14 for ’14

2013 was a solid year for car dealers. Buyer demand is returning. Factories are producing vehicles customers want. Credit and leasing terms facilitate sales.

Barring some unforeseen problems, the strong sales atmosphere should continue in 2014. Dealers do not face issues of weak sales demand, restricted supplies of attractive vehicles, or lack of credit availability. The challenges are interference and inappropriate roadblocks by those who want to tell dealers how to run their businesses or to profit from dealer operations and assets.

Federal Government.  Government intrusiveness is unprecedented. Whether it is the unintended consequences of the Affordable Care Act, business roadblocks by overzealous regulators, or interference with established business methods by those with no experience or expertise, the federal government wants your business to be as profitable as it is.

Franchisors.  Franchisors no longer want to own your business. They do not need the headaches of massive capital investment and maintaining relations with employees and customers. They simply want to run your business, and increasingly they are doing so through incentive programs and intimidation.

Plaintiffs’ Attorneys.  As dealership profitability returns, plaintiffs’ attorneys see dealers as increasingly attractive targets.

Suppliers.  Dealers rely on suppliers for services ranging from computer systems to lead generation. A dealer should control supplier relationships and must protect proprietary data to be sure that suppliers only use the information to serve the dealer.

2014 appears to be a year in which producing income will not be as critical as holding on to it. Here are 14 issues to which every dealer should give attention in ‘14.

Governmental Intrusion

  1. Protecting F&I income.  Every dealer should follow the developments in the attack on dealer reserve by the Consumer Financial Protection Bureau. Based on the consent order signed by Ally Financial in December 2013, the Justice Department has joined with the CFPB. The industry is furiously making its case for preservation of the reserve system that has benefitted consumers and dealers. What should you do?
  • Know the issues in the event you have to participate in defense of the system. To date, the CFPB has not disclosed the alleged evidence of discrimination. In fact, rate caps that have been in place for years, as well as increasingly vigorous financing and leasing competition fed by the internet, make claims of discrimination questionable. The present system creates a marketplace in which dealers work to beat rates offered by increasingly aggressive competition. Replacement of the existing reserve system with a flat fee process will reduce the competitiveness and incentivize dealer employees to “work their pay plans” by selling the available financing with the best flat fee.
  • Have a written fair lending policy.
  • Have in place a system to remove per deal discretion from F&I personnel. The dealership should have a predetermined spread over the buy rate for every deal. Permit deviations from that rate only for established non-discriminatory reasons.  
  • Train your employees in the requirements of your system, and follow-up to be sure that they are operating as you expect. 

Dealers should also recognize that other F&I products are on the federal radar screen. It will only be a matter of time before they turn their attention to sales of extended service agreements, GAP, and the like. Have in place a transparent process for selling F&I products, through use of a menu or a similar tool. Have set selling prices of those products with deviations for established reasons to meet competition.

  1. Pre-Dispute Arbitration. The CFPB has started its hearing process with respect to use of pre-dispute arbitration provisions in financial paperwork. The Federal Trade Commission may soon take its own look. If you have made the determination to include pre-dispute arbitration provisions in your sales agreements, it is now time to review them. Overreaching can lead courts to invalidate pre-dispute arbitration provisions. Be sure your pre-dispute arbitration agreement is balanced, that it does not impose undue restrictions or obligations on the consumer, and that the consumer can invoke arbitration without undue trouble or expense. While the future of pre-dispute arbitration provisions is cloudy, there has been no change to date. A dealer that has determined to use arbitration can continue with appropriate safeguards.
  2. Have a compliance officer. All businesses have seen publication of an inordinate number of federal regulations, and dealers have seen more than most. In addition to the CFPB, dealers must be concerned about other federal agency oversight.
  • The FTC, which was given greater authority over car dealers and a bigger budget under the Dodd Frank financial reform act, was especially active in 2012 and 2013 with respect to car dealer advertising. In 2014, one can expect that it will continue with its increased advertising oversight, as well as potential action involving F&I products, spot delivery, pre-dispute arbitration provisions, and privacy.
  • In 2013, the Occupational Safety and Health Administration changed its HAZCOM labeling and training requirements. It also continued its lift inspection program in some geographical areas. Expect increased oversight in 2014.  
  • In 2013, the Equal Employment Opportunity Commission took action with respect to employer use of criminal background checks that it claimed were not necessarily job related. Expect continued review of personnel decisions, especially with respect to alleged retaliation for those complaining of discrimination or harassment.
  • Immigration and Customs Enforcement published new I-9 forms that were effective in May 2013. With the continuing federal debate over immigration, dealers can expect I-9 inspection activity in 2014.
  • Reporting receipt of cash when appropriate and prevention of money laundering continue to be important to avoid Internal Revenue Service and Department Of Justice enforcement. These should be constant subjects of training and oversight.

How can a dealer keep track of these and other federal and state obligations? Appoint a compliance officer. Given the regulatory overload, the only effective way a dealer can properly track and undertake its compliance obligations is to have a person in charge who reports directly to the dealer.

Franchisor Intrusion. 

  1. Know your rights. Manufacturers develop national policies. They usually push the national policies in each state until a dealer is willing to push back. If you object to a program a manufacturer is imposing on you, determine whether your state law provides you rights. State dealer franchise laws have been crafted over the years to provide strong protections to dealers, but dealers must be prepared to exercise their rights.
  2. Silence is not golden. When dealing with your franchisor, you must be careful to review every communication. Routine communications concerning new sales programs, warranty policy changes, etc. should be routed to the proper managers. However, a dealer should personally oversee handling of communications critical of the dealership’s performance. Review a critical communication, understand the issues raised, and answer every point. Manufacturers maintain files for every dealer. The purpose of many critical communications is to build a file in the event the factory deems punitive action against a dealer to be appropriate. If you believe that you can improve, make the changes but never admit that you have breached your obligations. If you believe a manufacturer is wrong, challenge its claims. If the manufacturer is interfering with your ability to make targets, such as through programs that are available to others and not you or inappropriate vehicle allocations, make that clear. Any manufacturer attorney reviewing a file to determine whether punitive action should be taken should know that the dealer is prepared to defend itself vigorously.
  3. Are performance targets correct? There are many reasons why the targets set by a franchisor for your dealership’s performance are important. Continued failure to meet targets could affect your income or constitute grounds for termination. If your dealership is not meeting performance targets, ask why. Are you not meeting sales performance goals because your primary market area is misdefined making you responsible for sales penetration as a result of areas where you don’t have an advantage? Are you not getting sufficient allocations of vehicles to meet targets? For discretion based bonus systems, for example targets for bonus payments designed to lead to sales improvements, are the targets realistic? For facility based programs, are the restrictions legal under state law?
  4. Know your rights in an audit and use them. Manufacturers’ audits have not slowed, and they will not. Many dealers view the audit process as a profit center for manufacturers. Protect yourself from enhanced manufacturer profit at your expense. Make sure that your employees know the incentive programs and the warranty policies of the manufacturer. The best defense to an audit begins by preparing your claim for compensation properly. When you inevitably get an audit, prepare carefully. Know the subject of the audit. Review state law, particularly how far back a manufacturer can go. Make sure that the auditor stays in bounds, and challenge improper conclusions. If you disagree with the audit results, follow the process for an internal challenge in the manufacturer’s system, and challenge through state provided means, if necessary.
  5. Know the importance of franchise and licensing laws. Dealers must pay careful attention to the challenges to franchise and licensing laws. If these laws are eliminated, internet brokers hope to control sales of motor vehicles. That is the subtext of today’s questions as to why dealers are important in the distribution system. Dealers are critical to protecting the public in their largest consumer purchases. Over the years, state legislatures have seen that franchise laws requiring sales through dealers and licensing laws requiring that dealers have certain characteristics such as a brick and mortar presence provide the greatest protections. Understand the arguments for the franchise and licensing system, and be prepared to support efforts of your national and state trade associations to protect franchise and licensing laws.

Plaintiffs’ Lawyers

  1. Adopt standards of conduct. No dealer can specifically train employees on everything to do or not do. A dealer who wants employees to operate according to standards should adopt a written set of standards and enforce them. The standards of conduct will tell employees what you expect.

Make sure that you have proper paperwork and it is used appropriately. State laws change, and dealers regularly develop changes in policy to comply with best practices. Make sure that your forms comply with the law and best practices. Make sure that employees use the forms properly.  Employees should use a deal completion checklist in completing deals and in reviewing deals.

Do the one thing that protects against lawsuits. What is the one thing that a dealer can do to minimize the chance of lawsuits? Have a complete complaint handling system. Customers who complain and do not feel that they are given proper attention are the most likely to visit a lawyer. Once a lawyer is involved, the chances of a lawsuit increase dramatically. Every complaint should be treated as important. It should be logged in. One person should be in charge to make sure either that the customer is satisfied or that everything has been done to attempt to satisfy the customer.


  Understand your indirect finance source agreements.  The CFPB is churning out regulations affecting your finance sources. Those regulations may result in changes to your indirect finance source agreements. Whenever there is a change, or if you start a new relationship, read and understand your agreements. Protect your dealership from inappropriate provisions in which the finance source tries to make its losses yours. Have a qualified lawyer review your agreements, if necessary.

13 Pay attention to your computer vendor’s agreement.  Are you buying a new DMS or making changes to your system? Know what is in your agreement. Is your data yours? Is it protected? How may the vendor use it for its own profit? What will be your liability if you sell or close your business? What will it cost to give other suppliers access to your system? What is the duration of your agreement, and why should you have an extended term agreement? If you have a dispute, where will you have to go to resolve it? Do not be a prisoner to your computer vendor. It is a supplier like any other, and make sure that you work with professionals to protect your rights.

14 Protect your data.  Do your suppliers have access to your computer system? Why? Can you push certain data to a supplier? Whether you push data or your supplier has access, what can it do with your data? Under federal law, you must require that your supplier safeguard non-public personal information of your customers. But much more is required. Your customer data is an important element of the blue sky of your business. Make sure that your supplier uses your information only to serve you, and it is not in a position to sell your information even through compilations that do not specifically disclose your customers’ information.