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.
The information contained herein
has been provided by Keith E. Whann and Deanna Stockamp of the Law
Firm Whann & Associates, LLC and is for general information
purposes only. You should contact legal counsel for specific application. |
