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.

When Do Not Call Really Does Mean Do Not Call

The National Do Not Call Rules (DNC) have been around for quite a while but I find that a surprising number of dealership employees think that the rules don’t apply to them. I often hear statements like “Hey, we’re not telemarketers, we’re just doing follow-up”. Unfortunately, it’s not that simple. So I thought it was time for a refresher on the rules and some suggestions on how to avoid potential legal pitfalls.

The DNC rules state that it’s against the law to call, for selling purposes, any number on the National Do Not Call registry, but there are some exceptions.  For instance, under the “existing business relationship” exception, a dealership may call a consumer with whom it has an established business relationship for a limited time after the consumer's last purchase, delivery, or payment - even if the consumer's number is on the National Do Not Call Registry.  Also, dealership staff may call a consumer for a shorter period of time after the consumer makes an inquiry or submits a lead to the company.  

One caveat: if a consumer asks you not to call, the staff may not call, even if there is an established business relationship. In that case, the dealership must honor the request not to call and loses the right to call the consumer, regardless of whether the consumer continues to do business with the dealership. As a result, in addition to the National Do Not Call List, dealerships must maintain an internal Do Not Call list of any consumers who specifically request that the dealership not call them. This is the tricky part at many dealerships.

What type of calls do the DNC rules cover? Covered calls are those made for “commercial” or “selling” purposes that offer to provide or arrange to provide goods or services to consumers. It’s pretty simple, if you’re calling to try to sell something – anything – the rules apply. If you’re calling for any other reason, you’re probably OK.

So what constitutes an “existing business relationship”?  There are two types of established business relationships, both of which are time-limited:

1) A dealership may call a consumer if that consumer has purchased, rented, or leased the business’s goods or services, or if a financial transaction has taken place. The time limitation on this relationship is 18 months after that sale or transaction.

2) If a consumer hasn’t purchased from you, you can call them only if they have made an inquiry or submitted an application to your company, such as a request for a quote. In these cases you can only call up to three months after the original inquiry (NOTE: this time-frame may be further limited by state law. For instance, California only allows for calls to be made for 30 days after an inquiry is made). This exception applies when a consumer visits the dealership and inquires about purchasing, calls for information, or submits an internet lead. The test for whether there's been an inquiry (and thus there could be an established business relationship even where a purchase or transaction hasn't been completed) is that an inquiry has been made of a nature to create an expectation on the part of the consumer that a particular company will call them. So, if a consumer merely called to inquire about business hours or location, that wouldn't do the trick, but asking about a company's products or services, or submitting an application or lead, would.

Another exception is if a consumer has given the dealership express written permission to call, you may call even if the consumer's number is on the National DNC Registry. The consumer must give express agreement in writing to receive calls placed by the seller, including the number to which calls may be made, and the consumer’s signature. The signature may be a valid electronic signature, if the agreement is reached online. The consumer can revoke this permission at any time by asking to be placed on your internal DNC list.

Even permissible calls have restrictions on time of day. They can't be made before 8 a.m. or after 9 p.m. local time at the called party's location. Sellers are also prohibited from blocking the transmission of caller ID information.

There's a safe harbor for sellers that have made a good faith effort to comply with the national DNC rules and a dealership would not be liable for violations that result from an error if the company has made a good faith effort to provide consumers with an opportunity to exercise their do-not-call rights. To fall within the safe harbor, the dealership must demonstrate that, as part of its routine business practice:

1. It has established and implemented written procedures to comply with the do-not-call rules;
2. It has trained its personnel, and any entity assisting in its compliance, in the procedures established pursuant to the DNC rules;
3. It has maintained and recorded a list of telephone numbers the seller may not contact;
4. It uses a process to prevent telemarketing to any telephone number of any list established pursuant to the DNC rules employing a version of the DNC registry obtained from the administrator of the registry within a time-frame specified by rule (the search is required to be made at least once every 31 days); and
5. Any subsequent call otherwise violating the DNC rules is the result of error. 

So, how do you stay on top of these regulations? The good news is that many CRM programs do much of the heavy lifting in terms of flagging consumers on the National DNC list. The not-so-good news is that your CRM can only do so much. Often, decisions must be made at the dealership level as to the validity and timing of established business relationships and consumer placement on the dealership’s internal DNC list. Following are suggestions for staying compliant with DNC rules (for dealers who have a CRM system that automatically accesses the National DNC Registry): 

• All dealership employees should be trained on DNC rules and on how to identify customers flagged as “Do Not Call” in your CRM. Your CRM provider should be asked to provide comprehensive training to ensure that there are no misunderstandings about the system’s capabilities. 
• The dealership should appoint a single point-of-contact who is well-versed in the DNC regulations to administer the program (Compliance Coordinator).
• The DNC Compliance Coordinator should develop and maintain an internal company DNC list.
• All consumer requests to be added to the dealership’s internal DNC list should be routed to the Compliance Coordinator. He or she will be responsible for maintaining the list and flagging the consumers in the CRM. All dealership employees must report any customer Do Not Call request (written or verbal) to the Compliance Coordinator.
• All dealership employees should be instructed that any consumer request not to be contacted (even casual requests) must be immediately reported to the Compliance Coordinator. This includes requests to receptionists and customers telling salespeople “hey, don’t call me anymore”.
• All decisions as to whether or not a consumer falls into the “established business relationship” exception or “express permission to call” exception should be made by the Compliance Coordinator. In other words, no one flagged as “Do Not Call” in the CRM should be called without permission from the Compliance Coordinator.
• These directives should be made a part of the company’s Human Resources process, included in the employee handbook and new-hire orientation, and strictly enforced. Employees should be informed in writing that knowingly calling a person on the Do Not Call list without permission from the Compliance Coordinator is a serious breach of company rules and can lead to disciplinary action. This is vital to ensure safe harbor protection for the dealership in the case of errors.

If the dealership doesn’t have a CRM system that tracks the DNC list, they are required to search the National DNC Registry every 31 days. If new numbers have been added to the registry they are required to drop them from their call lists. The Federal Trade Commission has set up a specific website that businesses can use to access the registry: https://telemarketing.donotcall.gov/profile/create.aspx. When a business accesses the site for the first time a profile will need to be created by including identifiable information about the business. Organizations that subscribe to more than five area codes will be required to pay a fee to access data on the registry. 

So there you have it. The rules are not very complicated but compliance can be tricky and is vitally important. Violators of these rules can be fined up to $16,000 per incident and consumers can bring private actions. In this age of greatly enhanced enforcement actions and lawsuits against dealers, it makes sense to pay attention.

Key Takeaways from the FTC’s Dealer Advertising Webinar

On March 19^th, 2014 two FTC attorneys, Mark Lassman and Carole Reynolds, participated in an NADA-sponsored webinar titled Comply with Federal Advertising Regulations. While much of the information is unchanged from what we’ve seen in the past few months, Mr. Lassman and Ms. Reynolds revealed some additional, and sometimes troubling, revelations that dealers everywhere need to be aware of:

• Even if a dealership follows their state advertising regulations to the letter, the FTC may bring an action based upon their interpretation of federal advertising guidelines and the net impression your ad gives to consumers. According to the FTC, a customer is not required to “figure out” what the ad terms mean. If the agency feels the ad is confusing in any way, the ad is likely to be considered misleading in their opinion. They cautioned against using industry terms of art in disclaimers that customers may not understand. 
• Disclosures must be clear and conspicuous to convey the information that qualifies the claim; and must be easily noticed and understood by customers.

• When you use disclaiming statements remember the “4 Ps":
  
  Prominence - Can consumers see and read it, or hear it? Small print and rapid fire delivery in TV, radio and website banners should be avoided.
  Placement - Is it where the customer would look? Caution: turned sideways on the ad is to be avoided. 
  Proximity - Is it near the claim it qualifies? Caution: back of direct mail; multiple clicks away is not close. 
  Presentation - Is the wording and format easy for consumers to understand? Caution: avoid industry Jargon, or technical terms; buried in fine print; multiple asterisks; gray or light print; loud music.

• In Radio and TV Ads, you can limit the required information, but you must include a reference to a toll free number or print ad published at least three (3) days before the radio or TV spot. References to a website for further information do not meet the FTC ACT requirements.
• When a dealer advertises $0 Down, that means no money out of pocket to take advantage of financing terms as far as the FTC is concerned. Disclaimers to the contrary are not acceptable. 
• The notion that the term “down payment” and “payments due at signing” are mutually exclusive and somehow OK to say $0 down payment when other upfront payments  fees are due in lease ads is false from the FTC’s standpoint. They made no bones about it; they have and will prosecute dealers who engage in this practice as false advertising since the net impression of the ad is false.
• The overriding basis for the FTC choosing to bring disciplinary actions is when the net impression an ad has is false even if small print disclaimers are present.
• They also warned dealers that they, and not their ad agency or media company, will be held liable for advertising violations. 
• Numerous questions erupted about the “Factory Review and Pre-Approval” being relied upon and the feeling that that absolves the dealer.  The FTC simply stated “Absolutely Not” - the dealer is responsible.
• They made a point that EVERY AD, EVERY MEDIUM, EVERY DAY can be considered by them to be a separate violation. They stated as an example that if a print ad was copied and published to the dealer’s website and then also put on social media sites, that is three ad violations in their opinion. 
• FTC remedies can include: cease and desist orders of 20 years duration; equitable relief including rescission, redress, injunctions; frozen assets and sale of assets; bans from business; and civil penalties up to $16,000 per violation. These remedies can be brought against companies and individuals.
• The FTC may also bring criminal charges for intentional violations.
• Deceptive appearing claims in ads lead to discovery of other Truth in Lending Act (TILA) claims.
• In addition to standard advertising mediums, additional areas that are covered include billboards, emails, mobile messages, windows and in-store displays, electronic displays, service area waiting rooms, handouts in parking lots, and auto displays at shopping malls, athletic events, or near colleges. Any media, any place. 
• Actionable Misrepresentations can occur at any point in the sales process including ads and marketing, training materials, greeting as the customer walks into the dealership, test drives, point-of-sale, finance or lease discussion, add-ons presentation, and can occur in any language.

The FTC attorneys strongly recommended that dealers have their ads reviewed for compliance with both federal and state guidelines by qualified professionals prior to publication. In addition, employees should be trained early and often.