A Few Things You Can’t Control, But Need To Know Because They Could Have A Significant Impact On Your Dealership
We are very aware that the motor vehicle industry is one of the most heavily regulated industries in America. As if this is not enough, a number of new regulations have been enacted and existing regulations revised over the last two years. Combine this with a sluggish economy, unrest in the Middle East, the war against terrorism and the overall decline in consumer credit worthiness, the challenge of operating a successful motor vehicle dealership has become increasingly difficult.
It is no secret the number of consumers across the Country with credit problems continues to grow, requiring motor vehicle dealerships to search for new sources of financing to accommodate these customers. In the fall of 2002, the IRS issued an updated Audit Technique Guide for the used motor vehicle industry. In light of the growth of subprime financing since the initial publication of the IRS Audit Technique Guide many years ago, this version also included a brand new Chapter on subprime lending. It explains in plain language the different tax ramifications for subprime and traditionally financed transactions, as well as issues pertaining to the sale of retail installment sales contracts. The information contained in this Chapter is critical to dealers because it can also have an impact on the structure of the relationship between the dealership and lender, which is typically governed by a lender-dealer agreement drafted by the lender.
As lending in the motor vehicle industry becomes more difficult, the lender-dealer agreements become more complicated. Remember, many of the standard dealer agreements used by lenders are non-recourse, however these agreements contain other language which may obligate a dealership to repurchase various finance contracts in a portfolio, an event which the dealership thought could not occur. For example, virtually all lender-dealer agreements contain language where the dealership provides various representations and warranties to the lender. Included are warranties from the dealership for everything ranging from the purchaser having no claims or defenses against the enforceability of the contract (whether or not these claims or defenses are valid), to all documents being used in a transaction complying with all federal and state laws. Experience has shown, however, that if dealers understand the structure of the transactions contemplated by these agreements and carefully scrutinize them prior to signing, they can minimize their dealerships’ risk of potential liability and increase profitability by addressing various legal, business, and financial issues with the lenders and taking action to protect their interests.
While we are on the subject of motor vehicle financing, the lengthy conflict overseas has had an impact on the ability of dealers and lenders alike to collect on various consumer financial obligations. Virtually everyone agrees that it is their patriotic duty to support the soldiers and sailors who defend our Country. In some cases, however, providing relief to military personnel is not only a patriotic duty, it is the law. The Soldiers’ and Sailors’ Relief Act, which dates back to the Civil War, offers protection for individuals called to active duty, in part to eliminate worries about finances, lawsuits, evictions, and similar problems at home. One of the Act’s most highly publicized protections permits individuals who are called to active duty to have interest rates on existing debts lowered to a fixed rate of six percent. Additional provisions in the Act protect service members by preventing lenders and retail sellers from declaring a default, exercising an option to rescind or terminate a contract, or repossessing personal property. As everyone is well aware, everything in the motor vehicle industry is highly scrutinized and compliance with the Soldiers’ and Sailors’ Relief Act is not any different.
A more recently enacted law, the USA Patriot Act, and the evolving rules and regulations under this Act, also impact motor vehicle dealers and how their business is conducted. On February 24, 2003, FinCEN issued an advance notice of proposed rulemaking to solicit public comments on questions pertaining to the motor vehicle industry and the types of requirements that would be appropriate in implementing Section 352 of the Act. FinCEN has not yet released the regulations that will govern the motor vehicle industry’s customer identification requirements but, effective as of October 1st, financial institutions such as banks, securities brokers and credit unions were required to have their customer identification programs drafted and approved. Motor vehicle dealers that assist consumers in obtaining financing from covered financial institutions will find their procedures impacted and should modify dealership paperwork and sales related procedures to tighten identification verification procedures.
Speaking of tightening procedures, compliance with the FTC’s Safeguards Rule became mandatory on May 23, 2003 and the wait is officially over for those dealers who have been wondering when the FTC would take enforcement action. The FTC has served formal investigative requests on motor vehicle dealerships asking for evidence of compliance, including: A description of the type of information collected from or about customers and a sample copy of each form used to collect information; a copy of the written information security program and the time period during which it was written and implemented; a description of the security risks that were identified in developing the plan and how the final plan addresses each of the risks; the name and title of employees responsible for coordinating the safeguards plan; and the name of each service provider together with information regarding the types of customer information they have access to, the manner and form of access, the reasons for access, a copy of the contract requiring them to implement and maintain security safeguards, and an explanation of how the dealership confirms that safeguards have been implemented and are maintained. As a reminder, the penalty for noncompliance is $11,000 per day, retroactive to May 23, 2003. With large monetary amounts at stake and privacy being at the top of Federal and State Regulators’ agendas, we anticipate aggressive enforcement of the Safeguards Rule in the immediate future.
With everything that is going on, there will be no shortage of challenges or, depending upon your perspective, opportunities for both the Country and the used motor vehicle industry in the upcoming year. If keeping track of the legal, legislative and regulatory initiatives on the horizon isn’t challenging enough, consider their impact on your dealership’s paperwork. If you have not had your dealership’s paperwork and policies reviewed in the past year, now is the time to do so. Paperwork and regulatory compliance are probably two of the most important issues impacting the motor vehicle industry today and, in all likelihood, the future of your dealership.
This information is provided by Keith Whann of the law firm Whann & Associates, LLC and is for general information purposes only. You should contact legal counsel for specific application. © Keith Whann July, 2003.