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    New Illinois Law Effectively Restricts GAP and Products Sales

    3/30/2021

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    Illinois Governor Jay Pritzker signed the Predatory Loan Prevention Act which applies to all consumer financing in the state and took effect upon his signature on March 23.  The law adopts a maximum Military Lending Act calculated APR (“MAPR”) of 36% for consumer loans in Illinois.  Consumer loans are defined to include motor vehicle retail installment sales contracts as well as traditional loans.  Only banks, savings associations, credit unions and other federally chartered lenders are exempt from the law.

    The MAPR is an “all in” APR, and includes in the interest calculation, with limited exceptions: (i) finance charges; (ii) application fees; (iii) any credit insurance premium or fee, any fee for a debt cancellation contract, or any fee for a debt suspension agreement; and (iv) any fee for a credit-related ancillary product sold in connection with the credit transaction,  The Department of Defense (“DOD”), which interprets the MLA, has not provided much guidance on what constitutes a “credit-related ancillary product.”

    In 2020, the DOD withdrew a prior interpretation of the MLA that effectively said when a lender extends credit in excess of an item’s purchase price, the exemption from the MLA for motor vehicle acquisition loans would not apply. This change was understood to allow dealers to sell GAP without running afoul of the MLA.  Repealing this interpretation, however, only meant a vehicle financing transaction was exempt from the MLA.  It did not address whether GAP is covered in the MAPR calculation.  A prudent approach for Illinois dealers is to treat GAP premiums as interest for purposes of calculating the MAPR rate under Illinois law.

    It may be possible to act as an agent for a federally chartered lender in the origination of two-party (direct loan) financing.  However, the law does not recognize such an agency approach if “the totality of circumstances indicates that the person or entity [the dealer] is the lender and the transaction is structured to evade the requirements of this Act.”  The question essentially comes down to the dealer’s economic interest in the transaction.  Dealers are advised to consult with their federally chartered lenders to attempt to structure an agency relationship for the dealer to have no economic interest in the financing (such as a non-recourse loan compensated by a flat fee) to not run afoul of this prohibition against evading the requirements of the law.

    Penalties under the new law are harsh.  They include making the credit arrangement null and void from inception.  No interest, principal, fees, or charges can be collected from the consumer.  The Illinois Secretary of Financial and Professional Regulation (“Secretary”) can impose a fine of $10,000 per violation and a violation of the Act is also a violation of Illinois’ UDAP law, the Illinois Consumer Fraud and Deceptive Business Practices Act.  That law allows consumers to sue for actual damages, punitive damages, and attorneys’ fees.

    The Secretary is authorized to write rules under the Act, but it is not known when he or she will do so.

    Reportedly, efforts are underway in the Illinois legislature to amend the new law to exempt purchase money auto financing.  It is unknown what the timing or likelihood of success will be of such legislation. 
    ​
    For now, compliance is a must given the draconian penalties of the new law.  It is recommended that you speak with your DMS provider to determine if it can calculate an MAPR and speak with your federally chartered lenders about an agency arrangement for direct two-party financing.  

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    New Heads of CFPB and FTC Are Not Fans of Auto Dealers

    3/3/2021

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    The Biden Administration represents a fundamental shift in federal consumer protection policy.  Nowhere is this more so than in the new heads of the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC). A difficult road may lie ahead for auto dealers.

    The CFPB


    President Biden nominated FTC Commissioner Rohad Chopra to become the new Director of the CFPB after Trump appointee Kathy Kraninger resigned on January 20, 2021. 


    Kraninger exercised many of the CFPB’s regulatory powers in behind-closed-doors supervisory examinations.  The goal was to effect conduct not inflict punishment.  Enforcement actions fell during her tenure and proposed regulations were less favorable to consumer groups.  As an example, she attempted to limit prohibited “abusive practices” to situations where the harm to consumers outweighed the benefits and seek monetary relief only when there was a lack of a good faith effort to comply with the law.


    Chopra comes at consumer protection and auto finance from a vastly different perspective.  Many believe Chopra is reminiscent of former CFPB Director Richard Cordray, who issued Guidance attacking indirect auto finance rate participation as disparate impact credit discrimination. Disparate impact occurs without any intent to discriminate when neutral business practices are determined to have a negative effect on rates and other terms given to protected classes of persons under ECOA.
    “He will be at least as aggressive as former Director Cordray, if not more so,” said Lucy Morris, a former CFPB deputy enforcement director who worked with Chopra in the CFPB’s early years and is now a partner at Hudson Cook. “His statements are very hard-hitting, and the language is quite charged.”


    The CFPB has ramped up hiring of enforcement lawyers since President Biden took office.   On February 9, the Acting Director posted a blog entitled “Calling All Attorneys Interested in Joining the CFPB” at all levels.  Pursuing enforcement actions will be a priority for these new lawyers.


    Take, for example, his comments in connection with the FTC’s settlement of a disparate treatment credit discrimination enforcement action against a New York auto dealer in 2020.  The dealership was charged with credit discrimination based on alleged comments of an f & I manager stating that minorities should be given worse terms.


    To settle the FTC’s lawsuit, the dealer agreed to pay $1.5 million in consumer remediation and FTC penalties.  Chopra gave his views on rate participation and disparate impact credit discrimination in a separate statement:


    "A dealer markup is an undisclosed kickback that dealers earn for convincing prospective car buyers to agree to a higher interest rate than they actually qualify for with a lender. These kickback arrangements are kept secret from car buyers, who end up paying far more for financing.
    It is rare to uncover direct evidence of racist intent. That’s why disparate impact analysis is a critical tool to uncover hidden forms of discrimination, not only in this context but throughout the economy. . . . In addition to discriminatory practices, there is growing evidence of widespread fraud and deceit, including the same “liar loans” that fueled the last recession."


    The FTC


    President Biden’s choice to head the FTC is Democratic Commissioner Rebecca Kelly Slaughter.  Under the Biden Administration, Democrats will outnumber Republicans 3-2 on the FTC.


    Commissioner Slaughter is also no fan of auto dealers.  Writing in the same New York auto dealer case, Slaughter took dead aim at auto dealers:


    "The automobile-financing market in the United States is profoundly broken. Although this matter involves extreme conduct that may make it seem like an outlier, the tricks and traps that [the New York dealer] used against consumers are all too prevalent at auto dealerships across the country.


    The fundamental problem in the auto-dealing market is that auto dealers no longer make most of their money by selling cars. Instead, they make money by selling credit and add-on products, such as guaranteed asset protection (GAP), window etchings, extended warranties, and anti-rust coatings. Nearly all of these moneymaking strategies can be bad for consumers. . . . I agree with Commissioner Chopra that the time has come for the Commission to commence rulemaking proceedings to tackle both the unfair and deceptive consumer abuses as well as the discrimination too often seen at auto dealerships.

    The consumer-dealer relationship is fundamentally unequal, and the dealers have had the upper hand for too long."


    Both Chopra and Slaughter also favor a broad interpretation of what an “unfair or abusive practice” is particularly in the auto dealer context.  Most analysts believe both will apply legal bans on unfair, deceptive, and abusive practices far more broadly than former CFPB Director Kraninger did.  Both also believe that disparate impact credit discrimination, which may not be legally actionable under the Equal Credit Opportunity Act, separately constitutes an unfair trade practice subject to their regulatory enforcement authority.


    What’s a Dealer to Do?


    With these two in charge, it is time to take a look at your compliance policies and practices in sales and f & i.  If you have not already done so, it is time to adopt the NADA Fair Credit and Voluntary Protection Products policies.  These policies set firm dealership rate participation and aftermarket product pricing and require a documented legitimate business justification for charging any customer a lower rate markup or price.  These are intended to follow FTC precedent for mitigating disparate impact credit discrimination risks.  They are really a must.


    Also adopt or refine your customer dispute procedures and apply them the same to all customers.  The CFPB and FTC will generally act on customer complaints and if you can resolve one before it gets to them, you are well advised to do so, even if it means giving the customer a seeming windfall.  Don’t be pennywise and pound foolish.


    Schedule training and AFIP certify your sales and f & I people if you have not already done so.  You need a good story to tell if your dealership comes under scrutiny.  It is going to be a tough four years ahead.

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    February 11th, 2021

    2/11/2021

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    Service providers are necessary for the effective operation of any dealership.  From DMS providers to advertising agencies to CRM systems to IT providers and more, dealers rely on third parties to perform critical functions.  Service providers are given responsibility and placed in a position of trust.  Care must be used in selecting, contracting with, and managing service providers.
     
    Selecting Service Providers
     
    All service providers should be subject to some level of due diligence and scrutiny before being hired.  This is particularly important for service providers that will have access to dealership customers’ nonpublic personal information, dealership strategies, HR and benefit claims, or other confidential information.
     
    Vet a service provider prior to hiring them.  It is a best practice to identify multiple potential service providers and compare their respective track records in the industry and for the services you need.  For example, there are numerous DMS providers.  Which ones will best meet your needs in a way that minimizes complexity and is most user friendly?  Which ones have the best safeguards protections for your customer information?  Are there unique functions of a particular service provider that you find attractive?
     
    Once you have identified several leading service providers, do “due diligence” on their industry history and performance.  Has the service provider been subject to lawsuits from its clients receiving similar services?  What is the service provider’s Better Business Bureau reputation?  Has the service provider experienced a security breach and, if so, how did it address the breach and fix its systematic shortfalls?  Try to get references from other dealers using the same services and speak to the references.  The more important the service provider, the more you need to investigate.

    Putting out an RFP (Request for Proposal) to several competing potential service providers is a good way to get information about them to vet and a way to have each service provider applying for your business on equal terms.  
     
    Contracting with Service Providers
     
    A contract sets forth the terms for the services and, if properly drafted, provides you with important rights to manage the relationship with the service provider. A contract is more than a generic statement of services and the purchase price.   It is critical that you take the time to get the contract language to your satisfaction   It is not advisable to simply sign the vendor’s form contract.
     
    A contract should provide a detailed description of the services to be provided, the payment terms, and the applicable performance standards.  This requires attention to detail and should be specific to the nature of the services to be performed.  Examples of performance standards are percentage of calls handled within a specific time frame, delivery dates, time for responding to calls for IT support, and qualifications of personnel assigned to perform.
     
    Other provisions that should be included in all service provider agreements include:
     
    • Relationship/Independent Contractor  -  You do not want the service provider or any of its employees to be deemed your employees.  A well-drafted “independent contractor” clause is necessary to do this.
     
    • Ownership of Work Product  -  The service provider’s work should be stated to be “work made for hire” under federal copyright laws which means that you will own the work product.  This may not be possible for off-the-shelf or even customized software.  In such a case you should obtain a perpetual, fully-paid-up, and irrevocable license to use the work.
     
    • Confidentiality  -  The service provider should acknowledge the confidentiality of your information and the need to safeguard your customer information in accordance with the FTC Safeguards and Disposal Rules.  If the vendor suffers a security breach or otherwise believes your information may have been compromised, they must notify you immediately.
     
    • Representations and Warranties  -  The service provider should warrant that its work does not infringe or violate the rights of any person or entity.  If a claim is made that the work does infringe, the vendor is obligated to develop a non-infringing workaround that performs the same functions.
     
    • Indemnities  -  If you are sued because of any alleged wrongful act or omission of the service provider, the service provider should defend and indemnify you for any loss and expense.  The same holds true for all claims and arbitration demands.
     
    • Right of Audit  - You should have the right to audit upon reasonable notice the vendor’s performance as well as their program for safeguarding customer information.  If the service provider has access to customer or employee information, they should share penetration and vulnerability test results with you along with their plans to fix issues identified in such tests.
     
    • Term and Termination  -  Depending on the vendor, a one-year contract with automatic renewal terms is often best.  You may want to commit to a longer term to lock in pricing. For complex relationships with long ramp-up times such as DMS providers, you will want longer terms.  You  want the right to terminate for a material breach that is uncured for 30 days or immediately in the event of a financial failure or a takeover.
     
    • Covenant of Cooperation Upon Termination  -  Whenever and however the service provider agreement terminates, you want a continuing covenant of cooperation in transitioning to a successor.  This is particularly important for DMS providers.
     
    • Dispute Resolution  -  Designate an informal dispute resolution process followed by an arbitration clause that will apply to all disputes except for seeking injunctive relief. 
     
    Managing Service Provider Relationships
     
    Service provider relationships should be carefully managed to ensure you are getting the services you agreed to pay for. A best practice is to designate a dealer representative for each service provider, a relationship manager.  This person is responsible for the service provider relationship day to day.
     
    If a service provider is not performing in a satisfactory manner, it is important you take some action even if it means just going up the chain of command to the vendor’s manager who can address the shortfalls.  Under the common law, parties can be held to have effectively amended their contract through “course of dealing.”  The equitable doctrines of estoppel and laches may also operate to preclude you from exercising your contract rights if you have unreasonably delayed in questioning performance.  Use your right of audit, even if you do a remote audit, to stay on top of what the service provider is doing and failing to do.  Then take action.
     
    Document your complaints in writing.  Follow up in writing if the performance does not improve.  Not every shortfall in performance will justify a contractual notice of default.  Use informal means whenever possible.  This will help preserve the relationship and may lead to formally amending the contract if an alternative resolution is necessary.
     
    Do not threaten to exercise legal rights and then fail to do so.  Apart from “course of dealing” risks, repeatedly threatening default generally does not help a relationship.  But if doing so is necessary, such as in the event of a serious financial failure or a material uncured performance shortfall, do not wait to exercise your contract default rights.
     
    Prior to doing so, you should be working to vet and be ready to hire a successor.  Lining up a successor is not contractually prohibited.  As noted above, the contract should have a covenant of cooperation in which the service provider being terminated agrees to work with the successor for a seamless transition.  This cooperation is particularly necessary for vendors such as DMS providers and IT companies.  The more complex the services, the more likely it will take the work of a predecessor provider to ensure the success of a new provider.  One major DMS provider reportedly will not agree to assist a successor.  This is a factor to consider when deciding to hire them in the first place.  You want to avoid disruption to the business.
    Conclusion
     
    Vet all service providers and take the time to make sure your contracts reflect favorable terms.  Manage the relationship and work with the service provider to improve.  Always have a termination plan in mind and be ready to implement it once the contract ends, no matter why or how the relationship terminates.

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    State Attorneys General Crack Down on Subprime Auto Finance Lenders

    1/29/2021

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    As subprime auto finance delinquencies rise in the face of the COVID pandemic, State Attorneys General (AGs) have become more aggressive in investigating subprime auto lenders for compliance violations. The familiar unfair and deceptive acts and practices (UDAPs) state law prohibitions provide the basis to do so.
     
    The Massachusetts Attorney General has been a leader in pursuing and settling with subprime auto lenders.
     
    In 2017, the Mass AG acting in conjunction with the Delaware AG, settled with Santander Bank and its affiliates. The settlement included $16 million in relief to more than 2,000 affected consumers and a $6 million payment to Massachusetts. Santander was charged with facilitating unfair, high-rate auto loans to subprime Massachusetts residents.  This was the first time an AG entered into a consent decree with a subprime auto lender.
     
    Massachusetts charged that Santander’s own internal audit concluded that the company’s oversight of auto dealer conduct when making subprime loans was inadequate. Despite identifying a group of dealers that had extremely high default and delinquency rates and other problems, the company continued to fund loans through these dealers. Santander also allegedly identified a group of dealers it called the “fraud dealers,” but continued to fund loans through them.  Presumably, there was fallout to these dealers in the aftermath of the settlement.
     
    But Massachusetts was not done.  In 2019, the Mass AG settled with Exeter Finance for the sum of $5.5 million, including $4.675 million for consumer redress as well as Exeter agreeing to waive deficiencies and reform adverse credit reporting on certain subprime consumers.
     
    The AG’s Office alleged that Exeter facilitated the origination of Massachusetts auto loans that the company knew or should have known were unfair and in violation of the state Consumer Protection Law. The AG claimed that courts have held that lending is unlawful under the statute if lenders do not have a basis for believing that borrowers will be able to repay their loans in normal course. Exeter also allegedly mishandled servicing and collecting activities in violation of the Attorney General’s debt collection regulations.
     
    The Delaware Attorney General piggybacked the Massachusetts AG and also settled with Exeter as it had with Santander.  But these two AGs and their counterparts were not done.
     
    In 2020, led by the Illinois Attorney General, 34 Attorneys General settled with Santander for approximately $550 million in relief for consumers plus additional deficiency waivers.  The settlement resolved allegations that Santander violated consumer protection laws by exposing subprime consumers to unnecessarily high levels of risk and knowingly placing these consumers into auto loans with a high probability of default through the use of sophisticated credit scoring algorithms. 
     
    The suit also claimed Santander failed to monitor dealer behavior to minimize the risk of receiving falsified information on credit applications and power booking of vehicles.
     
    Now, the Massachusetts and Mississippi Attorneys General have filed lawsuits against Credit Acceptance Corporation (CAC) which promotes that it finances nearly everyone using models and methodology that projects levels of delinquency on a macro basis for users based on credit score.  So, going in, CAC knows that a high percentage of its borrowers will default and dealer compensation is adjusted downward accordingly.  This business model which allegedly promotes higher dealer markup on vehicles and aftermarket products is what the Massachusetts AG argues is an unfair trade practice.
     
    What This Means for Dealers
     
    The aggressive AG pursuit of subprime lenders starts with claims that consumers are being treated unfairly by dealers or that lenders are being deceived by falsified credit applications and power booking.  For an Attorney General, a large lender makes an easier target on a big stage but, back home, you can be sure this all signals a greater level of scrutiny of dealers for UDAP violations as well.
     
    There is also certain to be consequences as these lenders attempt to point the fingers at dealers being the real problem regardless of how they underwrite financing.  Claims of excessive markups on used vehicle and payment protection products, dealers requiring vehicle service contracts as a condition to getting financed, and the familiar claim of dealers putting consumers into credit with hidden rate markups are sure to follow.  State coffers are hurting at the present time and many AGs see dealers as low-hanging fruit for fines and penalties.
     
    None of this means you should not offer financing to subprime consumers provided you do not make any misrepresentations in obtaining the financing either to the consumer or the finance company.  These transactions will be more heavily scrutinized so make sure to dot your “i” s and cross your “t” s. The subprime area presents a series of challenges that prime financing may not.

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    FTC’s Recent Actions Point to Aggressive Pursuit of Auto Dealers

    8/17/2020

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    The Federal Trade Commission (FTC) has recently indicated its displeasure with auto dealers and that is a sign that dealers may need to tidy up their compliance practices.
     
    Recent FTC Consent Order
     
    In May, the FTC entered into a $1.5 million consent order with a New York dealer.  The FTC’s lawsuit alleged alleges the company jacked up what consumers had to pay by fabricating fees, inflating charges, and sneaking in stealth add-ons. The lawsuit also alleges the defendants discriminated against African American and Hispanic consumers by charging them higher financing markups and fees, in violation of the Equal Credit Opportunity Act (ECOA) and Regulation B.
     
    According to the complaint, the dealer also overcharged consumers by dinging them for as much as $695 in documentation fees, an amount limited by New York law to no more than $75. In addition, the lawsuit alleges the defendants often gave consumers one figure for the agreed-upon total, but then inflated the price without the buyer’s knowledge in other documents – a practice the dealer’s employees called “air money.”
     
    The FTC assessed the $1.5 million fine against both the dealership and its General Manager personally.  The settlement also requires the company to implement a fair lending program that safeguards against discrimination.   FTC oversight continues for 15 years.  This case alone should serve as a reminder to other businesses that may be overdue for an ECOA compliance check.
     
    FTC Study on Consumer Auto Sales and Financing Processes
     
    But the FTC wasn’t done.  In July, the FTC released a study conducted by its Bureau of Consumer Protection concerning auto dealers.[1]  Based in large part on interviews with 38 consumers, the study found misleading auto advertising, loan falsification, “yo-yo” financing, deceptive add-on fees, and privacy and data security issues, among other practices.  
     
    Advertisements with misleading financing terms (as well as those with deceptive price and discount offers) remain a concern.  Some consumers found out belatedly that they did not qualify for these advertised finance offers, that they could not combine a 0% APR offer with other incentives, or that the car they selected did not qualify for the advertised rate.
     
    Negotiating price was another fact cited by the FTC.  Customer confusion on the sales negotiating process or being compelled to only negotiate monthly payment were among the factors cited by the FTC study.
     
    Particular criticism was directed at auto dealers’ f & I offices.  Many consumers complained that vehicle prices and rebates negotiated by the salesperson were not honored by the f & i office.  The FTC study concluded, “In financing negotiations, dealers should honor discounts or other terms sales personnel promise consumers, or sales personnel should not promise them. If there are limitations on the discounts or terms being offered, dealership representatives, whether on the sales floor or in the financing office, should explain those limitations clearly and consistently.”
     
    Aftermarket products were another area of FTC criticism.  The study characterized aftermarket (add-on) products as follows:
     
    Most study participants’ contracts included charges for add-ons, but the interviews revealed consumers who were unaware which add-ons they had purchased, were unable to identify add-ons in the paperwork, were unclear what those add-ons included, and sometimes did not realize they had purchased any add-ons at all. Indeed, add-ons were the single greatest area of confusion observed in the study.
     
    Many consumers were left with the impression that aftermarket products were required to get financing or that add-on products were free (payment packing). Undisclosed limitations of add-on products, the absence of the cost of add-on products, and the requirement of bundling add-on products in lieu of being able to buy products separately were also cited by the FTC. 
     
    The FTC study also criticized spot delivery practices.
     
    Some participants in the qualitative study were surprised to learn that financing they expected to be final was not. Some participants expressed confusion about the concept of spot delivery. Some consumers had never heard the term, others knew of it but did not know what it meant, and a few thought it meant something that it doesn’t. For example, one consumer thought spot delivery was a cooling-off period. Some consumers were unaware that they had signed forms describing spot delivery and potential cancellation.
     
    Finally, the report criticized how consumers are treated in the sales and finance process.  Consumers are overwhelmed with documents and information that dealers pressured them into signing without reading.  The process was so lengthy that it left them feeling overwhelmed or experiencing “buyer’s fatigue” by the time they reached the financing portion of the transaction.

    What This Means for Auto Dealers
     
    The FTC’s recent actions criticize many common practices of auto dealers and suggest enforcement actions for unfair and deceptive practices for these actions are coming.  Also, in the consent decree, two Commissioners wrote statements supporting disparate impact credit discrimination cases against auto dealers.  Disparate impact discrimination occurs when you can’t prove intentional discrimination but a statistical analysis shows that members of ECOA protected classes (race, color, religion, national origin, sex, marital status, age, or because you get public assistance) get worse credit terms than non-protected persons, typically white males. 
     
    It is recommended that dealers adopt the NADA fair credit policy and program[2] which provides a way to address disparate impact credit discrimination risk by using a standard dealer participation rate (markup of sell rate) and use it for every customer unless you can document a specific business justification for providing a lower rate.
     
    Aftermarket product selling seems to be the biggest issue of the FTC study.  You should charge the same price for your aftermarket products and follow the 300% rule—offer 100% of your products to 100% of your customers, 100% of the time.  While using a menu is not required by any law, it is a best practice to show the customer considered the costs and benefits of each product or group of products and made an informed decision to accept or reject them.
     
    Advertising is another FTC hot point.  Try not to give disclosures in inconspicuous or unreadable mouse type and leave disclosures on the screen for a long enough time for consumers to read and comprehend them.  This is especially true for disclaimers and disclosures that not all customers will qualify for an advertised rate or other advertised terms.
     
    Negotiating price tactics were also criticized by the FTC.  While there is no legal prohibition on negotiating payment amount, it can be susceptible to payment packing when room is left in the quoted monthly payment for other products to be included and represented to be free.  State Attorneys General have been particularly aggressively in bringing enforcement actions against dealers for payment packing.
     
    Again, in most states, spot deliveries are lawful.   But make sure the customer understands that the agreed-upon financing is subject to being purchased by a lender and that, if not, either party can return the collateral (the vehicle and the trade-in along with any funds the customer has put down) and walk away.  Be careful about pressuring a consumer into new, less favorable terms.  Be sure to date the new contract the date it is signed and not backdated to the original deal.  Also send the customer an adverse action notice because of a change to terms less favorable to the customer.
     
    The FTC study is definitely worth a read.  Now would be the time to look at your compliance in these and other areas and make certain you are not taking the risk of being on the FTC’s enforcement agenda given all the new scrutiny of auto dealers.

    __________________
    [1] A link to the FTC study is available at https://www.ftc.gov/reports/buckle-navigating-auto-sales-financing

    [2] The NADA Fair Credit Policy and Program can be found at https://www.nada.org/faircredit/

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    Protect Your Car Dealership via Best Auto Dealer Compliance Solutions

    7/14/2020

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    Business initiation is a murky task due to the prevailing compliance roadblocks. You, as a dealer, are subjected to various laws and regulations. On the ground of non-adherence to these sets of protocols, you will get heavy penalties. And fines are exorbitant in nature. Of course, you won’t like this type of grievous imposition in the wake of any compliance breach!
    ​
    So, here, automotive dealership compliance comes in to force. It consists of all laws and regulations in your dealership area. It incorporates laws of selling, buying, financing, and insuring. It’s also wide due to the inclusion of customer communication. So, it’s very crucial for all automotive dealerships to be and remain in compliance


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    Different types of Auto Dealership Compliance Services:Before moving ahead, you need to ask yourself few questions. Today, it’s an age of the Internet and cloud computing. Everyone is equally vulnerable to cyber threats. So, will you survive in the business, if your customer data is wrongfully compromised?
    Business reputation becomes crucial if you encounter any growth. Without it, a commercial organization will completely paralyze. So, could you afford any reputation risks of advertising, sales, or F-I compliance violation?
    The answer to the above questions is an absolute NO.
    So, protecting yourself from dealership compliance issues is a big deal. The penalties are prejudicial to a career if not addressed carefully. These can be possible through robust awareness, training, and prevention. It’s imperative to strategize your dealership as there are so many regulations to adhere to.
    That’s why there are different compliance services available online nowadays. These are advertising, data security, mitigation of data breach risks, digital retailing, red flags, FTC & CFPB compliance. Above all, the consumer notice has a pivotal role in the entire journey of compliance procedure.
    Let’s discuss:
     
    AdvertisingThe Federal Trade Commission (FTC) has bought over 40 dealer advertising enforcement actions since 2012. So, reviewing your advertising for compliance with FTC guidelines and regulations is essential. Thus, an expert needs to review your advertising properly - especially if you have already entered an FTC consent mandate.
     
    Mitigation of Data Breach RisksThe security compromise of your customer data is the biggest financial risk. As a dealer, you need to ensure all the data security loopholes are to be fixed in time. It has been seen that 60% of small to mid-size businesses went out of business within 6 months after a data breach. In this scenario, it’s recommended to seek advice from a specialist to
    curb the menace of data threats.
     
    Customer CommunicationIf your dealership is complying with various automotive regulations – then it’s fine. However, it’s important to send customers risk-based pricing and adverse action notices. A specialist can guide you on when and how to send risk-based pricing and privacy notice. They can review this issue and help you become compliant. Here, you can use digital marketing notices and campaigns. So, don’t be laggard in this race.
     
     
    FTC and CFPB ComplianceThe FTC has become violently active in bringing enforcement actions against dealers. It adopts CFPB’s rules and regulations approach in

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    How Remote Delivery of Vehicles May Give Customers a Right to Cancel the Deal and What You Can Do to Avoid That Right

    5/21/2020

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    The coronavirus pandemic of 2020 has changed the way dealers do business.  Many dealers are adopting newr sales and vehicle delivery practices to accommodate state shelter-in-place laws or consumer stay-at-home mandates.  One way dealers are doing this is by arranging to bring the vehicle to the consumer's home, both for test drives and for vehicle delivery upon purchase or lease by the consumer.

    If not done properly, negotiating or delivering a vehicle other than at the seller's principal place of business can trigger an FTC rule as well as state laws governing door-to-door sales.  These require giving the customer a three-day right of cancellation of the transaction and mandate notices and forms relating to this right to cancel be delivered as well.

    The FTC's Rule on Cooling Off Period for Sales Made at Homes and Other Locations Outside of the Seller's Place of Business has been around since 1972.  Like state door-to-door sales laws, it requires that if the sale is conducted at the consumer's home, or any location other than the seller's place of business, the consumer must receive a three-day right of cancellation of the deal after it is consummated.  The consumer must be given a regulatory notice and two copies of a form to use to cancel by mailing one copy back to the dealer.   You have to wait five days to send the contract to a financing source and, if the customer cancels, return their down payment and trade-in vehicle within 10 days.  Not an ideal scenario for most dealers.

    However two main exceptions to the Rule apply to defeat having to give the three-day notice of cancellation.  One exception is when the deal is conducted entirely  by mail, telephone or online and without any personal contact with the consumer prior to vehicle delivery. 

    The second exception is when the sale is the result of prior negotiations at the seller's permanent place of business where the goods are sold regularly. 

    An FTC staff letter from 2001 stated that where the sale was negotiated and finalized without any face-to-face dealings, the dealer could bring the final contract documents along with the vehicle to the consumer and have the consumer sign the documents in their driveway.  This would not run afoul of the Rule.

    The danger comes when a test drive is conducted at a site other than your dealership.  In this case, if the sale or finance negotiations begin at the test drive, you won't meet either exception.  Likewise, if you deliver the vehicle and attempt to upsell the consumer on aftermarket products or change the deal at their home, you will also be responsible for giving the three-day notice of cancellation.

    The best scenario is when the customer comes to the dealership for the test drive and any negotiations begin there.  This would fit the second exception of the sale or lease being the result of prior negotiations at the seller's permanent place of business.  But what if the customer won't come to the dealership?

    The second  best solution is to have someone from the dealership with no authority to negotiate or conduct sales being the person to bring the vehicle to the remote location for the test drive and make it clear that any negotiations must be done by calling or emailing a salesperson whose name and contact information are given to the consumer.  Then, presumably, all negotiations will be done remotely. 

    This may not be a practical solution for some dealers.  If you must send a salesperson with the vehicle for a test drive, first adopt a Test Drive Policy that states clearly no sales or finance negotiations can occur at a remote test drive.  When the salesperson returns to the dealership, they should put a note in the deal jacket or files that indicates the test drive took place and there were no discussions of price or financing terms consistent with the policy.  The negotiations would begin only on a followup call or email to the consumer.  Again, all negotiations are done remotely.

    Same thing with delivery.  Do not deliver the vehicle without the final paperwork and do not attempt to continue negotiations for any product, service, or terms at the remote site.  If necessary, have the customer sign the documentation in their driveway, not in their home.  A better solution would be to have the customer electronically sign, sign and fax, or scan and email the signed documents to you for countersignature so when you deliver the vehicle, you are also delivering the final documentation signed by both sides.  (Don't forget to first send the customer electronically a review copy required by Truth in Lending first).

    These procedures should enable you to avoid having to give the three-day right of cancellation under the FTC Rule.  But you also have to worry about your state's law.  Some states such as Connecticut, New York, Ohio, and Kansas have adopted the FTC Rule.  Other states have not.  Many of those states do not have the exception for when the deal is conducted entirely  by mail, telephone or online and without any personal contact with the consumer prior to vehicle delivery.  Most states do have the exception for remote delivery when the initial negotiations are done at the dealership but check with your local counsel to learn the rules in your state and how to avoid the three-day right of cancellation under your state's law which may be harder than avoiding it under the FTC Rule.

    Serious penalties and consequences can flow if you are required to give the right of cancellation but fail to do so.  It is a violation of Section 5 of the FTC Act (unfair or deceptive practices) for which the penalties currently are $43,580 per violation.  This figure is adjusted upward annually to reflect inflation.  State laws give private rights of action and state Attorneys General can enforce both the FTC Rule and state law together.

    Courts have also ruled that if a customer is not given a right to cancel when they are entitled to receive one, they have a "reasonable time" to cancel the transaction.  This could be a period of months and result in the consumer getting a free "test drive" for an extended period of time.  And hope you don't sell their trade because they are entitled to get it back when they cancel.  If the deal was financed by a lender, the lender will also require you to repurchase the contract.  So take care not to put yourself in a position where you negotiate with the consumer away from your dealership which could trigger the three-day right to cancel.

    The FTC has said it is taking careful note of complaints and conduct that violates the law during the coronavirus epidemic.  Remote sales are increasing substantially so it is important that you be aware of the possible three-day right to cancel.  For remote test drives and remote deliveries, you can either give the FTC-mandated notice and two copies of the three-day right to cancel and wait five days to finance the paper or try to fall within one of the exceptions by taking the conduct described above.

    We are here to help you so give us a call at 267-481-5636 or email us at AutoDealerCompliance@gmail.com and we will do what we can to help you through the coronavirus times and the behavioral changes necessary to cope.
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    Contract Force Majeure Clauses May Provide a Defense to Delays in Performance Due to the Coronavirus or Related Government Action

    3/30/2020

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     The coronavirus pandemic has made it difficult to impossible for dealers to perform certain contractual obligations.  Especially where shelter-in-place orders are in effect and auto dealer sales operations are considered to be non-essential businesses, a dealer forced to close its sales business may be unable to make payments due on floorplan loans or meet franchise sales quotas.  Other contractual obligations may be difficult or impossible to perform as well.
     
    One possible avenue for relief may be available in contract “force majeure” or Act of God clauses.  These clauses are typically contained in the contract boilerplate and are designed to allow a party to delay its performance or even terminate the contract if an enumerated force majeure event occurs.  The clause will list a series of events that typically include acts of military intervention, strikes, civil unrest, natural disasters, acts of God, and other calamities.  Some contracts include a “catch all” provision making reference to any unforeseen act beyond a party’s control, or words to that effect (e.g., “any act or occurrence beyond a party’s reasonable control and due to no fault of the party”).
     
    Reviewing Contract Force Majeure Provisions
     
    Force majeure clauses are not consistent across all contracts.  Your contract’s force majeure clause will dictate what events may delay or excuse performance.  An act of God is generally defined as an unusual or extraordinary natural event, such as floods, earthquakes, volcanic eruptions, tornadoes, hurricanes, blizzards, etc.  The contract clause may list pandemics or acts of government authority as examples of force majeure events or contain other language that may cover the coronavirus and associated government responses.  A general “catch-all” clause could also be argued to delay or excuse  performance.  The contract language of the clause will ultimately determine whether or not you may be able to delay performance of a contractual obligation.
     
    Know that courts generally interpret force majeure clauses strictly, meaning they will not give an overly expansive interpretation to the enumerated events such as by limiting acts of God to mean extraordinary weather-related events.  A contract without a catch-all clause will be most strictly construed.  A catch-all clause at least gives you an argument that the list is not meant to be exclusive and a party’s ability to control the event is the determinative factor. Know, however, that most courts interpret a general catch-all provision to cover only externalities that are similar to those specifically stated in the balance of the clause.
     
    If a Force Majeure Event Applies, What Performance Does the Contract Require?
     
    Assuming there is a specific reference to a pandemic or you want to argue a “catch-all” clause applies to make the coronavirus outbreak and government responses a force majeure event, you still need to review the contract clause to see what performance is required.
     
    Force majeure clauses may codify an impossibility standard and require that performance of contractual obligations be “impossible” before all obligations are excused. Others may be less stringent, requiring only that the performance, in light of the triggering event, would be “commercially impractical.” So if your state or municipality has adopted a ban on gatherings of more than 50 people, that may provide a basis to fail to perform a meeting scheduled during the applicable time.  Also, not all force majeure clauses provide for termination of an agreement; many only excuse a delay in  performance, providing that any failure to perform due to a triggering event during the force majeure event  will not constitute a breach under the relevant agreement.
     
    Many force majeure clauses also require the affected party to make reasonable efforts to perform during the force majeure event to the extent it can do so. Again, it is the language of your specific contract that determines whether this is the case.
     
    Notice Required to be Given to the Other Party
     
    All force majeure clauses require the non-performing party to give notice to the other party, sometimes within very tight time deadlines.  Notice provisions may specify the form of the notice, to whom it must be sent, and the manner in which it must be sent. Additionally, many agreements will require that notices must provide sufficient specificity to make clear why the relevant triggering force majeure event applies to a given provision in a contract.
     
    Be sure to read the clause carefully and give timely notice in the manner required by the contract.
     
    Impossibility of Performance Defense
     
    In many states under the common law, there is an implied defense to performance if  a situation occurs that makes performance impossible.
     
    The party asserting this defense will bear a heavy burden of proving that the event was unforeseeable and truly rendered performance impossible, and the doctrine generally is applied narrowly. For example, assertions that the event rendered performance more expensive or difficult have been rejected under the impossibility doctrine.  Asa  result, some states, like California, have enacted statutes to address the impossibility of performance defense.  In California, the California Civil Code excuses performance under a contract when: “it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary.”
     
    The presence of a force majeure clause in a contract does not necessarily negate the defense of impossibility of performance but may cause the court to interpret the impossibility defense in a manner consistent with the force majeure clause.
     
    Summary
     
    For any contracts made difficult or impossible to perform due to the coronavirus or the acts of government authorities such as shelter-in-place orders, review your contract carefully with your attorney and pay particular attention to the force majeure clause.  Note whether you can argue it applies and, if so, deliver timely and sufficient notice, and comply with  any performance standards the clause requires.  Again, note that these clauses tend to be strictly construed by the courts but they may provide at least a bargaining chip to negotiate new performance arrangements with your counterparty.
     
     
    ​

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    Used Car Selling Compliance Risks and Best Practices

    3/20/2020

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    U.S. franchised dealers sold approximately 4.1 million used cars in 2019, an all-time high.  Overall, there were about 40 million used cars sold versus about 17 million new.   Used car sales are becoming a greater percentage of dealer sales generally.  Consumer “sticker shock” on new vehicle pricing (the average U.S. new vehicle sold for more than $37,000 in 2019, compared to just over $20,000 for a used vehicle) and the greater inventory of used vehicles spawned largely by vehicles coming off lease, were major factors. 
     
    But used car selling brings with it compliance risks that new car selling does not.  A new car typically comes with a manufacturer warranty and is priced at or below the manufacturer’s published MSRP.  The manufacturer assumes much of the risk relating to a new car sale.  
     
    A variety of different factors come into play with used cars including valuation, prior uses and vehicle condition, dealer or third-party warranties, title issues, and the dealer’s selling used vehicles that may be defective or less reliable than the consumer expects.  Litigation and arbitration relating to used vehicle sales is significantly higher than litigation and arbitration claims on new car sales.
     
    Let’s look at some compliance issues you need to be aware of in selling used vehicles.
     
    Used Car Buyers Guide
     
    The Federal Trade Commission (FTC) requires a Used Car Buyers Guide to be prominently affixed to every used vehicle a dealer offers for sale.  If the sales transaction is negotiated in Spanish, the customer must be given a Spanish copy of the Buyers Guide.  (Best practice: Give a copy of the Spanish Buyers Guide to any customer whose primary language is Spanish, even if the deal is negotiated in English).  The Buyers Guide becomes part of the sale contract and overrides any inconsistent terms.
     
    The FTC revised the Used Car Buyers Guide form in 2017.  You can find a copy on the FTC’s website, https://www.ftc.gov/tips-advice/business-center/guidance/buyers-guide.  Except in Maine and Wisconsin (which have their own forms), you should complete and display the FTC form on every used vehicle in inventory.  An FTC sweep of 94 dealers in 2018 revealed that only 7 were in compliance.  The others received a warning from the FTC that failure to comply may result in a fine of $43,280 per violation.  This is the measure of damages under Section 5 of the FTC Act prohibiting unfair and deceptive practices.
     
    The Used Car Buyers Guide focuses on dealer warranties, or the absence thereof.  Approximately 37 states permit “as is” sales of used vehicles without any dealer warranties.  The other 13 states and the District of Columbia do not permit disclaimer of implied warranties such as the warranty of merchantability which means the car runs as expected. 
     
    If you offer a warranty, it must be designated as a “full” warranty or a “limited” warranty.  You need to give the duration of the warranty, the specific vehicle systems covered in a limited warranty (the back of the Buyers Guide lists vehicle systems), the percentage of repair costs the dealer will pay, and any exclusions.  If a manufacturer or third-party warranty applies, you may, but are not legally obligated to, disclose that as well.  The detail is required only for a dealer warranty.
     
    There is no legal obligation for the consumer to sign the Buyers Guide but it is a good practice to do so.  You can put a box on the back of the Guide stating “I hereby acknowledge receipt of the Buyer’s Guide at the closing of this sale.”
     
    Complete the dealer information on the back of the Buyers Guide and designate a named person (not Used Car Sales Manager) and their phone number for a customer to contact.
     
    Remember that the Buyers Guide is not the warranty, only a summary of it.  Give the customer a copy of the complete warranty terms and conditions.
     
    Certified Used Vehicles
     
    A dealer can designate a used vehicle of the same franchise it represents as “certified’ if all of the following conditions are satisfied:
     
    1. A manufacturer or dealer warranty applies.
    2. A manufacturer representative has certified the vehicle.
    3. You have conducted additional inspections on the vehicle over and above the inspections you perform on used vehicles generally.
    4. You have cured any outstanding recalls on the vehicle.
    5. You have met all state law requirements for the sale of ‘certified’ vehicles.
     
    “As Is” Sales and Disclaiming Warranties
     
    As noted above, in approximately 37 states, a dealer can sell a used vehicle “as is” without any warranties.  In the other 13 states and the District of Columbia, implied warranties cannot be disclaimed.  In all states, implied warranties cannot be disclaimed if you provide an express warranty or sell the customer a vehicle service contract within 90 days of sale.
     
    Just because you are selling a vehicle “as is” does not mean you can withhold negative information about the vehicle from the consumer such as its prior use, whether it was in an accident, or is a lemon law or rebuilt salvage vehicle.  A number of states have lemon laws that define a “lemon” (usually based on the number of unsuccessful repairs) and require that the vehicle be disclosed as such.  Giving the customer a vehicle history report like a CarFaxÒ is a good idea but not an assurance of no liability.
     
    State laws govern the duty to inspect and disclose both patent and latent defects.  Any merchant is considered to be more qualified than a consumer to inspect and disclose any defects that a reasonable inspection would uncover.  Actively concealing defects or misrepresenting the condition of a vehicle is always a no-no.  Check with your local attorney to understand how far your state’s law goes in requiring inspections and disclosing the results.  It is always a good idea to keep a copy of the inspection report in the deal jacket to show your good faith.
     
    Claims Involving Vehicle Titling
     
    Some used car dealers retitle vehicles to avoid having to disclose vehicle damage.  A vehicle that has incurred water or hurricane damage may need a water damage title in some states and most states require a salvage title if an insurance company has declared the vehicle a total loss.  But some states do not.  “Title washing” occurs when a dealer takes the vehicle to a state that does not have the necessary title branding to obtain a clean title.  Title washing also occurs when an unscrupulous dealer removes the damage branding from the physical title.
     
    Title washing is a federal and state felony and dealers have served jail time for mass title washing.  Don’t even think about it.
     
    Odometer Disclosures
     
    The federal Truth in Mileage Act requires the seller of a vehicle to disclose the odometer reading on the vehicle and certify whether, to the best of their knowledge, the odometer reading is accurate, the reading is inaccurate, or the mileage is in excess of the odometer’s limits, such as if a car with a million miles was sold.  This is typically done on the title and both the buyer and the seller must sign the certification and disclosure.
     
    Odometer tampering is relatively easy to do.  It involves removing the vehicle’s circuit board or using a device on the circuit board.  A recent eBay search found such devices for sale for a price of approximately $120. 
     
    Rolling back odometers violates federal and state law.  Penalties start at $43,280 per violation as a deceptive practice under Section 5 of the FTC Act. The Truth in Mileage Act provides for civil penalties of up to $10,281 per violation with each vehicle a separate violation, criminal penalties, and up to three years imprisonment for willful violations.
     
    Other Issues
     
    Be careful when advertising used cars.  Try to avoid qualitative descriptions like “good as new,” “near new,” “runs perfectly.”  These can come back and bite you.  Stick to quantitative descriptions such as giving the year, make, model, and mileage, indicating the number of owners, and whether a full service history is available.  You also need to comply with Truth in Lending triggered terms if you are advertising financing of the vehicle.  Many states also have laws requiring that if you advertise a vehicle in any medium for a set price, you must offer that price to every consumer, even those who never saw the ad.  Be able to defend your pricing with reference to an industry source such as NADA, Kelley Blue BookÒ, or Black Book.
     
    Some dealers sell used vehicles without airbags or defective aftermarket airbags.  Unless disclosed to the consumer, some Attorneys General have ruled this to be an unfair or deceptive trade practice and it likely violates an implied warranty of merchantability as well.
     
    Selling ‘grey market” vehicles from Canada or Mexico should also be avoided.  These vehicles may not meet U.S. environmental and safety requirements and their sale in the U.S. frequently voids the manufacturer’s warranty.
     
    Recent Enforcement Activity
     
    State Attorneys General have been particularly active in scrutinizing dealer used car sales for violations.
     
    In 2020, the Arizona Department of Transportation brought criminal charges against seven persons operating an illegal ring that altered over 31,000 vehicle titles from unlicensed dealers in 42 states for about $100 per title.  The defendants altered the titles to make it appear as though the unlicensed dealers bought the vehicles from one of the suspects’ 31 operations with dealer licenses.
    In 2019, the California Attorney General brought two actions.  One against a dealership for title washing to conceal liens on used vehicles and another for deceptive advertising of used vehicles.  The Pennsylvania Attorney General sued for deception and missing disclosure documents, Massachusetts and Delaware sued for financing customers on terms they could not afford, and the Ohio Attorney General brought two actions for failing to deliver clean titles.  Many Attorney General actions are brought and settled in confidential examinations and enforcement actions.  The settlements usually involve substantial penalties and reimbursements to affected customers.
     
    Summary
     
    As the front-line seller of used vehicles, your obligations to disclose warranties, defects, and odometer readings, along with your obligation to deliver a clean and accurate title, can provide challenges in used car selling.  Do a reasonable inspection (and a beyond-reasonable inspection for certified vehicles) and be up front with the customer about issues and expectations for the vehicle.  Selling used vehicles is an area ripe for regulatory investigations, arbitration claims, and lawsuits, but having a systematic process to obtain, inspect, and disclose issues with the vehicle should help you manage used car selling successfully.

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    Randy Henrick to Partner with Ignite Consulting Partners

    1/6/2020

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       IGNITE CONSULTING PARTNERS ANNOUNCES NEW ADDITION TO THE TEAM !
       
       

    Ignite Consulting Partners, a leading provider of compliance services to car dealers and finance companies, is pleased to begin 2020 by announcing a new addition to its team. 
    Randy Henrick has joined the team as the leader of Ignite’s new Franchise Dealer Group.  "Through Randy's work at DealerTrack, he is a recognized expert in the compliance challenges faced by franchise dealers, so it's only natural that he assumes a leadership role with Ignite,'' said Richard Hudson, Ignite's Managing Member. Randy's background includes auto finance, privacy, data security, and consumer credit.  He was DealerTrack's regulatory and compliance counsel for twelve years. He is a frequent speaker at industry events and published author of numerous articles, including monthly articles in Subprime Auto Finance News. Randy also provides training and compliance audits to dealers. 
    "Randy is a thought leader on dealer training and education, which philosophically aligns with Ignite's vision, plus he brings a wealth of expertise that will be a benefit our clients, both franchise and independent dealers,'' said Steve Levine, Ignite's Chief Legal and Compliance Officer.   "I am pleased to affiliate with a dynamic and growing compliance leader such as Ignite," said Henrick.  "I think our association will benefit dealers of all types and provide creative and effective compliance solutions to our clients." 
    ​Randy will continue to offer compliance services and resources to dealers as principal of Randy Henrick & Associates, LLC.  Contact us at autodealercompliance@gmail.com

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      Randy Henrick is a leading auto industry compliance consultant. This article is not intended as legal or compliance advice due to the unique nature of a dealer's situation in each state. Randy's articles do provide issues and best practices that you may want to discuss with your attorney or compliance advisor for possible adoption in your dealership. Email Randy at AutoDealerCompliance@gmail.com
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