Overwhelmed by compliance demands on your dealership? You are not alone. Driven primarily by the increased aggressiveness of federal regulators, oversight of dealers can be daunting. It is time for compliance triage.
Dictionary.com defines “triage” as “the determination of priorities for action in an emergency.” It is time to prioritize your obligations to get through the emergency this flurry of new compliance challenges presents. The activities of two federal agencies predominate in increasing the challenges.
Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau was designed to be an unaccountable whiteboard for consumer activist priorities. While franchised motor vehicle dealers are exempt from its jurisdiction that has not deterred the bureau in exceeding expectations of unaccountability in its interference in dealer operations.
- In March 2013, the CFPB advised the institutions it oversees that they can be held liable for the disparate impact of financing rates on minorities resulting from dealer discretion in credit terms. It warned these financial institutions to either monitor and control those practices or adopt flat fee compensation practices. The bureau’s pressure has been unrelenting.
- The Bureau has announced that it plans to propose a regulation preventing the financial institutions it regulates from using class action waivers in predispute arbitration provisions. That is likely to result in changes in the relationship between dealers and their finance sources regarding predispute arbitration provisions in retail installment sales contracts.
When the CFPB was created by the Dodd-Frank Act, the Federal Trade Commission used its bureaucratic turf protection instincts. It sought and received greater authority to protect its role. One area that Congress expanded for the FTC was auto dealer practices. The FTC is the agency with direct enforcement authority over franchised car dealers, and the Dodd-Frank Act gave it expanded authority and an expanded budget in this area.
- Advertising – The FTC has brought 23 complaints, resulting in consent orders, against dealers in fifteen states since its authority was expanded. It has also brought two cases against dealers it alleged violated their consent orders resulting in punishing civil penalties.
- Spot Delivery – The FTC has an investigation underway regarding dealer spot delivery practices that may lead to complaints against dealers for their practices.
- The FTC is investigating the impact of franchise laws on competition in the auto dealer sector.
So what should a dealer do?
A dealer wishing to avoid the expenses and losses of lawsuits and other troubles resulting from compliance failures must understand the hot issues and must continuously adjust to consider those. That is the process of compliance triage, and here are the items to which you should give attention today.
Have a culture of compliance. Compliance starts from the top. So how do you do it?
- Establish a clear policy of full compliance with the law. Broaden that to an ethics policy or standards of conduct. You want to do what is legal and what is right.
- Train your employees. They must understand how they will act to reach your goals.
- Monitor your employees’ activities. Review car deals and listen to your customers.
- Take action where necessary. When employees operate contrary to your policies, solve the problem. Make sure the employee knows what went wrong and why. If the employee’s behavior is over the line, take disciplinary action, including termination.
Have a solid complaint handling system. There is no more important key to a loss prevention system than handling a complaint before a customer visits an attorney and the situation gets out of control. If a dealership gets a complaint, it should be logged in, properly routed to a responsible manager for handling, tracked, and satisfactorily closed. Early money spent to solve a problem is the cheapest money.
Control your advertising. The FTC has spent the bulk of its time on dealer matters enforcing advertising compliance. Give attention and require in-store advertising personnel and your advertising agency to know the rules and live by them. Here are the hot buttons.
- Requirements for follow-on disclosures in the event of a trigger term under the Truth in Lending Act and the Consumer Leasing Act are clear. When you advertise a trigger term, make the follow-on disclosures.
- Prevent bait and switch advertising. The primary focus of FTC advertising activity has been offers that are not available to all consumers and lack clear and conspicuous disclosures. Do not advertise prices net of incentives that are not available together, such as a first time buyers’ incentive and customer loyalty incentive. Where prices reflect rebates and incentives of limited availability disclose the qualifications a buyer must meet to obtain those benefits.
- Do not use zero down lease ads unless the consumer can take delivery without reaching in his or her pocket.
- Give special attention to your internet site since the FTC understands that is where dealers are advertising today. Be especially cognizant that disclaimers are readable on portable devices.
Handle spot deliveries carefully. Spot deliveries are still one of the two most highly scrutinized areas of the car business (the other being dealer participation which we will discuss next). If there is a law in your state concerning spot delivery, follow it scrupulously. Avoid abusive practices on which the FTC and state regulators will surely take action in the coming years if they find it. What are those?
- Failure to use contract provisions and selling practices that disclose to customers the conditional nature of the transaction.
- Coercing a customer to continue with a deal on less attractive terms because the original terms were not approved
- Retaking vehicles contrary to law
- Failing to return the trade and failing to return the downpayment after the deal is rescinded and the vehicle returned.
- Charging for use of the vehicle while it was in the customer’s hands.
Take action to protect the dealership because of the attack on dealer participation. The CFPB cannot enforce its wishes on dealers directly, but it can force finance sources to do the CFPB’s bidding. The agency has been unrelenting in the pressure. If a finance source communicates that there appear to be discrepancies negatively affecting consumers in protected classes, you must respond. Have a fair lending policy, in which the discretion of F&I personnel on rates is eliminated through a set starting point with downward deviations for non-discriminatory reasons.
Establish set prices for F&I products. The CFPB believes that its pressure on reserve can lead to attempts to enhance income in other areas. When F&I personnel have unlimited discretion on pricing of F&I products, there is the possibility that the CFPB could contend that consumers in protected classes were negatively affected by differing prices for the same F&I products. To combat this, use set pricing for F&I products, with provision for downward deviation for non-discriminatory reasons similar to those in a fair lending policy.
Comply with the Truth in Lending Act. TILA provides transparency for the cost of credit, including the cost of additional products. Have a system for clear disclosure of the products you are selling and the costs. The best systems include a menu that explains what the customer is being offered.
Run credit reports when authorized under the Fair Credit Reporting Act. Lawyers for debtors count on dealers not having adequate records to show they had a permissible purpose in connection with the extension of credit when running credit reports of customers whose sales were not completed. Do not fall into this trap. While the law does not require that a customer sign an authorization, a signed authorization for access to a credit report is the best way to show compliance. Run no credit report without a signed or secure internet authorization. Keep every authorization for five years, even for deals not completed.
Keep your identity theft protections fresh. Federal and state laws concerning identifying theft are geared to protecting consumers. But if you get trapped in a transaction involving ID theft, your dealership will be the real loser. And if your customer data walks out your door with an existing salesperson, that will threaten the goodwill value of your business. A recent federal case confirmed that the FTC may treat inadequate protection of consumer data as an unfair practice under the FTC Act for which the agency may sue a business. There are three critical ID theft programs you should make sure are fresh in your dealership.
- The FTC Privacy Rule requires that you give notice to a customer in a finance or an insurance transaction of what you will do with their non-public personal information. Your customers want to know you are protecting their information.
- The FTC Information Safeguards Rule requires that you have safeguards to protect the nonpublic personal information of your customers. Your customer information is one of the key elements of the goodwill of your business. Make sure this information is not being hacked from your computer system, walking out your door with your salespeople when they go to work for someone else, or being misused by suppliers to whom you give access to your computer system. The law requires that you have in place an information safeguards plan, and it requires that you regularly review and update that.
- The FTC Red Flags Rule requires that you know your customer. If you get involved in a transaction with an identity thief, your dealership will be the loser. You must have a Red Flags plan in place. Review and update it every year.
Have a dealership recall policy. There is no more publicized subject in the car business today than recalls.
- If you have new vehicles in inventory with open recalls, they may not be delivered until the recalls have been remedied. Federal law provides compensation for new cars grounded for safety defects, and you should request that.
- There is no federal requirement to ground used cars subject to recall. However, it is good sense to create business for the service department by repairing recalls on the brand of vehicles you sell. It is easier today to determine open recalls on any brand of vehicles through www.safercar.gov. Have a policy of repairing the open recalls you can on the brands you sell, and disclose open recalls on other brands or when you cannot remedy the recall.
Comply with the Fair Labor Standards Act. The FLSA provides substantial relief for employees including attorneys’ fees. Law firms have been springing up exclusively to bring FLSA claims.
- The Obama administration wants government agencies to presume that someone doing work for you is an employee unless you can meet the test developed by the Department of Labor to deem someone an independent contractor.
- Properly pay employees entitled to premium overtime pay.
- Make sure non-exempt employees make minimum wage for each hour worked.
- Use pay plans to protect your business. They should:
- be in writing and signed;
- state that they are not contracts;
- for sales pay plans, state that the basis for pay is commissionable gross determined in the sole discretion of the dealership;
- identify when commissions are earned and when they are paid; and
- preserve the dealer’s right to change the policy and to correct clerical errors.
Protect your franchise with a policy for responding to franchisor criticisms.
- If a franchisor claims you have sales performance issues, understand the objection and reply to explain that your sales performance is consistent with your obligations.
- If your franchisor If your franchisor complains about your CSI programs, be prepared to use your internal CSI data to challenge that.
- If the manufacturer complains about net working capital, consult with your accountant to determine whether your financial statements are properly reflecting your true working capital. If not, solve the problem.
Protect yourself from supplier overreach. Dependence on suppliers is unavoidable. However, make sure your agreements with your suppliers protect the dealership.
- Have a written agreement that the supplier will protect all customer information, with the right to use it only to provide services to your company.
- Review contracts:
- Make sure they provide benefits which you expect.
- Confirm the pricing is accurate.
- Limit the duration of the agreement.
- Insist that renewals are month to month.
- Check to see where you can be sued, and work to have any disputes determined where the dealership is located.
Compliance issues may vary from state to state and community to community. However, these are critical concerns to which you should give attention. And if there are other issues hot in your community, add them to this list.