Getting his start in the industry at Ford Credit, Gil Van oVer tells F&I Conference attendees that finance sources know which dealers they can trust and which they can't.
In today’s economic climate, what makes for a good deal isn’t simply about the profit made per deal. It’s about managing the risk the dealership is asking the finance source to take on, and a dealer’s compliance processes is at the heart of achieving that goal.
Last September, Reynolds and Reynolds’ Compliance Director Terry O’Loughlin, gvo3 and Associates President Gil Van Over and HH&O’s Bob Harkins joined Auto Scoop’s Adam Goldfein for a panel discussion on creating your best-chance deal. The group covered a variety of topics, from financial services reform to F&I’s seven deadly sins. The following is an excerpt of that discussion.
Goldfein: With regulations growing at such a tremendous pace, what are the most common risk areas inside the dealership?
Harkins: I think creating your best-chance deal really begins with a commitment to compliance and ethics. I can tell you that on every deal completed, there are 10 core Federal Trade Commission (FTC) regulations that we touch. There are five additional federal laws we also have to worry about on every deal. And if the 10 and five don’t take you down, every state has what is referred to as Unfair and Deceptive Acts and Practices (UDAP). State attorneys general love them, and they’re a gold mine for consumer attorneys.
The reason why they’re a favorite among regulators and consumer attorneys is because the law is broadly written. In fact, there is a UDAP test or a standard of enforcement that was developed by the Florida attorney general. It asks one simple question: Does the activity or practice have the tendency or capacity to mislead a consumer? And if the overwhelming answer is yes, that’s when we get visits from people we probably don’t want visiting our store.
F&I magazine published an article of mine a couple of years back called, The Seven Deadly Sins of F&I. It covered the seven most common areas that make dealers the target of media exposés, class-action lawsuits and high-dollar regulatory fines. The one deadly sin I think most dealers get hung up on is the use of the word ‘best,’ and this happens in two areas. The first is telling customers that this is the best or lowest rate the dealership can get for them. The second is telling customers ‘that this is the best or lowest finance charge available to you.’ There was a dealership in Colorado that was caught doing just that, and their approval included additional products and services. So, using the word “best” is a real recipe for disaster.
Goldfein: Terry, how litigious are attorneys general getting when we’re talking about the seven deadly sins?
O’Loughlin: I would say that car dealers are one of the attorneys general (AG)’s favorite targets, because, sadly, they always look like the good guy when they go after a car dealer. Add to that the fact that automobile-related complaints have been No. 1 for probably 11 or 12 of the last 15 years. And over the past years, there have been 18 different state AGs that have taken action against various dealers. In one case, the remedy amounted to between $2 and $3 million, so it’s a very real concern.
Van Over: I’ll just say that I’m getting calls regularly now to be an expert witness. I’m working on a lawsuit filed in Maryland back in 2003 that involves 43,000 transactions. I’m also working on another one filed in North Carolina back in 2004 that involves 22,000 transactions. I also have a couple of lawsuits in Las Vegas that were filed back in 2006, and a couple in South Beach, Fla., which were filed in 2005 or 2006. As you can see, these cases are just now bubbling up to the point in the litigation process where expert witnesses are starting to become involved.
I foresee more and more dealers being pursued by the dark side as more and more consumers become more desperate and begin looking for ways to get out of deficiency balances. And make no mistake about it, consumer attorneys have their own 20 Groups of attorneys that get together on a periodic basis, and they have their own word-tracks that they use to load the lips of consumers.
Goldfein: Terry, can you tell us a little bit more about these attorney get-togethers?
O’Loughlin: Well, the most recent conference, organized by the National Consumer Law Center, took place last October. The show offered 22 sections dedicated to the automobile industry.
There was one section that caught my eye that I wanted to mention. It was on car dealer add-ons. If you read the description of the course, it even says that dealer add-ons such as etch and rust proofing are a tremendous profit center for consumer attorneys. So, that section focused on new products and changes to old ones, claims and recent legislative efforts to classify certain add-ons as not being regulated as insurance.
Goldfein: So, what areas of compliance tend to be the most confusing for dealers?
O’Loughlin: When I was with the AG’s office in Florida, we reviewed more than 100,000 transactions. I personally examined well over 5,000 deal jackets, and one of the most common errors I saw was a dealer not disclosing an item on one of the lines on the buyer’s order. And simply avoiding disclosure created enough concern for legal action. The reality is most consumers do not read the transaction documentation. And if I were advising a F&I manager, I would advise him or her to make sure everything is itemized correctly.
Van Over: I’d like to add that if there is a warranty attached to a product and something calamitous happens and the consumer receives the benefit back from the provider, whether it’s insurance or not, then the product should be sold in F&I and should not appear on a window sticker. I think if you follow that rule and take all of those soft adds off of your addendums, you’re going to be positioning yourself to better protect yourself.
Additionally, it’s best that dealers live by the rule of three. It’s a rule born out of a couple of court cases where a consumer didn’t know they purchased etch and the judge asked how that could be when the customer’s signature appeared on three separate documents. That’s why I recommend that F&I managers have customers sign for products three times when the product is disclosed.
Harkins: Aside from seeking out legal counsel, I would encourage dealers to visit the National Association of Attorneys General’s Website. It offers a great review of many of the things we’re talking about today. Now, the site also offers an annual list of the top 10 consumer complaints filed each year. Well, you’ll be happy to hear that our industry appears three times on the 2008 list, which came out in August. So, just to reiterate, consult with your attorney on what to sell and what not to sell, what’s insurance and what isn’t, and what line a sold product should appear on. Dealers need to get those answers.
Goldfein: What would you say to those dealers who think their stores are too small to become a target of regulators?
O’Loughlin: Hopefully dealers have been following the progress of the Wall Street Reform and Consumer Protection Act, as there is a provision in the Senate version of the bill that would empower state AGs to enforce the Truth in Lending Act. Now that might not sound sinister on the surface, but the reality is that regulation has historically been enforced by the FTC. If the provision remains in tact, every AG will be enforcing the whole group of regulations under the TILA. That means the AGs are going to be turning their attention to how you prepare your documents, and whether those documents are legally compliant.
What’s scary about that statement is there are thousands of retail installment sales contracts being used in the United States, some of which are outdated and violate the law. So, if I were you, I’d make sure my retail and lease contracts have been reviewed, because, if this provision stays in play, every federal violation can then be viewed as a UDAP violation. And these claims are easier to prove and allow for more damages and expenses to be added. So, that would be a very serious change to the law.
Van Over: Yes, that’s a dangerous combination that Terry’s talking about. First of all, by combining a TILA lawsuit with an UDAP claim, the dark side has the best of both worlds, because if you’re violating the TILA on your retail contracts, it’s highly likely your programming is incorrect. And if that’s the case, you’re committing that error every time you program and write up a retail or lease agreement.
Goldfein: Terry, is there something dealers should be doing to protect themselves?
O’Loughlin: Well, I usually tell dealers to keep only the documents that their state requires, nothing more. The best cases I ever made as a regulator were on documents that were unnecessarily kept in the deal jacket. I’m talking about those extraneous presentation documents and four-square sheets. However, I want to make it abundantly clear that I’m not here to tell you to destroy documents and violate the law. I’m telling you there’s no requirement under the law for you to keep extraneous documentation.
Goldfein: Terry, let’s say a consumer makes a lemon law claim against a dealer’s service department and seeks out the state AG, which will probably ask to see the dealership’s documents related to the claim. Could that incident be used by the AG to sniff around for other problems?
O’Loughlin: Absolutely. That’s a common occurrence, but guess who ultimately gets access to all of that? Well, because of the Freedom of Information Act, it’s the class-action attorneys. In fact, class-action attorneys routinely come into state offices to look at files, and they want to get access to all of the deal jackets after that.
And just so dealers are aware, the AGs and the chiefs of staff meet quarterly to talk about consumer protection. And what they do is engage in what are called multi-state cases, so there might be 15 or 20 states working together on a particular issue. All of their pleadings, complaints, and motions are kept in a repository housed by the National Consumer Law Center. What happens then is consumer attorneys will pull these complaints over the Internet, change the names on the complaints and file suits against various dealers. So, if you’re in an isolated state like Maine, that isolation isn’t going to remain.
Van Over: There’s another source attorneys use to access dealer documents. If you submit a receivable to a federally insured institution that has some sort of bank fraud on it, whether it’s a falsified down payment or falsified information on the credit application, that institution is required to file a suspicious activity report with its regulator.
Now, there was a case three years ago in North Carolina where a lender filed enough suspicious activity reports with its regulator that the case was turned over to the Treasury Department, which handed it off to the FBI. The FBI then conducted an undercover investigation, found the claims to be consistent with what their undercover agents found, raided the dealership and took five years worth of files. Two months ago the dealer agreed to a plea agreement in order to stay out of jail. Now, this 75-year-old dealer can’t step foot in his dealership for the next two years.
Harkins: I wanted to talk about the TILA, which has been around since 1969. See, I live in Arlington, Texas, and I wake up every morning to a local Dallas channel. Well, two days out of the week there are maybe three or four automotive radio ads in a row, and all of them are violating advertising regulations under the TILA. The reason why is they’re giving a trigger term without giving a complete disclosure, which is what the TILA requires.
Dealers also get hung up on how they disclose the retail installment contract. Being from Texas, I have in my hand a current Reynolds and Reynolds’ Texas retail installment contract. Back when I started my career in F&I training in 1976 and talked about how to disclose a contract, we’d typically advise dealers to lay the contract out in front of the customer before going through the numbers. Some dealers did it more comprehensively than others, but ultimately it was sign here, here and here. I was with a dealer group recently that was still doing it the same way. The problem is that violates the TILA.
What I encourage dealers to do is call the NADA and request a bulletin they published called, Clarification of the Time and Requirements for Truth in Lending Act Disclosures. It’s about four or five pages, but I can sum it up in three words: Give before show. So, if I’m the F&I manager and Gil is my customer, I would say, ‘Mr. Van Over, here’s your completed retail installment contract in its entirety for your review.’ At that point I physically hand it to the consumer as the law requires. I will then tell Gil to keep it as long he likes to review it, which is what the law also requires. So, again, give before show.
Goldfein: There’s a lot of talk about the impact of the Internet on sales, and that discussion is now migrating into F&I product sales. What sort of risks do you think dealers face?
Van Over: I think it’s an area that’s ripe for missteps because it hasn’t been well defined by anybody or any industry, or any regulatory body. Unfortunately, the only way for that to happen is through lawsuits.
Now, I would say the biggest risk in the online segment is identity theft. There’s a town outside of Las Vegas called Pahrump. It’s considered the ‘meth head’ capital of Nevada, and the crime of choice among these people is identity theft. That’s because it’s a non-violent crime that’s not easily enforced and doesn’t carry severe penalties. Anyway, while working on a client’s Website I noticed a lot of credit applications coming from that town. When we started vetting those applications a little bit closer, it turned out that someone was just broadcasting credit applications in hopes of getting something approved. So, I would encourage dealers to be really careful with credit applications coming in through their Websites.
O’Loughlin: Well, there are a number of laws regarding internet commerce, including the Electronic Signatures in Global and National Commerce Act and the Uniform Electronic Transactions Act. Unfortunately, what Gil said is true, as technology is outpacing these laws. However, not using the Internet and all those electronic applications would be very foolish, and you’d be losing out on a major opportunity. The key is be very careful with this type of commerce.
Goldfein: Continuing with identity theft, can you talk about some of the challenges with the Red Flags Rule?
O’Loughlin: I was just reading about what’s called synthetic identity theft, which is where someone may take someone’s Social Security number and modify it a little bit so that it appears as though it’s not identical. The reason why that’s important is finance companies are now holding dealers liable if a case of identity theft was the result of the dealer’s failure to have a Red Flag’s program in place, even if the case of identity theft is determined two or three years from now.
So, while enforcement of the Red Flags Rule was delayed until June 1, the rule itself has been in effect since Nov. 1, 2008. And if you still don’t have your Red Flags program in place, there is a window of opportunity for a regulator to possibly take action against you.
Goldfein: What compliance issues occur more frequently than others?
O’Loughlin: Two come to mind, the first of which is advertising. I don’t know why dealers make so many errors in advertising. If you go to the Federal Reserve Board’s Website, it’ll walk you through how to prepare an advertisement. The rules are not complex.
The second one is something mentioned in the The Seven Deadly Sins of F&I article Bob talked about earlier, and that’s flying blind. That refers to not knowing what’s in your own documents. Somebody in your store — the controller, the GM, or the sales manager — should be reading through those documents to make sure, first of all, that they’re current, and secondly, that there aren’t conflicts in them. If you have a conflict, it will work in the favor of the consumer.
Van Over: I would say that bank fraud, whether it’s on the part of the producer, the F&I manager, the sales manager, or the consumer. I started in this industry at Ford Credit, so I come at it from the lender side. And I can tell you that even back then, and especially so today, lenders know who the kinks are in the industry. They know which finance manger they can trust and which one they can’t. They know which deals to work first and which to stick at the bottom of the pile.
Harkins: I would say understanding and reading credit reports. We look at the report and we have an idea of what the minimum acceptable contact rate is, but we forgot how to read credit reports. And if we’ve forgotten how to do that, how do we really talk and counsel the consumer to bring a deal in line for financing? So, I think it’s about getting back to the basics and talking to consumers about the components of their payments and telling them why it’s that much, and really counseling the consumer and providing them with full transparency.