I often think that those dealers who become embroiled in litigation, or are the subject of a government investigation, are sometimes simply the ones who, by the spin of the roulette wheel, attract the attention of a plaintiff’s attorney or a government regulator. Even the most ethical dealers and well-run dealerships will make legal errors which could be the subject of a lawsuit.
I suspect that I could audit any dealer and find some form of infraction due to the many onerous regulations which dealers now must endure. According to a recent study, compliance costs alone amount to more than $2,400 per employee or $183,000 per store. (Does this huge cost truly increase consumer protection proportionate to that cost?)
Avoiding the Roulette Effect
Obviously, running a perfectly squeaky clean organization, without making any compliance mistakes, would produce this result. But such perfection is simply illusory. Dealers need to undertake a three-prong approach to the roulette challenge:
- Pay attention to the currently hot issues and have a remedy, or at least plausible deniability, regarding them.
- A compliance management system
- Periodic in-house audits with an established and comprehensive checklist so nothing is missed.
Only the first prong will be addressed in this article.
The Hot Issues
Over the past 25 years or so, certain issues seem to appear, disappear and are revived again. For example, around the turn of the century, there was a series of alleged discrimination class actions filed against captive finance companies where the settlements were for a 10-year period with the reserve being capped. A similar issue reemerged with the CFPB, in the past few years, regarding disparate impact, another alleged discrimination allegation which affects dealers.
The use of used-car buyers guides has been policed intermittently, but not routinely, from time to time. The FTC revisits this matter periodically. State attorneys general became interested in buyers guides a number of years ago as well. They convened a number of investigations of dealers all across the country. Those investigations were very quickly abandoned.
Advertising enforcement has recently been a high priority for the FTC; and on the state level, it is policed vigorously and then not so much. I would estimate that there are over 50 of these types of issues which are sometimes “hot” but at other times grow quite cold. They only emerge because they attract someone’s attention based upon complaints or some attorney, regulator or organization targets them.
Recent Cases and Regulatory Actions
This is certainly one of the hottest issues facing dealers presently. There are various regulatory and legislative proposals being considered, and there have been enforcement actions taken when dealers indicate to consumers that remedial actions have applied in cases where vehicles are the subject of a recall.
Examples include certified pre-owned programs or when a used vehicle is presented to a consumer with the assertion that the vehicle has been mechanically evaluated. In these cases, the dealer should check to see if the vehicle has been recalled and what corrective measures should be implemented. In addition, dealers should document with the consumer how they are addressing the potential of a recall in a sale and in the repair shop. Finally, dealers must track this issue for any legal developments.
- Documentary fees
A state supreme court decision from last year ruled that a closing fee not directly related to the expenses incurred in closing a sale may be subject to legal action and damages. In other words, a cost accounting analysis of a documentary fee must demonstrate that it relates to the expense of a closing.
Remarkably, the state law did not provide an explicit definition, but the court found one: In states where such a definition is lacking, dealers must evaluate what they can include in this amount. They also can ask their dealer associations to lobby the legislature and include “profit” as one of the acceptable components of a documentary fee.
The CFPB’s Nine Priority Goals and Director Cordray’s Four Ds
The Consumer Financial Protection Bureau recently announced its nine goals for the next two years. Fortunately for dealers, only three of these issues may affect them. For the past four years, the CFPB’s director, Richard Cordray, has summarized the bureau’s emphases using an acronym, the so-called “Four Ds.” There is overlap between the goals and the “Ds.”
Once again, it’s time to applaud the NADA for preventing franchise dealers from being under the direct jurisdiction of the CFPB in the Dodd-Frank Act. Actions of the CFPB may, tangentially, still affect dealers, however.
3 of 9
The three issues on this list which affect dealers are arbitration, consumer reporting, and debt collection.
It would appear that arbitration will either be eliminated or truncated by the CFPB to reduce its efficacy vis-a-vis dealers. However, until then, every dealer should have an arbitration agreement with his customers. The major benefit will be to avoid class actions. Even if the CFPB eliminates arbitration entirely, it will probably be prospective.
A dealer’s past transactions may possibly remain protected by the arbitration language. The arbitration language which a dealer uses should be recently drafted, be subject to only the Federal Arbitration Act, not state law, and have some history of being tested in the courts. Some zealous attorneys have drafted language which so much favors the dealer that they are not enforced by the courts as they are considered unconscionable. In addition, the arbitration language should be the same in whatever document it appears. Plaintiffs’ attorneys despise arbitration because it prevents them from filing class actions, which is a compelling reason for dealers to use it.
- Consumer reporting
There are various issues which need to be addressed regarding this topic. Dealers need to know and understand adverse action notices, accessing credit reports, and the correct use of credit applications. Dealers should be using legally competent adverse action forms and credit applications. Obviously, reporting inaccurate information may invite legal action.
- Debt collection
Dealers who have buy here, pay here (BHPH) operations need to know the law in this area and observe it. Recent actions against a major BHPH dealer should underscore this issue. Constant harassing telephone calls or threatening false arrest, calls to the consumer at work or to the consumer’s personal references can be a violation.
The Four Ds
- Deceptive marketing
The basic definition in consumer law for deception is this: Does the action have the tendency or capacity to mislead a consumer? Follow this rule and, in most cases, there won’t be an allegation of deceptive marketing.
- Debt traps
Some BHPH transactions might rise to being labeled debt traps. The remedy for dealers is to serve their customers as caretakers, not undertakers, as a prominent advisor to the industry has quipped.
- Dead ends
Dead ends are debt collections as discussed above.
Every dealer should now be acquainted with this issue. And, every dealer should also be acquainted with, and implementing, the NADA’s Fair Lending program which is almost a perfect foil and solution to this preposterous allegation by the CFPB.
Consumer Car Law Attorney Associations
It may surprise some dealers that there are over 1,000 attorneys who practice consumer car law, which means their practices are based upon suing dealers for various alleged infractions. One of these associations is having a conference shortly and announced its agenda of targeted dealer practices. The hot issues which these plaintiffs’ attorneys are targeting are arbitration, “yo-yo” financing schemes, insurance and extended warranty scams, and repossession, GPS and starter-interrupt issues, based upon their agenda.
Please see above.
- Yo-yo financing schemes
This is the pejorative term for the perfectly legal practice, in most states, to spot deliver a vehicle. Dealers need to document the spot delivery with an accurate written description in the Buyer’s Order or a separate document so that there is no misunderstanding.
- Insurance and extended warranty scams
To avoid legal battles regarding ancillary products, dealers need to be certain they are appropriate for the consumers they are serving and they are documented and explained.
- Repossession, GPS and starter-interrupt issues
Starter-interrupt and GPS devices help consumers who otherwise couldn’t purchase a vehicle since they allow BHPH dealers to accept greater risk. It frees up capital since dealers can locate the vehicle and repossess it without other costs such as skip tracing. Once again, dealers should document the existence of these devices and not charge consumers for them.
In conclusion, forewarned is forearmed. Smart dealers are always prepared for the exigencies of doing business. Having a remedy for these current hot topics is part of this smart process. Govern yourselves accordingly.