The Car Counselor

The last few years have been a challenging period for the used motor vehicle industry and our Country as a whole. After a lengthy period of time with a very strong economy, today is very much different. We currently find ourselves saddled with a sluggish economy, a national decline in the average consumer’s creditworthiness, bankruptcy rates at an all time high, and, as if that were not enough, a shortage of lenders in the used car marketplace. Naturally, one topic on everyone’s mind is the excess inventory on their used car lots and how to find new ways to sell cars to customers the dealership cannot otherwise get financed.

With the number of lenders conducting business in the used motor vehicle industry decreasing, one of the keys to attracting a lender to your dealership is to demonstrate the ability to minimize the lender’s risk. When it comes to quantifying risk, all lenders have methods for evaluating customer creditworthiness and collateral, so these items speak for themselves. A motor vehicle dealer should be able to make a case as to the positive creditworthiness and reputation of his dealership. Lenders will often request credit information and references pertaining to both the dealership and the dealer principal. Tax returns, along with well-prepared financial statements, should be available upon request. Perhaps the greatest unknown variable for lenders, and the area that presents the greatest legal exposure for motor vehicle dealers and lenders alike, is legal compliance and the quality of the dealership’s paperwork. With the likelihood of consumer defaults increasing, so is the likelihood of litigation. The most prevalent claims and defenses raised by consumer lawyers today are related to noncompliant paperwork. A dealer should be able to demonstrate the ability not just to sell a car at his dealership, but to keep it sold! Not surprisingly, this is an area where dealers face one of their greatest challenges.

There are a whole host of State and Federal Laws that impact a motor vehicle transaction, including State Unfair and Deceptive Acts and Practices (UDAP) Statutes and Related Administrative Rules, State Motor Vehicle Codes and Retail Installment Sales Acts, the Uniform Commercial Code, the Magnuson Moss Warranty Act, the Fair Credit Reporting Act, the Truth in Lending and Leasing Acts, the FTC Used Car Rule and the Federal Privacy and Anti-Terrorism Laws and their implementing regulations, to name a few. Not only have these State and Federal Laws gone through major revisions during the past few years, but numerous case decisions and regulatory interpretations addressing compliance with these Laws are rendered on an ongoing basis and, together, they have had an impact on virtually every form in a motor vehicle sales transaction.

One of the most important things to remember is that none of the individual forms in a transaction is meant to stand on its own. Rather, a dealership’s forms must work together and be considered in the context of the entire transaction. Just as important is to recognize that the different variables in a transaction, such as whether a vehicle is new or used, whether the dealership is selling or leasing a vehicle, and whether traditional, subprime or buy here-pay here financing is being obtained, will impact the content of the dealership’s forms and the types of disclosures contained therein. While an individual form may be appropriate for the purpose for which it was designed, it may cause a problem for the dealership when used in conjunction with other forms in a transaction.

The fact that dealerships often obtain their forms from multiple sources can further complicate the issue. For example, the Uniform Commercial Code, the Magnuson Moss Warranty Act and the FTC Used Car Rule each impose specific requirements on dealerships when offering or disclaiming warranties. Many State UDAP Statutes also require that every retail sale of a motor vehicle be preceded by a written contract that contains all of the agreements of the parties, including all material statements made prior to obtaining the customer’s signature on the purchase contract. If a dealership is to be in compliance with all of these Laws, it must ensure that the Retail Purchase Agreement, FTC Buyers Guide and Limited Warranty Document contain the required disclosures and those disclosures must be consistent and properly integrated.

Putting all of this together, achieving forms compliance for a motor vehicle dealership and keeping current with legal, regulatory and legislative developments that impact the dealership’s forms can be extremely challenging. What’s more, consumer lawyers know the impact that these legal and regulatory developments have on dealership paperwork and recognize that many dealers have not taken action to update their paperwork or procedures. They have adopted a new strategy for handling motor vehicle cases in hopes of recovering large damage awards and attorney fees. Instead of focusing on what the consumer alleges his problem is with the motor vehicle transaction, the consumer’s lawyer goes for what has become known as the “quick kill.” They carefully scrutinize the dealership’s paperwork looking for incorrect or inappropriately completed paperwork that might provide the basis to successfully rescind the transaction, recover damages and collect attorney fees.

Just recently, a class action lawsuit was certified against an Ohio-based motor vehicle dealership group arising out of pre-printed disclosures on the dealership’s retail purchase agreement. The consumers asserted that the inclusion of a $97.50 “dealer overhead” charge as a pre-printed entry in connection with the sale or lease of a motor vehicle constitutes a violation of Ohio’s UDAP Statute. They also alleged that the inclusion of the charge as a pre-printed entry implies to consumers that it is both proper and non-negotiable and, because the dealership knows or should know that it is illegal, constitutes fraud or, at a minimum, negligent misrepresentation on the part of the dealership. The Trial Court granted the motion to certify a class consisting of all consumers who have purchased or leased a vehicle from the dealership group utilizing the standardized forms during the past four years. The class of consumers certified in this case is estimated to consist of nearly 60,000 individuals who are seeking a refund of the $97.50 overhead charge, an order prohibiting the dealerships from charging the fee in the future, punitive damages and attorneys’ fees.

Lenders recognize that the trend among consumer lawyers is to attack dealership paperwork and, as a result, are cautious of conducting business with new dealerships. There are still many quality lenders who remain committed to independent dealers and the used motor vehicle industry. A number of these lenders have expressed an interest in working with NIADA to develop ways to further minimize the risks and conduct more business in the motor vehicle industry. There was a great deal of activity and discussion about these lender issues and paperwork compliance at NIADA’s Convention.

With today’s sluggish economy and a diminishing pool of lenders, independent dealers find themselves having to work harder to attract lenders. Taking action now to formalize a business plan, gather appropriate credit and personal references, and ensure that your dealership’s paperwork and day-to-day sales activities are in compliance with the law will not only help minimize overall legal exposure, but should help attract new lending sources to your dealership. If you need assistance in reviewing and updating your dealership’s paperwork, various training and educational programs offered by NIADA and its Affiliated State Associations can be a valuable resource.

The Car Counselor

When dealers think about benchmarks, financial items such as profitability, expenses, inventory turn, and F & I penetration come to mind. Often overlooked are benchmarks for legal and regulatory compliance, which can have a significant impact on a dealership’s bottom line. We frequently receive inquiries requesting advice on what a motor vehicle dealer should be doing in this area. This article will assist you in establishing legal and regulatory compliance benchmarks for various areas within your Dealership.

Perhaps the greatest area of legal exposure for a Dealership is the paperwork. Dealers should have their paperwork reviewed and, as necessary, updated on a yearly basis. Having a relationship with a paperwork vendor capable of keeping you apprised of compliance issues as they develop will help streamline this process. You should also limit who within the Dealership has authority to revise the paperwork and have procedures in place to ensure that employees do not use paperwork brought in from outside sources, such as the last Dealership where they worked. Regularly auditing actual deals can help to ensure that paperwork is being properly completed and that computers are properly programmed to print information in the appropriate places.

You can’t sell a vehicle without advertising. The persons who create your Dealership’s advertisements should be familiar with the Federal Truth in Lending and Leasing Acts and State Advertising Laws, and your advertisements should be reviewed for compliance with these Laws. Regardless of whether they appear in the newspaper, on television, in a letter to a potential customer, or on the Internet, your advertisements must contain mandated disclosures if you use any of the “triggering terms” defined in Regulations Z and M. They must also contain any material limitations or exclusions disclosed in a clear and conspicuous manner. Direct mailers and telephone solicitations or follow up calls can raise a whole host of other issues. If mailers are sent to a list of “prescreened” customers or “guarantee financing”, for example, there are numerous other laws to consider, including the Fair Credit Reporting Act, Federal and State Privacy Laws, the Driver’s Privacy Protection Act, and your State’s Credit Repair Statute. On a final note, remember to keep copies of all advertisements in case you need to respond to a consumer or regulatory inquiry about an offer or the contents of an advertisement.

An area within the Dealership receiving a great deal of legislative and regulatory attention is finance and insurance. Dealers should start their list of compliance benchmarks in the F & I Department with making sure they have a copy of a dealer agreement for each lender and service provider with whom the Dealership does business. These agreements and any related materials should always be reviewed prior to signing them by someone who has knowledge about both the products being offered and our industry. Reviewing dealer agreements and properly training employees on how to sell service contracts, GAP agreements, insurance products and any other “after-market-products” sold at the Dealership can go a long way in protecting your Dealership from potential liability. All too often we find that Dealers rely on representations made by the third party as to the compliance of its marketing materials, the products it offers and even the training it provides to the Dealership’s employees. For those who use an F & I Menu, remember to revise it whenever you begin or cease offering a product so that it accurately reflects the products and services available at the Dealership. If product disclosures, finance charges and payment terms in the retail installment contracts and lease agreements are calculated by a computer program, you should also take time to verify that the required information and related calculations are in compliance with applicable laws.

When it comes to Dealership compliance, your employees play a major role. All potential employees should be required to complete an employment application and, at a minimum, you should contact references to verify that the individual is qualified for the position. Depending upon the job responsibilities and access the applicant will have to confidential information about your Dealership and customers, you may also wish to conduct background investigations or obtain a credit report. All employees should also receive an employee handbook that contains information about the Dealership’s internal policies and procedures. Remember to address issues such as who has access to pull and/or review credit reports, whether customer information belongs exclusively to the Dealership and whether employees are permitted to remove such information from the Dealership both during the term of employment and afterwards. If specific agreements are made with respect to commission payments and bonuses, you may also wish to enter into a separate written employment or compensation agreement. Employee handbooks should be updated regularly and employees should always be required to acknowledge in writing that they have received and read the materials. Just as important is requiring all employees to attend training and/or educational seminars related to their duties at the Dealership, not just at the time they are hired, but also on an ongoing basis.

Dealership privacy policies and customer identification procedures have also been under the microscope as of late. Every Dealer should have a Privacy Policy that accurately reflects the Dealership’s business practices with respect to collecting and sharing customer information and a comprehensive written information security program that describes how the Dealership protects the confidentiality of the information collected. Access to customer information and other Dealership records should be limited to authorized employees who need the information to complete their employment responsibilities. Customer information must be obtained to verify the identity of customers and the Dealership has to have procedures to ensure that it does not enter into transactions with any individual or entity that appears on the list of Specially Designated Nationals and Blocked Persons maintained by the Office of Foreign Asset Control (OFAC). Motor vehicle dealers are responsible not only for implementing their own privacy policies and procedures, but must also take steps to ensure that the lenders and service providers with whom they share information have taken steps to maintain the confidentiality of customer information.

With use of the Internet gaining popularity in our industry, dealership website and computer systems warrant a closer look. The same policies and procedures that apply in your day-to-day transactions apply when conducting business online. Online advertisements must comply with Federal and State Advertising Laws and should be updated and deleted on a regular basis. Dealers who permit consumers to submit credit applications electronically must post their privacy policies online and, if they obtain credit reports online, they must be capable of retaining copies for the appropriate time period. Keep in mind also that many of the same precautions taken with respect to your paperwork apply to your Dealership’s computer system. Computer systems and programs should be reviewed and updated regularly. You should also limit who has the ability to update software applications, take steps to prevent and prepare for a systems failure and ensure that data is eliminated or hard drives removed when disposing of computers and any other electronic media and records.

If you have already developed legal and regulatory compliance benchmarks and they meet or exceed those discussed in this Program, then you are on the right track. As you watch this, however, if you found yourself thinking that we raised a lot of good “ideas”, then its time to take the next step and put a plan of action in place. Formalizing legal and regulatory compliance benchmarks that help ensure your Dealership’s paperwork and day-to-day sales and business activities are in compliance with the law will not only help minimize overall legal exposure, but will help your Dealership sell more cars and keep them sold, increasing your Dealership’s overall profitability.

The Car Counselor

My recent article titled “Financial Benchmarks Help The Bottom Line, But Compliance Benchmarks Protect It!,” dealt primarily with benchmarks for legal and regulatory compliance related to the advertisement and sale of motor vehicles. Now, its time to take a look at your service department! If you are like most dealers, it’s been some time since you had the paperwork and signage in your service department reviewed and updated. This area of the dealership is often overlooked from a compliance perspective. Inconsistent disclosures in service paperwork, missing information and contradictory signage posted in the service department are common errors and easy targets for state regulators and consumer attorneys alike. Not long age, I encountered a dealership that was ordered to return $138,000 to consumers and pay $42,000 in civil penalties and attorney’s fees as a result of claims that it used noncompliant repair orders and imposed inappropriate charges in connection with repairs and services it performed. This article will assist you in establishing legal and regulatory compliance benchmarks for your service department.

As with the sales department, the greatest area of legal exposure is paperwork. Dealers should have their service paperwork reviewed and updated on a regular basis. Start by reviewing the repair order and other service related paperwork to ensure that they contain all of the information and disclosures required by applicable law. One of the most important things to remember is that the dealership’s service forms must work together and contain consistent disclosures. The dealership should obtain permission from its customers prior to road-testing their vehicles, ascertain whether they wish to have parts removed from their vehicles discarded or returned, and advise them of additional charges that may be incurred for miscellaneous materials and partially completed work or for restocking of returned parts. Customers should also be provided with the appropriate estimate choice form before any services/repairs are performed and a system should be in place to obtain proper authorization for any additional services or repairs that become necessary. The dealership’s warranty and return policies should also be clearly communicated to customers and be consistent in all of the service paperwork, such as the repair order, repair invoice and after hours repair authorization. If you perform a repair at no charge or a reduced charge to the customer when you are not obligated to do so, don’t forget to utilize a “goodwill” repair form indicating that the performance of the goodwill repair does not create any additional dealership obligation or warranty in connection with the repair or service.

Signage posted in the dealership’s service department is necessary not only to make appropriate disclosures to customers, but also to comply with safety-related laws and regulations. Signage advising customers of their right to receive an estimate choice, additional fees that may be incurred in various circumstances and the dealership’s warranty and return policies should be consistent with the information provided to customers in the service paperwork and be posted in the area where customers commence the service transaction. You should also have signs that restrict the access of customers to certain areas. In those areas where employees are performing services and repairs, signage should be posted explaining the proper use of safety equipment and the safety equipment, such as first aid kits, eye wash stations and goggles should be located in close proximity to the signs and easily accessible.

All service employees should receive information about the service department’s policies and procedures, as well as appropriate training. Remember to address which employees have access to service records, keys to customer vehicles and other customer information and property. Every dealership should have a Privacy Policy that accurately reflects the dealership’s business practices with respect to collecting and sharing customer information and a comprehensive written information security program that describes how the dealership protects the confidentiality of the information it collects. And don’t forget about protecting the confidential information you collect and store in your service department.

In today’s motor vehicle industry, the dealership’s service department is an integral part of the dealership’s overall financial success. Make sure the paperwork you are using, the fees you are charging and the signage that you have posted in your dealership’s service department are in compliance. Doing so will help to limit your potential liability and increase your dealership’s profitability.

The FTC’s Privacy Rule became effective in 2001 and the Safeguards Rule in 2003.  By now, you would think the motor vehicle industry would have a pretty good understanding of how to comply with these Regulations.  However, as I have traveled the United States speaking at various NIADA and State Affiliate Conventions and meetings, I am often reminded that this is not the case.  It likely has as much to do with the complexity of the FTC’s Privacy and Safeguards Rules as it does the number of other Privacy related Rules and Regulations that are being adopted.  In an attempt to make your dealership feel safe, we will draw a simple roadmap to help dealers maneuver through the Safeguards Rule requirements.
 
The FTC’s Safeguards Rule did not change the dealership’s obligations under the FTC’s Privacy Rule.  Motor vehicle dealerships are required to provide their customers with a Privacy Notice that advises the customer about the types of information the dealership collects, the sources from which the information may be obtained, and the dealership’s policies with respect to sharing that information.  In order to fully comply with the Gramm-Leach-Bliley Act and the FTC’s Privacy Rule, motor vehicle dealers are also required to make a statement about their information safeguarding practices in their Privacy Notices.  As a result, most dealership Privacy Notices state “we maintain physical, electronic and procedural safeguards to protect the confidentiality and security of the information we collect”.  Pursuant to the Safeguards Rule, dealers must also have a written document that specifies the steps they have taken to assess the types of risks that exist with respect to the information being obtained by unauthorized individuals and to protect the confidentiality and security of such information. 

The FTC’s Safeguards Rule specifically requires every dealer, regardless of the size of his dealership, to develop, implement and maintain a comprehensive written information security plan that describes the dealership’s program to protect customer information.  The Dealership must: (1) Designate an employee or employees to coordinate the safeguards program; (2) Identify and assess the risks to customer information in each relevant area of the dealership’s operation, and evaluate the effectiveness of the current safeguards for controlling these risks; (3) Design and implement a safeguards program, and regularly monitor and test it; (4) Select service providers capable of maintaining appropriate safeguards for the customer information the dealership shares and require them to agree contractually to do so; and (5) Evaluate and adjust the program as appropriate.

The FTC developed flexible rules to permit each dealership to develop privacy policies and information security standards taking into consideration the dealership’s size and complexity, the nature and scope of its activities, and the sensitivity of the information it collects.  Like the Privacy Rule, the Safeguards Rule applies only to transactions involving persons who obtain a financial product or service from the dealership primarily for personal, family or household purposes.  Although it is a good idea to apply the same privacy policies and information security standards to all of the information collected by the dealership, it is not required for information about companies or individuals who obtain financial products or services for business, commercial or agricultural purposes, unless the dealership’s Privacy Notice states otherwise.

In September of 2003, the FTC began serving formal investigative requests on motor vehicle dealerships asking for evidence of compliance, including: A description of the type of information collected from or about customers and a sample copy of each form used to collect information; a copy of the written information security program and the time period during which it was written and implemented; a description of the security risks that were identified in developing the plan and how the final plan addresses each of the risks; the name and title of employees responsible for coordinating the safeguards plan; and the name of each service provider together with information regarding the types of customer information they have access to, the manner and form of access, the reasons for access, a copy of the contract requiring them to implement and maintain security safeguards, and an explanation of how the dealership confirms that safeguards have been implemented and are maintained.  As a reminder, the penalty for noncompliance is $11,000 per day. 

With these monetary amounts at stake and privacy being on the top of Federal and State Regulators’ agendas, we anticipate that the FTC has only just begun its enforcement of this and other Privacy Rules.  Dealers are well advised to consider other Privacy Laws that have recently been enacted or are under consideration.  For example, On December 4, 2003, President Bush signed into law the Fair and Accurate Credit Transactions Act (FACT Act) in an attempt to reduce the risk of consumer fraud and related crimes, including identity theft, and to assist any victims.  The FTC has already begun adopting Regulations to enforce the Act, including a “Disposal Rule” that implements Section 216 of the Act.

Section 216 requires the FTC, in coordination with the Federal Banking Agencies, the National Credit Union Administration (NCUA), and the Securities and Exchange Commission (SEC), to issue regulations requiring “any person that maintains or otherwise possesses consumer information, or any compilation of consumer information, derived from consumer reports for a business purpose to properly dispose of any such information or compilation.”  The stated purpose of this Section is to prevent unauthorized disclosure of consumer information and to reduce the risk of fraud or related crimes, including identity theft, by ensuring that records containing sensitive financial or personal information are appropriately redacted or destroyed before being discarded. The FTC’s Proposed Disposal Rule would require that any person that maintains or otherwise possesses consumer information “take reasonable measures to protect against unauthorized access to or use of the information in connection with its disposal.”   Like the Safeguards Rule, it provides covered entities flexibility to make decisions taking into consideration their size, the sensitivity of the consumer information collected, the nature and size of their operations, and the costs and benefits of different disposal methods. Unless extended by the FTC, dealers will only have 3 months after publication of the Final Rule to become compliant.

Privacy is a constantly changing area of the law that will continue to impact a dealership’s policies, practices and operational procedures.  It is also at the top of Regulators’ enforcement agendas and a hot button for consumer attorneys. Therefore, when it comes to privacy issues, an ounce of prevention may be worth more than a pound of cure!

The Car Counselor

You filed the necessary license applications, met the facility requirements, and paid the appropriate fees mandated by the state to obtain your motor vehicle dealer license. After years of doing business, the city where your dealership is located passes new licensing and/or zoning requirements that impact your dealership or only apply to used motor vehicle dealers. Some dealers, including you, are unable to comply with the requirements because your lot cannot be expanded to meet the size requirements or you would incur substantial costs to remove structures and/or pavement to plant landscaping. Sound crazy? It’s happening! A few years ago Prince George’s County in Maryland, passed legislation mandating that used car dealers have a minimum of 25,000 square feet to continue operating their businesses in the County. There was no grandfathering provision for existing dealers or other exceptions. The only option for those unable to meet the requirement was to move the dealership. In Cleveland, Ohio the city adopted an ordinance that required used motor vehicle dealers to apply for a license from the Commissioner of Assessments and Licenses and imposed new fencing and landscaping requirements. If you find yourself in this situation, what would you do?

Dealers who encounter new licensing or zoning requirements generally have three options: Ignore them and incur fines and penalties and, in some cases, risk losing the dealership; comply with them and incur additional licensing fees and costs to bring their dealerships into compliance; or take a stand and fight the legality of the ordinance, which could result in a long and costly legal battle. Before making a decision, dealers should carefully consider all of their options. The licensing issue is the most straightforward. The question of whether a municipality may impose licensing and/or zoning requirements upon used motor vehicle dealers may raise a valid constitutional basis for challenging it. Every state has enacted regulations governing the licensing of motor vehicle dealers. These regulations typically define when an individual or entity is required to obtain a license to engage in an activity and, if so, the requirements for obtaining one. Most state constitutions further prohibit local municipalities from adopting or enforcing laws that conflict with general laws of the state. Taking a look at a real life situation may help bring clarity to this issue.

In City of Dayton v. Stearns, an individual was found guilty of violating a city ordinance that prohibited casual sales of second-hand automobiles from premises not used exclusively for the selling or displaying for sale of second-hand automobiles. A statute enacted by the State of Ohio that regulates the licensing of motor vehicle dealers and salesmen, however, excluded casual sales from the scope of the licensing requirements. The individual asserted that the city ordinance was unconstitutional as being in conflict with the State law because it placed an absolute prohibition on selling or displaying for sale motor vehicles without a license and did not contain the casual sales exemption. The Municipal Court agreed.

The Ohio Constitution provides municipalities with the authority to exercise all powers of local self-government and to adopt and enforce within their limits such local police, sanitary, and other similar regulations not in conflict with the general laws having statewide application. Following the rationale articulated by the Ohio Supreme Court in Auxter v. City of Toledo, and a number of other case decisions preceding and following that case decision, the Court articulated that the test for determining whether an ordinance is ‘in conflict’ with general or state laws is “whether the ordinance permits or licenses that which the statute forbids and prohibits and vice versa.” In the case of the Dayton Ordinance, the municipality required those wishing to function as a second-hand automobile dealer in Dayton to obtain a license upon the payment of a fee to operate in an area in which the state law on the subject also requires one wishing to engage in the business to secure a state license for a fee and, because the Ordinance conflicted with the state or general law, the Court held that it was unconstitutional and invalid.

Challenging zoning requirements, such as the fencing and landscaping requirements imposed on used motor vehicle dealers in Cleveland, Ohio, is not as straightforward. Dealers should first consider if the ordinance covers issues that are also covered by state licensing requirements, such as lot sizes, or if it covers something that is typically governed by municipalities, like trees and green space. If there is an overlap between the state licensing and municipal zoning requirements, the constitutionality issues discussed above may apply. Dealers should then consider whether the ordinance applies to all businesses or a class of businesses. If only a select class of businesses are covered, there may be a constitutional challenge related to the application of the law. A broader issue is differentiating between an existing dealer who does not want to comply with a new regulation versus one who is unable to comply.

When situations such as these arise, it is important to quickly determine if you are impacted and how and to take immediate action. The longer you wait, the more difficult it may be to challenge new licensing and zoning requirements. Putting together a group commonly situated dealers is also a good idea. And remember, in matters such as these, your state and local dealer associations can be of great assistance!

For purposes of the Credit Practices Rule, a co-signer is defined as a person who will be liable on the credit contract, but does not receive or use the proceeds or goods purchased with the credit. Put another way, a “co-signer” undertakes liability as a favor to the main debtor who would not otherwise qualify for credit. A co-buyer or co-borrower, on the other hand, would share the purchased goods and/or loan proceeds. Since they receive a benefit from the contract, they are not considered co-signers under the Rule and are not required to get the Notice to Co-Signer.

So, as is often the case in consumer credit transactions these days, when more than one consumer signs paperwork, how do you know whether they are a co-applicant or a co-signer? Finding your answer begins with the credit evaluation of the individuals and how they represent themselves during the credit application process. Let’s start with the credit application itself. It is important to know whether the applicant requested individual credit and needed a co-signer, or whether two or more people jointly applied for credit. If the applicants are co-applicants, which would be defined as two individuals jointly applying for credit, their debt and income are typically combined for evaluation purposes. If one of the applicants is going to act as a true co-signer, the debt-to-income levels are evaluated separately to see if either person can “back up” the extension of credit. Regulation B (which implements the Equal Credit Opportunity Act) specifically requires that an individual’s intent to be a joint applicant is captured at the time of applying for credit and should help dealers to recognize and record the applicant’s intentions.

Remember, the applicant’s intentions will likely impact not only whether they are given a Notice to Co-signer, but also what other documents they sign. A co-buyer will typically sign all of the documents that the buyer of the vehicle signs, and will be identified as an owner on the Certificate of Title. A true co-signer, however, will only have to sign the retail installment contract or guaranty and those documents that are necessary for the lender to obtain a security interest in the vehicle. Keep in mind that your state laws may have special definitions or create special rules for co-applicants and/or co-signers. For example, for purposes of the Credit Practices Rule, a spouse whose signature is required on a credit obligation to perfect a security interest pursuant to state law is not considered a co-signer for purposes of the Rule.

Well, there you have it, the differences between a co-applicant, co-buyer, co-borrower and co-signer. Until next time, this is The Car Counselor. And remember, car buying can be fun, and easy!

Go ahead. Take a good look at your dealership. It appears to be in good shape, but do you see what I see? What do you think it looks like from my perspective?

How can you improve dealership compliance and avoid problems before they happen, while increasing customer satisfaction and overall dealership profitability at the same time? It can be done. Want to know how I would accomplish it? I would begin by conducting a “Walk-thru” of your dealership paying special attention to the following things.

Paperwork: Dealers should have their paperwork reviewed and, as necessary, updated on a yearly basis. Having a relationship with a paperwork vendor capable of keeping you apprised of compliance issues as they develop will help streamline this process. You should also limit who, within the Dealership, has authority to revise the paperwork and have procedures in place to ensure that employees do not use paperwork brought from outside sources, such as the last Dealership where they worked. Regularly auditing actual deals can help to ensure that paperwork is being properly completed and that computers are properly programmed to print information in the appropriate places.

Advertising: The persons who create your Dealership’s advertisements should be familiar with the Federal Truth-in-Lending and Leasing Acts and State Advertising Laws and/or your advertisements should be reviewed for compliance with these Laws. Regardless of whether they appear in the newspaper, on television, or on the Dealerships’ website, your advertisements must contain mandated disclosures if you use any of the “triggering terms” defined in Regulations M and Z. They must also disclose any material limitations or exclusions to offers that are made in a clear and conspicuous manner. Direct mailers and telephone solicitations or follow up calls can raise a whole host of other issues. Remember to keep copies of all advertisements in case you need to respond to a consumer or regulatory inquiry about an offer or the contents of an advertisement.

F&I: Dealers should make sure they have a copy of the dealer agreement for each lender and service provider with whom the Dealership does business. These agreements and any related materials should always be reviewed by someone who has knowledge about both the products being offered and our industry. Reviewing dealer agreements and properly training employees on how to sell service contracts, GAP agreements, insurance products and all other “F&I products” sold at the Dealership can go a long way in protecting your Dealership from potential liability. All too often we find that Dealers rely on representations made by a third party as to the compliance of its marketing materials, the products it offers and even the training it provides to the Dealership’s employees. For those who use an F&I Menu, remember to revise it whenever you begin or cease offering a product so that it accurately reflects the products and services available at the Dealership and to make sure the menu is consistent with other paperwork provided to a customer.

Employees: All potential employees should be required to complete an employment application and, at a minimum, you should contact references to verify that the individual is qualified for the position. Depending upon the job responsibilities and access the applicant will have to confidential information about your Dealership and customers, you may also wish to conduct background investigations or obtain a credit report. All employees should also receive an employee handbook that contains information about the Dealership’s internal policies and procedures. Remember to address issues such as who has access to pull and/or review credit reports, whether customer information belongs exclusively to the Dealership and whether employees are permitted to remove such information from the Dealership both during the term of employment and afterwards. If specific agreements are made with respect to commission payments and bonuses, you may also wish to enter into a separate written employment or compensation agreement. Employee handbooks should be updated regularly and employees should always be required to acknowledge in writing that they have received and read the materials. Just as important is requiring all employees to attend training and/or educational seminars related to their duties at the Dealership, not just at the time they are hired, but on an ongoing basis.

Privacy Policies and Customer Identification Procedures: Every Dealer should have a Privacy Policy that accurately reflects the Dealership’s business practices with respect to collecting and sharing customer information and a comprehensive written information security program that describes how the Dealership protects the confidentiality of the information collected. Access to customer information and other Dealership records should be limited to authorized employees who need the information to complete their employment responsibilities. Customer information must be obtained to verify the identity of customers and the Dealership has to have procedures to ensure that it does not enter into transactions with any individual or entity that appears on the list of Specially Designated Nationals and Blocked Persons maintained by the Office of Foreign Asset Control (OFAC). Motor vehicle dealers are responsible not only for implementing their own privacy policies and procedures, but must also take steps to ensure that the lenders and service providers with whom they share information have taken steps to maintain the confidentiality of customer information.

Dealership Website and Computer Systems: Online advertisements must comply with Federal and State Advertising Laws and should be updated on a regular basis. Dealers who permit consumers to submit credit applications electronically must post their privacy policies online. Keep in mind also that many of the same precautions taken with respect to your paperwork apply to your Dealership’s computer system. Computer systems and programs should be reviewed and updated regularly. You should also limit who has the ability to update software applications, take steps to prevent and prepare for a systems failure and ensure that data is eliminated or hard drives removed when disposing of computers and any other electronic media and records. By the way, one more thing, what exactly is the dealership doing online? Marketing, advertising, taking orders or selling cars and how does it affect your paperwork? You must have answers to these questions!

Service: Dealers should also have their service paperwork reviewed and updated on a regular basis. Start by reviewing the repair order and other service related paperwork to ensure that they contain all of the information and disclosures required by applicable law. The dealership should obtain permission from its customers prior to road-testing their vehicles, ascertain whether they wish to have parts removed from their vehicles discarded or returned, and advise them of additional charges that may be incurred for miscellaneous materials and partially completed work or for restocking of returned parts. Customers should always be provided with the appropriate estimate or estimate choice form before any services/repairs are performed and a system should be in place to document any additional services/repairs that a customer authorizes. The dealership’s warranty and return policies should also be clearly communicated to customers and be consistent in all of the service paperwork, such as the repair order, repair invoice and after hours repair authorization. If you perform a repair at no charge or a reduced charge to the customer when you are not obligated to do so (a “goodwill” repair), don’t forget to utilize a form indicating that the performance of the goodwill repair does not create any additional dealership obligation or warranty in connection with the repair or service.

Signage posted in the dealership’s service department is necessary not only to make appropriate disclosures to customers, but also to comply with safety-related laws and regulations. Signage advising customers of their right to receive an estimate choice, additional fees that may be incurred in various circumstances and the dealership’s warranty and return policies should be consistent with the information provided to customers in the service paperwork and be posted in the area where customers commence the service transaction. You should also have signs that restrict the access of customers to certain areas. In those areas where employees are performing services and repairs, signage should be posted explaining the proper use of safety equipment and the safety equipment, such as first aid kits, eye wash stations and goggles should be located in close proximity to the signs and be easily accessible.

Okay, now you have a glimpse of what I see when I look at your dealership. You probably thought that your dealership was in pretty good shape, but I see numerous areas within the dealership that could use a closer look and a little fine-tuning. I see paperwork that needs to be updated and policies and procedures that need to be developed or revised along with ways to improve customer satisfaction, prevent mistakes and solve existing dealership problems, not to mention many unanswered Internet questions. If these issues are attended to and appropriate action is taken, it will result in a more efficiently run and profitable dealership.

Accomplishing this must be very complicated, time consuming and expensive, right? It doesn’t have to be. In fact, you can do most of it yourself provided you know what to look for. Want to see what I see? Get a copy of The Car Counselor’s Guide titled “Conducting Your Own Dealership Compliance Walk-Thru” and remember, put some fun back into the car buying process!

When it comes to selling a car, nothing seems easier than determining whether it is new or used.  In reality, nothing is further from the truth.  There is a maze of Federal and State Laws that impact whether a motor vehicle is characterized as new or used, including the Automobile Information Disclosure Act (The Monroney Law) and the Federal Trade Commission’s (FTC) Used Car Rule, Federal and State Taxation Laws, State Unfair and Deceptive Acts and Practices (UDAP) Statutes, and State Titling and Advertising Laws.  As strange as it may sound, there may even be times when a motor vehicle is appropriately characterized as both new and used.

The logical starting point in determining whether a vehicle is new or used is the definition of a new motor vehicle under the Automobile Information Disclosure Act.  This Act defines a “new automobile” as “an automobile the equitable or legal title to which has never been transferred by a manufacturer, distributor or dealer to an ultimate purchaser.”  Many State Titling Laws use a similar standard, differentiating between new and used motor vehicles on the basis of whether a vehicle has been titled in the name of an ultimate purchaser or end-user.  While these standards seem straight forward, the analysis becomes more complicated when mileage is put on a vehicle before it is sold to an ultimate purchaser.

Consider this set of facts from a case that came before the Florida New Motor Vehicle Dealer Administration Board.  In Germain v. General Motors Corporation, the manufacturer argued that a vehicle returned by the consumer pursuant to Florida’s Lemon Law was not covered under the Lemon Law because it was not a new or demonstrator vehicle.  The vehicle was used by an employee of the manufacturer as a “company car” for approximately one year before it was sold at retail to the consumer.  At the time of sale, the Purchase Agreement, the Used Vehicle Buyer’s Guide affixed to the window of the vehicle, and the application for title submitted by the selling dealership all identified the vehicle as “used,” which was the correct disclosure under the FTC’s Used Car Rule.  The FTC defines a “used vehicle” as “any vehicle which has been driven more than the limited use necessary in moving or road testing a new vehicle prior to delivery to a consumer…” However, after considering Florida’s definition of a used motor vehicle, the prior use of the vehicle, and the fact that neither the manufacturer nor the dealer had transferred title or possession of the vehicle to an ultimate purchaser prior to its acquisition by the consumer, the Board declared that it was “new” for purposes of Florida’s Lemon Law.

Federal and State Taxation Laws and State Advertising Laws may produce yet a different result.  For example, Federal Revenue Procedure 2001-23, which provides an alternative last-in, first-out (LIFO) inventory computation method for taxpayers that sell used vehicles, clarifies that the term “used vehicle” for purposes of the Used Vehicle LIFO Method refers to previously titled vehicles and does not include demonstrator vehicles.  State Advertising Laws will typically include another set of definitions for “new” and “used” vehicles and “demonstrator,” “factory official,” and “executive” vehicles as well.   While one State may include demonstrator, factory official and executive vehicles in the definition of “new” for purposes of advertising disclosures, others may require dealers to advertise such vehicles as “used.”

Keep in mind that most State UDAP Statutes and Advertising Rules require that any material statements be reduced to writing and integrated into the Retail Purchase Agreement for the transaction.  If a Maroney Sticker is posted in the vehicle’s window together with a Buyer’s Guide and the Retail Purchase Agreement identifies it as a new demonstrator vehicle, the dealer is well advised to explain in writing whether the vehicle is new or used and under which standards.  The disclosure may impact a number of other disclosures made in connection with the sale, such as the warranty statement (i.e. whether or not the vehicle may be sold “As-Is” under State Law), state inspection disclosures, and the sales tax calculation.  As usual, something that appears simple at first blush can be pretty complicated given the maze of regulatory and legal issues that must be considered.  Having an up-to-date Retail Purchase Agreement and related sales documents is the first step.  Understanding the issues raised in this article and the accompanying thought process will help to ensure that you complete them appropriately.

“Compliance” is an interesting word.  Defining it in terms of the motor vehicle industry means having your dealership’s policies, procedures and paperwork in accordance with the law.  Every dealership should have a compliance program, but it doesn’t happen on its own.  Sure, in my 20 plus years representing dealers I’ve heard many of them say “I’ve been doing this for many years (you insert the number) and have never had a problem.”  Of course, that’s the discussion in the exhibit hall, at the auction or over a cup of coffee.  Back at my office, however, I can’t count the number of times I have received a call from that same dealer asking for our help because his streak of luck just ended in a lawsuit or regulatory matter that could cause serious financial harm to the dealership.

Fortunately, most dealers don’t rely on a lucky streak and strive for compliance. They frequently comment, however, that compliance is impossible to achieve because of the overwhelming number of federal and state laws that impact a motor vehicle dealership, not to mention the fact that regulators and courts are continually modifying their interpretations of dealers’ obligations under them.  Yes, it is increasingly difficult to stay current.  But, if your goal is to avoid problems (AND IT SHOULD BE!), keeping up with legal and regulatory initiatives, recognizing their impact on your dealership’s paperwork and procedures, and training dealership personnel are all a must.  So the question remains, are you going to rely on your lucky streak or develop a compliance program?

Did I mention that an effective compliance program can help attract new lending sources for your dealership or help you sell a buy here-pay here portfolio?  It can also enable your dealership to develop a profitable strategy for marketing and advertising vehicles on the internet.  Heard enough?  I have.  For those of you who do rely on luck, the lucky streak is over.  Let’s develop a compliance program for your dealership.

Compliance is something that cannot be delegated; it has to be handled from the top down, starting with the dealer principal.  The good news is that compliance doesn’t have to be as difficult or as costly as many make it out to be.  In fact, there are a number of efficient and cost effective ways for dealers to obtain legal, legislative and regulatory information as it is happening.  A good example of this is the 2nd Annual National Dealer Compliance and Profitability Expo that took place at the Columbus Fair Auto Auction.  Attendance, both live and on the internet, were free.  The Expo featured a full day of education and discussion panels on a wide range of topics impacting motor vehicle dealers.

If you missed the broadcast, all 7 hours of programming are available at http://www.niada.tv/.  Speaking of NIADA.TV, the newly developed online television network should serve as another valuable part of your compliance program.  As I traveled across the Country attending industry conventions and conducting seminars on a various industry related topics, I was continually asked when compliance training that is affordable, timely and easily accessible would be available.  Many dealers also inquired about having materials they could take back to their dealership to conduct training sessions on their own.  Now it’s all available online when it is convenient for you and from the comfort of your dealership at http://www.niada.tv/.  The cost?  Once again, it’s free.

There are also a number of things dealers can do themselves to enhance dealership compliance. Regularly auditing actual deals helps ensure that paperwork is properly completed.  Having someone knowledgeable with the industry look over your advertising and review your website is a good idea as well.  What’s the best place to start?  The overall dealership itself.  Conduct a compliance walk-thru of your dealership and look at it as I would.  Not sure how to do that?  It’s easy if you know what to look for.  Visit the Problem Solved! section of the www.keithwhann.com website and review the article titled “Take A Good Look at Your Dealership: Do You See What I See? and you will be well on your way.  If questions arise during the walk-thru, or in your daily operations for that matter, an answer is often just a click away in the Car Counselor section of the same website.  Once again, it’s free.

Some say compliance is impossible.  It’s not.  You can develop an effective compliance program for your dealership that will not only solve problems before they happen or prevent problems from happening, but will also help increase dealership profitability.  You have to take the first step and, remember, there’s no time like the present.  The benefits are many and the cost is minimal.  Oh, by the way…forget the lucky streak!

Advertising.  It is a something all motor vehicle dealers engage in, but few truly understand what is required to make an advertisement legally correct.  Making it even more difficult is the number of overlapping federal and state laws that regulate it.  Let’s get back to the basics and see if we can’t clear up some of the confusion about this subject.

Any advertisement that deals with the extension of credit, regardless of whether it appears in the newspaper, on television, in a letter to a potential customer, or on the dealerships’ website, must comply with the Federal “Consumer Credit Protection Act” and “Consumer Leasing Act” and their implementing Regulations Z and M, more commonly known as the Truth in Lending and Leasing Acts, and State Unfair and Deceptive Acts and Practices (UDAP) Statutes.

The Federal Truth in Lending and Leasing Acts are similar in nature to the extent that they list certain “triggering terms” which create an obligation on the advertiser to make additional mandated disclosures in the advertisement. The disclosures are designed to insure that consumers are provided with sufficient information to make an informed decision when weighing the options of obtaining an item by cash, credit or through a leasing arrangement. They must be clear and conspicuous and in close proximity to the offer of credit.

Regulation Z governs advertisements promoting a closed-end credit (purchase/sale) transaction. The triggering terms are:

1. The amount of the down payment;
2. The amount of any payment;
3. The number of payments;
4. The period of repayment; and
5. The amount of any finance charge.

If any of the above-listed triggering terms are used in a closed-end credit advertisement, then the following three disclosures must also be included in that advertisement:

1. The total down payment as a dollar amount or percentage;
2. The terms of repayment/payment schedule; and
3. The “annual percentage rate,” using that term spelled out in full. If the annual percentage rate may be increased after consummation of the credit transaction, then that fact must also be disclosed.

The triggering terms defined in Regulation M apply if an advertisement offers a product through a leasing arrangement. The triggering terms are:

1. The amount of any payment;
2. The number of required payments; and
3. A statement of any capitalized cost reduction or other payment due (or that no down payment is required) at the beginning of the lease.

If any of the above-listed triggering terms are used in a consumer lease advertisement, then the following five disclosures must also be included in that advertisement:

1. A statement that the transaction advertised is a lease;
2. The total amount of any payment (such as security deposit or capitalized cost reduction) required at the beginning of the lease or a statement that no such payment is required;
3. The number, amounts, due dates, or periods of scheduled payments, and the total of such payments under the lease;
4. A statement of whether the consumer has the option to purchase the leased property and at what time and price (the method of determining the price may be substituted for disclosure of the specific price); and
5. A statement of the amount (or method of determining the amount) of any liabilities the lease imposes upon the customer at the end of the term and, if the customer has such liability, a statement that the customer shall be liable for any difference between the estimated value of the leased property and its realized value at the end of the lease term.

The triggering terms traditionally utilized most often by the motor vehicle industry include payment information and the amount of the down payment or capitalized cost reduction. An advertisement should not state that a specific amount of credit, installment payment or down payment can be arranged unless the dealership can, in fact, make those arrangements for consumers with approved credit. Similarly, if a security deposit, first monthly payment or any other payment is required at the time of purchase or at lease inception, the vehicle cannot be advertised as being available with “no money down.”

With so many lenders offering low interest rates and 0% financing for motor vehicle transactions, more dealers are advertising the annual percentage rate to attract customers to their dealerships. While the annual percentage rate is not a triggering term under the Federal Acts, additional disclosures may be necessary in order to comply with State UDAP Statutes and any Rules promulgated thereunder. State UDAP Rules dealing with Exclusions and Limitations in Advertisements and the Advertisement and Sale of Motor Vehicles generally require that any material limitations and exclusions that apply with respect to the consumer’s ability to obtain credit must be stated in close proximity to the words stating the offer. For example, if a dealer has to pay a fee to obtain a particular financing rate, the advertisement should include a statement such as “Dealer contribution may affect consumer cost.”

According to State UDAP Statute Substantiation Rules, motor vehicle dealers should also be able to substantiate claims set forth in their advertisements and should be prepared to present appropriate evidence to a regulatory agency. Remember, when interpreting any representations or claims made in an advertisement a reasonable consumer standard will apply. Dealer’s should avoid using any type, style, size, layout or illustration that may obscure any fact or cause an erroneous impression. Dealers should also be careful not to create, in the reasonable consumer’s mind, a false impression about the quality, usability, or prior use of the vehicle. Finally, the State UDAP Statutes and Advertisement and Sale of Motor Vehicles Rules require that any material statements made to a consumer in connection with a motor vehicle purchase or lease transaction must be integrated into the Retail Purchase Agreement or Retail Lease Agreement, as appropriate.

On a final note, dealers should remember that any direct mail pieces must comply with the above described legal requirements and, if the mailers are sent to a list of “prescreened” customers, there are numerous other laws a dealer should consider, including the Fair Credit Reporting Act, the Federal Privacy Laws and the Driver’s Privacy Protection Act. It has long been the law under most State UDAP Statutes that a statutory duty imposed on supplier cannot be delegated to a third party. No matter what type of third party the dealer uses for assistance with advertising, the bottom line is that it’s the dealer’s obligation to ensure that the content and distribution of the dealership’s advertisements comply with the law.

Visit the Car Counselor section of this website for answers to a variety of questions about advertising  issues that affect your dealership.