(267) 481-5636
    Randy Henrick & Associates, L.L.C.
    • Home
    • Services
    • Special Offers
    • About Us/Contact
    • Blog

    ​

    Blogs

    NEW JERSEY COURT DENIES DEALER ARBITRATION RIGHTS FOR FAILURE TO PAY FEES

    3/23/2017

    0 Comments

     
    The auto finance industry has spent a great deal of time and energy defending the use of arbitration clauses that preclude consumers from filing class actions and waive jury trials. 
    The CFPB's anticipated regulation prohibiting the use of class action waivers in consumer finance agreements is likely to be overruled and repealed by the Congress and President Trump under the Congressional Review Act.  This is a law that empowers Congress to consider administrative regulations under an expedited review process and send a repeal resolution to the President for signature.  If signed by the President, the regulation is repealed and the agency is prohibited from reissuing the rule or issuing a new rule that is substantially the same.

    That being said, a recent New Jersey Supreme Court case illustrates the importance of a dealer following its obligations to cause a consumer lawsuit to be dismissed in favor of an arbitration proceeding.  In Roach v. BM Motoring, LLC,  (No. 0777125 N. J. Sup. Ct  March 9, 2017), the plaintiffs purchased vehicles from the defendant dealer and signed dispute resolution agreements that required arbitration in accordance with American Arbitration Association (AAA) rules before a retired judge or an attorney. 
    Two months later, one of  the consumers filed a demand for arbitration with the AAA alleging violations of the New Jersey Consumer Fraud Act  for treble damages and other relief based on overcharges and misrepresentations.  Despite repeated demands by the plaintiff, the dealer did not respond nor did it advance the filing fees that the dispute resolution agreement required it to pay.  The AAA dismissed the arbitration claim for non-payment of fees.

    The other plaintiff filed a complaint in New Jersey Superior Court alleging similar violations six months after her car purchase.  The dealer filed a motion to dismiss based on the arbitration provision and the court dismissed the suit in favor of arbitration.  This plaintiff then filed an arbitration demand with the AAA which dismissed the claim because the dealer had previously failed to comply with the AAA's rules and procedures by not paying the fees in the other arbitration.  The dealer did not respond to the new arbitration demand.

    Both plaintiffs then filed this case against the dealer who moved to dismiss in favor of arbitration.  The dealer claimed it did not contemplate using the AAA as the forum for arbitration because of the excessive filing and administrative fees the AAA charges.  In opposition, the plaintiffs claimed that the dealer had materially breached the dispute resolution agreement by failing to advance the arbitration fees and thereby waived their right to arbitration. 

    The trial and intermediate appeal courts ruled the parties intended to arbitrate and should refile with the AAA and comply with AAA rules.   The AAA reinstated the arbitrations and the courts dismissed the plaintiffs' lawsuit.  The intermediate court  found there was sufficient factual dispute on the forum for arbitration and the dealer's conduct did not constitute a material breach nor a waiver of the right to arbitrate.

    The New Jersey Supreme Court reversed holding that the dealer's non-payment of filing and arbitration fees amounted to a material breach of the dispute resolution agreements, that the dealer was therefore precluded from enforcing the arbitration provisions and the case would proceed in the courts.

    The Supreme Court cited a familiar contract principle that if one party breaches a material term of a contract, then the non-breaching party is relieved of its obligations under the contract.  The arbitration provision was material because it went to the essence of the dispute resolution agreements.  Since the AAA roster of arbitrators includes retired judges and attorneys, the Court ruled the plaintiffs had properly filed with the AAA and consenting to AAA rules was consistent with consenting to AAA-administered arbitrations.  The Court went on to say that the dealer's failure to pay the AAA fees or respond to the arbitration demands also violated standards of good faith and fair dealing which are implied provisions of every contract.

    The Supreme Court reversed the lower courts and remanded the cases to the trial court for further proceedings.This case shows the importance of meeting your obligations in the event of a consumer dispute that you want and have the right to go to arbitration.  Missing a deadline, failing to advance fees, or not meeting  some other procedural requirement could put you back in the court system and probably with the likelihood of a jury since it is arbitration agreements that most typically waive the right to a trial by jury.
    Make sure you know in advance the rules and requirements for the arbitration procedures your retail installment sales contracts or dispute resolution agreements provide.  Create a checklist for convenience so you are not scrambling at the last minute to figure out what to do.  Then follow the requirements meticulously so your right to arbitration is not forfeited like this dealer in New Jersey.
    0 Comments

    REGULATOR ACTIONS AGAINST AFTERMARKET PRODUCT SELLING: THE NEXT FRONTIER

    3/6/2017

    0 Comments

     
    It's been over a year now since the federal Consumer Financial Protection Bureau ("CFPB") settled a disparate impact credit discrimination case with a lender.  And the last three settlements (with Honda Financial Services, Fifth Third Bank, and Toyota Financial Services) all backed off on the CFPB's prior "Guidance" that only flat fee payments to dealers could avoid disparate impact credit discrimination.  All three settlements permitted rate participation (albeit capped at 1.25% for up to 60 months and 1.00% for longer terms) but also allowed for supplemental payments to dealers by these finance companies.
     
    This appears to signal that the "disparate impact" rate participation cases are winding down and the CFPB, along with the Federal Trade Commission (FTC) and State Attorneys General (AGs) are looking at new ways to go after dealer revenues.  And at the top of the list appear to be actions against dealers for unfair, deceptive, and abusive practices involved in selling aftermarket products.  This is an area where the CFPB has won collectively millions of dollars from credit card issuers for alleged unfair, deceptive and abusive selling of credit card add-on products.  Now that is moving to auto finance.
     
    Unfair and deceptive practices have been prohibited by Section 5 of the FTC Act for many years and the standards are very vague.  A practice is "unfair" if it causes, or is likely to cause, substantial injury to consumers and there are no countervailing benefits.  It is the FTC's call whether a practice is likely to cause substantial injury even if no one is harmed and no one complains.  A "deceptive" practice is one that misleads or is likely to mislead a consumer and, again, the FTC makes that judgment even if no one is mislead or claims to be.  The Dodd-Frank Act gave the CFPB authority to prohibit "abusive" practices which the FTC considers to be a subset of unfair practices.  Abusive practices are practices that materially interfere with a consumer's understanding of a financial product or service or take advantage of that misunderstanding. Abusive practices also cover the inability of a consumer to protect their interests or a practice which takes advantage of the customer's reasonable reliance on a dealer to act in their best interests.  This also is in the discretion of the agency.  Collectively, we will call these UDAAP practices.
     
    Over the past several years, the CFPB, FTC, and Attorneys General have used the vague standards for standards for UDAAP practices to "regulate by enforcement."  Instead of publishing proposed regulations, taking public comments, and then issuing final regulations, the agency will bring an action against a dealer claiming a UDAAP violation even if no law, regulation, or case decision prohibits the practice.  An example occurred in 2015 when the FTC alleged that dealers advertising they would pay off a customer's trade-in balance was an unfair and deceptive practice and slapped 20-year consent decrees on five dealers.  No prior authority had ever ruled such advertising was unlawful.  But now that enforcement decree becomes the standard for other dealers.  CFPB Director Richard Cordray called it "compliance malpractice" for other similarly-situated companies not to follow enforcement orders in their own businesses, hence the term "regulation by enforcement."
     
    The CFPB ,FTC and State Attorneys General (AGs) have been regulating by enforcement in the aftermarket product sales area.  Last year, the CFPB imposed a $700,000 reimbursement obligation and fine against a buy-here-pay-here dealer. The CFPB claimed that the dealer required credit customers to purchase an automobile repair policy and a GPS payment device costing $1,650 and $100 respectively, but did not include these costs in the contract disclosures. According to the CFPB, the dealer “took unreasonable advantage of this by exploiting its customers’ misunderstanding of the credit and sales terms for its own financial benefit.”
     
    The CFPB has expressed its disdain for aftermarket products.  "[T]he Bureau has found or alleged that some companies offering ancillary products failed to accurately describe those products, [and] offered products that provided little or no benefit to consumers without disclosing this fact. . ."  The agency  has warned consumers that "the sales tactics may be high-pressure and confusing [and] the benefits you receive from the product may not match the benefits that you thought you were offered."
     
    The FTC has also brought actions for alleged UDAAPs in aftermarket product selling.  As part of Operation Ruse Control in 2015, it entered into a consent decree with an auto dealer (as well as another consent decree with the product provider) for selling customers a product allegedly designed to reduce their finance charge obligations over the life of their credit agreement by making half a payment every two weeks instead of one payment at month end.  Apparently, the cost to sign up for the program ($775) was determined by the FTC to be more than the savings consumers could expect to receive on a typical 60-month term.
     
    In September 2016, the FTC sued a dealer in California charging the dealership packed extra, unauthorized charges for add-on products and services into consumer financing agreements.  The dealer included products like extended service contracts, GAP, and maintenance or service plans charging some consumers for the products without their consent and falsely claiming to others that the products were required or were free.
     
    The New York Attorney General has collected over $17 million in fines and reimbursement obligations from dealers since 2015 over credit repair and identity theft products offered by a provider that the AG put out of business.  The AG also precluded the vendor's principals from ever participating in the "credit services" business again. 
     
    What's a Dealer to Do
     
    In this environment, you should review all your aftermarket product offerings and be sure you can demonstrate to a regulator that  each of them provides "value" to customers at the prices charged.  Extended service products should be capable of being defended given that modern vehicles are composed of many complex and computerized systems that cannot be replaced with a wrench and shop tools.  Whole systems need to be replaced and they can be expensive.  Vehicle etch systems, which regulators have cited, may be more difficult to defend.  A suit is pending in West Virginia challenging the value of etch as a theft deterrent device.
     
    In selling products, make sure your processes are transparent and explain the products in simple English as the average U.S. consumer reads at between a seventh and ninth grade level.  Make sure the consumer understands what the product does and does not cover and its cost, not just its effect on a monthly payment.
     
    Never "payment pack" an aftermarket product into a pre-agreed monthly payment for the vehicle financing with the customer.  All aftermarket products are optional and packing them into a monthly payment that has already been agreed upon but has "room" above the rate participation limit is an unfair and deceptive practice under federal and state law.
     
    A menu system, in which each product is explained with its price noted and its effect on the customer's monthly payment, is another best practice.  Do this for individual products as well as for packages (gold, silver, or bronze).  Transparency to the customer is critical.
     
    The CFPB has made noises about wanting to bring "disparate impact" credit discrimination claims based on different aftermarket prices and credit terms charged to protected classes of persons (women and minorities principally).  It is a best practice to charge the same price for each product to each customer on a given vehicle.  As with rate participation, if you lower the price for one customer, but not another, is a best practice to keep a document in the deal jacket explaining the legitimate business reason why you did so.  Periodic sales by the product providers, a customer's documentation of being unable to afford the list price, dealership employee pricing promotions or meeting or beating a competitor's price may be examples.  Review these with your attorney or compliance advisor who can suggest legitimate business reasons and the best way to document downward deviations in your file.
     
    Do "due diligence" on your service providers as well.  Do they have a record of being frequently sued or a negative rating with organizations like the Better Business Bureau?  Ask them to explain.  Do they have the financial resources to stand behind their product?  If you or your captive are not the primary provider, you are putting your name on someone else's product and effectively assuming liability for it (check their contract for liability limitations and the like).  Not something you want to go into without understanding the risks.  Check out their training materials as well and make sure they capture the transparent selling system that you want to incorporate into your dealership.
     
    Finally, make sure your dealership has a customer complaint process that is heavily weighted in favor of the customer.  You don't want a customer filing a complaint with the CFPB, FTC or Attorney General over a several hundred dollar aftermarket product.  Don't be penny wise and pound foolish.
     
    Aftermarket product selling may be the "next big thing" for federal and state regulators.  Make sure you can defend your products, your practices, and regularly train your f&i employees.  Doing so may keep you out of the active enforcement in this area.  Take the time to do it.
    _______________
     
    Randy Henrick is an auto dealer compliance expert who offers compliance consulting services to dealers at www.AutoDealerCompliance.net.  Randy served for 12 years as Dealertrack's lead regulatory and compliance attorney and wrote all of Dealertrack's Compliance Guides.  He presented workshops at the last three NADA national conventions, speaks to dealer associations, and prepares training and other compliance materials for dealers.  Because of the general nature of this article, it is not intended as legal or compliance advice to any person but raises issues you may want to discuss with your attorney or compliance professional.
     
     

    0 Comments

      Author

      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
      Follow us on Twitter @randyh44

      Archives

      October 2019
      August 2019
      June 2019
      April 2019
      March 2019
      February 2019
      January 2019
      November 2018
      October 2018
      August 2018
      June 2018
      May 2018
      February 2018
      December 2017
      October 2017
      September 2017
      July 2017
      May 2017
      March 2017
      January 2017
      December 2016
      November 2016
      October 2016
      September 2016
      August 2016
      June 2016
      May 2016
      April 2016

      RSS Feed

    © 2018 Randy Henrick & Associates, L.L.C.
    Back to top