There’s no doubt compliance will once again be a big topic in 2014, especially with the Federal Trade Commission, attorneys general, motor vehicle departments and state insurance commissioners targeting dealers at an unprecedented level. There’s also the indirect effect of the Consumer Financial Protection Bureau (CFPB). It doesn’t have authority over most dealers, but its regulatory activities can still impact how dealers operate.
Keep in mind that the Dodd-Frank Wall Street Reform and Consumer Protection Act did more than create the CFPB. It also gave the FTC enforcement authority over the auto dealer business, as well as new rulemaking powers. So what’s a dealer to do? Well, one thing my firm does to assist our clients is monitor media outlets to see which areas regulators are focused on. It’s something your store should do as well.
Well, from what we’ve seen and read, many of the legal actions taken against dealers in 2013 could have been prevented by the F&I department. So, to help steer your compliance efforts in the right direction, we’ve identified 10 regulatory hot spots your operation needs to be keyed in on this year. This list certainly doesn’t cover every state and federal regulation governing your business, but it will point out areas targeted by regulators. This list, by the way, should not be taken as legal advice, so please address all legal questions to your attorney.
No. 1: Deceptive Practices
The FTC kept a close eye on deceptive acts and practices last year, and I expect it to continue doing so in 2014. But this shouldn’t just be an F&I concern, as the issues that put dealers on the radars of state regulators can arise before the customer enters the F&I office.
What your store needs to pay attention to is how payments are quoted during sales negotiations. Not only is the FTC looking for deception, it’s also keeping an eye on quotes that have payments for F&I products packed in. And both issues are easy for the FTC spot.
No. 2: Payment Packing
The FTC has determined that the Truth in Lending Act (TILA) requires that customers be given a written disclosure of certain terms of the agreement during negotiations and before they agree to the a final payment (consummation of the deal, as regulators refer to it). These disclosures include the customer’s annual percentage rate, monthly payment amount and loan term. Car buyers must also be handed a full, written disclosure of any add-ons that were included in the payment calculation, as attorneys general have determined that not doing so equates to a deceptive practice.
No. 3: Undisclosed Price Adjustments
This involves changing the customer’s agreed-to price without full disclosure. If the price or terms change for any reason, the change must be disclosed and agreed to in writing by the customer. Failing to do so will be considered fraud and subject your store to criminal prosecution.
No. 4: Falsifying Customer Information
This practice was criminally prosecuted several times in 2013. It involves falsifying credit applications by creating nonexistent income or reducing debt to make the borrower’s debt-to-loan ratio more appealing to the finance source. Oftentimes, this type of bank fraud is done to get deals bought that had no chance of getting done otherwise. But no matter the intent, falsifying credit apps is considered a felony.
No. 5: Fraudulent Auto Loan Modification
If your store is in the practice of recommending firms to customers that promise to reduce their monthly car payment, you may want to rethink that practice or at least check up on the companies you’re recommending. These firms typically pledge to reduce a consumer’s payment by 25% to 40% for a fee that ranges between $350 and $799. But what happens in some cases is the customer is told to stop making payments on his or her auto loan, increasing the risk that their vehicle will be repossessed. Once the upfront fees are collected, the promised loan modifications are never done. Not only do customers not benefit from the services they paid for, their vehicle gets repossessed by the finance company.
No. 6: Disparate Impact
The Equal Credit Opportunity Act does not allow creditors to impose different terms or conditions on a loan based on a consumer’s race, color, religion, national origin, sex, marital status, age, or because he or she receives public assistance. Disparate impact is a legal doctrine that says creditors can be sanctioned whether the discrimination was intended or not.
So far, the CFPB’s use of disparate impact has centered on rate markups, but the bureau could easily apply the legal theory to product pricing. If it ever does, you could face charges of discrimination if you charge an individual who falls in a group protected by the ECOA significantly more for an F&I product than someone who isn’t protected by the law.
No. 7: Full Disclosure
Several dealers have recently run afoul of the law for not disclosing all the terms, rates and products included in the sales contract and price of the vehicle. Not only is it mandatory that all products and terms be disclosed to every customer, you also have to be able to prove that a complete disclosure was made.
No. 8: Paperwork
There are a slew of documents dealers must complete to comply with state and federal laws. Most dealers are aware of the list, but there are a couple areas dealers may want to pay particular attention to given recent enforcement actions. For this article, I’d like to cover Form 8300.
Anyone who receives $10,000 or more in cash in a single transaction or a series of related transactions while conducting their trade or business must file a Form 8300 with the IRS. And compliance is required if the payment is made in one lump sum, broken up into two payments that total $10,000 or more, or is part of a single transaction (or two or more related transactions) that causes the total cash received within a 12-month period to total more than $10,000.
Helping a customer avoid the filing of a Form 8300 is a severe violation and should never be allowed. The penalty for intentionally failing to file a Form 8300 in a timely manner (within 15 days after receipt of the cash) is $25,000 or the amount of cash received and not reported, whichever is greater.
No. 9: The Privacy Rule
The Privacy Rule applies when you extend credit to someone in connection with the purchase of a car for personal, family or household use, arrange for someone to finance or lease a car for personal, family or household use, or provide financial advice or counseling to individuals. If you engage in these activities, which all car dealers do, any personal information you collect to provide these services is covered by the Privacy Rule.
Examples of personal information covered by this requirement include an individual’s name, address, phone number or any other piece of personally identifiable information. In a typical vehicle transaction, the rule applies if you collect personal information about someone in connection with the potential financing or leasing of a car, even if that person does not fill out a formal application. The Privacy Rule does not apply if a person buys a car with cash or arranges financing on his or her own.
No. 10: Conditional Rebates
Offering to lower your customer’s interest rate if he or she agrees to purchase F&I products is a clear violation of the TILA. There are many legally permissible reasons for adjusting your customer’s interest rate, but doing so in exchange for your customer buying your products isn’t one of them. Charge whatever rate you want, but don’t tell or even imply that you’re lowering the customer’s interest because he or she agreed to purchase your products.
These are just a few of the areas we’ve seen regulators target, but there are others. A little common sense and honesty will eliminate most problems, but you also need to stay up to date with the laws governing automobile transactions — something with which your state dealer association can help.