxim <ital>exceptio probat regulam<ital> should be relevant here. It is translated as “the exception proves the rule.” However, it is not. With the ancillary product industry being so substantial, the US Fidelis case should demonstrate that it was the exception and the rule is that ancillary product providers are sound corporate citizens. However, that maxim doesn’t apply to the view of state regulators. They remain skeptical of ancillary products. Here are a few examples of that skepticism put into recent action:

  • New York Attorney General Eric Schneiderman reached a settlement for $1.6 million with multiple auto lenders for alleged use of deceptive sales tactics to sell add-on products and services.
  • Massachusetts Attorney General Maura Healy reached a settlement for $7.4 million with finance companies over allegations of charging interest rates that exceeded the 21% cap due to the inclusion of GAP coverage on subprime auto loans.
  • Florida Attorney General Pam Bondi settled a case against a dealer for $5 million regarding misrepresenting GPS devices.

There are many examples of these prosecutions which were considered violations of the Unfair and Deceptive Trade Practices Act (UDAP).

A Labyrinth in Quicksand – What to Do

The ancillary product world can, at times, be quite complex. Some products are quite simple whereas others demand sober legal analysis. Here are some considerations and recommendations:

  • A full legal analysis and calculus of every product by state should be performed by an attorney. Issues such as, can the product be sold, is it insurance, what licenses are required, rebate protocols, how the state retail installment sales act interacts with the product, and other issues need a thorough examination.
  • Document in a separate form all the products sold to the consumer.
  • Does your dealership have all related forms and documents required by federal and state law to be provided to a consumer at the time of sale, such as warranties, additional product disclosure menus, contract cancelation agreements, and conditional delivery agreements? The product needs to be appropriate to the consumer’s needs or it could be a UDAP violation.
  • Follow the 300% Rule:
    • An F&I manager should offer 100% of the products to 100% of the dealership’s customers 100% of the time.
    • There are cases in which the failure to offer a product was grounds for a lawsuit.
    • Following this rule may assist in avoiding allegations of discrimination pursuant to the Equal Credit Opportunity Act (ECOA) and Regulation B
    • It may avoid the allegation of payment packing.
      • It ties well with menu selling.
    • “We will offer 100% of the products that a customer is eligible for or that can apply to his transaction to 100% of the customers 100% of the time.”
      • The product needs to be appropriate to the consumer’s needs or it could be a UDAP violation.
  • If a dealer is engaging in menu selling he should consider these practices:
    • Always list the base payment without any ancillary products somewhere on the menu.
    • Have consumer sign or initial each page.
    • Have a written menu plan.
  • A dealer or finance manager should not be impermissibly splitting or sharing insurance commissions with a coworker who is not licensed.
  • Understand the commission structure. A dealer might be paid commissions in excess of those permitted by applicable law or in excess of those set forth in the applicable premium rate filing made by the insurance company with the applicable state insurance department.
  • Know what disclosures are required. A customer might be sold insurance without first receiving required disclosures (such as required disclosure of insurance eligibility requirements) and/or without signing documents that indicate that the customer understands that the purchase of insurance through the insurance producer is optional, not required.
  • Evaluate whether the product can provide value to the consumer. A customer might be sold insurance for which the customer is not eligible (for example, due to the customer’s or the vehicle’s age) or that is otherwise not suitable for the customer (not in the customer’s interest).
  • Include notice of the inclusion of a GPS or starter interrupt device.
  • In direct marketing of ancillary products, target lists should be scrubbed of people who wish to be excluded.
  • Charge the same price for the same product or grouping of products
  • Monitor and adjust your menus, scripts, and practices as a consequence of consumer responses and satisfaction indices
  • Maintain a detailed menu log.
  • If engaging in selling campaigns by telephone or electronic media understand the federal and state “do not contact rules” such as the Telephone Consumer Protection Act. Procuring express permission, by the use of a form, would be prudent.
  • Some states have passed legislation requiring various disclosures and protocols. Although they may not be necessary in some states they are examples of best practices and should be considered for implementation elsewhere:
    • Provide a copy of the proposed contract to a consumer before a sale.
    • Allow a “free-look” period that allows a purchaser to cancel the contract within at least twenty business days or so after purchasing.
    • Provide full refunds, minus any claims paid, for cancellation.
    • Do not use the word “warranty” when, in fact, such contracts are not considered “warranties” under law.
    • Do not represent falsely that the offered service contract is affiliated with a manufacturer.
    • Do not represent that they have knowledge that a consumer’s warranty is expiring.

Finally, support the Voluntary Protection Products Coalition, which includes 16 organizations, including the NADA, NIADA, American Bankers Association, American Financial Services Association, Guaranteed Asset Protection Alliance and Service Contract Industry Council. This coalition is seeking to protect the ancillary product industry’s legal rights and privileges. Participants in the ancillary product world have much to protect. Govern yourselves accordingly.

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Regulators Will Strike Back!

Regulators Will Strike Back!

At the Consumer Bankers Association (CBA) Conference earlier this year, an informal poll was taken from the several hundred bankers in the audience as to the major concerns they had for their industry. For the past six years, compliance was substantially the greatest concern and ranked first. However, in the 2017 poll, compliance declined to the fifth tier of concern with the change in the regulatory climate. The Trump administration and a Republican House and Senate have clearly posited that regulation should be reduced and markets should be allowed to work. Passage of the Choice Act in the House is a good example of this deregulatory zeal.

But are the bankers correct? Should dealers celebrate a defanged CFPB and an announced deregulatory posture?

The answer is a muted one. If the CFPB is disciplined, and its authority is significantly lessened, franchise and independent dealers should take a modicum of solace in this outcome. Issues such as disparate impact, new ancillary product rules, and less supervision of financing sources will lessen regulatory burden for dealers.

However, due to political pressure from certain senators and congressmen, as well as numerous consumer advocacy groups, the federal agencies, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Federal Reserve Bank (FRB), National Credit Union Administration (NCUA), Department of Justice (DOJ) and the Federal Trade Commission (FTC), will be emboldened to continue certain CFPB policies and add to them. These agencies have a mandate which they can’t ignore and possess powers which they seldom exercise. They also collect consumer complaints.

A sinister emerging issue which could force these agencies to act would be the apparent growing bubble regarding vehicle financing fraud which parallels the housing bubble.

Point Predictive, analysts of risk management in the financial sector, has concluded that as many as 1% of vehicle credit applications include some type of material misrepresentation which is similar to the percentage in the housing bubble around 2009. The losses which financing sources experience from deception may double this year to $6 billion which is twice what it was in 2015. Remarkably, only 3% of dealers can be responsible for all of a financing source’s fraudulent applications.

As would be anticipated by anyone who has observed miscreant dealer behavior, the common types of credit application fraud include misrepresenting years employed and income, creating false paystubs, indicating nonexistent vehicle options (powerbooking) and overstating the value of the vehicle. Deception of this nature can be attributed to the consumer or dealer or both.

If such an economic systemic problem emerges, agencies would have no choice but to prosecute and add regulatory burdens to financing sources and dealers, which has already been somewhat exhibited.

In addition, there is growing interest by both federal and state regulators in alleging deception against creditors for extending credit to consumers who are not truly credit worthy and who will default on their retail installment sale contracts or lease contracts early in the contractual term. Dealers need to be reminded that they are considered creditors under the law. This problem is further addressed below.

DAGA

DAGA stands for the Democratic Attorney General Association and its statements on its website are strident and defiant in reaction to the Trump administration:

“Our Democratic Attorneys General provide crucial checks and balances on a new federal administration that often refuses to follow the rule of law.”

“Democratic Attorneys General Are The First Line Of Defense Against The New Administration.”

Democratic attorneys general are planning to maintain many of the policies of the CFPB should it be reduced in power. For example, California is considering its own disparate impact enforcement.

Consider, as well, what actions DAGA members have taken against dealers in the past few years:

  • New York: Attorney General Eric Schneiderman has prosecuted and settled with dealers for over $15 million in the past three years and has convicted a dealer of felony charges regarding the burial of hazardous waste.
  • Massachusetts: The Massachusetts attorney general entered into a $13 million settlement regarding GAP.
  • Washington: The Washington AG sued and settled with a dealer for discriminating against Spanish speakers, misrepresenting finance terms, interest rates, title branding and warranties. The dealer had to pay $250,000 in its settlement and provide Spanish translated contracts in the future. Unusually, it was a civil rights case.
  • Delaware and Massachusetts: The attorneys general of these two states settled with a major financing source for $26 million regarding purchasing retail installment sale contracts from thousands of consumers who could not afford them.

The corresponding organization to DAGA is the Republican Attorneys General Association or RAGA. It is fair to report that the members of RAGA are generally supportive of the Trump administration. But all attorneys general must discharge their legal responsibilities and will be forced to respond to consumer complaints.

Attorney General Complaints

Many of the state attorneys general priorities are based upon consumer complaints. Dealers should remember that the Consumer Federation of America (CFA) and North American Consumer Protection Investigators (NACPI) have tallied consumer complaints every year for the past 30 years. Consumer complaints regarding vehicle transactions have almost been the No. 1 complaint every year for the past three decades.

Various state statistics in 2016, regarding vehicle complaints filed with the state attorney general, support this conclusion of the CFA and NACPI:

  • Illinois: There were 2,783 complaints which made these complaints No. 1 collectively.
  • New Jersey: These complaints returned to No. 1 as the most common complaint.
  • Michigan: Vehicle complaints were No. 3.
  • New York: There were 3,437 complaints filed, which meant that they were No. 2 on the list.

New Risks to Dealers

Regulatory action could also be manifested in new ways:

  • Autonomous Vehicles and Franchise Dealers: Autonomous vehicles have been attracting a great deal of attention from companies not traditionally affiliated with the automobile industry: software companies. A number of these companies are attempting to fashion artificial intelligence, which will drive vehicles without the need of a human driver.

It is also rumored that these software companies are quietly lobbying Congress to enact legislation, which would allow them to bypass franchise law and sell these futuristic vehicles directly to the public. The FTC has already welcomed this idea. If Congress enacted such a law it would probably override state franchise law pursuant to the commerce clause of the Constitution.

  • An “All In” 36% APR: In November 2016, South Dakota voters approved a referendum which bars licensees from contracting for or receiving greater than a 36% maximum finance charge on financing. The finance charge calculation, as in the Military Lending Act APR calculation (MAPR), is an “all-in” calculation, and would include all interest, fees, and charges, including any ancillary products or services.

A violation of the 36% finance charge cap would be deemed void and uncollectable, and the financing source could face a misdemeanor charge, a serious consequence, indeed. Adding products such as GAP, service contracts, and other ancillary products very quickly would increase the interest rate beyond the 36% cap. What this means, quite simply, is that dealers will have less opportunity to sell ancillary products to their customers. Profit opportunities will be lost and consumers will have fewer options.

  • Creditor Liability in Underwriting: As the Delaware and Massachusetts case demonstrated above, regulators may be targeting creditors for not denying credit to those consumers who will, most likely, default on their retail installment sale contracts or lease contracts.

Dealers should recall, once again, that they are creditors by law and share in this potential liability. In other words, dealers and financing sources may be liable for advancing sales when the consumer’s ability to discharge their contractual obligations is limited. The law used for these prosecutions is the ubiquitous unfair and deceptive trade practices act (UDAP), which grants federal and state regulators great leeway and flexibility.

Remedies for Dealers

Compliance is here to stay. To paraphrase the ancient Roman, Vegetius, “In Times of Peace Prepare for War” — or as the Boy Scouts say “Be Prepared.” Dealers should remain diligent in protecting their interests.

If dealers don’t have a sound compliance program they should implement one. If they have a good program they should maintain it. Dealers need to continue to include compliance as simply part of their business regimen.

If dealers don’t have a sound compliance program the place to start is to appoint a Compliance Officer and grant him the appropriate authority. Dealers should be encouraged to craft a compliance management system.

Many of the new threats to dealers can be challenged by trade associations. The NADA, NIADA, and state ADAs all lobby lawmakers and agencies. Dealers should enthusiastically support these associations so that they can protect dealer interests. For example, the Choice Act is pending before the Senate and the passage of it would lesson regulatory burdens substantially. Dealers should support their dealer associations in this highly significant deregulatory bill.

Dealers should also police their own. If they are aware of another dealer’s fraudulent activities regarding credit applications they should report them to the AG’s office anonymously before the problem grows. This reporting should apply to other infractions as well. Honest dealers suffer unfairly when deceptive practices are employed since it gives advantages to disreputable dealers.

In my days of service at the Florida Attorney General’s Office, dealers often reported deceptive practices to me anonymously. It improved the business climate as action was taken against these dealers’ infractions. The vast majority of dealers operate honestly but a very small percentage tarnishes the industry’s reputation and invites regulation.

Finally, please note: The “general” part of the term “attorney general” is what is defined as a postpositive adjective. In other words, an attorney general is really a general attorney of the jurisdiction. Consequently, the plural of attorney general becomes attorneys general since the noun is the attorney part. It can be confusing.

Govern yourselves accordingly!

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Understanding Warranties

Understanding Warranties

An issue came across my desk recently concerning a featured disclosure which should always appear in buyer’s order, retail installment sale contracts and lease contracts. This disclosure is a disclaimer, a disclaimer of several types of warranties.

It also became apparent, in my further discussions with various people in the industry, that there is confusion about this topic. The confusion is understandable when one considers the various related warranty terms: express warranty, limited warranty, implied warranty, implied warranty of merchantability, implied warranty for fitness for a particular purpose, extended warranty, service contract, Lemon Law, and “as is.”

Federal and state law addresses these issues. Be wary, however, to always refer to your state law because there is variance among the states concerning these terms.

In most states, every dealer who sells or leases any type of vehicle should provide to the consumer, in a clear and conspicuous manner, language which clarifies that the only warranty being provided is the one supplied by the manufacturer unless the dealer provides a separate written warranty. Additional language should be added, which is allowed in most states, and this language should disclaim express warranties and the two implied warranties. It’s best if this disclosure appears on the front of the buyer’s order.

Let’s take a closer look at seven key terms P&A executives need to understand and relate accurately:

  1. Warranty

A warranty is simply a promise that a proposition of fact is true. This concept is further defined by federal and contract law. The party making the warranty is the warrantor or seller. The party who may avail himself of the warranty is the warrantee or buyer. An express warranty is one that is explicit and definite.

  1. Disclaimer

A disclaimer is a disavowal or renunciation. In this case, a dealer would seek to disavow responsibility regarding the liability associated with the parts and functioning of the vehicle being sold.

  1. Written Warranties

Manufacturers provide written warranties regarding the vehicles they produce. The federal law, the Magnuson-Moss Warranty Act (or “Mag-Moss”) governs written warranties. The written affirmation of the workmanship, quality or material of the vehicle meets the definition of warranty as identified in Mag-Moss.

The warranty is part of the overall exchange between the parties as would any of the tangible features of the vehicle, such as the engine or drivetrain. This point is significant as it relates to the illusory, fictional, and nonexistent “extended warranty” which should only be called by another name, such as “service contract.”

Pursuant to Mag-Moss, these warranties would have to be clearly indicated as full or limited. A full warranty completely covers the replacement or repair of any defect in the vehicle. A limited warranty is a reduced full warranty and addresses only particular parts and defects. A full warranty is relatively rare.

  1. UCC and Warranties

The state law, Uniform Commercial Code (UCC), addresses various business issues, including contractual relationships between two merchants (dealers in this case) or between a merchant and a consumer. A merchant is a business which routinely entertains transactions in that type of business. For example, if a furniture store sold a vehicle to a consumer that furniture store would not be a merchant, by definition, but a Ford store selling a vehicle would be characterized as a merchant.

The UCC created the two versions of implied warranties:

  • Implied Warranty of Merchantability: As a merchant, who is in the business of retailing vehicles, the dealer is representing, by implication, that the vehicle is generally equipped and suited for the purposes of a vehicle. It has an engine, brakes, transmission, and so forth, and can transport the consumer. In other words, it works as a motor vehicle in all respects. Consumers are supposed to be able to rely upon people who operate car stores as they are UCC merchants. It is presumed that the dealer-merchant understands vehicles.
  • Implied Warranty of Fitness for a Particular Purpose: If a consumer tells a dealer-merchant that he is buying the vehicle for a particular purpose the dealer is on notice regarding what the consumer is going to be using the vehicle for. The dealer-merchant is then averring that the vehicle being sold is appropriate for the stated purpose. For example, if a consumer is purchasing a very small car with a small engine, and orders a trailer hitch added to it, and tells the dealer that he intends to haul a large boat, the dealer is agreeing that this vehicle will discharge this particular purpose. If the engine or transmission fails, when the boat is being hauled, the warranty will be violated and the dealer will have to compensate the consumer.

With such potential burdens being placed upon dealers regarding these two implied warranties, it is prudent to disclaim them.

  1. Service Contracts

Service contracts may act as warranties but they are not by legal definition. They are certainly contracts for services relating to the maintenance of the vehicle. But they are not intrinsic to the purchase of the vehicle as they are paid for separately, an additional sum of money. In addition, they may also be purchased after the initial sale. A dealer may offer a written warranty, separate and apart from the manufacturer’s warranty, and if it is part of the initial sale of the vehicle, and is part of the sales price, it would have to subscribe to Mag-Moss.

The law addressing service contracts, for the most part, is state law, although Mag-Moss addresses it broadly. For example, is a service contract an insurance product or not? The answer would depend upon state law.

  1. Lemon Law

Lemon law addresses the procedures for the failure of the manufacturer’s warranty for new vehicles. Generally, if a warranted problem can’t be corrected, after three attempts, the consumer gets his money back. Some states have lemon laws covering used vehicles.

  1. As Is/No Warranty

This simple term should be thought of as the complete avoidance of any warranties or promises regarding the condition of the vehicle. The purchaser of the vehicle must trust his own examination of the vehicle which may have defects. The FTC’s Used Car Rule, with its mandated buyer’s guide, addresses this issue. There are as many as 15 states which do not allow as-is sales. And, of course, slick plaintiffs’ counsel have legal strategies which have surmounted this appellation, at times, and held the dealer liable.

Dealers should make certain that their disclaiming warranty language is clear, accurate, and conspicuous, as there is much at stake. If the language is not correct in their documents, it is perfect fodder for a class action. Finance managers should be conversant with these terms in case a consumer begins asking questions about warranties. These questions are easy to frame but are not easy to answer. Govern yourselves accordingly.

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Checklists, Word Clouds and a Bright Future

Checklists, Word Clouds and a Bright Future

It could be said that compliance is long, life is short, and success is very far off, if one wished to recast an old adage for the automotive world. But there could be wise shortcuts for your dealer clients if they would pay heed to the key trends in the legislature and the types of compliance violations which are being prosecuted.

Everyone knows what a checklist is. They are vitally important for businesses to help focus their attention on the key issues which could become problems later. The same idea applies for agents and dealers. Checklists for the content of deal jackets, red flags, the safeguards rule and privacy issues should be created and relied upon.

Obviously, compliance, in general, should be approached in the same manner. By knowing what issues they may be facing, and which behaviors to avoid, agents can help dealers function more effectively. As part of their processes, dealers should use various checklists and may wish to consider the accompanying checklists and word clouds below.

Word clouds are far less well-known than checklists but can be helpful aids. A word cloud is a visual representation of text data which takes the shape of a cloud. Terms, and the relative importance of each term, are shown with font size and color.

Anticipated Legislative Activity in 2017

The American Financial Services Association (AFSA) is a trade association and monitors federal and state legislative activity on behalf of its members, which are financial institutions.

The analysis by AFSA of state bills initiated over the past several legislative sessions provides some indicia as to the issues which state legislatures have identified as worthy of legislative attention. Dealers and their associations may wish to influence the voting of their legislators regarding these issues. This checklist of subjects incurring legislator attention includes:

  • Ancillary product scrutiny: Since 2012, there has been a 121% increase in legislative activity regarding products such as debt protection and service contracts. These products have become increasingly important to dealers’ incomes and such legislation should be monitored.
  • Automatic license plate recognition (ALPR) systems: As with red light photographic monitors there is some consideration for monitoring all vehicles on the road. Financing sources would be able to identify where vehicles are, as would dealers.
  • Car buyers’ bill of rights: This is a pesky issue which began in California and provided substantive changes to the law in that state. There are various references to it in some legislatures but nothing substantive just yet.
  • Dealer reserve: As with ancillary products, dealer participation is being scrutinized. Dealers should be aware of the “kickback” myth, which claims that, when consumers do not get the buy rate, the additional interest rate paid is a kickback to the dealer.
  • Documentation fees: The trend continues to force dealers to justify their documentation fees. In other words, this fee should only cover actual costs, not profit. Other states should emulate Florida, where the mandated documentation fee disclosure includes profit as part of the amount charged to the consumer. This protection would avoid any allegations of overcharging or deception.
  • Driver/owner liability shifting: If dealers loan or rent vehicles or allow test drives, this issue becomes highly important. Dealers should always have consumers sign an agreement stating, in the clearest terms, that consumers are fully liable for any consequences for taking custody of the vehicle.
  • Electronic contracting: Some consumer advocates remain concerned that UETA and ESIGN will allow for dealer overreach.
  • Electronic titling: The era of paper titles will one day disappear.
  • Payment assurance technology: Payment assurance technology essentially means starter interrupt devices, which are quite pro-consumer, albeit some legislators think otherwise. These devices increase access to credit and avoid dangerous repossessions.

There are numerous other issues which are trending in state legislatures. The list includes fair lending issues, fraudulent lien release/non-fraud lien release requirements, ignition interlock devices, lienholder notification, mechanics liens/impound fraud, repossession, bankruptcy/default triggers, repair/towing, excessive or fraudulent liens, retail installment sale requirement and restrictions, the Servicemembers Civil Relief Act of 2016, state legislation specific to vehicle sales and leasing, trade-in calculations, transportation network companies (e.g. Uber, Lyft, Sidecar), vehicle rescission/turn contract restrictions, dealer relations/franchise legislation, and contract restrictions.

The word cloud here would appear as:

Anticipated Prosecutorial Activity in 2017

Certain state attorneys general have clearly taken the lead in prosecuting dealers. New York Attorney General Eric Schneiderman leads the pack with four major settlements regarding ancillary products coupled with payment packing in the past several years. Plaintiffs’ counsel follow the lead of state attorneys general and certainly heed the four “D”s of cases to prosecute: discrimination, deception, dead ends and debt traps.

This word cloud for agents and dealers would appear as:

The basic checklist of what issues will be prosecuted against dealers in 2017, and which should be avoided, would appear to be:

  • Advertising infractions
  • Payment packing
  • Improper crediting of the trade-in, cash, rebate or coupon
  • Misrepresenting the outstanding lien on the trade-in
  • Misrepresenting bank fees, delivery fees and packs
  • Misrepresenting the residual factor
  • Misuse of “N/A” or use it as a term for “national average”
  • Intentionally confuse the money factor amount as the interest rate

Dealers also should endeavor to educate consumers on the basic myths of auto finance:

  • The residual is the amount the consumer will get back at the end of the lease
  • All leases provide equity build up
  • Consumers can get out of a contract at any time without added cost
  • All transactions have a three-day right of rescission

Dealers must also be sure their F&I teams are not engaging in any noncompliant behaviors. That list includes:

  • Overstate the value and benefits of extended service agreements, car care service plans, etch, and other ancillary products
  • Spot-deliver the vehicle with the intention of dehorsing the customer or never honoring the initial offer
  • Overcharge on state taxes and battery, tire and lease fees
  • Have the lessee pay all the taxes upfront in a state where it is unnecessary
  • Relate to the lessee that multiple security deposits will lower the lease rate when that benefit is not applied
  • Actively discriminate against discrete and insular minorities
  • Misrepresent residual-based financing
  • Obfuscate the terms and conditions of the many insurance products such as decreasing term life, credit life, or payment interruption insurance

And, unfortunately, there are many others. It should be noted that there is nothing new on this list which hasn’t been seen in years past.

The Bright Future of 2017

The bright future for dealers, from a compliance perspective, is that there will be fewer new compliance initiatives. In fact, existing compliance laws may be pruned and repealed. The checklist for this bright future is:

  • HR 1737 and SB 2663: The House bill has passed and the Senate companion bill is pending. This act would essentially nullify the disparate impact theory as it applies to dealers and financing sources.
  • CFPB v. PHH Corp.: This federal appellate court opinion ruled that the CFPB is unconstitutionally organized. The new chief executive will be able to treat the CFPB as he would any other government agency. The CFPB will no longer be shielded from executive branch oversight.
  • Financial Choice Act of 2016: This pending legislation will further erode the CFPB’s lending guidance.
  • New chief of executive, Congress and state legislatures

These new engines of government will not seek to add needless regulation and may even repeal the burgeoning compliance burden placed upon the dealer community. But some new laws will pass.

Nevertheless, prudence dictates that dealer compliance efforts should remain as a significant part of a dealer’s business protocol. And dealers need to remain vigilant regarding these matters since passing consumer laws is often championed by the media.

The bright future word cloud for 2017 is:

Govern yourselves accordingly.

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100 Years of Compliance History

100 Years of Compliance History

The National Automobile Dealers Association (NADA) will be celebrating its 100th birthday in January 2017. Founded in 1916, NADA has been a tireless advocate for dealer interests and was created to respond to regulatory and compliance issues. To place the origin of NADA in chronological perspective, here is a short list of vehicle-related historical facts:

1891: First car accident.

1904: First speeding ticket was written.

1914: First electric traffic light was introduced.

1914: For the first time, the federal budget included money to purchase two vehicles for the President of the United States.

Over the course of this NADA century, the business of selling, financing and leasing vehicles has become complicated. In 1940, for example, a dealer could sell and finance a vehicle using only one piece of paper. Today, it takes approximately 39 feet. The history of the car business is replete with a complex history of the development of compliance law.

A 2014 study conducted at the direction of NADA concluded that federal compliance alone costs dealers an average of $183,000 per rooftop or $2,400 per dealership employee. This large expense is due to the ever-increasing compliance burden which is born from the continual addition of new federal laws. One need only review this chronology to recognize this truth as it relates to financing and leasing vehicles.

Dealers are responsible for following these laws and regulations in addition to many others:

1812: Office of Foreign Asset Control (present form 1950 and 2001)

It’s hard to believe that a law passed during the War of 1812 could have any relevance to the car business. Economic sanctions against foreign states date to this war, when the U.S. administered sanctions against Great Britain in retaliation for the harassment of American sailors. Today, of course, dealers must not engage in business with specially designated nationals (SDNs) pursuant to this same law, which has been extensively revised over these many years.

1914: Federal Trade Commission (FTC) Act

The FTC Act created the Federal Trade Commission. Pursuant to the basic powers granted to the FTC to police unfair and deceptive acts and practices (UDAP), the agency has prosecuted many cases against dealers. Deceptive advertising is a major target. In addition, the FTC has mandated various regulations such as the Used Car Rule (see below).

1926: Federal Arbitration Act (FAA)

All dealers should avail themselves of arbitration. The FAA has been upheld many times in court challenges. Unfortunately, one of the consequences of the Dodd-Frank Act (see below) will probably deny the application of the FAA in cases where the arbitration provision contains a class action waiver.

1958: Automobile Information Disclosure Act (Monroney Sticker)

The lack of disclosure regarding vehicle prices led to this law, which requires vehicles to have a label placed on the vehicle with a manufacturer’s suggested retail price (MSRP) and other information.

1966: Modern Class Actions Rule

Class actions have been available for consumer redress for over two centuries. Every consumer attorney wishes to convert a consumer complaint into a class action as there are large fees involved. However, before the 1960s, consumers had to opt into a class action. Now, consumers must opt out. The modern rule assumes that all affected consumers will wish to join a class action.

1968: Truth in Lending Act (TILA) and Regulations Z and M

TILA had a major impact on how dealers transact business when they execute retail installment sale contracts and lease contracts. Disclosures, calculations, protocols and advertising have all been affected.

1970: Fair Credit Reporting Act (FCRA)

FCRA addresses the entire credit reporting process. Dealers must observe certain protocols for obtaining and using credit reports. As with the ECOA, below, dealers must send adverse action notices for credit declinations.

1972: IRS Form 8300 Cash Reporting Rule

Dealers must account for cash transactions of $10,000 or more and must follow certain legal dictates.

1972: Federal Odometer Act (FOA)

The FOA was passed to provide consumers with disclosures regarding the accurate mileage of the vehicles they are purchasing. Manipulation of odometers in vehicles is strictly prohibited and there are both civil and criminal sanctions for violating FOA.

1974: Equal Credit Opportunity Act (ECOA) and Regulation B

The ECOA’s primary purpose is to outlaw discrimination. Dealers are creditors and must judicially utilize the credit application process and provide adverse action notices should credit not be extended.

1975: Magnuson-Moss Warranty Act

This federal law requires dealers, as sellers, to provide written warranties with their vehicles when a warranty is included in the transaction regarding the vehicle itself.

1975: Holder Rule

This Rule provides that an exact disclosure must be included in a retail installment sale contract which explains that any valid consumer claim or defense which the consumer has against the originating dealer also apply to any assignee of the contract.

1985: Used Car Rule

This rule is truly draconian. When selling a used vehicle, the dealer must post a notice which describes the mechanical condition and any warranty terms which may apply. The font type, font size and the size and color of the paper are exactly prescribed.

1985: Credit Practices Rule

The Credit Practices Rule provides both substantive and disclosure elements for dealer contracts. For example, onerous conditions favoring dealers such as pyramiding late charges or confessions of judgment are illegal.

1991: Telephone Consumer Protection Act (TCPA)

The TCPA was recently revised, and along with other do-not-call laws, restricts how dealers may contact the public. This collection of laws is somewhat involved.

1999: Gramm-Leach-Bliley Act (GLBA)

GLBA requires dealers to implement the Privacy Rule and the Safeguards Rule. Disclosures and internal procedures at the dealership, in maintaining consumer records and sharing them, are strictly addressed.

2008: Red Flags Rule

The Red Flags Rule was created by the FTC, along with other government agencies such as the National Credit Union Administration (NCUA), to help prevent identity theft. However, it didn’t go into effect until 2011 due to industry resistance.

2010: Dodd-Frank Act

The Dodd–Frank Wall Street Reform and Consumer Protection Act is an omnibus act which created the Consumer Financial Protection Bureau (CFPB). The CFPB has extensive powers and a large budget. Richard Cordray, the CFPB’s Executive Director, identified the CFPB’s mission as policing the “Four Ds”: discrimination, deception, debt traps and dead ends. Franchise dealers are not subject to the direct jurisdiction of the CFPB thanks to the lobbying efforts of NADA.

In addition to the federal rules listed above, states have passed acts modeled after the FTC Act and utilize state UDAP authority. UDAP is a very broad and powerful source of authority. Violations of federal law are often considered violations of the state UDAP law even when the federal law doesn’t allow for a private cause of action. In addition, class actions routinely depend upon UDAP, as does the state attorney general.

The states have passed numerous laws over this century, such as the Uniform Commercial Code, retail installment sales and leasing acts, credit repair acts, and so forth, adding considerably to the compliance burden.

In reviewing this chronology, it is obvious that dealers have a very heavy compliance burden to discharge. And, as the century continued, more laws were added on a regular basis. It leads to two questions: Does the benefit to consumers outweigh the cost of this compliance burden? What other laws will be added to this list in the coming NADA century?

Unfortunately for the industry, one can safely predict more regulatory compliance will be added in this next NADA century. Compliance costs are here to stay. Govern yourselves accordingly.

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