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Knowing Safeguards, Avoiding Potholes

February 2005, F&I and Showroom - Feature

by Terrence J. O'Loughlin, M.B.A.

Alas for you lawyers also! You load men with intolerable burdens, and will not lift a finger to lighten the load. — Luke 11:46

Lawyers like the automobile business for all the wrong reasons. This business is now the focus of both private and public-sector investigations and expanding litigation. Private attorneys see dealers as a large target for profit whereas public-sector attorneys must respond to consumer complaints and media publicity.

In the public sector, many federal and state agencies are dedicated to protecting consumer rights regarding automobile transactions, including the Offices of the State Attorneys General. Other agencies, such as district attorneys and law enforcement, have also been forced to address dealership practices. The Florida Office of the Attorney General examined more than 50,000 dealer transactions in the past 10 years and settled with numerous dealers for millions of dollars. This governmental interest is a consequence of some unlawful, unethical practices of dealers. Alternatively, some dealers are simply negligent in knowing what the law requires.

In the private sector, more than 40,000 lawsuits are filed against dealerships annually in both state and federal courts. In 1980, more than 12 million lawsuits were filed in general, but in 2003, more than 100 million lawsuits were filed. Considering that F&I departments now generate 43 percent of the average dealership's revenue, it should be no surprise that most dealership lawsuits originate from F&I practices. Across the country, private-sector attorneys attend conferences to learn about these practices and how to file cases against dealers. The number of lawsuits filed against dealers will certainly increase.

The following experts recap the compliance recommendations they shared in November 2004 at the F&I Conference & Expo in Las Vegas.

Compliance Is the Dealer's Responsibility

Carl Ragsdale is chief operating officer of the National Automobile Dealers Association's Dealer Services Group.

The dealer is ultimately responsible for everything that goes on in his dealership. He must create a culture that insists on fair treatment for everyone regardless of race, gender, credit history or level of education and sophistication in the buying process. It's no longer sufficient for the dealer to merely espouse these principles. He must have processes in place to ensure that they are adhered to and demonstrate that there are consequences for violating them.

The dealer can no longer afford to demand that the F&I manager attain a certain level of income per transaction and ignore the methods that are used to reach that goal.

Two tests that resonate with me are:

  • Do your employees treat customers as you would want your son or daughter to be treated in the vehicle-buying process?

  • Would you be comfortable with all your F&I transactions being spelled out on the front page of the local newspaper?

    Does this mean that dealers aren't entitled to make a profit and generate revenue in the F&I office? Of course not. But it is in the dealer's enlightened self-interest to adhere to high ethical standards as well as to comply with all applicable statutes.

    How does this benefit the dealer?

  • It helps protect him from litigation. Proper conduct will aid in his defense if it doesn't prevent the lawsuit in the first place.

  • A balanced selling system in which all products are presented and priced fairly and clearly may actually increase F&I sales (instead of slamming a customer on rate and not being able to sell him other products).

  • A culture that treats all customers with respect and dignity goes a long way toward creating repeat customers. A one-time slam-dunk is very shortsighted when compared to the economic benefit of a long-term relationship with a customer.

    Remember that dealer financing is a tremendous benefit to consumers. Their ability to obtain financing at over 20,000 dealerships plus bank and loan companies' offices exerts great competitive market pressure on all sources to offer attractive rates. If 20,000 finance outlets didn't exist, the remaining sources could charge a much higher rate to finance automobiles.

    These 20,000 credit offices are clearly a great convenience for the busy consumer who prefers one-stop shopping.

    The greatest benefit to consumers is the availability of credit to those who otherwise couldn't secure financing. Banks are reluctant to make relatively small loans ($10,000 to $20,000) to credit-challenged people. Dealers, due to their large volume of business done through select finance sources, can get "C" and "D" tier customers financed.

    Vicarious Liability & Dealer Participation

    Kenneth Rojc, Esq., is a partner in the Auto Finance Group of Nisen & Elliott in Chicago.

    Some major issues currently on our radar are vicarious liability and dealer participation.

    New York is still the only state holding automobile lessors to unlimited vicarious liability. Rhode Island repealed its unlimited vicarious liability laws, but they could be reactivated if the repeal isn't extended by July 1. Potential vicarious liability occurs in Illinois, Maryland, Massachusetts and New Jersey (based on a rebuttable presumption of agency relationship between the lessee and lessor); California, Connecticut, Delaware, Florida, Oklahoma, Rhode Island and Wisconsin (based upon minimum insurance requirements); and Maine.

    However, if any leased vehicles are driven to or garaged in a vicarious liability state, the lessor will be subject to vicarious liability. So even if a lessee executes a lease contract in Illinois, if he or she moves to New York, the leasing company could be liable if the vehicle is in an accident.

    To mitigate the effects of unlimited liability, lessors could stop leasing in New York, which many have done. They could also modify lease contracts to prevent vehicle use in New York, shift the cost of vicarious liability to lessees, offer balloon payment retail installment sale contracts and pursue legislation to change or repeal the liability law in New York.

    The General Motors Acceptance Corp. settlement in February 2004 in connection with an ECOA class-action lawsuit set a 2.5 percent APR markup cap on retail installment sale contracts up to 60 months and 2 percent on contracts having a term greater than 60 months. This may become an industry benchmark. GMAC had to pay up to $9 million in attorneys' fees and costs up to $600,000.

    On Nov. 15, 2004, WFS Financial settled its ECOA class-action suit on similar terms. Additionally, it said it would conduct a refinance program for two years. Class members will be allowed to reduce the APR on their retail installment sale contracts by 1 percent. WFS will refinance up to a limit of $1 billion of its outstanding loan portfolio. The company will pay attorneys' fees of up to $3.86 million and court costs of up to $350,000. It also must pay $90,000 to class members as compensation.

    Many other ECOA class-action suits are still pending against major captive finance companies and banks in California, Illinois, New Jersey, New York and Tennessee. The GMAC, NMAC and WFS Financial settlements put pressure on the other defendants to settle their suits similarly. The greatest cost of the settlements is not the damages paid to plaintiffs but rather the attorneys' fees.

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