Oh, what a difference a few years make. In late 2008, many auto pundits lamented that we might never again see sixteen million annual new vehicle sales. Proving that their memories are as faulty as their predictions, in 2012 they told us that, just like they always expected, sixteen million annual sales are on the horizon. 2013 will probably see the industry get close to that magic mark, and maybe even hit it if the folks in Washington decide to stop scaring potential buyers. While the sales atmosphere for dealers is the best in half a decade, the targets on dealer rooftops at which federal regulators, state attorneys general, consumer watchdogs, and class action lawyers are aiming have never been larger. Dealers are enjoying great profit opportunities, but if they don’t give attention to expanding compliance and operational challenges, they are likely to give a healthy portion of that back. Here are thirteen items to which you should give attention in ’13.
Regulatory Issues
1. The FTC is here, and they aren’t just trying to help. The FTC was granted broader authority in the Dodd-Frank financial reform legislation to enforce laws affecting dealerships. The agency received additional funding to support its auto dealer activities that it used in 2012 and is likely to use to increase activities in 2013. One of the areas in which dealers can expect the FTC to be active is advertising. In 2012, the FTC issued complaints against, and announced consent orders with, a number of dealers who advertised some variation of the pitch that they would “pay off your trade no matter how much you owe”. Those dealers also were challenged on their internet advertising practices and on their disclosures of necessary financing terms. Dealers should not be surprised by further FTC challenges to dealer advertising. TILA advertising violations are at the top of the list, and alleged deceptive advertising practices like the failure to disclose conditions to offers are also items of interest. Check your advertising in all media that you use, particularly the internet where the FTC may very well concentrate its efforts.
2. Dealer finance reserve polices may come under attack. You can be sure that the FTC is watching carefully to see if the Consumer Financial Protection Bureau will impose on finance sources limits on dealer reserve in the paper that they buy. While many in the finance world believe that dealer reserves will eventually become extinct, those proponents of flat fees simply do not understand the impact that will have on sales of new vehicles. F&I personnel who are no longer adequately compensated may very well not fight to make the tough deals, and that will have an adverse impact on sales. Watch carefully for developments and support your national and state dealer associations. Pitch in to help in the event of any request for assistance in explaining the importance of dealer reserves to regulators, legislators, and opinion makers. And be vigilant in your dealership for “disparate impact.” One of the prevalent criticisms of dealer reserve is that dealers can use it to the disadvantage of minorities – leading them to pay more for credit than other customers. Have a policy in place for dealer reserve – perhaps a fixed starting spread for negotiating with all customers that can be adjusted based on factors unrelated to the possible protected status of your customer such as the need to meet competitive offers.
3. The FTC is likely to check whether dealers are using and updating their privacy policies. In 2012, the FTC sued a dealership that had peer to peer software loaded onto its system. This opened up the dealership’s customer information to any person on the P2P network. Customer privacy issues have been a top priority of the FTC for years, and 2013 likely will see increased regulatory activity. When was the last time you reviewed and updated your information safeguards and red flags policies? Both programs must be regularly reviewed and updated, and dealers should not be surprised to find the FTC looking to find whether they have been. Of particular concern will be electronic protections for customer information since methods of electronic ID theft are proliferating with alarming speed.
Franchise Issues
4. Use your hard-won franchise rights. Virginia has one of the strongest and most effective franchise statutes in the country. Virginia dealers worked hard to convince legislators of the need to level the playing field. But these rights are only as good as your willingness to use them. Challenge franchisor threats and performance criticisms. Often these communications are part of a process of building a file to support termination, to add another point, or to take some other action damaging to your business. If a manufacturer is threatening you or strong-arming you, answer every communication and explain why you are complying with your franchise agreement and state law. Make sure that the factory lawyers who review your file when they are asked to comment on the strength of a potential case involving your dealership understand the strength of your position.
5. Protect your rights in a manufacturer’s audit. 2012 saw a continuation of the trend of increasing manufacturer audits of dealers. In some cases, dealers saw themselves faced with crippling chargebacks. Before a factory audit commences, review state law, particularly how far back a manufacturer can go in doing its audit. Virginia limits sales and service audits to six months, which is the strongest protection for dealers in the country. Make sure that the auditor stays in bounds. If there is an audit with which you disagree, review the procedures for an internal challenge to the franchisor and use them. Don’t just say that you challenge the results, that they are not fair, and that you’re a good dealer who doesn’t deserve such harsh treatment. That will get you nowhere. Make a detailed submission going category by category, and item by item if necessary, explaining why under the manufacturer’s policies, as affected by state law, the chargeback is wrong. If you get an unsatisfactory answer from your manufacturer on that challenge, use your rights to challenge a chargeback to the DMV. And don’t forget, Virginia law prohibits a manufacturer from processing a chargeback and debiting your account while you are engaged in the manufacturer’s review process and the DMV hearing process.
Lender Relations
6. Protect Your Floorplan Relationships. Floorplan sources have learned the truth of what dealers told them at the beginning of the 2008-09 financial crisis – providing floorplan is historically a very safe and profitable activity for lenders. As a result, numerous new floorplan sources are entering the market. The competition will positively affect rates and terms available. However, if you are shopping for floorplan, be careful. Dealers who most successfully weathered the financial crisis did so because they had solid relationships with their floorplan lenders. A new entrant, offering attractive rates and terms, may be tempting, but if times get tough, how long will that lender be around? When shopping for new floorplan arrangements, but make sure you choose a floorplan provider who is dedicated to the business with whom you can build a relationship that you can depend on if times get tough.
7. Understand what you are agreeing to in indirect finance agreements. Finance sources are regularly revising their indirect finance agreements – the document that governs the assignment of retail installment sale contracts. That trend is likely to accelerate as regulations under the Dodd Frank financial reform law mandate changes in finance source policies in 2013. Whenever you are asked to sign a new indirect finance agreement, review it carefully. An agreement that contains representations and warranties by your dealership that are designed to give greater protection to a finance source than it should have unnecessarily shifts financing risks to your dealership.
8. Challenge Buy Back Demands. 2012 showed us that while there is much more consumer credit available to make deals, finance sources will not delay in demanding that a dealer buy back paper if it feels there is a problem – whether or not the source has a clear right to make the demand. If you get a buy back demand, review your indirect finance agreement. Is the basis for the buy back contractually sound? Do the facts justify the buyback demand, or are they misstated? If you disagree with a buy back demand from a finance source, challenge it.
Customer Issues
9. Understand that pre-dispute arbitration provisions are under attack. In the spring of 2011 dealer attorneys thought the issue of pre-dispute arbitration was finally settled. In a decision known as AT&T Mobility v. Concepcion, the United States Supreme Court overruled California’s invalidation of a pre-dispute arbitration provision finding the California court’s label of the process as unconscionable was improper. The Supreme Court ruled that a state could not alter the strong presumption in favor of arbitration under the Federal Arbitration Act. Rather than settling the issue, however, this has only sharpened the divide. Many courts that are opposed to pre-dispute arbitration have been looking for ways to continue the assault on these provisions in agreements despite the U.S. Supreme Court’s opinion. They have seized on a portion of the Supreme Court opinion suggesting that litigants could still challenge an arbitration provision based upon state laws concerning formation of an agreement. Using this, courts in California and other states have continued to challenge the validity of pre-dispute arbitration agreements contending that because of unconscionable provisions there is really no meeting of the minds on the agreement. Further word on this issue may come in 2013 from the Consumer Financial Protection Bureau and the FTC that have authority under the Dodd-Frank law to take action on pre-dispute arbitration provisions. Dealers who have chosen to utilize pre-dispute arbitration provisions in their agreements with consumers should not abandon use of those. But it would be foolhardy to depend heavily on pre-dispute arbitration provisions as an effective limit on substantial liability in the future. Proper handling of transactions is a must.
10. Do your employees know what behavior you expect of them when dealing with your customers? You know how you want your customers treated. You want the highest CSI, and you want to avoid problems that lead to legal actions by state and federal regulators and plaintiffs’ attorneys. But do your employees know what you want – in detail? The will if you take the time to do a written description of your policies – detailed standards of conduct or an ethics policy, for example – backed up by regular training.
Operations
11. Protect against wage and hour lawsuits. The vast majority of employment lawsuits today are filed under the Fair Labor Standards Act – the federal wage and hour laws.
- Make sure that every employee earns minimum wage. This can be a problem in the sales department during tough months. Know the hours your employees work and make sure that they earn minimum wage for each wage period.
- Be sure employees are properly classified. Salespeople, qualifying mechanics, and partsmen are exempt from overtime, as are employees in more traditional exemption categories. However, the employee must meet the qualifications for the exemption. Make sure that everyone you treat as exempt from overtime is exempt.
- Make sure that everyone who works for you is classified as an employee except those who clearly meet the tests as independent contractors under IRS guidelines. The government wants people working for you to be employees so that you will withhold taxes, pay FICA, etc. If you misclassify personnel as independent contractors, you may have to pay dearly as a result.
12. Have a strong policy on supplier agreements. Products or services you pay for month after month, but that you don’t need, can be a drag on dealer resources. Make sure that you have a policy in place for entering contracts with vendors who supply everything from your computer services to hazardous waste removal. Be sure that only specified senior managers can sign contracts. Do a cost benefit analysis of every contract. Avoid long term agreements unless necessary. Avoid contracts with automatic rollover provisions. Make sure you can sue or be sued only where your dealership is located.
13. Negotiate your DMS Agreements. Negotiating a DMS agreement? In addition to the issues about which you should be concerned in any supplier agreement, your DMS supplier has access to all customer information on your system. Your customer base is a major component of the goodwill value of your business, so protect the information. Make sure that your data remains yours. Be sure that the DMS supplier can only use your data to provide and improve service to you. Most suppliers will tell you that the information safeguards protections of the contract provide the coverage that you need, but that is false. The DMS provider can still sell the key information on your transactions as part of compilations that don’t reveal your customers personal information. Don’t be afraid to use a consultant to get the system performance and protections that you deserve.