Every few months, I ask one of my law partners to share with you the issues they are seeing in their area of our motor vehicle dealer practice. This month, Rob Byerts, describes the myriad of regulatory and compliance issues with which he is assisting our dealers clients and which must be addressed by all dealers in the coming months.
Your dealership has survived the bankruptcy of domestic manufacturers, the unavailability of consumer credit, and the overall decline in sales. You are still in business, and profitable (mostly), so all you need is more product, right? Look out. Many more risks to your business are lurking, waiting for an opportunity to impact your bottom line, even your existence. Dealers need to take steps, now, to protect themselves against the threats confronting them. Compliance audits, training and regular reviews should be part of every dealer’s efforts to ensure these risks do not turn into liabilities.
What’s that? The sun is shining? No need to worry? Selling season has been good to you? Excellent. But dangers abound. State Attorneys General are actively pursuing car dealers.
“Wash. Attorney General accuses Everett car dealer of ‘jacking up prices’” — 4/27/10 Puget Sound Business Journal; “Corbett Sues Pair of Car Dealerships” — 6/29/10 Automotive News; “Ohio Charges Monroe car dealership with deceptive advertising” — 6/2/10 Toledo Blade.
Federal agencies are also after car dealers: “Colo. auto dealer to pay $1.5M to settle lawsuit” — 1/7/10 AP; “Car dealer in Vegas to pay 110K to settle lawsuit” — 1/4/10 Mercury News.
So are plaintiffs’ attorneys: “Local car buyers’ deals put in reverse in ‘yo-yo sales’” — 5/6/10 Virginian-Pilot; “[Miami dealer] class action certified on trade-in values” — 7/21/10 Daily Business Review.
The regulatory environment for a new motor vehicle dealer is treacherous. Federal and state regulators impose numerous requirements on car dealers. Automobile dealerships are among the most heavily regulated industries in the nation. According to the National Automobile Dealers Association (NADA), motor vehicle dealers must comply with over 85 different federal regulations. Each state has an additional package of regulations. In 2009, state legislatures engaged in an exceptional level of regulatory activity.
Auto dealers face a mind-boggling set of regulations and rules, as well as an army of plaintiffs’ lawyers representing consumers seeking relief. Attorneys representing dealers regularly observe that, if dealers do not take steps to address these risks, a claim against the dealership is inevitable.
Yet, despite regular reminders from industry experts, there are some of you who have not yet come up to speed on compliance. You still have not developed your Safeguards Policy. Since the Red Flag Rule is not yet being enforced by the Federal Trade Commission (compliance has been required since last year, only enforcement is postponed) your dealership does not yet have its identity theft prevention program in place. You have not updated your privacy policy to take advantage of safe harbors under the revised rule. Some of you still have not checked to make sure your used car buyers guides/window stickers comply with federal law. If you are in one of these groups, your risk factors are increasing. Dealers who are behind in addressing compliance (lets face it, you have been dealing with a lot of other issues) now need to pay attention to compliance.
What do you need to do? First, look at the obvious things.
- Monroney labels and add-ons: Make sure the information required to be displayed on the car is, in fact, displayed on the car. For example, new cars must all have Monroney labels (sticker price and other relevant information). New cars come that way but sometimes the sticker gets removed before the sale becomes “final.” Make sure all the new cars you have on the lot display the sticker. In addition, add-ons to new cars must be clearly disclosed, preferably on a supplemental sticker on the window clearly visible to customers.
- Buyers guides: Used cars must display a buyers guide disclosing warranty and related information using the FTC required form. All of the required data (including as-is/warranty, service contracts and other information) must be displayed on any used vehicle before it is offered for sale. If you serve native Spanish speakers, you better have Spanish language buyers guides on the cars.
Second, make sure that your dealership has prepared and implements FTC and other government agency required plans and policies, including:
1. A Safeguards Policy to secure and protect customer information;
2. Secure disposal of credit reports, bureaus, and information taken from credit reports;
3. An Identity Theft Prevention (Red Flag) Plan;
4. A procedure to ensure compliance with Do Not Call/Fax requirements;
5. A process to demonstrate OFAC compliance.
Third, take a careful look at the way you handle credit reports and credit applications. New laws and regulations addressing privacy concerns and identity theft have been accompanied by new ways to gain security breaches and new enforcement measures. Dealers must take measures to protect consumer data, employee data and business data from disclosure. The onslaught of cyber attackers seeking to steal identities and valuable information keeps increasing. Every dealership needs to take steps to understand and react to these issues, including appointment of an information security/privacy officer to stay abreast of these complex areas, performance of self audits of dealership premises and processes to detect vulnerabilities, and identification and implementation of training of dealership personnel so they can protect you, your dealership and your customers.
In that same analysis, take a look at your privacy notice and your procedures for issuing adverse action notices. You do not have a procedure for issuing adverse action notices? You thought the banks handled that? Well many times banks and captive lenders do handle such notices, but sometimes they do not. Have you ever told a customer that his credit score meant no one would finance his purchase? You can be required to issue an adverse action notice in those circumstances and may not be able to rely on a bank or other lender’s notice. Make sure your procedures cause you to issue a privacy notice when anyone enters into a contract with you to buy a car and you extend them credit or arrange for someone else to extend them credit, or, in the leasing context, once someone enters into a lease agreement with you.
Fourth, ensure your deal jackets contain required disclosures. In addition to the paperwork to prove entitlement to incentive claims (and related paperwork to substantiate warranty claims) your recordkeeping for new and used sales needs to include written disclosures reflecting:
- Unexpired manufacturer warranty availability;
- Used vehicle warranty availability;
- Fuel Economy Guide availability;
- NHTSA Collision Cost booklet availability;
- Any dealer add-ons;
- Third party payment(s);
- Cosigner notice
Fifth, review your advertising practices, both for individual units and in general. Is the advertising truthful? Does it mislead? Make sure the qualifications you impose are clearly conspicuous to anyone who reviews the advertisement, finance disclosures required by Regulation Z are clearly conspicuous and leasing disclosures required by Regulation M are clearly conspicuous. Check state regulations for additional requirements. Plaintiffs’ attorneys and regulators find great ammunition in dealer advertising. Does your advertising firm protect you against alleged violations in your ads? Probably not.
Finally, if you haven’t had a recent compliance/legal audit of your dealership, get one done. Contact an experienced dealer lawyer who will include not only your paperwork, but also your policies and procedures, your physical layout, your print, radio and TV advertising, your phone and fax policies, your web site and any other subject that involves any contact between the dealership and its customers. If you think you can do this yourself, think again. If you have looked at all, then it’s likely that you have been looking at your own stuff for long enough that you cannot see what others find obvious. A fresh set of eyes can see many things, particularly when those eyes have been trained to look for compliance problems.
More challenges lurk on the regulatory horizon, including Red Flag enforcement, Risk Based Pricing Notices, and Model Privacy Notices. Although it has been pushed off before, the FTC enforcement moratorium for the Red Flag rule will expire later this year. If you have not complied with the Red Flag rule requirements, you have one more chance to do so. The Risk-Based Pricing Rule imposes a new notice requirement that takes effect January 1, 2011.
The rule requires dealers and other creditors who use credit reports to deliver a Risk Based Pricing Notice to consumers to whom the dealer will extend credit but on “material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that person.”
On November 17, 2009, the FTC adopted final Model Privacy Notice forms for compliance with the Gramm-Leach Bliley Act and its implementing regulation, the FTC’s Financial Privacy Rule. The Model Privacy Notice replaces the Sample Clauses, which now provide the safe harbor for compliance. Until December 31, 2010, notices using the new Model Privacy Notice or Sample Clauses will enjoy safe harbor protection. After January 1, 2011, privacy notices, whether delivered or posted online, must adopt the new Model Privacy Notice to be entitled to the safe harbor. Have you revised your privacy notice(s)?
Just because you have survived the worst year in U.S. automotive retailing history does not mean you are good to go forward. You have taken the steps to ensure your financial survival. Now you need to take the steps to protect your finances from others looking to enforce the complex regulatory environment you operate in. Don’t sit back and wait for someone else, be it regulators or plaintiff’s lawyers, to take action against you.
