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11/14/2015 Protecting the Dealership from Losses Compliance Triage Michael G. Charapp, Esq. Charapp & Weiss, LLP 8180 Greensboro Drive Suite 1000 McLean, VA 22102 T – 703 ‐ 564 ‐ 0220 mike.charapp@cwattorneys.com Disclaimer The information provided in this session is intended for educational purposes only. It is not intended to be and should not be considered legal advice. Be sure to consult competent legal counsel before taking any action based on this information. 2 Who I Am Michael G. Charapp, a partner in the law firm of Charapp & Weiss, LLP, is the son of a Dodge dealer in western Pennsylvania where he spent his teenage years working in all departments of the family dealership. Following graduation from the University of Pittsburgh (B.A. 1971), Mr. Charapp enrolled in Georgetown University Law Center where he received his J.D. Degree in 1974. From 1984 to 1996, Mr. Charapp was the Executive Vice President and General Counsel for the Rosenthal Automotive Organization, then one of the ten largest auto dealer groups in the country. Mr. Charapp is a member of the bars of the Commonwealth of Virginia and the District of Columbia, and he represents and advises business clients, including over 200 automobile dealers and several automobile dealer trade associations. He is a founding board member and past president of the National Association of Dealer Counsel and co ‐ author of Auto Dealer Law: the Definitive Legal Guide to the Purchase, Sale and Operation of Vehicle Dealerships available at www.autodealerlaw.com. 1

11/14/2015 Triage dictionary.com: noun 1. the process of sorting victims, as of a battle or disaster, to determine medical priority in order to increase the number of survivors. 2. the determination of priorities for action: She began her workday with a triage of emails. Why Triage is Important • Motor vehicle dealerships are the most regulated retail businesses in the US • The NADA publication “The Regulatory Maze” lists more than 100 federal regulations directly affecting dealership operations • Franchisor requirements compound the complexity • Prioritizing compliance efforts if critical Marketing 2

11/14/2015 FTC – Advertising • Seven rounds of consent orders involving 23 dealerships in 15 states have grabbed dealers’ attention • What are hot buttons? – TILA and Leasing ads non ‐ compliance – Bait and switch ‐‐ advertisement net of incentives of limited availability without adequate disclosure and advertising deals that are not available – Untrue $0 down lease claims – Advertising “pay off your trade no matter how much you owe” is radioactive – 2012 consent orders – Advertising in all media involved, but internet advertising is the true target today 7 Digital Advertising • The FTC revised its guidance concerning online advertising disclosures to take into account the expanding use of smart phones with small screens and the rise of social media marketing. • The guidelines emphasize that consumer protection laws apply equally to all types of media, whether television, radio, print, or internet accessed on a desktop computer or on a mobile device. • Staff also emphasized that it will be guided by the primary consideration of whether disclosures are clear and conspicuous. Cybersquatting • The newest threat to dealer assets is cybersquatting • Originally, cybersquatting involved “squatting” on a URL to attempt to sell it at a profit. Federal law made this more difficult • Now cybersquatting is done to try to hijack a dealer’s prospects through URLs that are similar to URLs of the dealership • A dealer must be vigilant about this practice and must take action when cybersquatting is discovered 3

11/14/2015 Sales and F&I CFPB/FTC/IRS • The Dodd ‐ Frank Act created the CFPB – Franchised dealers exempt from regulation but CFPB can push down changes through finance sources – The future of dealer reserve ? – The future of pre ‐ dispute arbitration? • In Dodd ‐ Frank Act, the FTC was empowered and funded to enhance regulation of dealers – Activities in advertising and privacy CFPB The Attack on Dealer Participation • Consumer advocates believe that dealers should only make money on selling the vehicle – not on anything else • Rate participation is a hot button – consumer advocates call it mark up • Based on the false assumption that wholesale rates are available to consumers • The attack is advancing rapidly 4

11/14/2015 CFPB Threat to Major Financial Institutions Summary: You can be held liable for discrimination by dealers. You must:  Impose controls  Monitor dealers  Take Action on Discrepancies  Compensate victims; OR  Pay flat fees The CFPB Attack On Dealer Reserve The Business Case for Rate Participation • The business case against the CFPB’s attack on dealer reserve – The unintended consequences • What will flat fees do to the rates that customers pay? • What impact will flat fees have on deliveries? • If flat fees remove the incentive to fight for credit for those needing it most, who will suffer? – The detriment will be to the customers who need credit the most CFPB Attack on Reserve SUGGESTED DEALER ACTION • Establish a written fair lending policy ‐‐ Review the NADA policy as an example • Use a written form for rate setting with a fixed starting point • All plans are optional – but some revisions will destroy the protection of the plan • Permit deviations for established non ‐ discriminatory reasons • Require management approval for other deviations • Keep records to support deviations 5

11/14/2015 CFPB OTHER F&I PRODUCTS • Emphasis, properly, has been on CFPB’s attack on dealer reserve • It is only a matter of time before federal scrutiny spreads to other F&I products ‐‐ extended service agreements, GAP, etc. • Dealer focus: – Concentrate on products that provide value to consumers; – Use a transparent process for selling F&I products, through use of a menu or a similar tool; and – Establish fixed selling prices for those products with deviations for established competitive reasons. Business Case for FL Policy • Reduces exposure to finance source pressure and relationship problems • Increases reserve penetration based on experience by eliminating shortcuts • Likely to increase F&I product penetration by incentivizing full presentation, increasing sales of multiple products, and reducing cancellations CFPB Attack on Predispute Arbitration Predispute Arbitration Choice • Dodd Frank financial reform act empowers the CFPB to study and regulate arbitration • Arbitration provisions with a class action waiver provide the most effective defense against class actions. • Court decisions generally uphold pre ‐ dispute arbitration. • CFPB authority and Proposal 6

11/14/2015 CFPB Attack on Predispute Arbitration CFPB Proposal • Proposal concept is going though small business review – Ban class action waivers – Mandate finance sources to report on results • Process and timetable • How can this affect dealers? • Industry opposition and reasons ID Theft Protection Critical Government Requirements • Vulnerability to ID theft is top of mind for many consumers • Dealers must be especially cognizant of 3 FTC requirements – FTC Privacy Rule – FTC Safeguards Rule – FTC Red Flags Rule • Recent case authorized FTC enforcement for data breach as an unfair act or practice. ID Theft Protection FTC Compliance Obligations • FTC Privacy Rule – requires delivery of a notice • FTC Safeguards Rule – requires protection of dealership data – Must have coordinator – Must be regularly reviewed and updated • FTC Red Flags Rule – requires detection of signals of identity theft and mitigation of threats – Must be regularly reviewed to update red flags – Annual report to senior management 7

11/14/2015 ID Theft Protection Business Case for ID Theft Compliance • Privacy Rule – clear disclosure to customers about what the dealership will do with their info • Information Safeguards Rule – customer information is an important element of the goodwill value of any store; protect against employees walking out with the information and suppliers accessing and misusing the information • Red Flag Rule – The dealer is the real victim in a vehicle purchase by an ID thief IRS Car Dealer Priority CASH REPORTING • The IRS is regularly auditing dealer compliance • Report to the IRS the receipt of cash of more than $10,000 in a transaction or in a series of related transactions on IRS Form 8300 • Penalties for cash reporting failures can be severe: – The IRS has taken a consistent position that subsequent violations of cash reporting for a dealer who has a previously unsuccessful audit will be deemed knowing violations with a $25,000 per violation civil penalty – Make sure that the dealership has a cash reporting policy IRS Car Dealer Priority 8300 PROGRAM DESIGN A written program utilizing a redundant system is critical • Front line employees must recognize a cash deal and understand the information to be obtained from the customer • Cashiers must code receipts for backup • The general office is generally in charge of filing and should look for deals missed on the floor • A backup system using the dealership’s DMS to catch deals that are missed is critical • REMEMBER: compliance on wholesale deals and in parts department 8