California Law Becoming Pandemic for Industry

There’s a new pandemic threatening U.S. auto dealerships at a frightening pace. Dealer operations nationwide will soon feel the effects of legislation that first incubated in the state of California. The germ started with the final acceptance and enactment of AB 68, better known as the California Car Buyer’s Bill of Rights (CBBOR). Not only has it given used-vehicle consumers new liberties, it is also forcing dealers to take on a new set of costly business practices and consumer protections. What does this mean for you? Well, it means that it’s only a matter of time before your dealership’s used-vehicle sales operation is going to catch this “virus” and be required to implement dramatic changes.

According to a May 16, 2007, report issued by the American Financial Services Association, seven states (Arizona, Massachusetts, Minnesota, Missouri, New Jersey, New York and Oregon) have introduced 15 bills containing provisions similar to those adopted in the California CBBOR. Eleven of those bills address contract cancellation, four of which (MA HB 229, MN HB 1675, MN SB 1333, MO SB 335) apply only to cancellation of contracts on used vehicles. The remaining seven (AZ HB 2652, AZ SB 1472, NY AB 343, NY AB 346, NY SB 5072, OR HB 2983 and OR SB 538) apply to both new and used vehicles.

Fueling the spread of this legislation is the appeal it has with politicians and their constituents. And it is spreading quickly. Several other states are considering similar legislation, including Arkansas, Illinois, Montana, Nevada, Pennsylvania, Rhode Island, Tennessee and Texas.

Unified Effort Required

The initial CBBOR legislative effort, which began about three years ago, included much broader consumer protections (i.e., more frightening and onerous to dealers). However, the effort was quickly shot down in the form of a veto by Governor Arnold Schwarzenegger after the initial legislation was deemed too unfriendly to auto dealerships, a major source of sales tax revenue and state income tax. Legislators were also getting an earful from their biggest donors — again, auto dealerships. Those complaints, however, did little to stop the CBBOR virus from spreading.

The second generation of the CBBOR virus got the California Motor Car Dealers Association (CMCDA) involved. It helped to construct legislation that was more dealer-friendly. The “Governator” ( Governor Schwarzenegger) felt obliged to sign that version of the legislation, eliminating the possibility of the dealer-unfriendly version ending up as a ballot initiative on the near-term horizon.

Even with the comments and direction of the CMCDA, the 48-page legislation was groundbreaking for several reasons. For one, it defined what the term “certified” meant. This element brought vehicle makers — albeit kicking and screaming — and their Certified Pre-Owned/Certified Used Vehicle (CPO/CUV) programs into the fold. What it did was allow the CMCDA to demonstrate the associated liability that dealerships face with every used-vehicle deal.

Another positive was the actions taken ended the OEMs’ arms-length relationships with dealerships. Automakers could no longer say they didn’t know or control what their CPO dealerships did. The reality is that OEMs prescribe what dealers must do to comply with their CPO program requirements and, ultimately, their franchise agreements. From the perspective of hungry lawyers, those with the deepest of automotive pockets just got pushed into the pool.

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Legislation Forces Change

I first heard of the California CBBOR virus outbreak from several of Compli’s California dealership clients in March 2006. The clients were asking for the documentation and content needed to comply with rules set forth under the CBBOR. While working with our legal eagles to create the content program for our dealership compliance management platform, I learned the CBBOR had become a huge issue for all dealers in California. It required the formation of new business processes, on-site documentation and staff training on the various provisions, which has been a costly and painful process. Check it out:

1. Prohibition on loan packing (Ouch!)

2. Disclosure of commonly packed

items (Yikes!)

a) Programs and services “packed”

into the deal must be made clear to

the buyer

3. Two-day return option for used cars (Bam!)

a) Buyers can pay for the option of

returning their car

b) This option must be displayed

throughout a dealership and in sales

contracts

4. “Certified” car prohibitions (Ooof!)

a) Dealers cannot use the word

“certified” if the car does not meet

all rules (and there are a LOT of

rules)

5. Cap on dealer mark-ups (Noooo!)

6. Disclosure of credit score (OK)

I am not certain when I first heard the phrase, “As California goes, so goes the nation,” but it seems an appropriate phrase to describe the spread of the CBBOR. It has become virulent quickly, quietly spreading state-to-state in a variety of strains nationwide. It’s a pandemic that dealers must address to remain compliant and resistant to the costs of these emerging laws.

What OEMs Now Face

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Given the major negative effects the CBBOR legislation would have on our customers in California, I thought the best way to inform them of the pending legislation was through their franchisers. What better way to inform a dealership than through its franchiser, which provides and audits the stringent CPO/CUV requirements — a key element in the CBBOR. Franchisers have the deepest pockets of those impacted by the litigation that everyone in the compliance industry knew would come (Author’s Note: I can speak to several examples of OEM-involved litigation related to OEM CPO programs, but will save those for a future article). I met with nearly every CPO organization in and around Detroit and with some of the import OEMs to show them that technology and content was available to inoculate their distribution channels against the CBBOR virus. Alas, it was to no avail.

Now, legal teams in California are roaming dealer malls in pursuit of dealerships with out-of-compliance CPO programs. And OEMs are spending millions on periodic scheduled see-it-coming-from-a-mile-away audits by folks from MSX International and Carcannon.

Dealerships are busy places. They survive off average margins in the single digits. There are no layers of personnel waiting around to manage new compliance requirements. So, when yet another OEM program comes down the pike (e.g., CPO, CUV, Blue Oval, 5Star, Signature, etc.), or if the state of California defines what CPO really means, dealers are going to pay attention when they can and the best they can. However, this usually results in inconsistent compliance, which is a hungry lawyer’s friend.

From what I read in the trade publications, it seemed that the best way to get the attention of an OEM is to sue one. Dealer non-compliance with the California CBBOR and other related legislation is evident in hundreds of dealerships in California. The OEMs are now pursued legally with vigor, as they are the developers of the requirements associated with these programs (which, by the way, are designed to support residual values). The growth in litigation makes sense and should have been obvious. I wonder why the lawyers representing automakers didn’t see it coming.

Prevention Is the Best Defense

With the success of litigation and the growth of claims and payouts in California, other states saw an opportunity to support listless lawyers seeking a better life (via dealer money) in the halls of legislatures across the country. The spread of the CBBOR has been startling. In fewer than 36 months since the beginning of the pandemic in California, legislative actions broke out in Massachusetts, Minnesota, New Jersey and New York.

Wikipedia states that an epidemic is “a classification of a disease that appears as new cases in a given human population, during a given period, at a rate that substantially exceeds what is expected.” The interesting thing about epidemics is that they are merely a matter of scale and timing. Pandemics, however, wax and wane over time. The emergence of the CBBOR is a virus that is not going away, and pain for non-compliant dealerships will result. But where flu outbreaks once ravished our cities, ways of dealing with their effects and aftermath grew. New technologies and methods of management eventually reduced or eliminated much of the negative effects. So weaker folks (i.e., less compliant dealers) get the strain and don’t survive while more resistant folks (i.e., more compliant dealers) get stronger.

Whether you are doing business in the rolling hills of Minnesota or in the city of New York or the Los Angeles basin, there are new technologies and methods that can help support your dealership’s success in satisfying these emerging business requirements.

Dealerships need to be inoculated immediately with a compliance management system that combines a potent cocktail of “good-faith” methodology, best-of-breed content and cutting-edge technology. The best part of such a system is the way it can enable new, productive and profitable ways to manage and protect a dealership from the increasing virulence and complexity of legislation, OEM requirements and business operations compliance.

Here’s a question for you: What would you do if you knew a flu pandemic was spreading and coming your way? I don’t know about you, but I’d hurry to get in line for my inoculation shot. Sure, it’d hurt for a moment, but it could save my life.

Jim Lawrence is vice president and product manager for Compli. He has extensive experience in building cutting-edge dealership software in the fixed operations and front-end of dealerships, and is involved in managing compliance software development at Compli. For more information on the topic of this article or on any compliance topic, e-mail [email protected] or visit www.compli.com.