Tag Archive | "Terry O’Loughlin"

O’Loughlin to Deliver Post-CFPB Keynote at Compliance Summit

ORLANDO, Fla. — Organizers of the annual Industry Summit announced that attorney and former dealer regulator Terrence J. “Terry” O’Loughlin will deliver the keynote address for the Compliance Summit portion of the event, which will be held Oct. 8–10 at the Caribe Royale Orlando in Orlando, Fla.

Compliance Summit includes a full-day of front-end compliance training — including workshops, dealer panels, and an interactive open forum — on Monday, Oct. 8, followed by a comprehensive review and certification testing by Automotive Compliance Education. ACE is offering a “Product Specialist” certification for the first time this year.

O’Loughlin, who serves as director of compliance for Reynolds and Reynolds, will kick off the Compliance Summit schedule on Monday at 9:05 a.m.

“Time and again, attendees tell us they remember Terry ‘The Regulator’ O’Loughlin, and not just for the content he delivers onstage,” said show chair David Gesualdo, publisher of F&I and Showroom and Auto Dealer Today. “His reputation precedes him, he speaks from experience, and he is firmly on the side of the rightminded dealer.”

Despite the sweeping changes sparked at the federal level by the election of President Donald Trump, including a defanged and renamed Consumer Financial Protection Bureau, O’Loughlin stressed that dealers must continue to invest in compliance training to protect their businesses as well as their customers.

“The law hasn’t changed, and many state attorneys general have said they will make up the shortfall left by the former CFPB, and there is an army of class-action attorneys who welcome these opportunities,” O’Loughlin warned. “In times of peace, prepare for war.”

Registration for Industry Summit 2018 is open at the event’s website. Register by Sept. 20 to enjoy a $100 early-bird discount. To discuss sponsorship and exhibition opportunities, contact David Gesualdo at (727) 947-4027 or via email hidden; JavaScript is required.

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Powerbooking and Its Evil Cousins

In my days with the Florida attorney general’s office, I was the “car guy.” I received hundreds of written complaints every year regarding vehicle transactions. One of my most amusing complaints — but an instructional one as well — was the one I received from a woman who had returned her leased sedan. Several months after the return, she received a letter from the leasing company, which assessed her $2,100 for a missing moonroof.

Her lease did indicate that a moonroof was one of the options on the vehicle. However, upon review of the subpoenaed deal jacket, there was no evidence of a moonroof. Of course, even before I perused the deal jacket, I was quite confident that this poor woman had been powerbooked.

I contacted the leasing company and the first two clerks told me that she owed the money for the missing moonroof. I was extremely amused by their response as I posed the question, “Do you honestly think that this woman would lease a vehicle and weld the roof closed?” Incredibly, the two clerks both said yes. Ultimately, I spoke with their general counsel, who understood the absurdity of the situation and waived the excessive wear charges. And, of course, the dealer had to pay damages to the consumer.

I was reminded of this incident recently by a conversation I had with a dealer consultant who also works with nearprime and subprime financing sources. He told me that he has been reviewing numerous transactions recently and concluded that as many as 70% of these vehicle sales were powerbooked. He also said he believed this nefarious practice is reemerging in the industry. If this consultant is correct, certain finance managers are challenging fate.

If finance managers don’t believe that they can face criminal charges over these infractions, they would be poorly advised. I prosecuted a case which led to a finance manager being incarcerated for eight years. He, too, didn’t think that he would ever be caught, tried, and sentenced.

Powerbooking Defined

To be clear, the term “powerbooking” refers to the practice by some dealers of misleading the financing source about alleged added options to the vehicle, which is the subject of the intended assignment of a retail installment sale contract or lease contract. With the fictitious addition of equipment and accessories to the vehicle, the financing source will pay more for the contract, since the asset is theoretically worth more. Both new and used vehicles can be the subject of powerbooking.

Furthermore, powerbooking is illegal, unlawful, deceitful, fraudulent, unfair, larcenous, and a material breach, among other accurate assertions. Finance managers could face time in prison if they engage in this practice.

In order to underwrite these transactions, financing sources require from the dealer a description of the vehicle including a posting of the accessorization. The full value is then ascertained by the financing source. Obviously, the inclusion of accessories such as a navigation system, remote starter, or a premium sound system will increase the value of the vehicle which will be the basis of the amount advanced by the underwriter.

This fraud may affect both the underwriter and the consumer. In the case of the underwriter, it is accepting an assignment of a retail contract or lease of a vehicle which has nonexistent accessories. It is not getting what it bargained for.

Consumers are not always careful in reading the documents which they sign at the dealership. They may sign a buyer’s order, for example, which lists these nonexistent accessories. Hence, they are victims of both a theft and a fraud.

Civil and Criminal Law Charges

Powerbooking is a pernicious act in the industry and the penalties can be severe. It may be instructive to understand the relevant law.

The great distinction between civil and criminal law remedies is the loss of one’s liberty. Someone who is convicted of a criminal infraction may go to jail for a specified period of time. Generally, if one is incarcerated for less than a year, it is a misdemeanor, whereas if one is incarcerated for more than a year, it is considered a felony.

This distinction also includes the severity of the crime, which, in these cases, would mean the amount of money involved. For example, if it is a $300 fraud, it may be a misdemeanor; a $1,000 fraud might constitute a felony. In other words, if a finance manager powerbooks a transaction for $1,000, he could spend a year in jail, depending upon that state’s criminal code.

Relevant civil charges for powerbooking include civil theft, civil fraud, civil RICO (defined below), material breach of contract, recourse, and a violation of the unfair and deceptive trade practices act. Suffice it to say that the standard of proof for a civil allegation is less than the standard is to prove a criminal violation.

Relevant criminal charges for powerbooking include theft, fraud, and RICO. In proving a criminal infraction, the prosecutor has a much heavier burden than in a civil matter.

Depending upon who prosecutes the case will determine which of these charges or allegations may be advanced. For example, the underwriter may advance all of them except RICO, whereas the attorney general, state attorney, or district attorney could advance RICO, theft, and fraud. UDAP (defined below) is generally prosecuted by the state attorney general.

In both criminal and civil cases, the finance manager must have the requisite intent and must complete the act. In other words, the finance manager must have purposely performed the act, although gross negligence can rise to being considered “intent.” Finance managers should understand the following terms and their definitions as they relate to them:

  • Material breach of contract: If a finance manager significantly fails to perform a key term or condition under the contract, which would allow the underwriter to sue the dealer for various monetary damages and termination of the contract, it is characterized as a material breach. Powerbooking is such a breach since the financing source is not receiving the vehicle with all the indicated options as promised.
  • Recourse: The right of the underwriter to seek the complete or partial return of any advanced funds.
  • Fraud: A known false statement, or a material omission, by the finance manager intended to mislead a consumer to rely upon that statement or omission.
  • Theft: If a finance manager permanently or temporarily takes a consumer’s property or money it is a theft. Theft includes larceny and the crime of false pretenses.
  • RICO: RICO stands for the Racketeering Influenced Corrupt Organizations Act. It allows for various enhanced penalties including forfeiting all the dealer’s inventory and assets. It is a grave charge.
  • UDAP: The Unfair and Deceptive Trade Practices Act allows for penalties, damages, and injunctions. It is the favorite statute of the state attorney general.

The Evil Cousins of Powerbooking

Offering and selling ancillary products to consumers as part of the overall vehicle transaction can be extremely beneficial to the public. In the vast majority of cases, the finance manager executes all the proper documents and the third-party provider of the product, such as the GAP or a service contract provider, is appropriately remunerated and the contracts are delivered.

However, in some cases, the finance manager never pays or notifies the third party and pockets the premium or payment. In the alternative, the consumer is misled into believing in a nonexistent third-party provider. The finance manager hopes that the consumer never attempts to utilize the benefits of the product in these cases or discharges the work at the dealership.

A further dishonest related practice is adding these types of ancillary products without the consumer being informed of their existence. This could rise to being payment packing in some cases.

All these evil cousins can be both civil and criminal violations.

It is said that 90% of all attorneys give the other 10% a bad name. The reverse could be stated concerning the car business: 10% of the dealers give 90% of the dealers a bad name. If a dealer is identified as having a finance manager on his staff who powerbooks, he immediately becomes a member of that 10% — an unenviable position.

Wise dealers should be monitoring their deal jackets for any of these practices and proceeding appropriately with their legal counsel should they be found. And finance managers who engage in these practices are hereby warned and should cease and desist.

Govern yourselves accordingly.


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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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Perception Can Be Reality — and Liability

In my attorney general (AG) days, it was a running joke that taking legal action against dealers had no downside, regardless of the merits of the case. We joked about generating newspaper headlines that might read, “Attorney General Rips Off Car Dealers.”

The belief was that, no matter what cause of action or how flimsy the evidence, filing a case against a car dealer would always be a victory for the public. Dealers could always be found liable. As a professional working in the P&A segment, you can’t help but be concerned. Let’s take a closer look at how car buyers view our industry, how that perception affects the number and severity of legal and regulatory actions, and how it can be improved.

Casual Dismissal

The same perception of automobile dealers held by AGs and prosecutors can be said about private plaintiffs. It has risen to an article of faith, for example, that a spot delivery is always fraudulent, a so-called “yo- yo” deal. At one of the auto finance roundtables the Federal Trade Commission (FTC) held several years ago, I spoke with a highly-regarded consumer attorney who testified that he never saw a case of a spot delivery which wasn’t fraudulent.

I knew this attorney and discussed his assertion after his testimony. I asked him how many spot delivery transactions he had seen and he said several hundred. I replied by saying that there are hundreds of thousands of spotted transactions annually. Certainly he was not asserting that they are all fraudulent? He would not recant. I also told him that the Florida AG’s office had examined in excess of 100,000 transactions and determined that fraudulent spot deliveries were a very small percentage; in fact, a far smaller percentage that I had envisioned. Yet, today, spot deliveries are still casually referred to as “yo-yos,” which is both pejorative and inaccurate.

The CEO of a major vehicle company once remarked to me that, if a dealer ever appears in front of a jury, the case is lost and the damages will be substantial. “Just about everyone thinks that they have been ripped off by a car dealer,” he said.

Litigating issues in court is difficult for dealers because of the entrenched bias against them. This bias is the consequence of the number of complaints filed by consumers against dealers and the chronic evaluation of the trustworthy status of car salesmen.

Actions and Complaints

Dealers remain a favorite target for regulators. For many years, the Consumer Federation of America (CFA), a consumer rights organization, and the North American Consumer Protection Investigators (NACPI), an association of state and local consumer protection officials, has produced an annual listing of the Top 10 consumer complaints. The author was a participant with NACPI for many years.

Thirty-seven agencies received a total of 281,639 complaints for the year of 2014 to rank these industries regarding the number of consumer complaints. The rankings for 2015 are currently being compiled and will be made available in the coming months. So here are the Top 10 consumer complaints for 2014:

  1. Automobile
  2. Home improvement
  3. Credit/debt
  4. (tie) Retail sales
  5. (tie) Utilities
  6. Services
  7. Landlord/tenant
  8. Home solicitations
  9. (tie) Health products and services
  10. (tie) Internet sales
  11. Fraud
  12. Household goods

This survey has been taken for many years, dating back to the 1990s, and as long as the author can remember, automobile complaints have been No. 1 on this list. It should be added that these results vary by state. In Michigan, for example, automobile complaints are in fourth place. In Missouri, they aren’t listed in the top ten postings. And, for the FTC rankings for 2015, automobile complaints are in eighth place. However, in Ohio, automobile complaints are No. 1.

Ranking Professions by Honesty and Ethics

For over four decades the Gallup organization has been polling the American public to determine how professions are regarded in terms of honesty and ethics. The 2015 had a surprise for the automotive industry: Vehicle sales professionals are no longer in last place for perhaps the first time in 40 years. The bad news is they are now tied with telemarketers, senators and congressmen for the second to last spot. (Lobbyists have moved to the bottom.)

  1. Nurses
  2. Pharmacists
  3. Medical doctors
  4. High school teachers
  5. Policemen
  6. Clergy
  7. Funeral directors
  8. Accountants
  9. Journalists
  10. Bankers
  11. Building contractors
  12. Lawyers
  13. Labor union leaders
  14. Business executives
  15. Stockbrokers
  16. Advertising practitioners
  17. Car salesmen (tie)
  18. Telemarketers (tie)
  19. Members of Congress (tie)
  20. Lobbyists

Why does this matter? Dealers are weary of hearing about the ever-increasing demands of compliance. But they will continue to be weary, since there will never be an end to such regulation. Being No. 1 in consumer complaints and being viewed dismally in terms of ethics and honesty greatly spawns investigations and lawsuits.

As big targets for being sued and paying substantial legal damages, dealers need to actively reduce and control the complaints which are filed with government agencies and attorneys. Dealers also need to improve the perception that they are not trustworthy.

This litigation problem will worsen — and may worsen significantly — when arbitration will no longer be available for installment financing and lease transactions. The Consumer Financial Protection Bureau (CFPB) will be taking such action probably in 2017. Every consumer attorney will seek to transform a single complaint against a dealer into a class action, and many of them will be successful in doing so due to the wealth of complaints filed by the public and the unfortunate perception that dealers aren’t honest in their business transactions. Attorneys love to refer to developments of this nature as “opening the floodgates of litigation,” and some welcome the opportunity for new business.

Top Ten Suggested Remedies

Dealers need to take action to rebut these false impressions and prepare for the future. Here are 10 short and long-term strategies which may help with these challenges:

  1. Complaint management program: Dealers should scrupulously redress all consumer complaints before they are filed elsewhere. They should have a complaint protocol at every store.
  2. Mediation: In place of arbitration, dealers should consider implementing a mediation program.
  3. Be more self-regulating: All dealers should be active participants in their trade organizations and 20 Groups, and they should advance fair, legal and ethical practices.
  4. Brag: Dealers contribute substantial sums of money to charities and local community interests. They also are enormous advertisers in the media. The media should be encouraged to report about all the good purposes to which dealers contribute.
  5. Compliance and ethics training: Training and ethics programs should be implemented by every dealer. These programs include NADA University, NIADA’s Certified Dealer program, AFIP, and NAF’s Consumer Credit Compliance Certification Program. Customers should see signs, placards and notices about this training at the store, on websites, and in other dealer materials. When interacting with dealers, consumers should be acutely aware of these dealer efforts.
  6. Trade associations: Our industry trade associations (e.g., NADA, NIADA, ACVL, NVLA, state ADA’s, NAF, NABD) should continue to professionalize the image of dealers everywhere, and all dealers should support these organizations.
  7. Act more like Congress: As indicated above, congressmen are tied with car salesmen on the list of least trustworthy professions. Unlike car salesmen, however, congressmen get reelected 96% of the time. Customers rarely, if ever, return to the same dealer at that rate. How does this happen? Voters take possession of their congressmen (e.g., ‘“He’s my Congressman.”‘ which is in contrast with the entire Congress. It is similar to other statements such as “He’s my attorney or doctor.”) Dealers need to personalize their services so that a customer may be tempted to say ‘“He’s my dealer.”‘ or ‘“He’s my salesman.”‘ Consequently, customers will be far less likely to file a formal complaint and will return to purchase other vehicles, as well as recommend that dealership to other people.
  8. Emulate Florida law: A wise law was inspired thinking by the FADA and it prompted the Florida legislature to pass it several years ago. Section 501.98, Florida Statutes, requires that, at least 30 days before bringing any claim against a motor vehicle dealer for an unfair or deceptive trade practice, a consumer must provide the dealer with a written demand letter stating the name, address, and telephone number of the consumer; the name and address of the dealer; a description of the facts that serve as the basis for the claim; the amount of damages; and copies of any documents in the possession of the consumer which relate to the claim.

In other words, Florida dealers will have a chance to resolve a consumer complaint before a case is filed. In the absence of arbitration, this law is all the more important. All states should pass such a law.

  1. License all sales professionals: Professionalizing the sales force and having a mechanism to eliminate people who are ethically challenged would improve the public perception of our trade. This licensing could be quite simple and inexpensive. Once obtained, licenses should be posted at the store.
  2. License all F&I professionals: Finance managers should have the same status as real estate agents or titling agents. Finance managers should be required to understand their ethical and legal duties. Reasonable cost-efficient testing and licensing, paid for by adding the cost to dealer fees born by customers as part of the transaction, should be the objective. The license of the finance manager should be posted for customers to see.

It is not an easy task to blot away past perceptions. However, in an increasingly sophisticated and litigious marketplace, not improving one’s reputation and preparing for the legal future would simply be unwise. Govern yourselves accordingly.

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O’Loughlin to Tackle ‘Rules and Regulations’ at Compliance Summit

LAS VEGAS —Terry O’Loughlin, director of compliance for Reynolds and Reynolds and a former regulator, will serve as a featured speaker at the upcoming Compliance Summit Las Vegas, organizers announced Tuesday. The conference will be held Aug. 29–30, 2016, at Paris Las Vegas, as part of Industry Summit.

“Compliance is one of the more unrelenting — and daunting — responsibilities that dealers face. Implementing the right policies and tools in compliance, along with applying best practices, all are proven strategies to help dealers meet those responsibilities, especially considering the likelihood for ever-increasing regulation and scrutiny,” said O’Loughlin, who served in the Florida attorney general’s office before joining the Reynolds Document Services group in 2006 as director of compliance. “Compliance Summit promises to focus on compliance as a critical business management issue for dealers, and I’m pleased to join a number of my professional colleagues in presenting at the conference and being part of the event.”

O’Loughlin’s presentation will be followed by a panel discussion; the event will also include featured speakers and panels dedicated to Your Responsibilities and Easy-to-Implement Processes and Controls and, to conclude the educational sessions, an open forum called “Is It Compliant?”

“This is not Terry’s first rodeo, so to speak, and past attendees of Compliance Summit have singled him out as an informed and passionate speaker,” said David Gesualdo, show chair and publisher of Auto Dealer Today and F&I and Showroom. “When a former regulator and current industry advocate speaks, we are wise to listen.”

Registration for Compliance Summit Las Vegas is open at the event’s website. Attendees are welcome to take part in the rest of Industry Summit, and those who register by July 29 will enjoy a $100 discount. Attendees are also invited to sit for the Certified Automotive Compliance Specialist exam for no additional charge.

For more information about Compliance Summit, including sponsorship and exhibition opportunities, contact David Gesualdo via email hidden; JavaScript is required or at 727-947-4027.

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Compliance Roulette

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:

  1. Pay attention to the currently hot issues and have a remedy, or at least plausible deniability, regarding them.
  2. A compliance management system
  3. 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

  • Recalls

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.

  • Arbitration

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.

  • Discrimination

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.

  • Arbitration

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.

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