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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!. The Legal Environment (cont.). Consumer attorneys and regulators have dealers in the cross-hairs. CFPB “Guidance” Issued June 25, 2013
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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 (cont.) • Consumer attorneys and regulators have dealers in the cross-hairs. • CFPB “Guidance” Issued June 25, 2013 • The key: don’t give them any ammunition!
1. The devil is in the details! • 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! (cont.) • 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!
2. Fair Credit Reporting Act (“FCRA”) • 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. FCRA (cont.) • 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.
3. Equal Credit Opportunity Act (ECOA) • 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
4. Truth in Lending Act (“TILA”) • 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
5. Dust off those Privacy Policies! • 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. Privacy Policies (cont.) • Must have established programs to address these rules, and • They should be reviewed and updated eachyear. • List of items in the materials that should be reviewed • FTC Enforcement Actions • 2012 Franklin Toyota-Scion of Statesboro, GA Case
6. Damage Disclosures • 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
7. Down payments • 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
8. Proper handling of spot deliveries. • 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 (cont.) • 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
9.Bankruptcy and Rescission Blues. • 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.
10. How to avoid becoming a bailee. • 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
11. Other Key Issues: Dispute Resolution Program • 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. Dispute Resolution Program (cont.) 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. Protect those original documents! • 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. When is a “dead file” not really dead? • 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. Where are Internet sales conducted? • 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. Beware sharks in sheep’s clothing! • 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. 757-213-6973 or chris@hrgclaw.com