Auto dealers face are subject to federal and state laws and regulation from federal as well as state and local regulators. You need to be on top of both as compliance with one doesn't earn you a free pass on not complying with the other. Let's break them down by categories and focus on some of the things you need to know.
Federal Laws and Regulations
In general, federal laws focus more on disclosure of deal terms, privacy practices, warranty provisions, and other obligations than they do on the substance of what you can do. Federal laws protect consumers when it comes to credit discrimination, the access and use of credit reports, disclosure of deal terms in retail installment sales contracts, and informing consumers of your privacy and data-sharing practices.
Federal laws like Truth in Lending and the Consumer Leasing Act (and their enabling regulations Regulation Z and M) set forth detailed rules on how disclosures of credit terms must be made to consumers. The Equal Credit Opportunity Act prohibits discrimination in credit and requires you to issue an adverse action notice if you cannot get a consumer who has filed a credit application financed. The Fair Credit Reporting Act requires that you have a "permissible purpose" to obtain a consumer's credit report, restricts with who you can share credit information and requires additional terms for an adverse action notice if any credit report information is used in making the decision to not extend credit or not extend credit on the terms the consumer requested.
The Gramm-Leach-Bliley Act requires you to give consumers and customers a privacy notice describing how you collect information and what consumer information you collect as well as with whom you share it. With limited exceptions, your notice must give the consumer a way to opt out of sharing any of their information with unaffiliated third parties and with your affiliates for some purposes as well. The Act is enabled by the FTC's Privacy and Safeguards Rule. The Safeguards Rule requires you to create and implement a data protection safeguard plan to protect consumer information you maintain from being wrongfully accessed and the Data Destruction Rule describing how and when you destroy consumer information that is no longer required for your dealership.
The FACT Act was the genesis for the FTC's Red Flags Rule (steps you must take to verify the identity of each customer) and the Risk-Based Pricing Rule which is a notice you should give to each credit applicant that provides information about their credit score and other credit information.
The Magnuson-Moss Warranty Act contains disclosure requirements about warranties as does the FTC's Used Car Rule which was updated at the end of 2016. It requires a prominent notice on each used vehicle indicating warranties and other information. The Automobile Information Disclosure Act provides for the Monroney stickers that are required to be affixed to each vehicle. The federal Odometer Act requires accuracy in odometer readings in connection with vehicle sales.
The FTC's credit practices rule requires placement of the prominent "holder" notice on a contract indicating that an assignee (like a bank or finance company) that buys a contract from a dealer is subject to claims and defenses that could be asserted against the dealer.
Federal laws also prohibit contacting consumers by telephone, fax, text message, or email except in limited circumstances and with specific requirements to either have prior consent or give the consumer the option to opt out.
Section 5 of the FTC Act prohibits unfair and deceptive practices. Unfair practices are practices which cause or are likely to cause (in the FTC's opinion) substantial injury to consumer. Deceptive trade practices are representations, omissions, or practices that mislead or are likely to mislead a consumer where the consumer's interpretation is reasonable. The FTC has primary federal regulatory authority for franchised dealers and sets rules about unfair and deceptive advertising and sales practices. Many of these rules are not published as regulations but derive from the concept of "regulation by enforcement" where the FTC alleges a dealer's conduct is unfair and deceptive, a consent order is signed, and that conduct thereby becomes effectively prohibited for any dealer.
The IRS requires completion and filing of a Form 8300 for any transaction or series of transactions in which cash or cash equivalents are paid in excess of $10,000, The Office of Foreign Assets Control prohibits entering into transactions with anyone on the Specially Designated Nationals and Blocked Persons List (SDN List) which is available online or through a credit service. Penalties for non-compliance are substantial.
This is not a complete list of federal laws and regulations applicable to the sales and f&i processes but it gives you an idea of the nature of the laws and the complexities of disclosure requirements.
State and Local Laws and Regulations
State and local regulations focus less on disclosure requirements and more on what you can and cannot charge or do in a consumer credit sale or lease. Many state laws are enforced by the Attorney General but some, such as "little FTC Acts" prohibiting unfair and deceptive practices, can be enforced by private persons and contain substantial damage penalties.
States have retail installment sales laws or motor vehicle retail installment sales acts that indicate what needs to be in a credit sale contract (in addition to Truth in Lending disclosures) and generally put caps on what you can charge customers for financing. State Annual Percentage Rate limits vary significantly and state laws also prohibit or cap certain fees such as document preparation fees, delivery fees, late charges, and collection costs. .
State Consumer Leasing Acts contain similar restrictions on leases and broaden the advertising requirements of federal Regulation M on ads for leases. Things like mileage allowances over the lease term and costs per excess mileage, disclosure of end-of-lease fees, and the residual cost to purchase the vehicle, are not uncommon.
Every Attorney General has advertising guidelines for dealers in the state. There are also laws in many states governing dealer advertising. One common provision is that if a dealer advertises a special price in a medium of communication (like an Internet special), it cannot charge a higher price for the vehicle to any customer, even if the customer has not seen the Internet price. Size of type for disclosures in ads are often more specific that the "clear and conspicuous" requirement that typifies federal disclosure rules. State laws govern promotions, sweepstakes, off-site sales, and other sales activity and small claims court procedures for consumers who wish to take action against dealers.
State laws govern spot deliveries (approximately 16 states prohibit spot deliveries),unfair, deceptive, and fraudulent practices against consumers and services laws which may require posting of servicing prices or not exceeding an estimated cost without first obtaining the consumer's consent to do so.
State and local laws also regulate hours you may conduct operations, signage, and other mundane aspects to doing business. Licensing is also a state law issue.
The state minefield of laws that can trip up dealers vary state by state. It is important that you take the time to learn your state and local laws and regulations as well as the federal laws. The task is not easy and this is another reason why each dealer needs a Chief Compliance Officer and a Compliance Management Plan.
© January 2017