The FTC Strikes AGAIN - What a Surprise!

The Federal Trade Commission started the year by making a major statement regarding how they feel about questionable auto dealer advertising practices with their Operation Steer Clear action in January. Just to remind us that they weren't kidding around, they've apparently decided to end the year with a splash: FTC Takes Action Against Two Auto Dealership Chains For Violating 2012 Orders Prohibiting Deceptive Advertising of Vehicle Costs.

As I predicted in my January 22nd post, The FTC Strikes Again - You Ain't Seen Nothing Yet, dealer advertising is on the FTC's radar and they're not going away anytime soon.

According to media accounts, one of the dealers cited in the most recent action stated "Was it fair? Absolutely not. The reason we settled it was because it was less expensive than to go to court." 

Well, as we parents are so fond of telling our children: "Life isn't fair..."

This dealer and his legal counsel apparently feel that the FTC has not been clear in delineating their expectations regarding compliant advertising. Perhaps that's true, but after attending the FTC's dealer advertising press conference this past March, I'm not sure I completely agree. As I outlined in the post Key Takeaways from the FTC's Dealer Advertising Webinar, it seems to me that the FTC has been pretty forthcoming about their perspectives regarding proper advertising.

I've said it many times before and I'll say it once again: If you’re not sure that your advertising is compliant, don’t guess! It makes sense to have your advertisements reviewed, and edited if necessary, by someone knowledgeable before publication. It may cost a few bucks, but it’s a small price to pay.

$360,000 (plus legal fees) and bad press seems like a really high price to pay for guessing wrong.

For a quick refresher on how regulators view advertising, you may want to check out this post: 10 Advertising Guidelines That Every Dealer Should Be Familiar With.

Winning the Battle and Losing the War

Just over 4 years ago, I wrote an article about how much damage an irate customer can do in the digital age: Unhappy Car Buyer Gets 110,000 Views on YouTube.

In a nutshell, the customer’s initial complaint was that the car he purchased had problems and he wanted his money back, but a good portion of the disparaging video he produced dealt with how the customer was saddled with what he felt was an unfair arbitration agreement by the dealer. The customer wanted to have the case heard in court and the dealer wanted to have an arbitrator decide the case.

This case has been going on for over 7 years and it appears that it's finally been resolved. The dealer was able keep the case out of court and with an arbitrator (they won that battle). But - the arbitrator ruled against the dealer and awarded the customer $10,393 plus legal fees of $324,724. Ouch!

As if that's not bad enough, the YouTube video trashing the dealer now has over 1.3 MILLION views!

By the way, this battle was over a used car that sold for roughly $9,000...

The obvious question seems to be: was it worth it?

How does your dealership handle customer complaints???

Think Compliance Isn’t Your Problem? Think Again

News broke recently about 5 dealership employees that were arrested and face federal charges of conspiracy, bank fraud, wire fraud, and aggravated identity-theft. This brings the total to 7 employees at the same dealership who have been indicted so far this year. Not very pretty.

Now you may be thinking that these folks must have engaged in really outrageous behavior to get arrested, especially by the feds. You’re likely also thinking that this could never happen to you – and you may be right. But before you ignore this as something that only happens to people in other dealerships, you might want to read on.

For a number of reasons I’ll get into shortly, my take on this latest government action is that there’s a profound change occurring in the car business legal environment – not only for dealers, but for everyone who plies their trade selling cars. I know, I know - you’ve heard this all before – but please stay with me for a little bit.

It’s no secret that for the last few years federal and state regulators have sent a clear signal that they’re fed up with what they consider to be deceptive practices in the auto industry -- and they’ve placed a bulls-eye squarely on the backs of car dealers. But where the game is changing the most is that instead of just hitting up dealers with their typical arsenal of fines, lawsuits and consent decrees, the Powers-That-Be have apparently decided to go directly after dealership staff. Eye-opening to say the least.

Since it’s likely that you don’t go to work every day with the intention of getting charged with a crime, you might want to hear about some significant takeaways from this recent action as I see it:

The indictments resulted from practices that have been around for many years and still are common in some dealerships – The charges included creating or altering documents to submit to financial institutions to show inflated income, misrepresenting proof of a customer's residency, unlawful use of a customer's personal identification, listing accessories not actually included on a vehicle so a financial institution would increase its loan amount, utilizing straw buyers, and quoting customers an inflated monthly vehicle loan payment so that a finance manager could add a service contract and GAP insurance without the customer realizing it. In carspeak, that’s kinking credit apps and stips, power booking, straw purchases, and payment packing – sound familiar?

Virtually all positions in the sales department were caught up in the operation – Sales managers, a finance manager, a GSM, and 3 salespeople were indicted. So if you’re involved in any aspect of selling a car, you could be at risk.

The idea that only employers are responsible for any illegal activities that occur at their dealership is simply not valid - There’s no indication in the media stories that the dealership owners were named in the indictment – just the employees (although news that 7 of your employees were arrested can’t be good for business).

Multiple law enforcement agencies were involved – The U.S. Attorney’s office, the FBI and the IRS all participated in this operation. Thought you only had to worry about the CFPB and FTC looking over your shoulder?

It’s easier than you think to get caught – According to media accounts, a confidential informant who had previously worked at the dealership “provided multiple volunteered audio recordings regarding the loan fraud, documented proof of the loan fraud, and miscellaneous documentation he acquired during his employment at dealership” to the FBI. So not only are dealership employees at risk of exposure for illegal practices from disgruntled customers, their co-workers could also implicate them.

The potential penalties are very real and quite devastating - According to the media stories, the maximum penalty for conspiracy is five years in prison and a $250,000 fine. The maximum penalty for bank fraud is 30 years in prison and a $1 million fine. The maximum penalty for wire fraud is 20 years in prison and a $250,000 fine. The minimum penalty for aggravated identity theft is two years in prison. And if those numbers aren’t bad enough to shake you up, here’s something else to think about: even if these employees are found not guilty - was it worth being criminally charged, having their reputations ruined, paying legal fees, losing their livelihood and likely having to change professions?

Quite frankly, many dealership employees get caught up in risky behavior not because they’re bad people, but because they simply don’t know any better. In many cases the old-timers have taught the new hires the “old school” way of doing business. It’s not unusual for dealership employees who have never been properly trained to simply rely on doing business the way it’s always been done.

Obviously, compliance training is vital for all dealership personnel, but it goes beyond that. The missing element in most compliance programs is that employees are taught what not to do but given no guidance on how to be successful doing things the right way. Let’s face it, sales department staff members are put under tremendous pressure to “make the numbers”. In the absence of proper knowledge and skills, this can lead to the temptation to step over the line legally and the rationalization that “everyone else is doing it that why, why shouldn’t I?”

The answer is complete education. When dealership personnel learn skills like loan underwriting guidelines, subprime financing and proper deal structuring, it eliminates the need for kinking credit apps, power booking and straw purchases. This goes hand-in-hand with superior sales training to teach employees how to build relationships with customers so that they can land them on the right vehicle that fits their budget and credit profile – again eliminating the need to “fudge” things because the customer “needs more income” or doesn’t have enough down payment. Next, when F&I personnel become better at selling products, there’s no longer the need to “pack payments” in order to increase their numbers.

In my humble opinion, it’s really pretty simple. By becoming better educated on doing things the right way, you’ll not only be far more successful, but you’ll sleep better at night. Sounds like a win-win to me.

Good luck and good selling!

Are You in Good Hands?

A common rationalization for some dealers to be less than diligent in their compliance efforts is “my insurance will cover any claim”. Well, that theory took a serious hit recently when a federal judge agreed with two insurance companies that denied coverage in lawsuits against a large public auto group. The court found that since the dealerships’ employees “intentionally misled” customers, the insurers were within their rights in refusing to cover the claims.

A little history is in order. The auto group had been named as a defendant in at least three lawsuits concerning its sales to consumers of window etch. The suits alleged that the dealerships had failed to disclose that the price of the etch product was included in the amount of financing they obtained and that employees told purchasers and lessees that they had to purchase etch in order to obtain financing. In addition, plaintiffs alleged that the dealers provided them with forms with blank prices and the prices were not disclosed in any of the transaction documents.

The Insurance companies had issued the dealer group at least three separate liability policies, and each of the policies included an Auto Dealer Enhancement Package that provided liability coverage for sums an “insured legally must pay as damages arising from an occurrence because of an alleged or actual negligent act or error or omission by an insured resulting from a violation of truth-in-lending laws.”

The dealer group alleged that the types of claims and allegations made in the underlying suits fell within the scope of coverage provided in the Auto Dealer Enhancement Package. The insurance companies disagreed.

Here’s why: liability policies typically cover only the negligence of the insured, and will not apply to results of willful or intentional acts by the insured. Common exclusions from insurance policy coverage can include:

• Intentional wrongful acts
• Illegal or dishonest acts
• Intentional or knowing violation of any law, regulation, statute or ordinance
• Gaining of any profit or advantage to which you are not legally entitled
• Claims arising out of false advertising or misrepresentation in advertising
• Antitrust, unfair competition, restraint of trade, unfair or deceptive business practices, or violations of any consumer protection laws
• Claims against you that are brought by or on behalf of any federal, state or local government agency
• Claims arising out of any wrongful act committed with the knowledge that it was a wrongful act
• Claims arising out of the same wrongful act or series of continuous, repeated or related wrongful acts, alleging the same or similar facts

In finding for the insurance companies, the court stated “fraudulent misrepresentations and nondisclosures were done intentionally with the full knowledge of and at the direction of the principals of the dealer as a 'pattern and practice' of doing business."

Ouch.

Now when you think about it, there are any number of compliance missteps that may be considered “intentional” under the above guidelines. A few that come to mind are payment packing, bait & switch advertising, price gouging, failure to sell at advertised price, falsifying credit applications – you get the picture.

Here’s the bigger picture: by training employees to operate compliantly and ethically, the dealership’s exposure will be greatly limited, but more importantly, customers will be happier, and sales will increase. I recently read this comment from a student enrolled in Automotive Career Training at the College of Auto Management that really hit the nail on the head:

”First allow me to say that this course is definitely essential to the growth of the automotive industry as whole! I am in my 6th year in the industry. In that time I have been a sales consultant, floor manager, and an internet manager but at no point in time was I approached or sat down and discussed the ethics laws of how to rest assured that my practice was legal or law abiding. This leads you to believe that all is fair as long as the customer agrees and consents - whether they understand or not is not really my problem or concern.

Personally this course helped me draw the line between a great salesman and a crafty con artist per se. Just because you can get customers to say yes doesn't mean you did a good job selling them a vehicle. You could have done a great job of deceiving them during the whole process. After going through this course, I realized that a lot of practices that I thought were "the car business" actually are not. As a person who prides himself on honesty and integrity, this course has opened my eyes to true accountability on what is legal and what is not legal (since the customer most likely doesn't know and the dealership may not teach you). 

Also I know that this course will separate me from other candidates who do not have the knowledge. I know that I am an asset to a company and their practices in the case of an audit or any accusations that may face them knowing that me as an employee, on any level, am well familiar with the laws and legal practices of the industry. So they can rest assured that I will not put their dealership on "the 6 o'clock news". 

I plan to take this knowledge and use it how it should be used! Help build trust for my dealership, build stronger relationships with customers, and advance my career the right way. Learn how to sell opposed to mislead. Thank you for offering this knowledge.”

So I ask this simple question: is it better for dealers to spend their time worrying about whether their insurance company will pay a claim if they get caught up in a compliance lawsuit or train their people to think like the gentleman above? It seems to me that the answer is obvious.

In my humble opinion, the Good Hands People dealers should be focused on is not an insurance company - but the people who serve their customers every day. The rest will take care of itself.