In light of the ongoing increase in oversight activity, I recently conducted an interview with a very successful plaintiff’s attorney. And while she’s not an “enemy,” she represents a successful courtroom adversary, one who has won a number of $100,000+ settlements and judgments against automotive dealers in her home state. I thought her perspectives might have real value. Let’s call her Ms. Lawyer or ML for short to protect her identity.
Randy Henrick: What types of practices do you see at dealerships that you feel present the biggest risks for dealer liability?
Ms. Lawyer: I think dealers who engage in repeated yo-yo financing schemes really run afoul of not only federal Truth in Lending but state unfair and deceptive practices acts and laws as well. We have seen dealers who unwind over 50 percent of their contracts with consumers. Now don’t tell me a good F&I manager doesn’t know what lenders will buy contracts for their customers. If they are unwinding to a significant extent, it is indicative of a “bait and switch” scheme to mislead the customer and bring them back to finance on worse terms for the consumer but better terms for the dealer. They also violate Truth in Lending by backdating the new contract. Very few dealers send out adverse action notices when they unwind a deal, and that supports a class action under ECOA and FCRA. Signing a “spot agreement” also makes the first contract illusory, and that violates Truth in Lending.
RH: Doesn’t a class action require commonality, and each deal is different in terms of why the deal was unwound?
ML: Not if the percentage of unwound deals is so high that no reasonable F&I manager could claim it believed in good faith the contract would be bought. Misleading the consumer into thinking they have signed a contract that the F&I manager knows cannot be assigned is arguably common law fraud and certainly an abusive trade practice under Dodd-Frank. It is compounded when the dealer immediately sells the customer’s trade-in, leaving the customer no choice but to accept the more onerous terms of the second or even third contract that the dealer presents. It’s just a matter of calculating each consumer’s damages and knowing the difference between the contract they signed and the one they were ultimately forced to sign by the dealer. Punitive damages are also in play with some of these dealers, and our recoverable attorney’s fees are also very significant.
RH: What about arbitration clauses that waive the right to bring a class action suit?
ML: Denying customers’ rights under federal law are not deal-specific disputes subject to arbitration clauses. Neither are violations of public policy. Procedural unconscionably exists with the dealers intimidating consumers with “take it or leave it” documents. Many dealers don’t even give the customer a review copy as required by Truth in Lending. I genuinely believe that dealers see compliance violations as a cost of doing business, and we endeavor to make that cost very high. These are real people you are dealing with who have been affirmatively harmed by these dealers.
RH: What other violations do you see in your work with consumers?
ML: Payment packing is widespread. I have many clients who were told they had to take high-priced aftermarket products that should have been optional in order to obtain financing. One dealer built in vehicle etching into every car it sold and included it as an additional item in the vehicle’s cash price, claiming it was required by the factory. As I mentioned, few dealers give risk-based pricing notices or adverse action notices and they commit privacy violations by sharing customer information, even though their privacy notices say they don’t. They also don’t disclose prior history of used vehicles, and some dealers manipulate CarFax reports they give consumers to omit the bad stuff. It’s why I always tell consumers to get their own CarFax report, even if the dealer offers one for free. FTC Used Car Buyers Guides are frequently missing from used cars on the lot as well.
RH: What is your sense of the Consumer Financial Protection Bureau’s theory that dealer markups create a disparate impact or should otherwise be illegal?
ML: Well, my evidence is anecdotal as I haven’t done any statistical studies, but my strong sense is women and minorities pay higher prices and higher finance rates at the dealership. I also think dealers size up consumers on race, gender and ethnicity and send those consumers to subprime lenders whereas a comparable white person would be sent to non-subprime lenders and emerge with better credit terms. The discrimination is built into the entire process of sales and F&I. Dealer discretion to mark up rates is an invitation to discriminate, especially against the less sophisticated customer, including elderly people who might otherwise be inclined to trust the dealer to act in their interests. I think the “abusive practice” prohibition in Dodd-Frank was written with automotive dealers in mind, and we are starting to see state attorneys general using their authority to penalize abusive practices.
RH: What about dealer advertising and general showroom behavior toward consumers?
ML: Both are pretty bad, especially when it comes to vulnerable customers who may be poor or have poor credit. I had one elderly client who was literally locked in an office for several hours during discussions about buying a new truck; he became so disoriented that they sold him two! Certain dealers have always treated consumers unfairly with offers to pay off credit balances on trade-ins when they really only intend to finance the additional cost into the purchase price. Then they set down a bunch of documents, get signatures without accurate explanations and then try to enforce hidden arbitration clauses once litigation becomes necessary. Combine that with a 50 percent chance the consumer will be yo-yoed and you have a case against dealers every other week. Advertising I have seen appears to just lure consumers into the dealership. It is funny how those low-cost advertised vehicles are already sold out or have hidden traps to them. The FTC is very aggressively hitting dealers on deceptive advertising, but in many states, it can be the subject of a private cause of action as well.
RH: In your experience, do you see dealers beginning to take compliance more seriously?
ML: I think the ones who we sue or who get a call from the FTC or state attorney general may do so for a while. But it has to come from the top for a dealership to really change its behavior. Many of the salespeople have been doing it like this for years and move from dealer to dealer leaving the compliance failures behind. For example, dealers seem to be under a misconception that they can pull credit on a customer as soon as they walk into the showroom, without a written consent from the customer to do so. The FTC has indicated that is not permissible unless the parties are very close to a deal that both intend for the consumer to finance. Many customers are damaged by dealers pulling their credit reports without their consent as it can lower credit scores that are not ideal to begin with.
RH: If you could make one change in dealerships generally, what would it be?
ML: I think dealers need to take compliance seriously by adopting a compliance management system with a strong compliance officer in charge. The reason I say a “compliance system” is to ensure that key process steps and documentation requirements are automated and tracked so that they don’t become discretionary, and so evidence of a dealer’s compliance can later be produced in the event of an audit or legal action. Finance directors should be charged with monitoring F&I managers, not just insuring warranty penetration. We encourage our clients to record their interactions with dealers, since we are a “one party state” (only one party needs to consent to the recording) and encourage dealers to do the same. This may be the only way to insure truth and accuracy in the loan closing process. I think dealers that are not out to take advantage of customers do better in the long run than the ones who see compliance risk as just another cost of doing business. Actual and statutory damages, plus punitive damages and attorney’s fees, can make what seems like a small case into a large dealer liability. And the adverse publicity doesn’t help them either. Some are beginning to get it, but we have a long way to go.
Randy Henrick is associate general counsel and lead compliance counsel for Dealertrack Technologies Inc. This article is intended for information purposes only and does not constitute the giving of legal or compliance advice to any person or entity. Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on your particular situations from a knowledgeable attorney or compliance professional licensed to practice in your state.