2017 was a tumultuous year in the car business. In other words it was business as usual. Dealers have become accustomed to coping with major changes. 2018 should not be much different in terms of challenges, but it can be rewarding. Here are eighteen issues to which you should give attention in 2018.
FEDERAL GOVERNMENT
Businesses have become accustomed to federal policies as a major factor in their fortunes, and car dealerships are no exception. Whether it is general economic policies that affect consumer demand or micro management through over-regulation, dealers have coped for decades. The Trump administration push for deregulation, and the ingrained bureaucratic backlash to that, will affect dealers. So will the tax bill that will hopefully spur a general economic upturn, and perhaps counter the beginning of the cyclical sales downturn that dealers began to experience in 2017.
- Discrimination and Harassment. Whether it results from anti-Trump attacks for his alleged treatment of women, as some claim, or Hillary Clinton’s loss removing the cover for some politically protected violators, as others claim, the story of the latter part of 2017 was the behavior of sexual scofflaws. Dealers cannot ignore that the constant publicity about media, news, and political celebrities abusing women can lead to heightened sensitivity in the workplace. Are your policies and procedures to protect against claims of discrimination and harassment up to date? Have you emphasized to your employees the importance of bringing complaints to their supervisor or someone more senior in the organization? Have you trained your management staff to deal with complaints by listening, investigating, coming to a conclusion, and taking action? Now is the time to review your policies, practices, and training to be sure they are current.
- Deregulation – Personnel Matters. The Trump administration push for deregulation has so far been felt most dramatically in employment law. The Obama administration’s doubling of the wage threshold for the white collar exemption, in trouble before the 2016 election, was killed, along with the Obama-proposed reporting of wages of each employee on EEO-1 annual filings. New personnel at the top of departments responsible for labor matters will continue the change. The most visible changes will be at the National Labor Relations Board where a new Republican majority and Republican general counsel will end the attack on sensible handbook provisions that allegedly harmed concerted activity and stop the rise of the joint employer doctrine. If you adopted or changed your handbook during the Obama years, it is now time for a review for the latest protections.
- Deregulation – Arbitration. In 2017, Congress wielded the previously little used Congressional Review Act to kill regulations. For dealers, the CRA was used in 2017 to kill the Consumer Financial Protection Bureau rule preventing finance sources from enforcing class action waivers in arbitration provisions. This confirms the viability of arbitration, including class action waiver provisions. If you do not use arbitration provisions in your deal documents, consider whether you should do so. If you use an arbitration provision, you may wish to review it to be sure it protects you against legal challenges to invalidate it.
- In the most visible legislative success of the Trump administration, Congress passed tax reform. In 2018, this will have a major impact on your business. It may require structural changes to your business or less drastic changes. To take advantage of the new law you will likely have to take steps. Consult your tax advisor.
- Immigration Enforcement. The Trump administration characterizes itself as a law and order administration, particularly on immigration. The most important immigration related compliance matter for car dealerships is completion and maintenance of I-9 forms. Be sure your processes are in place.
- Cash Reporting. As part of a law and order administration, the Trump IRS will likely continue the federal government’s long standing emphasis on audits of cash reporting to make sure businesses are doing their part to track bad guys. You should have a written policy for reporting of cash of more than $10,000.00 and prevention of money laundering, and your employees should understand it.
- FTC: The Fed Cop is on the Beat. One agency whose priorities are not likely to change during the Trump years is the Federal Trade Commission. Empowered by the Dodd-Frank financial reform legislation to oversee car dealers, the FTC is the compliance agency of primary concern for dealers. The FTC’s most active regulation of dealer activities has been in advertising, but it has also taken action on spot deliveries, sales and F&I practices, safety claims like certification on sale of used vehicles with open recalls, and consumer privacy issues. Simply finding your business in the FTC’s sights can tie up a dealership as it goes through an investigation, and a consent order against a dealership can dramatically affect ongoing business for ten years. Understand the FTC hot buttons, and make sure your compliance policies are in place to protect your dealership.
- The Swamp Strikes Back: the DoD, the CFPB, and the Military Lending Act. The Military Lending Act is more than a decade old and was enacted by Congress to protect service members against predatory practices in activities like title loans and pay day loans. Sales of motor vehicles on credit were exempt. At the end of 2017, the Department of Defense, reportedly at the behest of the CFPB, issued a regulation that the sale of vehicles financed including GAP or credit insurance will be subject to Military Lending Act requirements. The Military Lending Act requirements are daunting for dealers since it prohibits extension of credit over 36% (including premiums for GAP and credit insurance and other fees not calculated in the TILA APR), requires complicated oral and written disclosures, and invalidates arbitration provisions with class action protections. Dealers should avoid the application of the Military Lending Act in sales of vehicles to active military and dependents by not including in the financing GAP or credit life or A&H insurance.
FRANCHISORS
Dealers are used to factories using the good times to consolidate their power over dealers. The last few years have not been an exception.
- Back Your State Association. Polarization of political views is affecting state politicians as well as national politicians. Newly elected officials’ interests may not necessarily coincide with the interests of dealers. Dealers can only expect to protect against negative legislation challenging franchise and licensing laws or gain improved protections if their state elected officials understand the issues. That is the business of your state association, but it cannot do it without your help. Your state association needs your support, both financial and through personal activism in contacting and getting to know your representatives. The stakes have never been higher.
- The Importance of Franchise and Licensing Laws. In dealing with your state elected officials, know the importance of franchise laws and licensing laws. Those are the primary targets of direct sale manufacturers, online brokers, and virtual dealers who want to take your business. There is a reason brick and mortar dealers are required by licensing laws: if something goes wrong, the customer knows where to go for relief. There is a reason for franchise laws: left to their own devices, factories will eliminate local businesses watching out for consumers and erase their millions in investments and years of work when the latest distribution fad has them thinking they no longer need franchisees. Franchise laws and licensing laws protect competition, protect consumers, and are in the public interest. Understand the importance of the laws so you can educate your representatives on their importance.
- Your Primary Market Area. The primary market area as defined by your manufacturer has never been more important. Factories have always relied on a claim that a dealer’s failure to adequately serve its market is a basis for termination. However, factories increasingly use dealer sales effectiveness as a qualifier for incentives or the ability to buy new dealerships. If your PMA is too large, you will have difficulty being sales effective. If your PMA is too small, you will have difficulty obtaining factory leads or doing special events. If you believe your PMA is misdefined, especially if there are areas in which you have no sales advantage, ask for a redefinition. If that is denied, challenge the PMA definition using state procedures.
- Warranty Reimbursement. Virginia law provides for retail reimbursement for labor and parts. Virginia protects your rights, so use them. You will be surprised at the dramatic increase in gross profit in your fixed operations departments.
- Incentive and Warranty Audits. With increased compensation on warranties and increased factory reliance on incentives, an audit is a profit center for your manufacturer where anything it can charge back goes to its bottom line. Protect yourself. Understand your incentive programs. Understand warranty requirements. Most important, understand your audit protections under state law. When a manufacturer comes for an audit, someone should be in charge to present the dealership’s position. Your manufacturer may only look back for six months, unless it can show fraud. Challenge any results with which you do not agree. If an audit chargeback is imposed, use your franchisor’s internal processes to challenge it. If you still do not like the result, challenge it through the state provided process.
- Recalls and Audits. Recalls have been the hot story in the car business for several years. Have a recall policy in place. New cars with open recalls should be grounded, and the inventory records for the vehicles should reflect that so they are not delivered. On used vehicles, fix the open recalls you can and disclose those you cannot. Have service advisors check and advise service customers of any open recalls on vehicles of your line make. Most important, be careful to document recall repair work properly. Recalls are costing factories billions. They are using the audit process to recoup recall payments to dealers who allegedly don’t cross the Ts and dot the Is. Vigorously challenge any chargebacks because of allegedly improperly handled recall repairs.
OPERATING ISSUES
Operating issues in 2018 may be as challenging as any you have ever seen. It is hard to predict the market. In 2017, dealers started to see a cyclical downturn, and some predict that will continue with expected interest rate increases in 2018. However, with the tax bill, deregulation, and generally increasing consumer confidence, will that cyclical downturn be offset?
- Expenses from the Good Times. The last few years have been good times for car dealers. With increased gross profits often come increased expenses. It is time to give attention to expenses. Do an in depth analysis, determine where cuts can be made, and take the steps necessary if the cyclical downturn negatively affects sales.
- Give Attention to Cyber Security. It is not just big companies and government that are targets of hackers and other virtual malefactors. Bad guys target everyone, including car dealerships. Work with your computer vendor to make sure you have the latest in protections against cyber intrusion. Don’t forget the old fashioned remedies such as regularly changing passwords, guarding against employees sharing passwords or leaving them exposed, and limiting web surfing that leaves your system open to attack. Be especially careful on methods of payment. Dealers doing large transactions have been victimized by hackers who have taken residence in their systems to send false wire instructions for accounts that immediately get emptied. When doing deals, especially larger deals or deals involving multiple vehicles, do not accept payment instructions through the internet unless you call the person with whom you are doing business at a number you recognize to verify the instructions.
- Advertising and Fees. Federal and state advertising regulators have been active, especially on “bait and switch”. This is defined by regulators as advertising prices at which you do not intend to sell vehicles. One tactic of which they are critical is advertising a price and then bumping it with fees for reconditioning and sales expenses not permitted by law. Litigation over doc fees around the country has reduced, but litigation and regulatory actions are bound to spike if dealers advertise at prices they will bump by fees not authorized by state law. The Virginia Motor Vehicle Dealer Board has committed to educating and then penalizing dealers who advertise used vehicle prices with disclaimers that reconditioning fees will be added. It has also indicated that field agents my review sales files on dealers who advertise this way with a possibility of further penalties for each deal done adding reconditioning fees separately on used vehicles.
- Supplier Policy. Who in your dealership can contract with suppliers? Who reviews your contracts with suppliers? Limit those who can sign and make sure they know the landmines. That is especially the case with large expenditures such as a computer system. Review carefully every supplier contract. Ask yourself why you should sign a long term contract, or a contract with an automatic roll over for a lengthy period, or a contract that requires you to go to a faraway state if a conflict occurs. If you are unsure about the effect of contract terms, seek legal advice.