DEALERSHIP COMPLIANCE CAN BE COMPLEX, EVEN FOR THE PROFESSIONALS THAT
ADVISE THEM
By: Keith E. Whann
The motor vehicle industry is one of the most heavily
regulated industries in America today. Often overlooked is the fact
that motor vehicle dealerships
have to be licensed, can only sell vehicles at a licensed location
and can only use licensed salespeople. To complicate matters even
more, there are a whole host of state and federal laws that impact a
motor
vehicle sales transaction, including State Unfair and Deceptive Acts
and Practices (UDAP) Statutes, State Motor Vehicle, 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 and
Anti-Terrorism Laws and their implementing Regulations, to name a
few. Not only do these laws often overlap, but regulators and the courts
are continually modifying interpretations of these laws. Putting
all
of this together, achieving compliance for a motor vehicle dealership
can be extremely difficult and keeping current with legal, regulatory
and legislative developments can be extremely challenging.
Not surprisingly, paperwork compliance is one of the biggest challenges
and the area that presents the greatest legal exposure for a motor vehicle
dealership. State Motor Vehicle Codes and Unfair and Deceptive Acts and
Practices (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 purchase contract.
One of the most important things to remember is that none of the forms
in a transaction is meant to stand-alone. Rather, the dealership’s forms
must work together and be considered in the context of the entire transaction.
Just as important is to recognize the different types of transactions
a dealership engages in, such as whether it sells new or used motor vehicles,
and the types of financing it offers, all of which will impact the content
of the dealership’s forms and the types of disclosures contained therein.
The fact that dealerships often obtain their forms from multiple sources
can further complicate the issue. 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.
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. If a dealership is to be in
compliance with all of these Laws, it 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.
The task for a dealership’s consultant can therefore be significant when
it comes to paperwork issues. They have to understand the applicable
laws and the impact of recent case decisions interpreting them, the type
of business the dealership engages in, and the related products and services
involved in the dealership’s transactions.
Selling a vehicle and completing the appropriate sales related paperwork
is only half of the dealership’s battle, it often has to assist the consumer
to obtain financing for the transaction. The typical dealership will
have business relationships with a number of lenders and must enter into
a lender agreement with each one of them before offering financing to
customers. These agreements are often not reviewed by the dealership
or are reviewed by someone who does not have experience in the motor
vehicle industry. Unfortunately, these agreements can create legal exposure
for the dealership that it never anticipated. In virtually all of the
agreements we have reviewed during the past several 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. In many cases, the dealership makes this representation
even though the lender has provided the financing contracts and trained
the dealership’s personnel on how to complete them. Often times, the
agreements also have indemnity provisions for the lender (i.e. if something
goes wrong, 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. Experience has shown that lenders may be willing
to negotiate revisions to these agreements which are more favorable to
the dealership if the dealership’s representative can articulate why
the revisions are appropriate.
While we are on the subject of contracts, the same principles that apply
to lender agreements apply to the agreements the dealership enters into
with other service providers. In order to comply with the service provider
provisions of the Gramm-Leach-Bliley Act and the FTC’s Privacy Rule,
motor vehicle dealerships should have by now entered into new agreements
or amended their existing agreements with all of their service providers
to include provisions whereby the parties agree to comply with the applicable
privacy laws. When entering into an agreement with a third party, keep
in mind that the dealership and its salespeople are subject to licensing
requirements and regulations that limit the types of activities that
may be conducted at the dealership. Generally speaking, dealers can only
sell motor vehicles and products and services incidental to the sale
of a motor vehicle at their licensed location. Ultimately it is the dealership’s
responsibility to ensure that it is complying with the appropriate licensing
requirements and is conducting all facets of its business in accordance
with applicable laws.
With the recent downturn in the economy and the increasing number of
customers with impaired credit, many dealerships are turning to subprime
and buy here-pay here financing. When retail sellers engage in these
types of financing activities they have to consider taxation and accounting
issues along with legal and compliance issues. Dealers frequently have
individuals advising them who are not familiar with the motor vehicle
industry in general, let alone the nuances of subprime and buy here-pay
here financing. They often are not even aware that guidance is available
from the Internal Revenue Service on many of these issues and that the
industry has worked with the Service to develop a written Audit Technique
Guide that contains specific chapters on subprime lending and related
finance companies.
Lastly, in the Year 2002 no article of this type would be complete without
considering the impact of the Internet on a motor vehicle dealership.
Many companies have gained experience with the Internet and conducting
business via e-commerce from other sectors of the marketplace. Motor
vehicle dealerships should, however, exercise caution before working
with these vendors. Remembering that the motor vehicle industry is heavily
regulated and that the dealership is subject to licensing requirements,
most of the traditional methods used to conduct sales online are not
useful in the motor vehicle industry. Furthermore, consumers cannot complete
the required paperwork electronically and a dealership cannot ship a
vehicle to the consumer’s front door. Federal and state laws governing
consumer transactions, dealer licensing, titling laws, advertising laws
and even lender agreements will all have an impact on what, if any business,
a dealership conducts via the Internet. It should be noted that the role
of the Internet in the motor vehicle industry was recently the subject
of a public forum held by the FTC and will likely receive further attention
in the future.
Clearly, the motor vehicle industry is unlike any other. For many consumers,
the purchase of a motor vehicle is the second largest purchase they will
make. The sale of a motor vehicle often includes other related products
and services and financing for the transaction. As a result, the transactions
that take place at a motor vehicle dealership often come under the scrutiny
of federal and state regulators and consumer attorneys who use the maze
of rules and regulations to break car deals. Given the complexity of
the motor vehicle industry, more and more dealerships are turning to
the NIADA and its State Affiliates for assistance with these issues.
They can often help dealers sort through the legal and regulatory maze
and point them in the right direction when it is necessary to obtain
assistance from professionals or vendors familiar with the motor vehicle
industry.
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