By Michael G. Charapp
Charapp & Weiss LLP
What a difference a year makes. Last year’s article, Twenty for ’20, was upbeat. It warned of challenges for dealers but noted that dealers’ resiliency would lead them to success because of the strength of the overall economy.
We could not foresee how resilient dealers would have to be. Once the pandemic struck, dealers had to change to address limitations imposed at the federal, state, and local levels and dramatically different consumer behavior.
2021 brings a new set of challenges. It is not clear when the pandemic conditions will finally recede. The pandemic is not the biggest driver of challenges for 2021, however. The federal election results will have an enormous impact on dealers and will require them to change the way they have done business over the last four years.
From 2008 to 2016, dealers dealt with significant changes in the way they had to do business because of federal mandates. The last four years saw a dramatic shift away from those mandates. Given the results of the 2020 federal election, however, the 2008-2016 mandates are coming back, and dealers must know what they must do.
- Use a Fair Lending Program: The last four years saw a change in emphasis on fair lending programs. Earlier, the Consumer Financial Protection Bureau had challenged dealer reserve practices. The CFPB actions were highly controversial and ultimately led to congressional disapproval of the CFPB’s attempt at regulation. To deal with the criticisms, the National Automobile Dealers Association developed a template program for fair lending. It requires a dealer to establish a standard starting point above buy rate for all customers, with downward deviations for non-discriminatory factors. Fair lending oversight at the federal level is returning. If you did not adopt a policy, or if you adopted one and stopped using it because of lack of emphasis by the Trump administration, take steps to adopt the NADA Fair Lending Policy.
- Sale of Voluntary Protection Products: Before the inauguration of the Trump administration, the federal government was reviewing pricing practices for voluntary protection products such as extended service contracts and GAP. The regulators claimed that inflated pricing was evidence of credit discrimination, since one has to analyze the overall costs of lending for a vehicle buyer under credit discrimination laws. To answer the criticisms, NADA, along with the National Association of Minority Auto Dealers, developed a template program for sale of voluntary protection products. Federal agencies under the Biden administrations will reinstitute investigations into pricing of voluntary protection products. Use the NADA/NAMAD program to protect against charges of discrimination in sale of VPPs.
- Electric Vehicles: Manufacturer priorities already have dealers changing their marketing, advertising, and training priorities on sales of internal combustion engine (ICE), hybrid, and electric vehicles. The Biden administration will impose federal mandates to hasten the required distribution of electric vehicles. The federal government must do more than just mandate levels at which electric vehicles are distributed to dealers. It must help with incentives for consumers to want to buy electric vehicles and with infrastructure for charging stations. Manufacturers must do their part by creating desirable electric vehicles that are more than just retrofitted ICE vehicles. Dealers will be seeing more electric vehicles more quickly under Biden mandates, and they will have to further adapt their marketing, advertising, and training.
- Advertising: Dealers can expect that the Federal Trade Commission will enhance its enforcement activities against dealers. Whenever the FTC concentrates on dealer activities, the main focus is advertising. Enforcement of the Truth in Lending Act and the Consumer Leasing Act advertising requirements are the cornerstone of enforcement activities. The requirements are black and white. If you use a trigger term, you must make follow on disclosures. If you do not do that, the FTC has you on a clear cut violation and it can compel you to stop activities it labels “bait and switch” that are less clear cut in consent orders. The FTC expects advertised prices and offers to be available to all unless limitations are clearly and conspicuously disclosed. If limitations make a price or offer unavailable to all, the advertisement must clearly and meaningfully disclose the terms customers must meet to obtain the advertised benefits.
- Unfair and Deceptive Acts or Practices: The Federal Trade Commission’s basic authority is to protect consumers against unfair and deceptive acts and practices. The expected FTC concentration on dealer practices will lead to lawsuits challenging activities the agency deems not transparent and straight forward in dealings with consumers.
- Workers’ Rights: Throughout the Obama administration, aggressive steps were taken to enhance workers’ rights. Executive orders, regulations, and decisions construing the reach of the Fair Labor Standards Act, particularly the concerted action provisions of the Act, affected dealership policies. During the Obama administration dealers regularly faced the challenge of updating their personnel handbooks. That is likely to be the case in the Biden administration. Be aware of changes in federal enforcement that will require you to change your policies and personnel handbook.
- Pay Plans: The nature of your workforce is changing. Workers want to know how they will be paid, and they want the ability to check pay calculations. The days of a pay plan on a napkin are over. Have a template for your pay plans, and develop them based on your template.
- Personnel Diversity: Your workforce is probably becoming more diverse. Whether you have a separate HR department, or personnel activities are the responsibility of your general office, you should have personnel trained in HR principals. Those with HR training will understand the importance of a diverse workforce and recruiting to build diversity.
- Personnel Practices: Those with training in HR practices and HR concepts will also understand the importance of using fair personnel practices. Complaints of unfair personnel practices are a fact of life today. HR personnel should understand how to deal with those complaints. More important, they should know how to develop policies and practices to avoid complaints.
- #MeToo: It seems the #MeToo movement has lost some steam during the pandemic. That will change based on priorities under the Biden administration. Is your process for investigating and taking action on complaints of harassment and discrimination established and in use?
Dealers were consumed in 2020 by the pandemic. For much of 2021 they will face similar concerns. However, there will come a point when dealers need to look beyond the pandemic to see what changes will be permanent and how to adjust to those.
- Online Protections: The pandemic required dealers to enhance their online activities to continue their relationships with customers who could not or would not visit the showroom. Enhanced online communications are not likely to change. The larger your online presence, the more susceptible you are to data theft. When was the last time your dealership reviewed its FTC Information Safeguards policy? Review your policy and update any risk assessments and protections implemented. Have you worked with your DMS provider to be sure you have the most up-to-date digital protections? If you have computers online that do not operate through your DMS system, work with a consultant to be sure you have effective protections in place.
- Training Employees on the Importance of Online Protections: Many employees simply do not understand the seriousness of the issues faced by dealers today from hackers, phishers, and other digital miscreants. Regular training of employees is critical. They must not only understand the protections you have put in place and how they must participate, they must understand the reasons protections are critical.
- Emphasize Standard Protection Tips: Even with the most sophisticated and up to date intrusion protections, employees can unknowingly subject the system to threats. Emphasize standard tips to protect your system.
- Regularly change passwords.
- Do not share passwords.
- Do not leave passwords visible at the employee’s workstation.
- Do not click on emails from unknown senders.
- If it is an employee’s job to review emails from unknown senders, do not click on links which may contain malware, ransomware, or phishing attempts.
- Do not surf the web and click on sites which can lead to downloads that affect the system.
- Do Not Become a Victim of Digital Theft: Avoid theft of your data. If your data is compromised, your dealership is a victim since your customer base is a valuable asset. If a bad guy succeeds in defrauding you of a vehicle through identity theft, you will be the loser either from loss of the value of the vehicle or increased insurance rates if your insurance company pays you for the vehicle. Wire transfers are an especially tempting means of victimizing businesses, and emailed wire transfer instructions must always be verified through a known person or through a known phone number before using them.
- Social Media Posts are Not Free Advertisements: Too many dealers look at social media use by their employees as a free method of advertising. It is not. It is the newest basis for imposing penalties on dealerships for violations of advertising laws and regulations. Have a social media policy. The goals of the policy should be to drive consumers to the dealership’s web pages where your advertising includes proper disclosures and disclaimers and to move prospects into the dealer’s follow up system.
- Beware of Lengthy Supplier Contracts or Those with Multi-year Rollovers: Many dealers entered the pandemic intending to cut expenses by making changes in their supplier contracts, only to discover that they could not because of the length of the contracts or because of multi-year rollovers. Have a supplier contract policy. Review every supplier contract. If it will be for an extended duration, rather than for month-to-month, ask yourself why. If it must be for a duration, and there is a rollover, make sure the rollover is month-to-month.
- Indirect Finance and Lease Agreements: Because of increased online activities, indirect finance and lease agreements are being amended by finance and lease sources to enhance their protections. Review indirect finance and lease agreements offered to you to be sure the terms do not unfairly prejudice you.
Vehicle manufacturers and distributors were not exempt from pandemic-driven changes. Changes undercut many assumptions that drive manufacturer policies, yet they will continue to insist on implementation of policies to achieve their goals.
- Facilities Requirements: Increased digital sales activities of dealers, that are likely to continue, undercut the arguments for increasingly large and luxurious dealership facilities. Those facility demands are more manufacturer ego driven than business driven given the changes in how dealers will sell vehicles. It is more important than ever when facing facility demands that you understand your state law protections and agree only if facility upgrades make economic sense in a post-pandemic world.
- Performance Threats: The hiatus on performance threats from some manufacturers lasted a short time last spring. Several manufacturers have now reinstituted their processes for threatening dealers because of alleged performance shortcomings. The pandemic played havoc with the factors that affect franchise performance measurements. New vehicle production was interrupted, drying up availability for dealers. The pandemic further undercut factors on which factories base their calculations because it changed work travel patterns, leisure activities, and willingness of consumers to leave home. These affect factory assumptions of where and how consumers shop. Factory sales performance measures were affected by COVID-19, and for some time they are likely to be unreliable.
- Separate Agreements: Some franchisors are seeking to establish separate agreements, particularly for alternative propulsion vehicles such as hybrids and electrics. Separate agreements are not necessarily objectionable. They are, however, when put in place to establish requirements contrary to state law rights of dealers. When asked to sign a separate agreement, carefully review it. Ask yourself why a separate agreement is being demanded. Understand what changes are involved in the separate agreement. Be sure it is subject to your state franchise laws.
- Succession: Some manufacturers have been pressuring dealers to establish succession plans. Manufacturers want to know who will take over in the event a dealer dies because they want to prevent control fights and they want to control who will be operating their franchisees. If you do not have a succession plan, expect to face pressure for one. Make sure your plan makes clear who will be in charge if something happens to you.
2020 was the ultimate year for challenges none of us foresaw. How will you fare in 2021? Here is hoping that 2021 is as free from unpleasant surprises as possible.