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America: Land of Opportunity or Home of the Regulated?
Appeared July 2014 - volume 11 - issue 7 - page 20
Article has been viewed 385 times.
If you think the Feds are out to get you, you may not be all that paranoid. The number of claims brought up against auto dealers seems to have greatly increased over the last four years, reaching nearly 80,000 in 2013. Small, large, independent or franchise the law does not discriminate and neither does its enforcement.
There has always been a fair amount of regulation for modern day auto dealers. The Truth in Lending Act was enacted in 1968 and The Equal Credit Opportunity Act in 1974. The Buyer’s Guide has been a permanent fixture on cars offered for sale for over 30 years and the Federal Trade Commission has been around for what seems like forever. Auto dealers have always had an established set of laws to live by, and they have had to learn how to operate their businesses within those rules while still finding ways to be profitable. Even if a dealer was not in full-compliance of federal regulations, as long as he treated his customer right and kept his ear to the ground, for the most part he stayed out of trouble.
That strategy worked, until recently. Right up there with scarce inventory and slumping sales, increased enforcement of federal and state regulations has taken its toll on post-Great Recession auto dealers. With the signing of the Dodd-Frank Act in 2010, a whole new era of regulatory compliance was ushered in for the financial industry and those related to it. Dodd-Frank’s purpose was to promote the financial stability of the United States through improved accountability and transparency in the financial system while protecting consumers from abusive financial services practices and though its prime target was the mortgage industry, the rippling effect of its reach and power has upswelled to engulf the auto industry as well.
“The FTC’s authority for enforcing laws has been around for some time,” explained FTC Attorney Mark Glassman. “The renewed enforcement authority granted under the Dodd-Frank Act has also renewed oversight of the auto program.”
Dealer Compliance Attorney and Hudson Cook, LLP Partner Thomas Hudson agrees. The increase of enforcement on auto dealers in the past four to five years has greatly impacted the industry, he says and resulted in significant financial impact.
“The compliance game changed in a very basic way,” Hudson said. “Before, dealers were doing their best to stay compliant to keep the plaintiff’s attorneys and state Attorney Generals off their backs. Now, compliance is really a matter of life and death for the dealership.”
Hudson also suggests that in addition to the intensifying scrutiny dealers feel from the FTC, they also have to be ready if the newly formed Consumer Financial Protection Bureau (CFPB) comes calling. The CFPB is another product of the Dodd-Frank Act and was established in 2011 as an independent agency of the United States government responsible for consumer protection in the financial sector. The CFPB has jurisdiction over banks, credit unions, securities firms, pay day lenders, mortgage-servicing operations, foreclosure relief services and debt collectors. The CFPB officially says it does not have authority over auto dealers (except Buy Here-Pay Here dealers), but Hudson says that is not entirely accurate. The complexity of the wording for exempted entities (those selling and financing cars but not holding the paper) makes it confusing, but the CFPB’s reach can extend to independent auto dealers who operate Buy Here-Pay Here businesses and to some of those who sell their paper.
Technicalities aside, it boils down to an awful lot of federal muscle flexing on top of a battered, under-resourced, industry that has seen profit margins shrink, overhead expenses rise and the costs of keeping satisfied customers outpacing the revenue being brought in. Since there does not seem to be any indication of the rules being relaxed, the best thing auto dealers can do is to take extra good care of their customers and know exactly what is expected of them at the federal and state regulatory levels.
What seems to be of primary focus and concern for FTC regulators is deceptive advertising and improper disclosures. This includes misrepresentations in print, television, radio and online advertising. The most recent FTC crackdown, dubbed “Operation Steer Clear,” was a nationwide sweep focusing on the sale, financing and leasing of motor vehicles. In all, 10 dealers from across the country were caught in this January 2014 wave of enforcement, nine of which later settled their charges but not before they were made examples of by the Commission for other dealers to learn “what not to do” when it comes to advertising.
The CFPB has taken on the cause of fighting discrimination in lending practices and has issued fair warning to auto dealers and indirect auto lenders about dealer mark-up and compensation policies as well as offering guidance on how to address fair lending risk. If you don’t think they are serious, just take a look at what happened with Ally bank last December. The CFPB and the Department of Justice determined that more than 235,000 minority borrowers paid higher interest rates for auto loans between April 2011 and December 2013 because of Ally’s pricing system. The result was an order to pay $80 million in damages to those who were affected as well as $18 million in penalties.
How were the violations discovered? That’s a good question. The FTC is not at liberty to say how they find violators, but it is assumed that a majority come from consumer complaints. Both the FTC and the CFPB have user-friendly websites that make it very easy for a consumer to submit a complaint against a business as well as toll-free telephone numbers set-up for the same thing. There is also the possibility of an employee (or former employee) turned whistle-blower who contacts either agency with a first-hand account of wrongdoing. It is also speculated that given the scope of each agency, and its resources, there is a fair-share of media monitoring, social network trolling and overall industry inspection going on. For each case that is being made, the investigating agency delves into a fact-finding frenzy auditing records, transactions and paperwork from the dealer in question. It’s usually at that phase when the lawyer is called.
For some dealers that might be too late. In an ideal world, dealers would heed the advice of attorney’s, regulators, compliance officers, association executives, and industry experts and get their compliance management system in order before the Feds come knocking at the door. A complete compliance management system is one that includes training all staff (from reception to sales to service, etc.) in proper procedures, designating a dealership compliance officer who has been given the resources to do that job including copies of federal and state rules, acts and regulations and ongoing training particularly in the area of finance, a written policy for handling consumer complaints, documentation of the dealership’s privacy policies and procedures, continuous review of forms and contracts being used and a commitment from the dealership that it will operate with total transparency in its sales, finance, warranty and credit-related transactions. It sounds intimidating and expensive, and attorneys like Hudson believe it is and probably one of the biggest factors that will contribute to the demise of more and more dealerships in the next 10 years who either can’t afford to stay-up with compliance or lack the resources to do it.
“The restrictions that are in place today for auto dealers are so great, and the amount of capital required to open up a dealership from this point on will make it harder for new businesses to open,” Hudson said. “Many dealers won’t make it because they simply can’t afford the regulatory burden.”
That does not seem to matter to the federal regulators. The cost of compliance is insignificant compared to the protection of the consumer.
“The agency tries to create a fair marketplace and wants to ensure consumers are given accurate information in an educated way,” Glassman said. Though they are not anti-business, the FTC and the CFPB are pro-consumer and will always enforce the rules they have been mandated to uphold no matter the aftermath. For dealers, this means a plea of ignorance will never cut it.
“Knowledge is not a requirement in proving liability,” Glassman said.
The rules are all there in black and white, or LCD and backlight, depending on where you go to look for them. Important documents such as the federal Truth in Lending Act and Federal Reserve Board Regulation Z, the federal Consumer Leasing Act and Federal Reserve Board Regulation M, the Equal Credit Opportunity Act and Federal Reserve Board Regulation B, the federal Gramm-Leach-Bliley Act and the Federal Trade Commission’s privacy regulation, and the Used Car Rule can all be found in various places online. There are also a variety of resources available on a website the FTC has set up specifically for businesses at http://business.ftc.gov/ (find information specific to automobiles under the Selected Industries tab) as well as through industry specific groups such as the National Independent Automobile Dealers Association and its state chapter affiliates. Making sense of it all may take more effort though, such as taking specialized training courses, subscribing to online legal compliance services, purchasing books and guides explaining the rules and taking the time to read industry magazines and newsletters.
One other lesson to heed from all of the increased enforcement examples is that size doesn’t matter. The pattern used to be that mostly larger dealers would find themselves in the middle of a federal complaint, but today the target is on anyone and everyone’s back. Hudson recently had a smaller dealer in Montana, who totaled around 90 deals a month, contact him in a panic with a CFPB demand to produce 2,400 deal jackets for the purpose of an investigation. The photocopy bill alone to comply with the demand would have bankrupted the dealer, even before the formal investigation started.
“That means the radar just got a heck of a lot lower,” Hudson said.
Is the increased regulation enforcement the end for entrepreneurship in America? Probably not. You would still be hard-pressed to find another country that incubates small businesses and growing companies into maturity like the United States does. It will mean, though, that the level of involvement and commitment to compliance will have to take a top priority for anyone who wants to own their own business, specifically if that business is an independent auto dealership. Time will tell, however, if dealers new and old will still find it profitable to earn a living selling cars, given the rising costs of protecting consumers. America: the home of the free and land of the brave or nation of excessive regulatory burden and country of corporate compliance. You be the judge.