Dealers Suffer Either Way with the Brownback Amendment

First, I’d like to go on record as saying that I sincerely believe that the Brownback Amendment is a good thing. The last thing auto dealers need is more regulation. Most dealerships are highly ethical and provide a great service to the public by helping provide affordable auto financing. NADA, as usual, is doing an outstanding job of lobbying for dealers’ interests.


Unfortunately however, the media spotlight this amendment has received has once again brought negative attention to the auto industry. Any way you look at it, the President of the United States, the U.S. Military and numerous consumer groups are fundamentally stating the auto dealers can’t be trusted. That’s never a good thing.

Whether we like it or not, it’s difficult to deny that there are unscrupulous dealers out there who do indeed prey on consumers – often they run small lots close to military bases. This is unfortunate but should not be a reflection of the industry as a whole because these sleazy operations represent just a tiny percentage of auto dealerships in this country.

It’s the other end of the spectrum that is far more concerning. Take for example, the late, great Bill Heard Chevrolet. Here was a dealer group that was in business for almost a century, had 14 big stores, did over $2 billion in annual sales, and employed 3500 people…hardly a corner lot next to a tattoo parlor.

Before they went out of business, Bill Heard was battling all kinds of accusations, lawsuits and regulatory actions - including forgery, deceptive advertising, credit fraud, identity theft, sexual harassment, and just about anything else you can think of. Once the dealerships closed their doors, the media couldn’t say enough about the compliance issues – it was instant national news. Besides the pending lawsuits, hundreds of Consumer Affairs and Better Business Bureau complaints came to light. To add insult to injury, Bill Heard was also cited with labor violations for violating the WARN act after it closed.

Although Bill Heard was a victim of the economy, I can’t help but think that they also suffered the consequences of their own bad behavior in their demise. It’s very sad for the many, many honest, hard-working employees that lost their jobs. As for the few dishonest employees that committed the illegal, unethical acts – they have blemished the entire industry.

 Dealers just don’t need any more bad press.

Can't Blame Them For Doing What They're Told

Back when I was a green-pea salesman, I listened carefully to everything the closers and sales managers said. These guys were good! It seemed that no matter what the customer said, they had an answer. So I listened and learned. When I got my shot and became a closer, I carefully followed my sales manager’s lead. Same thing as I moved up through the ranks – I listened and learned from the old timers. By the time I became a GM, I knew it all, right? Well, not exactly. Any of this sound familiar?


Sales manager to salesperson: “Your customer has great credit but the bank is going to need more income. I don’t think they’ll ask for proof”. (falsifying credit information)

Sales manager to finance manager: “Listen, these folks are in a hurry. Let’s make them mental owners. Just have them sign a contract real quick and we’ll get the rest of the paperwork done another time. If they leave without signing something, they won’t be back”. (improper disclosure)

Sales manager to salespeople: “Guys, that ad car is a big loser. Switch your customers to something else unless we can make a ton on the back end”. (bait and switch)

Sales manager to finance manager: “Joe’s got this guy committed at $30 a month more then we need. Let’s make some money!” (payment packing)

Sales manager to salesperson: “We can probably get this guy done, but there’s going to be a big bank fee. If he wants that Sentra, don’t mention the ad price. We need to sell it for a few grand more for the deal to make sense. He’ll be happy we can get him done”. (hidden finance charge and failure to sell at advertised price)

Sales manger to salesperson: “It looks like the negative equity is her hot button. Here’s what we’ll do: Tell her that we’ll pay off her trade and get her committed at $379 a month. I’ll just add the negative equity to the price.” (failure to properly disclose negative equity)

Finance manager to salesperson: “Let your customer know that the bank may call her and ask some questions. Make sure she tells them that the car is for her and not her brother!” (straw purchase)

Finance manager to sales manager: “I don’t care if you take a hold check for the downpayment, but the bank isn’t going to go for a deferred down, so we need to show it as cash on the contract.” (failure to disclose deferred downpayment)

Finance manager to used car manager: “We’re over-advanced on that Tahoe deal. I need a book sheet for $15,500. Doesn’t it have premium wheels or something?” (power booking)

Many long-standing dealership practices are not necessarily legal or ethical but often times staff members have no idea they are breaking the law. The vast majority of dealership employees are well-meaning, honest people just trying to earn a living. However, if they have never been properly trained in compliance matters, they may simply rely on doing business the way it’s always been done. Dealers should not assume that employees know all the rules. Education is the first and most vital step towards building an ethical organization. After all, if employees don’t know or understand the rules, how can they be expected to follow them?



Jim Radogna is the President of Dealer Compliance Consultants, Inc., a San Diego, California training and consulting firm.

jim@dealercomplianceconsultants.com

http://www.linkedin.com/pub/jim-radogna/16/499/b14

www.DealerComply.com

When the Going Gets Tough, the Tough Get an Attorney

It’s been a tough couple of years for just about everyone in this business. I suspect there is an exception though – attorneys that specialize in suing car dealers.

It seems that the recent economy has caused a higher than usual amount of disgruntled customers. An example is the customer who can no longer afford his or her car payment and would like to find a way out of the deal. Then there are the folks who got used to trading in their vehicles pretty much at will. No down-payment? No problem. Upside-down? No sweat. Well, as we’ve become painfully aware, those days are over. So, unfortunately, there are customers out there who feel that they got “screwed” by a dealer because they owe far more than their vehicle is worth and actually need money down to trade it in.

Enter the consumer attorney. Just Google “auto dealer fraud” and you’ll see what I mean. Besides the numerous law firm websites, you’ll find several consumer advocate sites which “educate” people about “car dealer scams”. After browsing through a few of these sites, a consumer may decide to call for a “free consultation” or ring up his local attorney general’s office. Not a pleasant thought. An innocent dealer can easily become the target of a government investigation or lawsuit simply because a customer is trying to wiggle out of a transaction.

According to the above-mentioned websites, these are some potentially “fraudulent activities” by dealers:

• Improper contract disclosure and concealing material facts

• Negative equity/Over allowances

• Payment packing

• Backdating of rewritten contracts

• Forced service contracts or “add-on” concealment

• Undisclosed deferred down payment

• Foreign language translations

• Used vehicle disclosures/Misrepresentation

• New/Used/Demo/Unwind misrepresentation

• Forgery

• Fraudulent credit applications

• Improper Contract Rescissions

• “Yo-yo financing” or spot delivery

• Overcharging of fees

• Undisclosed prior vehicle history or damage

• Odometer issues

• Bait and switch advertising

• False & misleading advertising

• Lying about credit scores

• Buy-lease switch

• Straw purchases

• Price gouging or discriminatory pricing

• Failure to sell at advertised price

• Contract re-negotiation

• Warranty fraud

A number of actions also start out as potential lemon law claims. I’ve actually seen freeway billboards for Lemon Law attorneys. The infamous 10,000 RV negative equity case in California began as a service contract dispute on a used motor home. Once the plaintiff attorneys got their hands on the deal jacket, well, the rest is history.

Unfortunately, dealers are more and more frequently becoming the targets of lawsuits, enforcement actions and, of course, the associated negative publicity. Attorneys general in many states identify accusations against dealerships as being their #1 concern, and recognize the political capital in going after dealers.

It’s more important than ever for dealers to dot there “I”s and cross their “T”s when it comes to compliance. Processes should be put in place to ensure that transactions will hold up to legal scrutiny in case of a customer complaint, such as:

• A vehicle history report should be run on all used vehicles to detect potential disclosure problems such as prior rental, damage, mileage, title issues, etc.

• A consistent process should be used for quoting payments, rates, etc.

• Consider having price caps on F&I products.

• Have an extra set of eyes check out all paperwork. If a mistake or oversight is discovered, correct it immediately.

• All employees should be properly trained in both legal compliance and company procedures.

In this environment, it is vital to take compliance seriously and understand that it is downright fashionable to target auto dealers. Let’s not make it so easy for them.

Avoiding Workplace Harassment Claims

Another day, another news story about a sexual harassment lawsuit against an auto dealer. This time it’s the general manager and the GSM versus the receptionist. Allegedly, they were snapping her bra, whacking her backside with a back scratcher, hounding her with come-ons, and sending her inappropriate text messages among other things. According to the suit, the abuse became so bad that the receptionist quit her job after only 6 weeks.


If any of this is surprising to you, simply Google “auto dealer harassment” to get an idea of how common these types of lawsuits are in our industry. You will find many cases of not only sexual harassment, but also racial harassment, age discrimination, etc. The amounts of fines and damages that dealers have been assessed are eye-popping.

In a statement about another case against a dealership, U.S. Equal Employment Opportunity Commission (EEOC) regional attorney John Hendrickson said that it was “amazing that at a time when the auto industry is struggling for survival and women exercise so much influence in the marketplace that anyone would in engage in sexual harassment or show contempt for female customers.”

EEOC Acting Chairman Stuart J. Ishimaru also said in a statement that "sexual harassment and sex discrimination against women in traditionally male-dominated industries, such as the auto industry, are still unfortunate realities."

Harassing conduct is sometimes so commonplace that we often don’t recognize the behavior as being inappropriate. Many people who have been around auto dealerships for any length of time may not be very surprised that this type of behavior exists, while others may feel that these are mostly frivolous lawsuits designed to extort money from dealers. Perhaps the accused were “just kidding around” and meant no harm?

No matter what, the dealer loses. Any lawsuit is a bad lawsuit. Besides the cost of defending these claims, there will likely be immeasurable damage to a company’s reputation. What owner wants the public to be exposed to media stories accusing their dealership of employing harassers or racists?

To help avoid these types of claims, dealership employees should be trained in harassment prevention. Staff members (especially supervisors) need to understand that it is simply not okay to snap bras, whack backsides or use derogatory nicknames in today’s world, no matter what the intention. As far as the law is concerned, harassment depends on how the conduct was received, not on the intent.

Some states, such as California, require harassment prevention training for supervisors. That’s great, but what about the non-supervisory employees? There is often a great of down-time at a dealership, and employees may get bored and tend to “goof around”. Is it harmless horseplay or perhaps behavior that crosses the line? Are supervisors able to monitor their subordinates’ behavior at all times? Are supervisors setting a proper example (bra-snapping)?

Most companies have an anti-harassment policy that all employees must sign, although I would venture to guess that the majority of people don’t read it or understand it. Having a policy in place and hanging posters is simply not enough protection for a dealership. Once again, All Dealership Employees Should Be Trained In Harassment Prevention.

Perhaps then the media, the EEOC and employees looking for an easy target to sue, can go pick on somebody else.



For information on convenient and affordable harassment training programs, use this link: http://www.dealercomplianceconsultants.com/hartrain.html

Advertising Compliance – Dodging Bullets

I remember the good old days when I was blissfully ignorant about everything except making the next car deal…


Back in the days when I was a dealership general manager, I couldn’t wait for the next Big Sale, Promotion, Mailer, etc., whatever it took to make things happen. I gladly signed up for whatever “Next Big Thing” my boss was willing to pay for. After all, we had to keep the staff pumped up and the customers coming in, right?

Well, since then I’ve learned a thing or two about compliance and now realize that many of the programs we participated in were questionable at best or downright misleading (and thus, illegal) at worst. I never gave those advertisements a second thought because I figured we paid the program vendors a lot of money so they must be legal and proper, right? And even if the ads were improper, the vendor would be responsible, not us, right? Ah, wrong and wrong.

There was one program that we did that still gives me night terrors when I think about it. I was GM at a dealership that was part of a group in California and I got the word from the corporate office that we signed up for a promotion with a company from another state. It went something like this: the company sent out mailers which were simulated newspaper ads with my picture and all kinds of exciting quotes from me about this amazing sale we were putting on. Now the really exciting part was that these ads were mailed to people in hand-addressed envelopes, so they were more likely to open it. When the addressee opened the envelope, he or she found the “newspaper ad” with a Post-it note stuck to it signed by “J”, an apparent friend of theirs who saw the ad and thought they would be interested.

I have to admit - I loved it! I thought this was a great marketing concept. Everyone knows someone with the first initial J, so it had a certain degree of credibility. Of course, a few customers were a bit savvier and called the dealership to express their disgust with our “sleazy tactics”, but I digress.

At any rate, I was excited, the staff was excited, and, not surprisingly, the promotion did quite well. So, what’s the problem?

Well, the ad was “questionable” in all kinds of ways, such as:

• Proclaimed that the dealer “used $20 million from 20 banks to revive the local credit market during this sale” and that we had a “partnership local banks for a special credit and pricing event” – sorry, but we didn’t have any deals with any banks for any amount of money.

• Stated that these “banks” were offering us “preferred terms that our competitors couldn’t match in this market” – yeah, sure…

• 3.9% APR available on certified pre-owned vehicles – too bad we didn’t have any CPO cars…

• Vehicle payments advertised that virtually no one would qualify for: 60 month financing on an 8 year-old car with $29 down and an amount financed of less than $5,000… Good luck with that. (I don’t know, maybe one of those 23 phantom banks that I allegedly hooked up with would have done that kind of a deal?)

As far as I’m concerned, I - and the dealer - dodged a bullet with that ad. The worst part, of course, being the “I” part. My name, my picture and my “quotes” were all over the ad. Was I potentially liable for any violations? Heck yeah!

Advertising is considered deceptive if “members of the public are likely to be deceived” or the advertisement has a “tendency or capacity to mislead the public”. If an ad is deceptive, an advertiser has liability regardless of whether there was intent to deceive. A dealer has the duty to investigate the accuracy of any statements made in advertising. You should never assume that advertising agencies or representatives know all the laws and regulations governing advertising compliance. This is particularly true of companies based in other states, such as internet and direct mail providers. State advertising laws are very stringent and the responsibility for compliance lies with the dealership, not the advertising agency.

Bottom line: Be careful when advertising. If you’re not sure about an advertisement or promotion, it’s a good idea to have an attorney look it over. It’s probably better than trying to dodge those bullets, or worse yet, getting hit by one.

Jim Radogna is the President of Dealer Compliance Consultants, Inc., a San Diego, California training and consulting firm.

http://www.linkedin.com/pub/jim-radogna/16/499/b14

jim@dealercomplianceconsultants.com

http://www.dealercomply.com/

More Fun from the Fed: Risk-Based Pricing Notices

As if you didn’t have enough rules and regulations in your life…
The Next Big Thing from our friends at the FTC and Federal Reserve is known as Fair Credit Reporting Risk-Based Pricing Regulations.

According to the agencies, “the risk-based pricing notice requirement is designed primarily to improve the accuracy of consumer reports by alerting consumers to the existence of negative information on their consumer reports so that consumers can, if they choose, check their consumer reports for accuracy and correct any inaccurate information. It is meant to complement the existing adverse action notice provisions of the Fair Credit Reporting Act”. How’s that for a mouth full? These rules generally require a creditor to provide a risk-based pricing notice to a consumer when the creditor uses a consumer report to grant or extend credit to the consumer on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that creditor.

Yep, you guessed it, auto dealers are considered creditors.

Well, we tried…

In seeking an exemption from the rule for dealers, industry associations responded that in three-party financing transactions, automobile dealers are not engaged in risk-based pricing and therefore should not be subject to the requirements of the rules. Although the dealer obtains a consumer’s credit report in a three-party financing transaction, it does so in order to determine which third-party creditors to send the consumer’s credit application, and not to set the terms of the retail installment sale contract. Accordingly, the automobile dealer is not engaged in risk-based pricing because it is the third-party creditor, not the dealer, who analyzes the consumer’s credit-worthiness.

Unfortunately, the regulators disagreed. Thus, automobile dealers that are original creditors in a three-party financing transaction must provide risk-based pricing notices to consumers, in accordance with the rules.

While the rules don’t become effective until January 1, 2011, here’s a short synopsis of what to expect:

• A risk-based pricing notice is to be provided to the consumer after the terms of credit have been set, but before the consumer becomes contractually obligated on the credit transaction.

• The rules apply to the person to whom the obligation is initially payable (also referred to as “the original creditor”).

• The risk-based pricing notice must contain a statement informing the consumer that he or she may obtain a copy of a consumer report, without charge, from the consumer reporting agency identified in the notice.

Because it may be difficult to determine which consumers must receive the notice, the rules also include certain exceptions:
1. When a consumer applies for, and receives, specific material terms.

2. Creditors may provide consumers with a credit score disclosure in lieu of a risk-based pricing notice. This may be good news for California dealers who are already required to provide a credit score disclosure under the Car Buyer Bill of Rights, although the current form may have to be modified to include additional information that provides context for the credit score disclosure.

3. When a consumer has been or will be provided a notice of adverse action under in connection with the transaction.

4. In some cases, a consumer’s credit file may not contain sufficient information to permit a consumer reporting agency or other person to calculate a score for that individual. In those cases, a creditor using either of the credit score disclosure exceptions described above is permitted to comply with the rules by providing an alternate narrative notice that does not include a credit score to those consumers for whom a score is not available.

We’ll keep you posted as the launch date gets closer.

Jim Radogna is the President of Dealer Compliance Consultants, Inc., a San Diego, California training and consulting firm.

Will You Still Love Me Tomorrow?

There are a number of good reasons for operating an ethical and legally compliant dealership, not the least of which is staying out of a courtroom. Perhaps the most important - and most often overlooked - reason is increased customer satisfaction. There are times when an employee may feel that he or she came out the winner by bending the rules a little, but what about the dealership’s reputation? What about the customers who were mislead? It seems like there might be some losers in the game.

Customers often make decisions during a vehicle sale transaction that they come to regret after the “ether has worn off”. Perhaps they read the contract more carefully after they get home or showed it to a relative, friend, neighbor, etc. The customer may notice some imperfections on the vehicle in the light of day and have it inspected by a mechanic or body shop or run a vehicle history report. If there is a concern, some customers will let the dealer know while others will just chalk it up to (bad) experience.

Now, if the dealer is lucky enough to get a chance to rectify the customer’s concern, how will the complaint be handled? Will it be “Sorry, all sales are final” or “You signed the contract”?

What about the customer that doesn’t bother to report the concern? You can be sure they’re telling somebody about the transaction.

Here are examples of after-sale situations that can cause potential customer satisfaction nightmares:

• The customer sees your advertisement for a price lower than was charged for the vehicle.

• The customer discovers additional charges on the contract for items that he or she thought were included in the price of the vehicle.

• The customer discovers that F&I products were sold at much-higher-than-market prices.

• The customer discovers additional charges on the contract for items that he or she never agreed to purchase.

• The customer gets a call from the lender who asks for verification that the vehicle has a sunroof – and it doesn’t.

• The customer discovers that the price of the vehicle was raised to cover negative equity on the trade-in when after being told that the dealer agreed to purchase the trade-in for the full loan balance.

• The customer gets a call from the lender asking for verification of an income amount which is much higher than what was written on the credit application.

• The customer discovers that the vehicle purchased had undisclosed prior damage.

• The customer runs a vehicle history report and discovers that the vehicle purchased was an undisclosed previous rental, a prior demo, flood damaged, etc.

• The customer brings the vehicle in for repairs and discovers that the warranty or service contract coverage or term was misrepresented.

Don’t put your business and reputation that you have worked years to build at risk. Take compliance seriously. A focus on compliance and training will protect your company, your employees, your customers and, most importantly, your good name.

Jim Radogna is the President of Dealer Compliance Consultants, Inc., a San Diego, California training and consulting firm.