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11/14/2015 1

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

• f Auto Dealer Law: the Definitive Legal Guide to the Purchase, Sale

and Operation of Vehicle Dealerships available at www.autodealerlaw.com.

11/14/2015 2

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

11/14/2015 3

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

• f 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

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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

11/14/2015 5

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

11/14/2015 6

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

• f 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

11/14/2015 7

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
• f identity theft and mitigation of threats

– Must be regularly reviewed to update red flags – Annual report to senior management

11/14/2015 8

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
• f cash of more than $10,000

in a transaction or in a series

• f 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

11/14/2015 9

Fair Credit Reporting Act

• The Fair Credit Reporting Act was enacted

in 1970 to promote the accuracy of credit reports and to ensure the privacy of the information contained in those reports.

• Today credit repair companies and their

attorney allies are using the FCRA to demand that dealers remove credit inquiries when they did not have a “permissible purpose” to run a report

FCRA Compiance

Importance of Authorization

• The FTC has stated that a customer inquiry

about vehicle prices or a customer request for a test drive is not initiation of a transaction allowing a dealer to obtain a credit report.

• Express written permission to obtain a credit

report is not required under the Act. However, the only way to prove, in many circumstances, the right of the dealer to obtain a credit report is to get express written permission.

FCRA Compliance

How Can a Dealer Protect Itself?

• Get a written consent or a

click through on a secure internet site

• Keep the consents for five

years

– Consents where a vehicle is not sold are the issue – Failure to maintain those will leave the dealership vulnerable to lawsuits

• Secure credit report access
• Audit the credit reporting

agency bill against consents

11/14/2015 10

Truth in Lending Act Compliance

How to Prevent Packing Claims

• Carefully review TILA disclosures with the customer

by going over the various elements making up the payment

• Emphasize that the additional products have been

chosen by the customer

• Use a menu
• Video taping can help – but only if the rules for use
• f taping are scrupulously followed

Truth in Lending Act Compliance

Menu Basics

– It must disclose the base payment – There should be a place for initialing choices and for signing – There should be a la carte

• ptions

– There should be a disclosure that choice of additional items will not affect the customer’s ability to obtain credit Truth in Lending Act Compliance

Backdating

• Backdating of retail installment sale contracts

when they must be redone has been on the radar for plaintiff lawyers

• If a dealer must recontract a customer to solve

a spot delivery issue, it must be careful

• Dating the replacement contract with the
• riginal delivery date may violate TILA
• Always date a replacement contract with the

date it is signed

11/14/2015 11 Forgeries

• Claims of dealer employee forgeries of

customer signatures are the newest weapon

• Theory: Dealer personnel are caught

between the pressures of producing income and turning paper

• When a customer must recontract or the

signatures on forms are missed, it is tempting to sign for the customer

• Answer: Review deals for consistent

signatures, make sure another manager greets a customer in to resign, and call to confirm when papers go to the customer

Fixed Operations

Recalls

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• New Cars

– Ground new vehicles until recall is done – Compensation for down time

• Used Cars

– No federal requirement to be sure used cars have recalls performed but:

– Work for service department on same line‐make – OEM agreements may affect deliveries

– Check other brand vehicles – www.safercar.gov – Disclose open recalls and reason – Legislative proposals

11/14/2015 12

Warranty Audits

• Manufacturers are increasing their audit

activity in an attempt to find dollars

• Know the programs and the rules
• Train your employees
• Document your rights to payment fully and

carefully

• Spot check

Warranty Audits

• Know the rules! Get it right the first time.
• When you have an audit:

– Have one dealership contact person who will be available to the auditor – Make sure to attend the opening and closing meetings – Be prepared to argue your position during the audit

– Provide a comfortable work area away from the department being audited

– Know your rights under your state law – Appeal and appeal

Human Resources

11/14/2015 13

Employment Practices

Wage and Hour Compliance

• Law firms have been established across the

country to bring lawsuits for violation of the federal Fair Labor Standards Act and state wage and hour statutes

• FLSA relief – back wages, attorneys’ fees,
• ther relief
• May be enforced through class actions

Employment Practices

Wage and Hour Issues

• Employee vs. Independent Contractor. The government wants

all personnel who work for you to be classified as employees unless it is clear that they fully meet the criteria as independent contractors

• Classification of Employees. Salespeople, qualifying

mechanics, and “partsmen” are exempt from premium

• vertime ‐‐ know the limits
• Minimum Wage. The general office should check every pay

period to determine whether exempt employees are making the minimum wage for each hour worked

• Premium Overtime. Ensure proper pay for those who are

eligible

• Terminal Liability. Take special care to ensure that a departing

employee is paid according to his or her plan. Employment Practices

Wage and Hour Issues

• Stop doing pay plans on

napkins!

• Make sure that that pay plans

protect the dealership

– In writing and signed – Disclaim contract – Basis is commissionable gross determined by dealership – When are commissions earned and paid? – Dealership right to change – Dealership right to correct errors

11/14/2015 14

Franchise Relations Warning Letters

• The dealer is in violation of its

franchise agreement!

– What does the dealer agreement say? Make sure that that the dealer has the agreement and related, exhibits, schedules, and communications – What protections does state law afford? – Be proactive – explain why the dealer is not in violation – A DEALER IS NEVER IN VIOLATION – A DEALER MUST BE RENEWED unless the franchisor wants to go through state termination process

Performance and Capitalization Threats

• “You are not sales efficient.”

– Is the store sales efficient? – If not, why not? – Is the PMA wrong? – Are there demographic issues? – Are there allocation issues?

• “You are not in compliance with CSI requirements.”

– CSI programs are inherently suspect and often statistically indefensible

• “Your net working capital is deficient.”

– Fix it

11/14/2015 15

Administration

Protecting Customer Data

Customer Data and Suppliers

• A supplier claims that it needs access to your

DMS

• Questions:

– Why? – Who are you? References? Financials? – Where are you? If I have a problem, how will I find you? – What are you going to do with the information? For your own use? For the use of others?

• Check out suppliers carefully and insist on

comprehensive protections

Data Access by Suppliers

• Do not simply give open access to the DMS, if you

can avoid it

• Even when pushing information from your DMS,

select the information carefully

• Under the agreement with the supplier, to what

use can it put the dealer’s information? Make sure it is only for services to you – refuse to allow compilations

• If there is misuse and the dealer must sue, can it

file suit in its own home town or does it have to go across the country to sue?

11/14/2015 16

Importance of a Contracting Policy

• Apparent authority of managers means you

will be bound to contracts they sign

• Policy

– Who May Sign – Under What Circumstances – Who Must Review – Notify potential suppliers of your policy

• Policy Must Apply to All Contracts

Review the Contract

• Duration – what is the base

term?

• Pricing
• Renewal – is it automatic, or

your option?

• Performance – what does a

supplier owe you?

• Beware of supplier‐only

protections

• Choice of Law, venue,

jurisdiction – you are unlikely to fight in a distant location

What is Your Liability?

• Personal Guaranties

– Why? – Beware of hidden guaranty language

• Indemnifications

– Scope of supplier’s indemnification, if any? – Scope of dealer’s Indemnification, and why?

• Liens

– Why? – How broad?

11/14/2015 17

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

USED VEHICLE RECALL STATUS DISCLOSURE

Identification of Parties

Buyer(s)/Lessee(s) Name (“you”) Address: Street City State ZIP Contract Date Dealership (“dealer”) Franchisor-Manufacturer (“franchise”) Year Make Model VIN

The undersigned buyer(s)/lessee(s) of the Vehicle acknowledge the following disclosure of the Vehicle's National Highway Traffic Safety Administration (“NHTSA”) safety recall status as known by dealer prior to delivery. THIS FORM SUPERSEDES ALL VERBAL COMMENTS REGARDING THE VEHICLE’S RECALL STATUS.

(Customer(s) initials)

____ ____ 1. Franchise Vehicle Subject to Open Safety Recall: Remedy Available Vehicle is subject to an open NHTSA safety recall. Contact dealer at the earliest opportunity to arrange to have the recall status remedied as soon as possible. ____ ____ 2. Franchise Vehicle Subject to Open Safety Recall: Remedy Not Available Vehicle is subject to an open NHTSA safety recall, but a remedy for this recall does not appear to be available. Periodically contact dealer

• r check the NHTSA recall search portal at vinrcl.safercar.gov/vin/ to determine whether a remedy for the

recall is available. As soon as a remedy is available, contact dealer to arrange to have the recall remedied as soon as possible. ____ ____ 3. Non-Franchise Vehicle Subject to Open Safety Recall: Remedy Available Vehicle is subject to an open NHTSA safety recall. Dealer is not franchised to perform the recall repair. Contact a franchise dealer at the earliest opportunity to arrange to have the recall status remedied as soon as possible. ____ ____ 4. Non-Franchise Vehicle Subject to Open Safety Recall: Remedy Not Available Vehicle is subject to an

• pen NHTSA safety recall, but a remedy for this recall does not appear to be available. Dealer is not

franchised to perform the recall repair. Periodically contact the manufacturer or check the VIN on the NHTSA recall search portal at vinrcl.safercar.gov/vin/ to determine whether a remedy for the recall is

• available. As soon as a remedy is available, arrange to have the recall remedied as soon as possible.

____ ____ 5. Vehicle Not Subject to Open Safety Recall Vehicle is not subject to an open NHTSA safety recall. ____ ____ 6. Safety Recall Status Unavailable Dealer was unable to determine whether Vehicle is subject to an open NHTSA safety recall. Contact the manufacturer to learn about the NHTSA safety recall status, and have the recall remedied as soon as possible, if applicable. If a recall notification (“report”) obtained from the automaker, NHTSA, or a third party recall information provider was provided to you, you understand that the report was obtained from an unaffiliated third-party provider. Dealer is not responsible for any errors or omissions in the report. This report is provided as a courtesy and is for your information only. By signing below, you acknowledge that:  Dealer disclosed this recall status information prior to execution of the Vehicle sale or lease agreement; and  You took this recall status information into account in agreeing to purchase or lease the Vehicle and in agreeing upon the Vehicle’s value.





Date Customer’s Signature Customer’s (co-buyer/co-lessee) Signature



Date Dealer Representative’s Signature

Identification of Vehicle (“Vehicle”)

USED VEHICLE RECALL STATUS DISCLOSURE

Identification of Parties

Buyer(s)/Lessee(s) Name (“you”) Address: Street City State ZIP Date Dealership (“dealer”) Franchisor-Manufacturer (“franchise”) Year Make Model VIN

The undersigned buyer(s)/lessee(s) of the Vehicle acknowledge the following disclosure that the Vehicle is subject to a safety recall that has not been remedied (“Open Safety Recall”) according to the National Highway Traffic Safety Administration (“NHTSA”)’s recall search portal.. THIS FORM SUPERSEDES ALL VERBAL COMMENTS REGARDING THE VEHICLE’S RECALL STATUS. ____ 1. Franchise Vehicle Subject to Open Safety Recall: Remedy Not Available Vehicle is subject to an open NHTSA safety recall, but a remedy for this recall is not presently available. Periodically contact dealer or check the NHTSA recall search portal at vinrcl.safercar.gov/vin/ to determine whether a remedy for the recall is available. As soon as a remedy is available, contact dealer to arrange to have the recall remedied. ____ 2. Non-Franchise Vehicle Subject to Open Safety Recall: Remedy Appears to be Available Vehicle is subject to an open NHTSA safety recall. Dealer is not franchised to perform the recall

• repair. Contact a dealer franchised for the vehicle brand to arrange to have the recall remedied.

____ 3. Non-Franchise Vehicle Subject to Open Safety Recall: Remedy Not Available Vehicle is subject to an open NHTSA safety recall, but a remedy for this recall does not appear to be

• available. Dealer is not franchised to perform the recall repair. Periodically contact the

manufacturer or check the NHTSA recall search portal at vinrcl.safercar.gov/vin/ to determine whether a remedy for the recall is available. As soon as a remedy is available, arrange to have the recall service performed by a dealer franchised for the vehicle brand. By signing below, you acknowledge that:  Dealer disclosed this recall status information prior to execution of the Vehicle sale or lease agreement;  The Vehicle is being delivered to you with an Open Safety Recall, and you accept it in that condition with an understanding of the vehicle’s recall status; and  You took this recall status information into account in agreeing to purchase or lease the Vehicle and in agreeing upon the Vehicle’s value.



Date

Customer’s Signature



Customer’s (co-buyer/co-lessee) Signature

Identification of Used Vehicle (“Vehicle”)