Already heavily regulated, the automobile industry can expect increased scrutiny from what promises to be an activist-driven Congress. But this scrutiny won’t come from regulators alone. Lenders, tired of losing money on bad deals, will also be vigilant when it comes to a dealership’s F&I processes.
Driving this regulatory environment are the activities that led to the current credit crisis. Dealers can also expect consumer groups to advance a number of issues. The following are 12 examples of how broadly dealership behavior is being scrutinized.
1. Regulators Keeping an Eye On Advertising
Knowing customers are hard to come by these days, expect regulators to be on high alert when it comes to advertising. One rule dealers need to be aware of is the Telephone Consumer Protection Act (TCPA), which restricts telemarketing activities and the use of automatic telephone dialing systems. It also restricts the use of artificial or prerecorded voice messages.
In 2003, the Federal Communications Commission (FCC) and the Federal Trade Commission (FTC) revised the TCPA to establish the national Do-Not-Call registry for residential or personal wireless phones. Under the revisions, dealers who have an established business relationship with their customers may call them for up to 18 months after the consumer’s last purchase, last delivery, or last payment. However, the rule says a dealer must stop calling the customer if he or she requests not to be called. Violating this rule could lead to a fine of up to $11,000.
Additionally, a dealership can call a customer for three months if he or she makes an inquiry or submits an application to the dealership. However, a dealer must cease communication if a customer requests not to be called. The rule also prohibits dealers from contacting consumers on their cell phones without permission.
Internet advertising generally has the same requirements as traditional advertising, although the federal law governing such practices is called the CAN-SPAM Act. The law bans false or misleading header information, prohibits deceptive subject lines, and requires commercial email to be identified as an advertisement. It also requires the sender to include a valid physical postal address.
Dealers need to scrutinize firm offers by mail and seek legal counsel prior to sending them. Letters which appear to be related to or from a government agency, can be considered a deceptive advertising practice.
2. Opt-Out Rule In Effect
The Affiliate Marketing Rule provides consumers with an opportunity to “opt out” before a person or company uses information provided by an affiliated company to market its products and services to the consumer. The regulation applies to information obtained from consumer transactions or account relationships with an affiliate, the consumer’s application, credit reports and other third-party sources. The regulation, which became effective in January 2008, implements a provision of the Fair and Accurate Credit Transactions Act (FACTA) of 2003.
3. Tune Up for Used Car Rule Proposed
In November 2008, 42 attorneys general signed a letter requesting the FTC to amend the Used Car Rule to require additional disclosure about a vehicle’s history. Although no action was taken, regulators want to ensure that consumers know the complete history of the vehicle they’re buying.
The current rule requires dealers to post a “Buyer’s Guide” notice on any vehicle available for purchase, and mandates that consumers be informed about whether a vehicle is covered by a warranty or sold “as-is.” The rule also requires that a final guide be given to the customer at the end of the sale to reflect any changes, as it operates as an amendment to the sales contract. However, the 42 attorneys general say the rule doesn’t go far enough in protecting consumers.
What regulators want is the rule to mirror what the states of Maine and
Wisconsin require. They mandate that dealers post information about the vehicle’s history, such as whether a car was assigned titles that would indicate damage from a flood or crash, or if the car was repurchased by a manufacturer under a state’s Lemon Law.
4. Caps Proposed For Interest Rates and Fees
Expect lawmakers to continue to propose laws that would set a cap on interest rates and fees. Last July, Senator Dick Durbin (D-Ill.) introduced a bill aimed at setting a federal usury cap similar to the one in place for military personnel and their families.
Dubbed the Protecting Consumers from Unreasonable Credit Rates Act, the bill (S. 3287) never made it out of the Committee on Banking, Housing and Urban affairs. However, legal watchers believe the bill could be resurrected this year.
If it had passed, the bill would establish a federal usury cap on annual percentage rates (APR) of 36-percent. The cap would also take into account all interest, fees, defaults and other finance charges.
5. Attorneys Attacking Dealer Preparation Fees
The fees dealer charge to cover the cost of prepping a car for sale is and will continue to be under attack. Consumer attorneys are already likening these fees to the unauthorized practice of law. They argue that manufacturers already pay or reimburse dealers for vehicle prepping, which may include removing the coatings and coverings that protect a vehicle when it’s shipped to dealerships.
6. Barring Arbitration In Car Deals
Consumer interest groups are lined up to rid the auto retail industry’s use of arbitration in vehicle leases or sales. And although a bill introduced last year died in a congressional subcommittee, legal watchers warn of more attacks to come.
Introduced in February 2008 by Rep. Linda Sanchez (D-Calif.), the Automobile Arbitration Fairness Act of 2008 would have amended federal arbitration law to prohibit the use of the practice unless all parties involved agree to settle by arbitration.
Despite the bill dying, expect consumer attorneys to continue to strike arbitration provisions in Buyer’s Orders, retail installment sale contracts, and consumer leases. It’s also a safe bet that consumer interest groups, which despise the practice, will continue their attack on arbitration.
7. Risk-Based Pricing Notice Under Review
Dealers could soon be worrying about a new federal requirement that sounds very much like adverse action notices. However, these new notices would have to be handed to a consumer after the terms of credit are set and before the consumer becomes contractually obligated.
Called risk-based pricing notices, the new requirement would implement a provision of the FACTA. It aimed to educate consumers about how the use of credit impacts the price they pay for credit, and to encourage consumers to monitor the accuracy of their credit reports.
Last May kicked off a 90-day period for credit industries to comment on the FTC’s and the Federal Reserve Board’s proposed implementation of the risked-based pricing notice regulation.
The regulation basically requires a creditor to provide a consumer with a risk-based pricing notice when, based in whole or in part on the consumer’s credit report, the creditor offers credit to a consumer on terms less favorable than what other customers are offered.
8. Spot Delivery And Yo-Yo Sales Out of Favor
Although spot deliveries and yo-yo deals are regulated at the state level, these types of deals have quickly fallen out of favor with lenders. So, while compliance is still critical, expect lenders to really regulate these types of deals.
A spot delivery refers to the practice of a dealer placing a consumer in a car “on the spot” to make a sale. However, the sale is contingent on the dealer’s ability to obtain third-party financing for the purchase.
Some states require dealers to use “spot agreements” or “conditional sales agreements” that allow dealers or consumers to unwind or re-contract if financing cannot be secured.
It’s also recommended that dealers not sell a customer’s trade-in vehicle on a spot delivery deal until financing has been secured. Selling a trade-in vehicle before you have a deal financed can subject you to a theft claim or similar liability.
9. Credit Repair Organizations Act
Enacted in 1997, the Credit Repair Organizations Act is being used by consumer attorneys to also sue dealers. It protects buyers of credit repair services by requiring that organizations provide consumers with the information necessary to make an informed decision regarding the purchase of such services. It also aims to protect the public from credit repair organizations which employ deceptive advertising and business practices.
The regulation also prohibits an individual from making untrue or misleading statements about a customer to a credit reporting agency, or to anyone who might extend credit to a customer.
This regulation puts dealers in a difficult situation since F&I managers typically discuss sensitive financial and credit information with consumers and lenders.
10. Federal Consumer Credit Safety Commission
The one legislative proposal that should really scare the automotive finance industry is the one made by Sen. Dick Durbin (D-Ill.) last September. While never passed, the bill would have cleared the way for the creation of a new government agency that would have wide-ranging authority over financial transactions.
Dubbed the Consumer Credit Safety Commission Act of 2008, the bill (S. 3629) never made it out of the Committee on Banking, Housing and Urban Affairs. And although bills not passed at the end of each congressional session are cleared from the books, it’s highly possible that this proposal will be reintroduced this year.
Under Durbin’s original proposal, the commission would be allowed to collect, investigate, resolve and inform the public about consumer complaints about credit providers.
11. Document Maintenance And Storage Issues
With the enforcement date of the Red Flags Rule coming next month, it’s clear curbing identity theft is the flavor of the day among regulators. So expect regulators to be on high alert when it comes to all rules and regulations aimed at protecting consumers from identity thieves.
One regulation dealers need to continue to be mindful of is the FTC’s Disposal Rule, a part of the FACTA that provides direction on document maintenance, storage and disposal.
Another rule to keep tabs on is the Gramm-Leach-Bliley Safeguards Rule, which requires dealers to design, implement and maintain safeguards to protect customer information.
12. ELT Spreading Quickly
States are quickly transitioning to electronic lien and title (ELT) programs.
California was the first in October 1989. Today, there are more than 11 states with such programs, with Pennsylvania being the first to implement a mandatory program.
When California turned on its ELT model, the program was limited to exchanging title data via diskettes. By the mid-1990s, lien specifications and standards were established by the American Association of Motor Vehicle Administrators and state staffers from California and Massachusetts, clearing the way for states to go paperless.
The use of ELT programs was further bolstered by the federal Electronic Signatures in Global and National Commerce Act (ESIGN Act) and the Uniform Electronic Transactions Act (UETA). Both rules provided electronic signatures the same legal status as ink signatures and paper records.
Expect states to continue to adopt ELT programs, as many have come to realize the cost savings and error reductions of going paperless.
Terrence O’Loughlin is director of compliance for Reynolds and Reynolds. He can be reached at [email protected].