DEALERSHIP WORST PRACTICES BY THOMAS HUDSON
You hear the phrase “best practices” at conferences and 20 Group meetings to describe things that dealers do that go beyond mere compliance with the law. For instance, most dealers, as a “best practice,” will get the customer to sign an authorization to pull a credit report even when the federal Fair Credit Reporting Act doesn’t require a signed authorization. Not required, but a “best practice.”
At this year’s string of buy-here, pay-here and independent dealer industry meetings, though, I picked up on a number of dealer practices that are at the other end of the spectrum. These “worst practices” are the sorts of legal mine fields that can cost you your dealership.
Here’s my list, in no particular order.
Financing Customer Repairs. Many dealers with repair shops will fix a customer’s car or foot the bill at a repair shop and simply add the amount of the repair to the customer’s balance owed on a retail installment contract. Depending on how it’s done, these programs raise licensing, disclosure, and other issues. Dealers almost never seek legal advice about whether this practice is legal and, if so, how to do it correctly.
Side Notes. Many dealers take “side notes” from customers, frequently without charging any interest on the notes, as a means of increasing the disclosed down payment in an effort to meet finance company down payment requirements. Sometimes the side notes are timed to be paid quickly enough to qualify for the special “pickup payment” disclosure rules in Regulation Z, sometimes not. This practice raises contractual, disclosure, and licensing issues.
Hold Checks. Dealers will take post-dated checks that serve as part of the disclosed down payment. This practice raises some of the same issues as the practice of taking side notes.
Varying Car Prices Based on Creditworthiness. A frequent question we get is whether a dealer may increase the price of a particular car because a finance company buying the related retail installment contract will impose an “acquisition fee” or will buy the contract at a discount. The short answer is that this practice violates the federal Truth in Lending Act unless the increase in cash price is disclosed as a finance charge (something that dealers do not do).
Requiring ACH Payments. Dealers who require that their customers make payments through the automated clearinghouse through deductions from their checking or savings accounts are violating federal law, specifically Federal Reserve Board Regulation E. There are ways to encourage customers to elect to make ACH payments, but you cannot require them to do so.
Using GPS and/or Starter Interrupt Devices Incorrectly. Dealers who try to charge customers for these devices when the dealer or finance company requires that they be used violate the federal Truth in Lending Act. Dealers who don’t disclose that a GPS device has been installed on a customer’s car run the risk of a lawsuit alleging privacy violations or a violation of a state’s unfair and deceptive acts and practices law.
Letting the Circus Come to Town. Dealers who hire fly-by-night marketing companies to run those special weekend blitz sales promotions and who don’t first assure that the companies will operate legally in every way – from advertising and solicitation through the F&I closing – run the risk of being charged with advertising violations, disclosure violations, and unfair and deceptive acts and practices. Remember that you, as a dealer, are responsible for everything that these yahoos do.
Operating Without Using Mandatory Arbitration Agreements. Not everyone thinks that requiring car finance customers to sign mandatory arbitration agreements is a good idea, and there are certain circumstances in which I agree with that view. Generally, though, an arbitration agreement signed by your customer is the first and best line of defense against class action lawsuits. It’s likely that the use of arbitration in consumer finance transactions will be banned within a couple of years, but, in my view, that’s no reason not to use arbitration agreements as long as you possibly can.
Going it Alone. People who go into the car business tend to be very self-confident, entrepreneurial types who have a great deal of faith in their own judgment and ability. Some of them are so confident that they don’t think there’s much to learn from other dealers. They’d be wrong. A well-run 20 Group with a compliance-knowledgeable moderator (not all of them are) can teach even experienced operators a lot. Before you sign up, do your homework. Not everyone who offers this service is an ace. Also, don’t assume that a “best practice” described in a 20 Group meeting is legal. Laws differ from state to state, and a “best practice” in Alabama might be a jail sentence in Oregon.
If your dealership engages in any of these “worst practices,” you might want to give some thought to reviewing the situation with your lawyer. It’s possible that (gasp!) I’m wrong about how dangerous some of these practices are. It’s also possible that you’ll get rid of a ticking time bomb that could cost you a pickup truck full of money.