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    THE EQUIFAX SECURITY BREACH AND ITS IMPLICATIONS FOR YOUR DEALERSHIP

    10/11/2017

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    ​On September 7, the credit bureau Equifax revealed that it had undergone a massive security breach that compromised the names, addresses, birthdates, Social Security numbers, and in some cases drivers license numbers of approximately 143 million U.S. consumers.  The compromise creates a potential treasure trove for identity thieves and will have effects on your dealership, now and in the future.  Let's consider a few of them and how you might deal with the situation.
     
    Consumer Inquiries and Credit Freezes
     
    Many consumers will be nervous about sharing personal information with dealerships.  You will want to explain to them that the data breach came from Equifax, not your dealership, and that you maintain effective safeguards to protect customer non-public personal information (NPI) in both physical and electronic form (you do, don't you?).  If your dealership has never suffered a data breach (or is not aware of having suffered one), assure the consumer with that fact as well.
     
    Many consumers will put fraud alerts and security freezes on their credit files.  A fraud alert requires you to contact the consumer in the manner specified by the fraud alert (you should document doing this).  A security freeze locks down the customer's credit file so you can't access it without the consumer giving the credit bureau a PIN that was issued to them at the time they froze the security file.  Most likely, the consumer will not have brought their PIN to the dealership.
     
    In the past, consumers would have to contact the credit bureau and wait to be mailed a new PIN.  However, as of this writing, consumers can now recover their PINs and temporarily thaw their credit files by calling the consumer affairs numbers at Trans Union (800-916-8800) and Equifax (866-349-5191) or going online to Experian at https://www.experian.com/ncaconline/freezepin.  Two words of caution. There may be a long wait time for the customer to get their PIN and the credit bureaus may change these phone numbers and webpage to do so at any time.  If possible, have the consumer use their personal smart phone to do this so it does not appear that your dealership took action to access a customer's PIN.
     
    Red Flags Issues
     
    The access of 143 million consumers' NPI is almost certain to increase the incidence of attempted identity thefts at your dealership, whether now or in the future.  Identity thieves warehouse stolen personal information and may sell it on the "Dark Web" as long as years later.  So this might be a good time to dust off your Red Flags program, retrain your sales and f&i people, and heighten your customer identification procedures.  If an identity thief obtains and finances a vehicle from an auto dealer, you will be the ultimate loser.   The creditor will in all likelihood make you repurchase the contract and the vehicle will be long gone, often sent to a "chop shop" for parts or exported out of the country.  The longer it takes to discover the identity theft (the customer not making the first scheduled payment is often the initial clue), the less likely you will be able to recover the vehicle.
     
    So what's a dealer to do?  Revisit your dealership's red flags and make sure that you raise your due diligence on any discrepancies from your customer identification service (you do use a customer identification service, don't you?) to satisfy the red flags that are identified.  If a customer's full identity is being used by the thief, chances are you will get a valid Social Security number, date of birth, and address.  And possibly a valid driver's license number as well.  One way to enhance this process is to ask the customer to provide additional information such as previous addresses and employers and see if your customer identification service can evaluate those as well.    
     
    Compare all physical documents carefully.  Does the driver's license appear forged in any way or does the customer not appear to be the age of the named consumer? Does any of the information on the credit application not match what your customer identification service reports.  If so, find out why and try to get documentation to support the answer.  For example, if there is an address discrepancy, most utility companies have online accounts from which a customer can access an electronic utility bill.  Get one and keep it in the file.
     
    It would be prudent to ask knowledge-based authentication questions (also called out-of-wallet questions) to every credit applicant.  These questions are available from your customer identification service and ask things that would not appear in a credit file such as related persons, prior addresses and their location, and vehicles the customer has owned.  If the customer doesn't answer them all correctly, get another set.  You may want to explain to the customer why you are doing this--to protect their identity and those of other customers and that it is not because you don't believe the customer, even if you don't.
     
    Talk with the customer and try to get a sense of whether they may be lying.  Identity thieves are typically in a rush to complete the transaction, will be amenable to paying a favorable price for the vehicle--perhaps making the deal literally too good to be true--and want to finance close to 100% of it (identity thieves don't pay in cash).  They may do things like answer questions with questions, repeat themselves, give inconsistent answers, or become aggravated and flustered.  Asking the customer questions that you don't know the answer to but which the customer thinks you do (where did you go to high school?  what was your high school's mascot?) can also make an identity thief uncomfortable.  Watch for signs and trust your instincts.  Many identity thieves will just walk out rather than go through an extended questioning process.
     
    A word about Internet sales.  Now more than ever, you want the customer to come to your store so you can speak with them.   An identity thief on the Web may have the real person's credit report right in front of them and it will be more difficult to establish their identity without making an in-person connection.  For this reason, more identity theft transactions occur online than face-to-face.  Adopt a policy of requiring the customer to come to the store even if it is only to pick up the vehicle, prior to which you can engage in your Red Flags due diligence personally with the customer.
    Resolving Tough Red Flags Cases
     
    You should involve your Red Flags Program Manager (you do have one, don't you?) in any situations where Red Flags appear and cannot be quickly resolved.  The Program Manager should also speak to the customer.  Remember that identity thieves, who often come in at the end of the month near the end of the day to make a quick sale, want to get in and out quickly and the longer you can speak to them and get a feeling about their legitimacy, the more likely they may just get up and leave the store.  That is not a lost sale; that is a saved identity fraud transaction.
     
    The Equifax breach may also cause larger numbers of "synthetic identity thieves."  These are persons who use a valid Social Security number with a different name and address and establish a thin but current credit file (it is very easy to do).  These require particular diligence.  If your customer identity verification service raises any questions about the legitimacy of this customer with the Social Security number (probably the number one Red Flag), here is a way you can address it:
     
    Every person can establish an electronic account on the Social Security Administration's website, www.ssa.gov.  In fact, this is the only way you can get your Earnings Statement as the Social Security Administration doesn't mail them out any more as they did in the past unless you go on the site and request a copy to be mailed to you.  Have the customer use their own device (smart phone, tablet) and not a dealer device to pull up their Social Security earnings statement and show it to you.  Don't make a copy.  Just look it over to see that it is legitimate for the customer.   If the customer is a synthetic identity thief, they will be unable to do this and that request may cause them to leave.  Credit bureaus set up many people with the same Social Security number but only the real person with the number should be able to access their account on the Social Security website.  Again, use technology to smoke out or verify someone whose information suggests they may not be who they claim to be.
     
    If you haven't done Red Flags training, now would be a good time to do so.  The Equifax breach will only make the process more difficult especially with identity thieves looking to purchase and finance a vehicle.  Also, the Red Flags Rule requires you to report to your Board or senior management at least once a year on the program and update your Red Flags and Identity Theft Prevention Program as well.  The Equifax breach has given you cause to do both.  Good luck.
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    ​FTC INCREASING ENFORCEMENT ACTIONS AGAINST DEALERS FOR ADVERTISING:  ARE YOU AT RISK?

    9/5/2017

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    A number of my colleague auto dealer attorneys have informed me that their clients are undergoing FTC enforcement investigations relating to dealer advertising.  Many are being offering onerous consent decrees to avoid litigation.  Typically, once the FTC sets its sights on your dealership, it is too late.  Violations of consent decrees can incur fines of $40,654 per day.

    What Types of Ads Does the FTC Find Most Problematic
    While “regulation by enforcement” essentially enables the FTC to claim that any advertisement is unfair or deceptive—even if no consumer has complained of any injury or harm—the FTC has certain hot buttons that seem to be present in many of their enforcement actions and consent decrees.  Here are some that you may want to consider.
    1. Ads That Only Tell Part of the Story  -  If you make an unqualified statement in an ad but the terms only apply to higher-end models of the vehicle, a limited number of customers, or a small part of the credit period, the FTC will take notice.  “Rebate stacking” falls in this category.  Rebate stacking is when you combine multiple rebates (recent college grad, veteran, returning lessee, first time car buyer) that few, if any, customers can meet.  If rebates are not universally available (e.g., a factory rebate on all sales of a vehicle model), you have to itemize and explain them so customers know what rebates they do and do not qualify for rather than assuming the combined rebate amount is available to them.  Be transparent with credit terms too.  One ad advertised a vehicle for $99 per month.  An unreadable fine print disclaimer that blended into the background apparently disclosed that the $99 was only for the first two payments, after which the monthly payments rose to $529 for the remaining 70 months.  Headlines that are contradicted by fine print disclosures are also considered to be deceptive by the FTC. 

    2. Ads That Omit Truth in Lending or Consumer Leasing Act Triggered Terms -  For a credit sale, if you advertise payment amount, down payment, number of payments or term, or finance charge, you have to include all of these terms plus the APR.  Advertising the APR alone is not a triggering term.  The other terms must be clearly and conspicuously disclosed in close proximity, not buried in a footnote.  For leases, if you advertise the lease payment amount, term, the capitalized cost reduction or amount due at lese signing, then you must include the fact that the transaction is a lease, give the full amount due at lease signing or by delivery, the lease term and amount of all payments, whether a security deposit is required, and any back-end liability of the consumer.  Many states also require you to include mileage and excess mileage fees.  Whether or not triggered terms are clearly and conspicuously included in the ad (not buried in a footnote) are among the first things the FTC looks at in evaluating dealer advertisements. What gets dealers in trouble most often is advertising only the payment amount without the other terms or burying them in a mouse-type disclosure.

    3. $0 Down Headlines -  A number of recent consent decrees have included bold headlines of $0 down, $0 drive-off or similar attention-grabbing claims below which are pictures of vehicles with attractive monthly payments.  The problem is that the $0 down doesn’t apply to those vehicles displayed in close proximity but to some other vehicles not hi-lited in the ad.  This may be buried in a small type footnote which is not sufficient because the FTC looks at the totality of the ad which leaves the customer with the impression that they can get the low vehicle payments with $0 down where the low payment vehicles typically require thousands in a down payment.  By the way, $0 down is a triggering term for leases but not for credit sales.

    4. Internet Scroll Disclosures or Click Throughs  -  Consumers don’t read long flowing Internet scrolling disclosures.  Required disclaimers should be made at the very top of the scroll and the scroll should be limited.  Click throughs are allowed but not for material terms such as TILA or CLA triggered terms or terms that give the full story on advertised vehicles and terms.  And the click through must go right to the disclosures, not to an inventory page or other dealer promotion.  Pop ups are disfavored because many people block them.  If you want to use a pop up, clearly state that the customer should click on the pop up for key disclosure terms relating to the ad, but be careful.  Use pop ups only when the disclosures are too long to be included in the ad which should rarely happen.

    5. Poorly Presented Disclosures  -  Disclosures must be: i) Prominent (large enough and contrasting with the background so that the average consumer will see and read it—figure 8 point type as a minimum).  Asterisks next to qualified terms should be at least 50% of the size of the qualified term; ii) Proximate (located close to the terms being qualified, never on a separate page and not in a small footnote at the bottom of the page or in the middle of a scrolling Internet disclosure); iii) Placement (in a location where an ordinary consumer will see it.)  Avoid ‘See dealer for details.’; and iv) Presentation (language should be simple, concise and not long-running.    Unambiguous short phrases.  Audio disclosures must be in a volume or cadence that an ordinary consumer can hear and understand it).  Plain English, not dealer-speak.

    6. Deceptive Pricing or Financing Ads  -  Ads that deceptively state price (one dealer advertised s vehicle with an attractive price but added an additional $5,000 down payment in a miniscule footnote); fail to disclose balloon payments at the end of a term of low payment amounts (a balloon payment is any payment more than twice the amount of the regularly-scheduled payment); bogus promotions or sweepstakes to lure consumers into the dealership ( one dealer mailed out scratch-off cards indicating everyone was a winner where no one was awarded a prize); or prescreening ads where a dealer is required to make the customer a “firm offer of credit” if the customer continues to meet the prescreen criteria given to a credit bureau (one dealer mailed out ads indicating everyone was pre-approved but did not follow specific procedures for prescreening and approved less than half of the customers for credit).  Be careful with ads that are intended to lure customers into the dealership with false expectations like deceptive clearance or mark-down sales, promises to finance everyone, or other claims that consumers will find too attractive to resist until they get to the dealership and find it’s not true.  The FTC considers these ads to be deceptive and legally actionable.

    Summary
    The FTC has imposed 20-year consent decrees on numerous dealers and fined two dealers sums of close to $100,000 and $200,000 for violating the consent decrees with what the FTC considered to be unfair and deceptive ads completely different from the ones that caused the original consent decrees.  This occurred before the current penalty of up to $40,654 per day was implemented.  Other FTC consent decrees have imposed six figure fines for other types of wrongful behavior.
    Now is not the time to take chances with your advertising.  Again, from what I am hearing from reliable sources, the FTC is being very aggressive right now in looking for the next round of dealer advertising.  Have all your ads approved by attorneys or compliance  professionals.   Don’t rely on ad agencies, brokers, or other third party leads providers.  The diligence you take now will be well worth it if you can avoid the FTC scrutiny that is going on nationwide.
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    Because of the general nature of this subject matter, this article does not constitute legal or compliance advice to any person but raises issues you may want to discuss with your 
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    Randy Henrick Quoted in Automotive News: http://www.autonews.com/article/20170712/FINANCE_AND_INSURANCE/170719875/cfpb-arbitration-rule-draws-industry-ire

    7/19/2017

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    The CFPB Arbitration Rule:  Risky but not Likely to Take Effect

    7/11/2017

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    The federal Consumer Financial Protection Bureau (“CFPB”) published its final rule on consumer arbitration and class action waiver clauses this week. The rule, which would take effect 241 days after being published in the Federal Register, effectively prohibits the use of arbitration clauses that waive a consumer’s right to participate in a class action for essentially any consumer finance transaction including auto finance. The CFPB itself estimates the rule will cause $2.6 billion to $5.2 billion to defend class actions over the next five years.

    Despite CFPB Director Richard Cordray’s fanfare in announcing the rule for the alleged protection of consumers (even though the CFPB’s own study revealed that it is class action plaintiffs’ lawyers who make windfalls on fees in class actions with class members getting little of the final ante), I’m betting the rule will never take effect.

    First, the Congressional Review Act (“CRA”) gives the Congress an expedited procedure for a simple majority with no filibustering to overturn any federal administrative agency rule or regulation for a period of 60 in-session days. Once signed by the President, the rule is repealed and the agency cannot enact anything similar.

    Congressional legislation to reign in the CFPB has also been active independently on Capitol Hill. Representative Hensarling’s bill would fund the CFPB through the Congressional appropriations process, and eliminate its UDAAP and supervisory authority, among other restrictions. To add a clause negating the arbitration rule would seem a fairly simple matter.

    Even if Congress doesn’t act, the American Banker reported the U.S. Chamber of Commerce will sue the CFPB on the arbitration rule 241 days after Federal Register publication. They have a number of compelling legal and Constitutional arguments that likely would result in a judge granting a preliminary injunction against the rule while the Court sorts it out. Cordray’s tenure as CFPB Director expires three months thereafter and his successor nominated by President Trump could be expected to revoke the rule even while the preliminary injunction lawsuit was pending.

    Already, auto industry and consumer finance lobbying groups have indicated they will lobby their Congress people to use the CRA or enact other legislation to undo the arbitration rule. They too could bring or join lawsuits against it that could delay its effect until after Cordray leaves. I think the likelihood of the rule surviving Corday are not very high.

    So you have multiple constituents, a favorable Congress, and a number of avenues to seek a repeal or overturn the arbitration rule. There is no need for panic. A call to your House and Senate representatives and trade association activity yes. If we are diligent in opposition, it is very unlikely that this rule—arguably Cordray’s last ditch effort to get at auto dealers—will ever see the light of day.
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    Summer Advertising: Avoid Unfair and Deceptive Traps!

    7/8/2017

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    Whether it’s the summer heat or the end of the model year, summer advertising for dealers can present risks of unfair, deceptive and abusive practices. In the current regulatory climate, where regulation by enforcement has all but replaced traditional rule-making via notice and comment from the public, literally any ad is at risk for an enforcement action by the FTC, CFPB, or an aggressive Attorney General looking to add to state coffers. Let’s take a look at the standards and some advertising that may not appear unfair or deceptive at first glance but which regulators have challenged and entered 20-year consent decrees with dealerships for the ad allegedly being unfair, deceptive or abusive.

    Standards for Unlawful Ads

    A deceptive ad is one that misleads or is likely to mislead (in the opinion of the regulator) a consumer acting reasonably. An unfair ad is one that is causes or is likely to cause (again in the opinion of the regulator) substantial injury to a consumer which the consumer cannot avoid and which Is not outweighed by benefits to competition (they never are). Unfair is broader than deceptive and can mean essentially anything the regulator doesn’t like.

    The Dodd-Frank Act added a new category of “abusive’ practices which is any practice (including advertising) that takes advantage of a consumer’s lack of knowledge or understanding of a product or service, materially interferes with the consumer’s ability to understand or takes unreasonable advantage of the consumer’s reliance on a dealer to act in the consumer’s interests. The FTC categorizes “abusive” as a subset of ‘unfair” practices.

    Fundamental Requirements for Advertising

    Honesty and Availability of Advertised Terms

    First and foremost, an ad must be truthful and not state terms that are not available to a substantial portion of a dealer’s customer base (unless so qualified) nor omit terms that would change the meaning or disqualify a meaningful number of customers. If a vehicle model is advertised at a low price or favorable credit terms, the number of such vehicles available and the conditions to obtaining the advertised price or terms must be clearly and conspicuously included. For example, “available to well-qualified customers approved for credit by XYZ Finance Company.” “15 available on these terms.” Remember also that if the terms are too favorable and only one or two are available, you are opening yourself up to a “bait and switch” unfair trade practice. Any variations must be clearly and conspicuously disclosed.

    We have seen a number of ads offering guaranteed trade-in amounts or 120% of Kelley Blue BookÒ amount. What the ads don’t say is that few, if any, customers will get 120% of the book value after the dealer makes deductions for vehicle condition and otherwise. Same for the guaranteed trade-in amount (“push it, pull it, all trades accepted”) where the amount is indirectly added to the purchase price of the vehicle.

    Because these ads misstate the customer benefit and are designed to lure customers into the showroom, regulators have found many of these types of promotions unfair or deceptive, especially if there are no terms and conditions or they are printed in such a small size to be virtually unreadable. Remember also that a disclosure can explain but never contradict the headline in an ad. If it does, it is considered an unfair trade practice.

    For example, a dealer that advertised an attention-grabbing $99 per month lease of a new vehicle was hit by the FTC for a 20-year consent decree because in a small, nearly unreadable disclosure, it was stated that the $99 was only for the first two months. After that, the payments increased to $529 per month for the remaining 70 months of the 72-month term.

    Failure to Advertise Truth in Lending or Consumer Leasing Act “Triggered Terms”

    The federal Truth in Lending Act (and its implementing regulation, Regulation Z) and the Consumer Leasing Act (and its implementing regulation, Regulation M) require that if you advertise certain “triggering” terms, you must also clearly and conspicuously include “triggered terms.” Not advertising the required triggered terms is one of the first things the FTC looks at in evaluating dealer advertising.

    For credit sales, if you advertise the monthly payment amount, the period for repayment, the down payment, or any finance charge, then you are required disclose the other of these terms (except for the finance charge) along with the Annual Percentage Rate or APR. Advertising the APR alone, without more, is not a triggering term.

    So, if you advertise 0% APR for 72 months, the 72 months triggers the disclosure of the down payment and the amount of each monthly payment (this can be expressed as the cost per $1,000 financed) as well as any irregular payment amount such as a balloon payment at the end,

    For leasing, if you advertise the amount of any up-front payments (e.g., $0 down is a triggering term for lases) or any lease payment amount, you must also disclose: the fact that the transaction is a lease; the total amount due at lease signing; the number and amount of scheduled payments; whether a security deposit is required; and whether the customer has any obligations at the back end of the lease (e.g., open-end lease). States add additional requirements such as the allowed mileage and excess mileage charge and the cost for the customer to purchase the vehicle at the end of the lease term.

    So, if you advertise “Get it for $299 per month,” you have to clearly and conspicuously state this is a lease, state the total amount due at lease signing (all In except for tax, tags, and registration), disclose the number of payments (and the amount of any that vary from the advertised amount), and whether or not a security deposit is required. As noted, state law may require the additional disclosures noted above.

    Remember you must also state who qualifies for the advertised terms (a minimum FICO or credit score is an excellent way to do this) and how many are available on these terms.

    The triggering term that seems to trip dealers up the most is monthly payment amount. That is a triggering term for both credit sales and leases. If you are advertising a monthly payment amount, you need to clearly and conspicuously disclose the other triggered terms.

    Internet Advertising

    All the rules on advertising in print, television, and radio apply on the Internet, as do more. Required disclosures must be in close proximity to the applicable headlines and be clear and conspicuous in any device in which the ad can be seen or heard. Your agency has to size the ad so the disclosures are clear and conspicuous in an Apple watch as well as a PC screen. Best to build the disclosures in the claim to keep other disclosures minimal.

    The FTC has said to avoid social media platforms that do not contain enough space for required disclosures. Advertising lease terms on Twitter would seem to present such a challenge.

    Avoid pop-up disclosures because consumers block pop ups or don’t read them. Long scrolling paragraphs of text should also be avoided because consumers don’t read them either. Most consumers read a scrolling message like an “F,” reading maybe the first two or three lines, then scrolling down the left side and reading perhaps only another line or two. Also, different devices have different scrolling patterns, vertical or horizontal that make clear and conspicuous disclosures a challenge. The FTC has said that Internet disclosures should be in close proximity to the headline.

    Regulators are similarly skeptical of disclosures contained in click-through linked pages from the ad. If a link is necessary because of legitimate space constraints, the link should indicate it is for additional financing terms and not be captioned “more information” or something equally generic. The link should take the consumer directly to a page containing only the financing disclosures and not to an Internet home page or sales page. A dealer should track the number of click-throughs and make adjustments necessary to get most consumers to exercise the click-through option. And “material” terms should never be contained in click-throughs. Triggered terms described above would most likely be considered to be material.

    The FTC has an excellent guide for Internet advertising entitled “.com disclosures: How to Make Effective Disclosures in Digital Advertising.” It is available on the FTC’s Web site, www.ftc.gov.

    Summary

    Being honest, transparent, and disclosing triggered terms described above in plain English are your best general guidelines for advertising, Make sure disclosures are clear and conspicuous and appear on the screen or in a cadence for radio advertising that a reasonable consumer can understand. Are the prices advertised in your “model year end clearance” materially less than your everyday advertised prices? Is your “Labor Day Sales Spectacular” anything more than smoke and mirrors? Can the majority of your customers qualify for the headline-grabbing ads or favorable finance deals and are there sufficient numbers of vehicles (and not just fully-loaded, high end models) to meet the reasonably expected demand? These are just some of the issues regulators focus on when deciding to bring enforcement actions. Be aware and stay cool.
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    FRAUD ON DEALERS IS ON THE RISE: TIME TO REVISIT YOUR RED FLAGS PROGRAM

    5/2/2017

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    Identity theft in the U.S. was at an all-time high in 2016, with an estimated 15.4 million consumers hit with it in some form.1 This was up from 13.1 million victims in 2015, a 17.5% increase, and the highest number in any year. New account fraud, the type that affects auto dealers, was up 20%. Anecdotally, the number may be higher than that.

    The insertion of chips into payment cards has caused card fraud to decline. So fraudsters and identity thieves are looking at bigger and more profitable ways to commit identity fraud. And automobile dealers are a prime target. Now would be a good time to update your Red Flags Program and train your people on identity theft. I have audited dealers who pass people with real red flags unresolved. You have to be diligent about identity verification in every deal.

    The introduction of the Red Flags Rule in 2010 brought down the number of autos purchased by identity thieves but you can't get complacent and approve everyone who gets an identity score of 60 or above, or in some cases less, on an automated identity report. Identity reports are about reasons, not scores. The scores can be arbitrary and are not terribly scientific. They are intended as a shorthand to dig further and are not intended to be used as the only thing to consider when trying to establish the customer as being who they say they are. Look at the reasons given in the identity report that suggest this may not be the real person. Let's consider some tips that you may want to incorporate in your Red Flags program and in transacting with customers.

    Social Security numbers

    Social Security numbers are at the top of the list of red flags. Credit bureaus create credit files of up to 50 people or more using the same Social Security number. How do you think illegal immigrants get jobs and financial resources such as credit cards? Until June 25, 2011, the first three digits of a Social Security number (the "area number") reflected the address of the person when they applied for the Social. Each three digit number was linked to a state. You can find a useful chart at http://www.lavasurfer.com/info/socialsecurity.html.

    But starting June 25, 2011, the Social Security Administration started issuing new numbers randomly because they were at risk of running out of numbers in largely-populated states while many numbers remained unissued in less populated states. Still, the list of 3 digit area numbers assigned to states prior to that time can be useful in asking a customer what state they lived in when their Social Security number was issued.

    A credit bureau or information broker will generally have a good formula for determining whether the customer is likely to be the person to whom the Social was validly issued. Socials are never reissued although identity thieves try to use the numbers of dead people. If the identity report questions the legitimacy of the Social for your customer, you have a major red flag.

    One way to clear this red flag is to ask the customer to pull up their Social Security earnings history statement on the Social Security Administration's website, https://secure.ssa.gov/RIL/SiView.do. This online access is available to all persons. Let them do it on their cell phone and when they pull it up, take a good look at it. Compare it against the information on the credit application as to date of birth, income, etc. Only the real person can pull up a Social Security earnings history statement using a password. If the customer declines to do so, that is another red flag.

    Out-of-state Purchasers

    In this day and age of Internet selling, identity thieves prefer transactions where they never have to meet the dealer in person. They will pick out a vehicle off your Website, offer to pay at or close to full price, take aftermarket products and financing, and ask you to ship the car to them. This should be another red flag. You want to do whatever you can to get the customer to come into the store so you can speak to them and verify their ID in person. If they won't, you really should have a "guilty until proven innocent" attitude about them being an identity thief.

    Get the customer to send you a color copy of their drivers license. Then compare it to their state's license form by buying a copy of the I.D. Checking Guide, United States & Canada edition, available from Driver's License Guide Company, 1-800-227-8827. It contains detailed pictorials of each state and Canadian province's drivers license and U.S. federal documents like passports, visas, immigration documents, and military IDs. Compare carefully.

    For out-of-state customers, use out-of-wallet knowledge based authentication questions which are available from your identity theft report provider. Make sure the customer answers all of the questions correctly and it is a best practice to get a second set to do the same. The customer may have the real consumer's credit report in their hands so questions about credit accounts may not be helpful. That's why two sets which will presumably contain some personal information questions are a better way to go. If the customer answers any questions wrong, get another set.

    Engage the customer in a discussion in which you ask questions that you may not have the answers to but which will make the customer uncomfortable. Where did you go to high school?
    What was the name of your first boyfriend/girlfriend? What is the street address you lived on in first grade? Identity thieves want quick easy transactions and if they think you are on to them, they may well just hang up the phone and abandon the transaction. Keep them talking and trust your gut.

    Deals That Sound Too Good to be True Especially Late at Night

    Identity thieves want in and out quickly. They often wait until close to the end of the month, close to the end of the day, and do little negotiation on vehicle pricing or financing. (Identity thieves don't pay with cash unless they are laundering money which is another subject). If the deal seems too good to be true, put your red flags radar up. If the customer pressures you to complete the deal quickly and deliver possession of the vehicle, again put your red flags radar up. Use some of the questioning techniques listed for out-of-state customers and slow it all down. The identity thief may just pick up and leave.

    Fraud Alerts on Credit Files

    If you pull a customer's credit file and it has a fraud alert, that is an indication from the real customer that they have been or may be the subject of identity theft. The Red Flags Rule requires you to do greater due diligence on a customer who puts a fraud alert on their credit file. You can ask the customer why they put a fraud alert on their credit file and let them know you will need to take extra steps to verify their identity as required by law.

    Again, slow the transaction down, ask several rounds of knowledge-based authentication questions, and observe and listen carefully as the customer speaks and acts.

    How Can You Tell If Someone is Lying?

    There are going to be occasions when the story doesn't sound right, when you can only speak with an out-of-state customer over the phone, or you otherwise seem bogged down in red flags.

    Keep talking to the customer, preferably in person. Here are some signs that a customer may be lying to you:

    • Pitch and tone – if someone speaks at a tempo that is out of character or unnatural, especially if it changes mid-sentence
    • Long pauses between sentences or words. Stuttering
    • Repeating a question
    • Diversions or avoiding a question
    • Answering a question with a question
    • Claiming interference with the cell phone line
    • Repeating themselves in a confusing way
    • Defensive or sarcastic attitude

    Follow your gut and intuition and don't approve the customer until you are satisfied.

    Documents to Help Verify Identity

    One of the advantages of the growth of the Internet is that many identity documents, that formerly came only in paper, can now be accessed online. In addition to a Social Security Earnings Statement discussed above, utility bills, bank statements, credit card statements, deeds, birth certificates (in some states), and other identity documents are available online. Ask the customer to pull up statements and identity documents. If the customer says "I never use the Internet," explain that by going to a credit card issuer's site, they can create a user name and password and pull up the account statements using their credit card number (which they may not have). Then you can review it and discuss the purchases on there.

    Ultimate Goal Is to Make It Difficult and Uncomfortable for the Identity Thief

    Identity thieves have gotten very sophisticated in being able to defend the identities they have stolen or created. Your goal in reviewing your red flags and other suspicions, is to make it difficult for the identity thief and slow down the process to better evaluate his or her legitimacy. As noted, identity thieves want quick, easy transactions. Having you assess them with questions they cannot answer or requesting documents they cannot provide will make the process slow and difficult and many will just walk out or hang up.

    Talk at your 20-group meetings about other dealers' experience with attempted identity thieves and put your respective learning--including those described in this article--into your Red Flags plan and then implement it. The cost of identity theft--repurchasing a contract and not recovering a vehicle that has been chopped up or exported overseas--is just too great to do anything less.
    1 Javelin Strategy and Research (2017)

    _________________

    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.

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

    3/23/2017

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    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.
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    REGULATOR ACTIONS AGAINST AFTERMARKET PRODUCT SELLING: THE NEXT FRONTIER

    3/6/2017

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    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.
     
     

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    Federal and State Regulations: How they differ and what you need to know

    1/31/2017

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    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
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    SOME PREDICTIONS FOR 2017   by Randy Henrick

    12/28/2016

    1 Comment

     
    2017 is going to be a very eventful year--and perhaps one of some great change--for auto dealers in the sales and f&i compliance arena.  The election of President Trump and a Republican Congress will certainly augur change although perhaps at a slower rate than dealers might like.  Let's consider some of what may happen in a very unpredictable year.
     
    Possible Changes Coming to the CFPB
     
    At this writing, a three-judge panel of the U.S. Court of Appeals in the D.C. Circuit has ruled unconstitutional the 2010 Dodd-Frank Act's appointment of a single director of the Consumer Financial Protection Bureau ("CFPB") who can only be removed "for cause."  The Court ruled that the Director must be subject to termination by the President for any reason.  The Court also threw out a CFPB "abusive practices"  ruling that reversed prior HUD precedent.  U.S. Circuit Judge Brett Kavanaugh, who wrote the appeals court’s primary opinion, said the CFPB erred in retroactively applying the law, violating “the bedrock due process principle that the people should have fair notice of what conduct is prohibited.”
     
    The Court's ruling is currently being held in abeyance pending an appeal to the full D.C. Circuit Court of Appeals, but a new President may agree with the Court on the unconstitutionality and fire CFPB Director Richard Cordray or attempt to remove him for cause.  His scheduled term in office does not end until 2018.
     
    With a Republican Congress and a Republican President, we may also see legislation restructuring the CFPB.  Texas congressman Jeb Hensarling, the Republican chairman of the House Financial Services Committee, has introduced a bill that would eliminate the CFPB’s power to penalize institutions for “abusive practices.” It would also replace the Bureau’s sole director with a five-member bipartisan commission, repeal the CFPB's Auto Finance Guidance, and make its budget subject to Congressional appropriations as opposed to the CFPB receiving automatically a percentage of the Fed's budget as it does today.
     
    Federal Trade Commission
     
    Also, the Chairperson of the Federal Trade Commission ("FTC") has submitted her resignation effective January 20, which means President Trump will be able to nominate three FTC Commissioners (at least one of whom must be a Democrat as the FTC is required to be bi-partisan) as two additional vacancies already exist.  Currently, only two Commissioners (one Democrat and one Republican) are in office.  What will this mean for auto dealers?
     
    Both agencies, along with State Attorneys General empowered by the Dodd-Frank Act to enforce federal as well as state consumer financial protection laws, have been operating largely under a mode of "regulation by enforcement."  Under this approach, an agency does not put proposed rules out for public comment and make changes before publishing final regulations based on the comments. Rather, it brings unfair and deceptive practice enforcement actions--frequently for matters not previously found unlawful--and the consent decree from the enforcement action becomes the effective regulation for similarly-situated entities such as other auto dealers.  Many FTC advertising enforcement actions have adopted this approach and the FTC sued a dealership and its principals in September 2016 claiming spot delivery practices (called "yo-yo" practices) can also constitute unfair or deceptive practices.
     
    While at first glance it may appear that regulation by enforcement may be reigned in, there exist problems for agency-issued regulations such as those the CFPB is preparing to issue to ban class action waivers in arbitration agreements.  The Congress has the power under a law called the Congressional Review Act (CRA) to engage in an expedited procedure (no filibusters) to pass a resolution of disapproval of any regulation issued by an administrative agency such as the CFPB or FTC during the prior 60 days during which Congress was in session.  If the Congress passes a resolution of disapproval and the President signs it, the regulation becomes null and void and the agency cannot create a substantially similar regulation.  President Obama vetoed several CRA disapproval resolutions passed by the Republican Congress but President Trump may be otherwise inclined and could sign resolutions revoking regulations enacted by the CFPB or FTC.  For this reason, regulation by enforcement (not technically a resolution subject to the CRA) may continue to be the agencies' preferred way of doing business.
     
    Whatever changes the Trump Administration makes to the CFPB or the FTC and its regulations passed during the last 60 session days (a period that goes back to June 2016), don't expect immediate changes with the possible exception of firing Richard Cordray as the CFPB Director.  It will take time for legislation to work its way through the Congress and additional time for proposed Commissioners for the FTC to be nominated and approved by the Congress.  In the meantime, don't expect a drastic shift in the approach of state and federal regulators towards dealer compliance issues.
     
    Expect the sale and payment packing of aftermarket products, privacy, data security procedures (especially in the aftermath of a security breach), advertising, Red Flags, and spot deliveries to be areas where the FTC and State Attorneys General focus attention.  The CFPB will continue to attempt to indirectly regulate auto dealers until either legislation or a change in Director curtails them.  Already, they have done significant work in studying aftermarket product sales and are well positioned to bring enforcement actions against lenders for dealers' unfair, deceptive, and abusive actions in selling or packing aftermarket products. 
     
    Change moves slowly in Washington and this is not the time to let down your guard on compliance activities.  With regulation by enforcement, theoretically any practice is subject to challenge and you want to document your compliance in every deal.  If you have not already done so, appoint a Chief Compliance Officer and adopt a Compliance Management Policy that pulls together all of your individual compliance policies into a working whole.  Do regular training and document honesty and transparency with customers.  This will best prepare you when the FTC or your State Attorney General come knocking at your door even if down the road, the regulatory intensity of the Obama years begins to abate.

    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 two 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.

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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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