IF YOU WANT TO ATTRACT NEW LENDING SOURCES, DON’T LET YOUR DEALERSHIP’S
PAPERWORK GET IN THE WAY
By: Keith E. Whann
The last few years have been a challenging period for the used
motor vehicle industry and our Country as a whole. After a lengthy
period of time with a very strong economy, today is very much different.
We currently find ourselves saddled with a sluggish economy, a
national decline in the average consumer’s creditworthiness, bankruptcy
rates at an all time high, remaining tension in the Middle East
and, as if that were not enough, a shortage of lenders in the used
car marketplace. Naturally, one topic on everyone’s mind is the
excess inventory on their used car lots and how to find new ways
to sell cars to customers the dealership cannot otherwise get financed.
With the number of lenders conducting business in the used motor
vehicle industry decreasing, one of the keys to attracting a lender
to your dealership is to demonstrate the ability to minimize the
lender’s risk. When it comes to quantifying risk, all lenders have
methods for evaluating customer creditworthiness and collateral,
so these items speak for themselves. A motor vehicle dealer should
be able to make a case as to the positive creditworthiness and
reputation of his dealership. Lenders will often request credit
information and references pertaining to both the dealership and
the dealer principal. Tax returns, along with well-prepared financial
statements, should be available upon request.
Perhaps the greatest unknown variable for lenders, and the area
that presents the greatest legal exposure for motor vehicle dealers
and lenders alike, is legal compliance and the quality of the dealership’s
paperwork. With the likelihood of consumer defaults increasing,
so is the likelihood of litigation. The most prevalent claims and
defenses raised by consumer lawyers today are related to noncompliant
paperwork. A dealer should be able to demonstrate that he can sell
a car at his dealership and keep it sold. Not surprisingly, this
is the area where dealers face their greatest challenge.
There are a whole host of State and Federal Laws that impact a
motor vehicle transaction, including State Unfair and Deceptive
Acts and Practices (UDAP) Statutes and Related Administrative Rules,
State Motor Vehicle Codes and Retail Installment Sales Acts, the
Uniform Commercial Code, the Magnuson Moss Warranty Act, the Fair
Credit Reporting Act, the Truth in Lending and Leasing Acts, the
FTC Used Car Rule and the new Federal Privacy and Anti-Terrorism
Laws and their implementing regulations, to name a few. Not only
have these State and Federal Laws gone through major revisions
during this past year, but numerous case decisions and regulatory
interpretations addressing compliance with these Laws are rendered
on an ongoing basis and, together, they have had an impact on virtually
every form in a motor vehicle sales transaction.
One of the most important things to remember is that none of the
individual forms in a transaction is meant to stand on its own.
Rather, a dealership’s forms must work together and be considered
in the context of the entire transaction. Just as important is
to recognize that the different variables in a transaction, such
as whether a vehicle is new or used, whether the dealership is
selling or leasing a vehicle, and whether traditional, subprime
or buy here-pay here financing is being obtained, will impact the
content of the dealership’s forms and the types of disclosures
contained therein. While an individual form may be appropriate
for the purpose for which it was designed, it may cause a problem
for the dealership when used in conjunction with other forms in
a transaction.
The fact that dealerships often obtain their forms from multiple
sources can further complicate the issue. For example, the Uniform
Commercial Code, the Magnuson Moss Warranty Act and the FTC Used
Car Rule each impose specific requirements on dealerships when
offering or disclaiming warranties. Many State UDAP Statutes also
require that every retail sale of a motor vehicle be preceded by
a written contract that contains all of the agreements of the parties,
including all material statements made prior to obtaining the customer’s
signature on the purchase contract. If a dealership is to be in
compliance with all of these Laws, it must ensure that the Retail
Purchase Agreement, FTC Buyers Guide and Limited Warranty Document
contain the required disclosures and those disclosures must be
consistent and properly integrated.
Putting all of this together, achieving forms compliance for a
motor vehicle dealership and keeping current with legal, regulatory
and legislative developments that impact the dealership’s forms
can be extremely challenging. What’s more, consumer lawyers know
the impact that these legal and regulatory developments have on
dealership paperwork and recognize that many dealers have not taken
action to update their paperwork or procedures. They have adopted
a new strategy for handling motor vehicle cases in hopes of recovering
large damage awards and attorney fees. Instead of focusing on what
the consumer alleges his problem is with the motor vehicle transaction,
the consumer’s lawyer goes for what has become known as the “quick
kill.” They carefully scrutinize the dealership’s paperwork looking
for incorrect or inappropriately completed paperwork that might
provide the basis to successfully rescind the transaction, recover
damages and collect attorney fees.
Just recently, a class action lawsuit was certified against an
Ohio-based motor vehicle dealership group arising out of pre-printed
disclosures on the dealership’s retail purchase agreement. The
consumers asserted that the inclusion of a $97.50 “dealer overhead”
charge as a pre-printed entry in connection with the sale or lease
of a motor vehicle constitutes a violation of Ohio’s UDAP Statute.
They also alleged that the inclusion of the charge as a pre-printed
entry implies to consumers that it is both proper and non-negotiable
and, because the dealership knows or should know that it is illegal,
constitutes fraud or, at a minimum, negligent misrepresentation
on the part of the dealership. The Trial Court granted the motion
to certify a class consisting of all consumers who have purchased
or leased a vehicle from the dealership group utilizing the standardized
forms during the past four years. The class of consumers certified
in this case is estimated to consist of nearly 60,000 individuals
who are seeking a refund of the $97.50 overhead charge, an order
prohibiting the dealerships from charging the fee in the future,
punitive damages and attorneys’ fees.
Lenders recognize that the trend among consumer lawyers is to
attack dealership paperwork and, as a result, are cautious of conducting
business with new dealerships. There are still many quality lenders
who remain committed to independent dealers and the used motor
vehicle industry. A number of these lenders have expressed an interest
in working with NIADA to develop ways to further minimize the risks
and conduct more business in the motor vehicle industry. There
was a great deal of activity and discussion about these lender
issues and paperwork compliance at NIADA’s Convention.
With today’s sluggish economy and a diminishing pool of lenders,
independent dealers find themselves having to work harder to attract
lenders. Taking action now to formalize a business plan, gather
appropriate credit and personal references, and ensure that your
dealership’s paperwork and day-to-day sales activities are in compliance
with the law will not only help minimize overall legal exposure,
but should help attract new lending sources to your dealership.
If you need assistance in reviewing and updating your dealership’s
paperwork, various training and educational programs offered by
NIADA and its Affiliated State Associations can be a valuable resource. |
