15 for ’15 – Prediction: Sunny with Headwinds

232331672014 was another strong year for motor vehicle dealers. The experts are predicting an especially strong year for 2015. Not to be contrarian, but when conventional wisdom is a forecast for spectacular results, it is time to be wary.

Conventional wisdom is for sunny weather for obvious reasons. Consumer optimism is rising. New vehicles are more attractive and exciting than ever, and sales increases have continued for several years.

There are significant headwinds, however, which should cause dealers to be cautious.

  • The unemployment rate is at its lowest for this President’s administration. However, the unemployment rate does not tell the story. The rate does not consider the historically high numbers of Americans who are no longer looking for work. And it includes millions of Americans who are underemployed and employed for less than the 30 hour per week threshold for health insurance eligibility. These factors will severely affect the long-term ability of many to buy a car.
  • While the American economy is doing better, many factors are still a drag on job creation and increasing wages. Many large companies are keeping funds overseas or are refusing to invest domestic funds in productive capability because of unfavorable tax laws. The housing market is still troubled. The Dodd Frank financial reform law makes it harder for American families to apply for and obtain credit to buy homes.
  • The cumbersome home credit process is leading to a cultural shift for young families who question whether the American ideal of home ownership is still important. There is a similar cultural shift among the young, especially the rising numbers of renters of urban dwellings, causing them to question the importance of owning a vehicle.
  • Whether because of lowered earnings or because of the effect of economic turmoil on their credit histories, or both, many potential buyers will not qualify for standard credit, Availability of subprime credit is more important than ever. Unfortunately, the federal government, through the Consumer Financial Protection Bureau, is engaged in a campaign against the subprime credit market. That organization has already sent civil investigative demands (subpoenas for administrative agencies) to several finance sources about their subprime credit practices. Any disruption in the subprime credit market that will make it harder for potential buyers to obtain the financing on which they depend to purchase vehicles.
  • The rapidly increasing pace and volume of federal regulations in health care and other aspects of business are having a negative impact on the way dealers conduct business, including dramatically increasing costs of compliance.
  • The major transportation story of 2014 was the historic decline in oil prices, leading to dramatically lower gas prices. This led to improved disposable income for Americans, but one must question why OPEC members have refused to make the production cuts they traditionally took to prop up falling oil prices.. Some analysts believe it is an attempt to make fracking unattractive since producing oil through that method is substantially more expensive than pumping it out of the ground. If these tactics succeed in driving out new oil production competitors, low oil prices will be short-lived. Historically, volatile oil prices have caused shifts in demand for the vehicles consumers prefer, and this has led to substantial inventory problems for some car dealers.

Some may predict aggressive tactics to take advantage of 2015’s predicted white hot market, but slow and steady will win this race. Dealers who pay close attention to the fundamentals will make money and hold on to it. Here are fifteen areas of concentration for ’15.

Federal Government

Dealers have seen increasing federal government interference in their businesses. While both houses of Congress will be controlled in 2015 by Republicans generally thought to be less intrusive in the affairs of business, there will be a backlash at the executive level where bureaucrats will take it upon themselves to impose policies despite the wishes of the new Congress.

  1. The CFPB Will Continue its Intrusion. The Consumer Financial Protection Bureau, created by the Dodd Frank financial reform law was set up to be resistant to political pressure. It has been the federal agency with the greatest recent impact on the operations car dealerships, and that is likely to continue. While the agency does not have direct supervisory or enforcement authority over car dealers, it controls the big banks and is increasing its control over other finance sources, particularly captives that provide the lifeblood of car sales. It will continue to use that authority to pressure finance sources to alter the way dealers sell and finance motor vehicles.
  • All dealers know of the CFPB’s war on dealer participation. The goal of the agency is to eliminate dealer participation and force finance sources to pay flat fees for origination of retail installment sale contracts. The industry, led by the National Automobile Dealers Association, has pushed back hard and had so far slowed the CFPB’s march to its goal. However, the CFPB is intensifying its oversight of finance sources. Those finance sources will have no choice but to increase oversight on dealer participation. To deal with this challenge, a dealer must adopt a fair lending policy, like that recommended by NADA, to set a starting point for all credit buyers with downward deviations for established reasons.
  • The CFPB has already pressured finance sources over sales of F&I products and services. Much like finance participation where the CFPB feels that participation should be equal for every customer, it believes that every customer should pay the same for finance products and services. The pressure will continue to build on finance sources to regulate dealers. If you have no set pricing matrix for your F&I products and services that eliminates discretion in pricing for F&I personnel, put one in place.
  • The Dodd Frank financial reform law gives the CFPB authority to regulate predispute arbitration provisions used by those over whom it has jurisdiction. The CFPB is in the midst of a study on arbitration and the steps it may take, the results of which should be published in 2015. Any regulation in this area by the CFPB could significantly affect predispute arbitration provisions that are important protections against class action lawsuits.
  1. The FTC Is Using Its Increased Dealer Authority and Budget. When the Dodd Frank financial reform law was passed, the FTC was concerned that its territory was poached by the new bureau. So Congress gave the FTC greater authority and a larger budget to regulate those who escaped CFPB’s jurisdiction – car dealers. The FTC has increased its activities over car dealers, and those activities are likely to increase in 2015.
  • To date, the FTC has dramatically increased its dealer advertising oversight. Dealers must now know of FTC action that can lead to complaints and costly consent orders. The FTC has been concentrating on ads, primarily on the internet, with Truth in Lending Act violations or utilizing what the FTC calls “bait advertising” where conditions to the availability to a price or term are not clearly and conspicuously disclosed. A dealer must have in place advertising guidelines to be followed by managers responsible for advertising and for its advertising agency.
  • The FTC is under significant pressure to take action on spot delivery, particularly abusive spot delivery practices. If you spot deliver, have procedures in place matching the required language in your buyer’s order, and hold onto a trade until a deal is complete. If you must rescind a deal, you must follow the procedure in your buyer’s order, you must return the trade and any downpayment, and you must avoid abusive tactics in retaking a vehicle.
  • Dealers are on the front line in protecting customers against identity theft. The FTC has regulations that require dealers to have two important programs in place — an information safeguards program and a red flags program to detect signals of identity theft. Have specific written programs in place that comply with the FTC rules, and regularly review and update them as necessary.
  1. Labor Practices are Under the Microscope. In line with the federal government’s increasing regulatory intrusion, it is substantially increasing its activities on the labor front.
  • The federal government is funding state programs to make sure workers are classified as employees instead of independent contractors. Occasional drivers and piece workers are at the top of the list. The IRS has created guidelines for determining who is an independent contractor. If you have questions about the proper status of workers, work with your accountant.
  • Proper classification of employees to determine whether they are entitled to premium overtime is also critical. Car dealers have special protection regarding salesmen, mechanics, and partsmen, but not everyone in the sales department, the service department and the parts department qualifies for the exemption. Those who are non-exempt are entitled to time and a half for overtime.
  • Employees are entitled to minimum wage for all hours worked. The general office should calculate whether employees are properly compensated every pay period to ensure all employees earn minimum wage.
  • Dealers must be careful about discrimination and harassment complaints. However, the most frequent complaint is for retaliation. An employer can be liable for retaliation against an employee who complains even when there is not an underlying ground for the complaint. Have in place a procedure for handling all employment complaints.
  1. The Internal Revenue Service is Always Active. The Internal Revenue Service is the agency that will enforce Obamacare requirements. Moreover, the IRS is regularly conducting audits for compliance with cash reporting reporting. A dealer that receives cash or cash equivalents of more than $10,000 in any transaction or series of related transactions must report that to the Internal Revenue Service on a Form 8300, and it must report the filing to the customer by January 31st of the year following the year in which the report was made. Many dealers think that they need no specific policy because any deal with more than $10,000 cash or cash equivalents will be apparent. However, many reportable transactions result from financed deals, where part of the downpayment was with cashier’s checks that are not the proceeds of a loan. These deals will not always be caught on the sales floor, and the information for Form 8300 will not always be developed on the sales floor. A dealer should have a written policy instructing those on the front lines – salespeople, F&I personnel, and cashiers, what to look for, and there should be a back up to catch reportable deals.


Franchisor challenges increase annually. They continually seek to increase their control over dealers by increasing use of rights of first refusal in buy sells, mandating how dealerships look through building and image standards, and inserting themselves in operations through various tactics. Dealers must be proactive if they wish to maintain their status as independent businesspeople.

  1. Give Attention to Your Performance Statistics. One of the primary methods of controlling dealers is through threats when your performance does not match the factory’s expectations. Be attentive to your performance, particularly regarding retail sales effectiveness and CSI. If your franchisor’s statistics show you are not sales effective, find out why. If there are changes you can make to improve, make those changes. If you believe the factory’s calculations are improper for a variety of reasons, challenge those and be prepared to stand behind your challenge.
  1. Be Prepared for Factory Audits. Factories have been increasing their audits of dealers. For some, the concentration is on warranty reimbursement to clamp down on warranty expense. For others, it is a concentration on exports and brokering activity. The best audit protection is to get your claims right the first time. In the service department, know the manufacturer’s warranty requirements and diligently comply. In the sales department, understand the limitations on export and brokering, and be prepared to do due diligence on your customers to avoid sales to brokers and exporters. If you face an audit, try to control the auditor’s activities by understanding the look back period under the Virginia Code and the basis for which chargebacks can be made, and use your rights under the factory’s policies and Virginia law to protect yourself.
  1. Get Retail For Service Work. Virginia has a law protecting your right to retail compensation for labor and parts. If the factory will hold you strictly to its policies, then you should hold the factory to state law. If you have not sought compensation on a retail basis for labor and parts do so. A dealer who does not do so is leaving money on the table.
  1. Assert Your Rights As An Independent Businessperson. Remember, you may be a franchisee, but you are still an independent businessperson. Review every program from the manufacturer with an eye towards what is best for your business. Do a cost benefit analysis of the program. Do an analysis whether the program will increase the factory’s control over your business. Remind the factory that recent actions by the federal government reflect the government’s view that a franchisor can be held liable for the employment practices of the franchisee if the franchisor increases and asserts oversight. You are an independent businessperson entitled to run your business as you see fit.

Legal Challenges

Dealers are increasingly finding themselves subject to legal challenges by state attorneys general, state government regulators, and private attorneys. A strong compliance program is essential for every dealership. That requires standards of conduct that set forth the dealer’s expectation of how employees will operate, training employees in what you expect, oversight and management to see they are performing as you expect, and disciplinary action where they do not.

  1. Complete Complaint Handling is Essential. Dealers often ask the one thing they can do to prevent legal actions. While one can never prevent all legal actions, the most effective tool is to have a complete complaint handling system. Most often, lawsuits arise from complaints not properly handled. The answer: Treat every complaint seriously, log it in, have someone responsible to handle it, and either resolve it or know why it cannot be resolved.
  1. Arbitration can be an Important Protection. The CFPB may be reviewing predispute arbitration provisions, but as of now there has been no change. One of the best protections a dealer can have is a predispute arbitration provision with a class action waiver. The provision must be professionally drafted, however. Courts have been active in striking down arbitration provisions that are one-sided or unfair.
  1. Do a Form Review. When is the last time you looked to be sure your forms protect you as best they can? Are you using all forms required under state and federal law? Too often dealers adopt forms and don’t change them for years. When was the last time you had your forms reviewed to make sure they provide the most effective protection for your dealership?
  1. Use A Deal Completion Checklist. Even where your forms are up to date and provide the protections you need, it hurts if they are not used properly in each deal. A deal completion checklist provides a roadmap to lead F&I representatives through the deal process. The checklist then provides a means by which reviewers can make sure a deal is neat and complete.

Operating Issues

There is no more complex business than a car dealership which is actually many businesses – sales of vehicles, sales of parts, sales of repair services (including body repairs for many dealerships), sales of finance and ancillary products, and accounting for profitability in all those departments. For 2015, however, some issues merit attention.

  1. Have A Vendor Policy. Do not contract with vendors that will make you responsible to pay for goods or services you don’t receive as you expected. Carefully check out any vendor. Talk to other customers, investigate using business rating services, and make sure you are dealing with a substantial business that can answer to you for its failures. Start the process of acquiring any goods and services by asking whether you need them. In any contract, carefully review the duration. A contract should be month to month unless there is some reason that it should be for a longer term. On term contracts, what is the renewal provision? It should not be an automatic renewal for the same term, but it should roll over on a month to month basis. Provide that if you are in a dispute with the vendor it will be determined where you do business and not in some distant state where the vendor hopes you will never hire a lawyer.
  1. Protect Your Data. Your data is a substantial portion of the goodwill of your business. Many vendors want access to your DMS, and dealers often provide unfettered access. Why? You are probably paying your vendor handsomely for the goods and services you buy. Why help the vendor create a profit center through access to your data which it can use in compilations it may sell. Do not grant open access to your DMS. Push any data a vendor needs. Make sure the vendor agrees to limit use of the data to servicing your account.
  1. Beware of Unfunded Liabilities. Increasingly, dealers are establishing programs providing rights to customers for free services – oil changes, state inspections, and the like. If you have such a program, how are you funding it? Often, dealers assume that a buyer for the dealership will assume the obligations, but not all buyers view these programs as valuable or beneficial. To the extent possible, create protections for your dealership by funding the programs or providing that they can be ended if you sell or close your business.

2015 will start strong. We all hope it will remain strong, but beware of the headwinds. As always, dealer operations are difficult and require strong and active management with attention to the fundamentals.