The Top 10 Ways to Reduce Legal Risk and Related Expense By M. Christina Floyd, Esq. VIADA Convention - July 19, 2013

 Consumer attorneys and regulators have dealers in the cross-hairs. ◦ CFPB “Guidance” Issued June 25, 2013  The key: don’t give them any ammunition!

 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

 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!

 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.

 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.

 CFPB Finance Discrimination Initiative and March 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

 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

 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

 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

 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

 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

 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

 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

 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.

 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

 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

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

 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

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

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

 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!

 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

 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

 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!

Questions M. Christina Floyd, Esq or