DEALERSHIP LEGAL COMPLIANCE IS COMPLEX,
BUT NOT IMPOSSIBLE
By: Keith E. Whann
The motor vehicle industry
is one of the most heavily regulated industries in America today. There
are a whole host of state and federal laws
which impact
a motor vehicle transaction, including State Unfair and Deceptive Acts and
Practices (UDAP) Statutes, State Titling 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 Laws and implementing Regulations, to name a few. The large number
of overlapping state and federal legal and regulatory requirements
makes compliance
extremely challenging for the typical motor vehicle dealership. Additionally,
as long as these laws require a motor vehicle transaction to be conducted
in ink on paper, forms compliance is the logical starting point of any
analysis
of legal exposure within the dealership.
Dealers often select forms for use
in the dealership without taking into consideration how all of the
forms work
together or whether they accurately
reflect the dealership’s
business practices. Remember, each form in a transaction is not meant
to stand alone, but rather is an integral part of the entire transaction.
Moreover, what is disclosed on one form can have significant impact
on
another. One
of
the most
difficult challenges for dealerships is complying with the large number
of overlapping disclosure requirements and maintaining consistency
throughout their forms. 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. In addition, State UDAP Statutes typically
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 contract. If
a dealership is to be in compliance with all of these State and Federal
Laws, the dealership
must ensure that the Retail Buyers Order, FTC Buyers Guide and Limited
Warranty Document contain the required disclosures and those disclosures
must be consistent
and properly integrated into the appropriate forms.
Sometimes it is not
the area of law or the number of overlapping laws that make an issue
complex, it is the subject matter of the transaction
itself. Virtually everyone knows that a written “Spot Delivery” Agreement
is required when a vehicle is delivered contingent upon final financing
approval, but few recognize that one form will not work for all transactions.
Consumer lawyers have been consistently challenging the way dealerships
use Spot Delivery Agreements, in part because many dealerships continue
to use a Spot Delivery Agreement designed for a traditional financing
arrangement for subprime transactions. The language contained in a
Spot Delivery Agreement can vary depending on whether it is used in connection
with a lease or purchase transaction, as well as whether traditional,
subprime or buy here-pay here financing is involved. Each of these
transactions
involves different rights and obligations of the dealership and customer
and different laws may apply. Remember, since the transaction is contingent
on final financing approval being obtained, the Spot Delivery Agreement
is a material part of the transaction and, therefore, it must be integrated
into the Retail Buyers/Lease Order.
While State UDAP Statutes generally
require that all material statements be reduced to writing and integrated
into the Retail Buyers Order, State
Retail Installment Sales Acts often times require all of the material
financing terms and conditions be contained in the Retail Installment
Sales Contract itself. The integration of an addendum by reference
into the Retail Installment Sales Contract is most likely not appropriate.
Forms used in connection with the installation of electronic payment
devices by dealerships or finance companies on vehicles as a condition
of extending credit to high credit risk consumers are a prime example
of this issue. Like many other products presented to the dealership,
the use of these products and the related paperwork may appear on their
face to comply with applicable federal and state laws, but such a determination
is impossible to make without conducting an analysis of all of the
dealership’s
paperwork and sales procedures.
In addition to paperwork issues, compliance
has become even more difficult given the numerous legal, legislative
and regulatory changes that have
occurred over the past year which have impacted the dealership’s policies
and procedures with respect to the completion of the transaction. For
example, last July, when compliance with the Gramm-Leach-Bliley Act
became mandatory, dealerships were required to establish a system for
providing
an initial Privacy Notice to all new customers. In addition to complying
with the notice and opt out requirements, a dealership and each of
its affiliated entities must be capable of tracking whether an individual
has opted out of a disclosure and following the opt out instructions.
It must also have policies and procedures in place to ensure that nonpublic
personal information is safeguarded and kept in a confidential manner.
A
large oversight for some motor vehicle dealerships is that conducting
certain activities on their websites will trigger notice obligations
under the Federal Privacy Laws. Motor vehicle dealerships often use
websites to collect information about customers and fail to disclose
that fact
in their Privacy Notices. Moreover, a number of dealerships collect
nonpublic personal information about a customer and offer a financial
product or
service online (i.e. accept a credit application via the dealership’s
website), but have neglected to implement proper procedures for delivering
a Privacy Notice to these customers. Federal and state regulators are
stepping up enforcement actions with respect to compliance with both
the Privacy Laws and use of the Internet to conduct these types of
transactions.
In addition to regulatory activity by state and federal regulators,
we are also beginning to see more complaints being filed by consumer
attorneys alleging violations in connection with advertisements and offers
via e-commerce. An increasingly popular trend is to print website screens
and get them admitted at trial. Language in dealership advertisements
has been utilized by consumer attorneys not only to raise claims under
the Truth in Lending and Leasing Acts, which require certain disclosures
to be made if a dealership uses a “triggering” term in an advertisement,
but also to raise other consumer claims, including violations of State
UDAP Statutes and claims under Federal and State Credit Services Repair
Acts.
Consumer attorneys are not the only ones scrutinizing dealership forms
and sales procedures. Lenders continue to focus on whether the dealership’s
paperwork and the underlying transaction itself comply with applicable
laws. Prior to offering either traditional or subprime financing to customers,
the dealership must enter into agreements with lenders. Unfortunately,
these lender agreements create legal exposure for the dealership that
it never anticipated. In virtually all of the lender agreements we have
reviewed during the past five years, the dealership must warrant that
it has complied with and the documents used in the transaction are in
compliance with applicable federal and state laws, rules, and regulations.
As the July 1, 2002 deadline for complying with new service provider/joint
marketer provisions in the Federal Privacy Laws approaches, many lenders
have also begun to amend their agreements not only to include the appropriate
privacy related provisions, but also as an opportunity to insert additional
representations and warranties from the dealership.
Lender agreements also raise a number of business related issues that
should be carefully considered by the dealer. Often times these agreements
have indemnity provisions for the lender (i.e. if something goes wrong
due to a dealership error, the dealership holds the lender harmless for
any damages, costs and expenses, including attorneys’ fees), but there
is no reciprocal provision for the dealership if the problem arises because
of an error on the part of the lender. Choice of law and forum (location)
selection clauses for dispute resolution can also cause a large economic
problem for the dealership should a dispute arise under the lender agreement.
In addition, default provisions can also be an issue, especially those
which state that a default with respect to one contract can be grounds
for requiring the dealership to repurchase an entire portfolio. Dealers
should take the opportunity to carefully review all of their lender agreements,
whether they have already signed them or are considering doing so, to
ensure that they understand their obligations and are able to fulfill
them. In some instances, a dealer’s review of a lender agreement has
lead to the lender being willing to make changes to the dealer agreement.
Dealers looking for assistance in this area can find analyses of a number
of lender agreements in the Company Store at www.lndependentDealer.com.
While legal compliance for a motor vehicle dealership can be complex,
it is not impossible and there are a number of things a dealer can do
to protect its dealership from unwanted liability. A periodic review
of the dealership’s forms helps to keep them up-to-date and eliminate
mistakes in their completion. It is also a valuable component of the
dealership’s bona fide error defense to consumer complaints and lawsuits.
However, dealers should not stop there. A comprehensive audit of the
dealership, its business practices and its lender agreements will go
a long way in protecting a dealership against frivolous and unnecessary
lawsuits, regulatory actions and contractual disputes. One last word
of advice- it is usually easier and more cost effective to prevent problems
from occurring with proactive measures than it is to successfully resolve
problems after they arise.
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