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The Top 10 Ways to Reduce Legal Risk
and Related Expense
By M. Christina Floyd, Esq.VIADA Convention - July 19, 2013
The Legal Environment!
Consumer attorneys and regulators have dealers in the cross-hairs.
◦ CFPB “Guidance” Issued June 25, 2013
The key: don’t give them any ammunition!
The Legal Environment (cont.)
Forms must be up to date and correctly completed
◦ Failure to use compliant versions of forms and ensure that they are fully and correctly completed violates the law
◦ Rule of Thumb in completing forms: if there is a blank line information should be inserted!
◦ Forms must be completed at the time of signature
1. The devil is in the details!
Where delivery of a vehicle is conditioned on approval of financing, it is crucial that the customer be informed of this in writing and the Buyers Order reflect that fact.
What do you do when forms are not completed properly?◦ No Signing for the Customer
Bottom line: fix it, don’t cover it up!
1. The devil is in the details! (cont.)
Credit Reports: the basic rule is simple, you must have a legitimate business reason or the individual’s express authorization before you may access their credit report.
Get the authorization in writing!◦ If they are not present, still document
authorization.
2. Fair Credit Reporting Act (“FCRA”)
Required to identify lenders the credit application will be sent to.
◦ If sending to multiple lenders, create an addendum to the application listing the lenders it may be sent to and have the customer sign off on it
All authorizations should be retained at least two years, not just ones that resulted in a deal.
2. FCRA (cont.)
CFPB Finance Discrimination Initiative andMarch 2013 “Guidance” Bulletin on indirect lending
◦ Alleges dealer participation provides incentives for and increases the risk of discrimination against minorities and protected classes
Defense: establish a standard process and procedure for financed transactions ◦ Implement strict policies for finance managers to
follow – rate sheets or reserve targets
3. Equal Credit Opportunity Act (ECOA)
Providing adequate disclosures ◦ Allowing the customer to take a copy of the RISC
Determining the proper date of the RISC when a customer has to be re-contracted◦ It must be the date of signing, not delivery.
Explaining the processing fee◦ Authorized by state law and charged to everyone
as a fee to cover services provided by dealers◦ Not for title work, credit checks or loan processing
4. Truth in Lending Act (“TILA”)
Privacy Rule - requires dealers to give customers notice of how they handle and protect non-public personal information. ◦ Must be given at the time of sale and if “Buy Here, Pay
Here”, must give notice annually.
Information Safeguards Rule - requires dealers to have safeguards in place to protect customers’ non-public personal information.
Red Flags Rule – prevention of identity theft
5. Dust off those Privacy Policies!
Must have established programs to address these rules, and
They should be reviewed and updated each year.◦ List of items in the materials that should be
reviewed
FTC Enforcement Actions ◦ 2012 Franklin Toyota-Scion of Statesboro, GA Case
5. Privacy Policies (cont.)
Don’t rely on auction condition reports or vehicle history reports (Carfax)
Prior accident damage must be disclosed◦ Even if not on a vehicle history report◦ Applies to auction sales also
Legal standard: “knew or should have known”◦ Actual and Constructive Fraud Claims◦ Avoid by inspecting and disclosing or disclaiming
6. Damage Disclosures
Hold checks and side agreements - may violate Dealer Agreements
◦ Dealer warrants that down payment has been fully paid and not loaned by the dealer
◦ A hold check or side agreement is considered a loan◦ Lender can demand that the dealer buy the contract
back
Use of check guarantee service not a defense to the down payment warranty
Forecloses criminal charge for check fraud
7. Down payments
One of the most contentious areas of the automotive business◦ Regulators and consumer advocates hate them
Primary areas that regulators and consumer attorneys target to attack spot deliveries:◦ Improper disclosure of the conditional nature;◦ Spot delivering when finance personnel know that it is
unlikely customer will be approved;◦ Forcing a customer to re-contract;◦ Retaking vehicles without following the law;◦ Sale of the trade vehicle prior to funding
8. Proper handling of spot deliveries.
Crucial to have a proper policy and procedure ◦ Only use documents with proper disclosures◦ Designate specific decision-makers◦ Set specific criteria for approval of spot deliveries◦ Note the circumstances under which a spot delivery
will not be approved◦ Prohibit sale or payoff of a trade prior to funding◦ Store trade vehicles in a separate area ◦ Prohibit coercing customer to sign a new RISC ◦ Train personnel on the documents, disclosures and
criteria for spot deliveries
8. Proper handling of spot deliveries (cont.)
VA Law provides 30 days to process the title work, which can be extended, but
Under the bankruptcy code trustees can invalidate security interest unless it was perfected within 30 days.◦ No extension of this deadline applies◦ Lender can demand buy-back of contract◦ Loss of collateral and no ability to collect
If a certificate of title is not issued before the temporary certificate expires, buyer can return the vehicle for full refund.
9. Bankruptcy and Rescission Blues.
A bailee is someone who accepts another person’s property in trust, which creates a bailment.
Once a bailee accepts possession of the property, if anything happens to it, the bailee is responsible
Typically arises with property left in trade vehicles and repossessions
Decline any customer’s request to leave personal property in dealership’s possession
Alternative: inventory and have them sign a release
10. How to avoid becoming a bailee.
Key to controlling the direct and indirect costs associated with customer and employee conflicts is to address such disputes early in their life cycle
Analogous to performing preventative maintenance on a vehicle
Road map for dealing effectively with all types of conflict
11. Other Key Issues: Dispute Resolution Program
Establish a Complaint Handling System
Complaint intake - treat every complaint seriously
Contact every customer or employee who complains ASAP
Investigate both sides - find out the true facts Develop a response – accept their demand or
offer an alternative Follow up with the customer
11. Dispute Resolution Program (cont.)
What to do when the complaint handling system fails to resolve a dispute? Mediate!
The goal of mediation is to help the parties in dispute reach agreements that address their needs, concerns and interests.
The mediator helps the parties communicate constructively
11. Dispute Resolution Program (cont.)
Advantages of mediation: Parties determine the outcome, instead of
a judge or arbitrator Parties choose their mediator More creative solutions than a court order Facilitates, promotes and improves
communication Quick and saves money – most disputes
resolved in a fraction of the time and cost it would take for litigation or arbitration
11. Dispute Resolution Program (cont.)
More advantages of Mediation: Voluntary, confidential and without
prejudice Statutory rights to litigate are preserved No public disclosure of dealership
operations Fosters good will & preserves relationships More effective way to resolve conflict
◦ Statistics indicate that over 80% of all mediations result in a settlement
11. Dispute Resolution Program (cont.)
Can either make or break a dealer’s defense to a legal claim; they must remain intact.
No notes should be written on them or taped to them.◦ Don’t let a note written in haste be the smoking
gun that shoots down your defense!
11. Protect those original documents!
Whenever a claim can still be brought based on documents signed by the customer or actions taken by the dealership
A consumer has up to five years to bring a claim based on documents they signed to purchase a vehicle, even if the deal was not completed.
Crucial for the dealership to maintain “dead deal” files for at least five years from the date documents were signed.◦ Consider electronic scanning
11. When is a “dead file” not really dead?
If an issue with an Internet sale arises, it may not be resolved in the dealer’s locality◦ Could be sued in the state where the customer lives
Goochland County Case – sale of a used vehicle to an Oregon resident through eBay◦ Court held no evidence the dealer did anything to “purposefully avail
itself” of jurisdiction in Oregon
◦ Very fact specific and left open the possibility of a different result if the facts are different
Ensure that deal documents clearly state that the transaction is agreed by the parties to have been conducted in Virginia
11. Where are Internet sales conducted?
Attorneys contacting dealership personnel on behalf of a customer.◦ “Just calling as a favor” or “Just trying to help out”
Don’t believe them!◦ Whenever an attorney acts on behalf of a person, they are
representing them whether they want to or not◦ Anything you say or do will be used against you!
The attorney should be referred to the dealership’s attorney - let your lawyer speak for you!
11. Beware sharks in sheep’s clothing!
