Minimizing The Risks Of Taking Credit Applications Over The Telephone Or Internet

The Fair Credit Reporting Act (“FCRA”) restricts reasons dealers may use to obtain, use, and share credit reports.  In addition to these restrictions,FCRA requires dealerships to provide certain notices to consumers applying for credit.  Dealerships should only obtain credit reports from consumers when they have express permission to do so.  Issues arise when consumers make inquiries about obtaining financing when they are not physically present at the dealership.  In these cases, it is imperative that the dealership has processes in place to obtain consumers’ written consent or otherwise show they have permission to obtain credit reports on behalf of consumers.  Otherwise, consumers may claim the dealership violated FCRA by accessing the their credit reports without prior consent.

You will need to determine whether your dealership will accept credit applications from consumers that are not physically present at the dealership.  There are inherent risks associated with accessing credit reports when the applicant is not at the dealership that you will need to balance with business considerations such as customer expectations, convenience, and pressure from competitors.  If you choose to accept credit applications and obtain credit reports for consumers prior to them visiting the dealership, you will need to consider implementing the following safeguards in order to stay complaint with FCRA.  For inquiries initiated over the internet, make sure your website requires credit applicants provide “digital authorization,” such as a box applicants check signifying they consent to the dealership accessing their credit reports.  Also, you should only accept credit applications that applicants submit through an encrypted system, such as a form on your website, and not unencrypted media such as email.  If the applicant submits an inquiry over the telephone, you should consider asking the applicant to make an inquiry over a secured, encrypted, form such as one located on your website.  If the applicant is unable to do so, your staff should note on the credit application the date and time they received the application and ask the applicant to send a facsimile authorizing the dealership to access the credit report.

Once the applicant visits the dealership, you should have him or her compete a credit application, sign it, and retain a copy in the applicant’s file.  You are required to provide adverse action notices or credit score disclosures regardless of whether the consumer initiated a credit inquiry at your dealership or remotely, and your processes regarding credit applications submitted by telephone or the internet should incorporate your dealership’s Red Flags Rule and Safeguards Rule compliance programs.  Effective training and monitoring of employees’ access to consumers’ credit reports will help your dealership stay compliant with the FCRA and avoid potential lawsuits.

Reblog: Car Buying Flowchart

I saw this flow chart on Jalopnik and got a kick out of it.

Three Things To Remember When Selling Vehicles Online

According to a recent study by JD Power, customers visit an average of 1.4 dealerships before purchasing a vehicle.  As recent as 2005, consumers visited 4.5 dealerships before purchasing.  By using resources available on the internet to gather information, customers can significantly narrow the list of potential vehicles they wish to purchase without having to visit as many dealerships.  Many dealers recognize the power of the internet and resources available to generate leads and traffic. Moreover, state and federal regulators recognize that customers are relying on information provided on the internet when making purchases.  In response, regulators are becoming more inclined to intercede on behalf of consumers and target questionable practices related to advertisements on the internet.  Here are three points to help keep your dealership compliant when marketing and selling vehicles online:

• Treat Your Online Ads Like Your Offline Ads:  Recently the Federal Trade Commission (“FTC”) published its long-awaited guidelines on how the FTC views practices related to online advertisements.  In summary, the guidelines apply many standards that the FTC applies to advertisements placed in newspapers, television and radio.  For example, when online advertisements include “trigger terms,” like payments or price, dealers must make full disclosure of how they arrived at the price or payment, including down payment, APR, availability, credit score requirements, and so on.  Not only must you make the necessary disclosures and avoid claims that are “unfair,” or “deceptive,” but you also must make sure that these disclosures are legible on a host of devices, including desktop computers and mobile phones.  This requirement mirrors the FTC’s requirement for legible disclosures appropriate to the advertising medium used.  So, download the FTC DotCom Disclosures, review it thoroughly, and remember to be as vigilant with monitoring your online advertisements as you would be monitoring your offline advertisements.
• Safeguard Consumers’ Data:  In addition to researching pricing and availability of vehicles online, many consumers seek to secure financing by submitting their credit information to dealers.  If your dealership collects nonpublic personal information via online submissions (over email or by a form on your webpage), you must make sure your Safeguards Rule and Red Flags Rule compliance plans address how you protect this information and detect possible identity theft.  You should inventory who has access to this information and where the information is sent.  For example, if you allow sales personnel to receive consumers’ nonpublic personal information on their smartphones or personal email account, your policies should address how you protect this information.
• Deliver Vehicles At Your “Brick And Mortar” Location:  Even though consumers conduct the bulk of their research online, vehicle transactions typically occur at a dealership’s physical location.  That may not always be the case, especially as more and more consumers rely on the internet to facilitate exceedingly complex transactions.  While you may choose to aggressively market your business online, your goal should be to encourage consumers to take physical delivery at your dealership.  Why?  Some states allow for “cooling off” periods where consumers can rescind the contract if they take delivery of vehicles away from the dealer’s premises.  Also, many states allow consumers to rescind retail installment contracts if both parties have not executed the agreement.  For example, if you print the deal paperwork and mail it to a customer to sign, the consumer may void the contract up to the point your dealership’s representative countersigns the contract.  Furthermore, if you sell and deliver a number of vehicles to consumers in a different state than your state of residence, consumers in that state may seek to sue you in that state’s courts, should a conflict arise.  They may successfully argue that you have availed your business of the state’s jurisdictions by soliciting business within the state.  Requiring consumers to complete the transaction by signing the paperwork, and taking delivery, at the dealership should mitigate risk of consumers bringing these kinds of claims.

Image Courtesy of Edmumds.com

One word at a time

Good advice that applies to legal writing too…

How Mobile Phones Fit Into Your Compliance Processes

 

In a few short years mobile phones have become ubiquitous in both our personal and professional lives.  Modern smartphones allow businesses to communicate rapidly with consumers and help employees work together effectively.  Mobile phones on the market today can send and receive emails, upload media to social sites like Facebook and YouTube, and capture high quality images and video, among other capabilities.  As more and more employees use cell phones, whether they use personal devices or ones issued by your business, it is imperative that your processes address how employees are permitted to use these devices.  Here are a few issues to consider regarding employees and cell phone usage at your business:

Distracted Driving:  Many states, such as New York and New Jersey, penalize drivers who are caught operating a motor vehicle while communicating via text messaging.  These prohibitions are generally aimed at preventing “distracted driving.”  Your business may incur liability if employees injure others or damages property while operating one of your dealership’s vehicles and text messaging.  OSHA may fine your business if an employee is injured in this manner based on your dealership’s obligation to provide a workplace free of serious hazards.  In order to mitigate potential liability from personal injury lawsuits and OSHA fines arising from distracted driving, your employee handbook should clearly communicate your dealership’s policies against distracted driving.

Sensitive Data:  Mobile phones used in conjunction with business activities are covered under federal and state laws that address privacy and fraud prevention, like the Safeguards Rule of the Gramm-Leach-Bliley Act and the Red Flags Rule.  If your employees receive nonpublic personal information on mobile phones, your compliance processes must include how you safeguard this information and what steps your business takes to monitor employee use of this information.  Laws such as the Safeguards Rule and the Red Flags Rule require businesses to conduct ongoing evaluations of processes and implement changes when they find shortcomings.  Do not forget to include mobile phones in your review of your compliance efforts.

Personal vs. Private Use:  There are several issues that involve employees’ use of mobile phones that blur personal and private use.  For example, does your business provide mobile phones or do you allow employees to BYOD (Bring Your Own Device)?  If you provide mobile phones, are employees allowed to use them for personal reasons?  Do you have ways to remotely lock and erase data contained on mobile phones should employees lose them?  Are employees permitted to use their personal mobile phones to act on your company’s behalf, such as posting content to the dealership’s social media websites or answering leads?  Do you allow employees to receive consumers’ nonpublic personal information on their personal mobile phones?  Do employees use mobile phones to conduct business on behalf of your dealership while “off the clock?”  Each of these questions present issues that your business should address in your employee handbook.

How To Create And Use General Releases Effectively

No matter how sound its processes may be, it is not unusual for a typical dealership to generate customer complaints during the course of business.  Each department of a dealership is like a miniature business and some departments, such as the service department, involve hundreds, if not thousands, of transactions with customers each month.  Many dealers seek to resolve complaints by offering customers some form of consideration for their troubles, whether the consideration takes the form of discounts for future visits or merchandise.  Whenever you offer customers something in order to satisfy their complaints, you should consider asking them to sign a general release.  If you do not, consumers may be undeterred from suing you even if you gave them something in order to resolve the complaint.  While general releases cannot stop consumers from initiating lawsuits, they usually discourage plaintiffs’ lawyers from agreeing to take the case and may help resolve any lawsuit quickly and in the dealership’s favor should the consumer chose to file a lawsuit.

Here are a few tips for creating and using effective general releases:

• Keep It Simple:  An effective general release does not need to be several pages long.  Depending on the circumstances involved in the complaint, the body of the general release may only be a paragraph long and, with signatures, contained on one sheet.  Along with length, your general release should be clearly written in plain language that is easy for people outside the legal profession to understand.
• Clearly Identify the Particulars:  Your general release should clearly identify the parties to the release, the date of the release, the nature of the customer’s complaint, and what the dealer provided to the customer to resolve the complaint.  If your dealership provided merchandise, future discounts, money, or anything else to the consumer, the general release should clearly state what the customer received and in what quantities and amounts.
• Provide Something New to the Customer:  In order for a general release to be effective, you must provide something beyond what your dealership and the customer agreed upon.  For example, suppose your dealership delivered a vehicle to a customer and later had to rescind the deal.  If the customer provided a down payment, he or she is entitled to receive the down payment upon rescission.  If you draft a general release to indemnify your dealership and the return of the down payment is the only thing the customer received, the general release is probably unenforceable for want of consideration, a key component to any contract.  So, in the example above, the dealer should consider giving the consumer something else that the dealership does not have to provide as part of the original transaction.
• Create Effective General Release Processes:  You should create processes that help you identify when general releases are used and retain them in a secure location.  Since these documents may be used in litigation, you should be aware when your employees ask customers to sign them.  Also, you should consider keeping the general releases in a secure area and in a filing system that makes their retrieval, by customer, easy.  No matter how effective a general release may be, it will not be of much help if you cannot find it.

Don’t Let Repurchase Demands Go Unanswered

Recently some auto dealers I know informed me that lenders are becoming more aggressive with exercising repurchase provisions of indirect finance master agreements.  These demands are usually triggered when a consumer defaults on a loan and the lender, citing a breach of a warranty or representation in the indirect finance master agreement proceeds to compel the dealer to repurchase the contract.  What’s troublesome is that many of these agreements do not obligate the lender to return the collateral to the dealer, thereby leaving the dealer with a bad loan and no vehicle.  Of course, the lender’s interpretation of the indirect finance master agreement is not dispositive of whether your dealership indeed caused a breach.  You should carefully review the demand for repurchase and the facts surrounding the deal to determine your rights and your best method to respond.  Be prepared to challenge demands that you believe are inappropriate and do not let such demands from lenders go unanswered.  Here are some common claims a financial institution will make and what you can do about them.

• The dealership accepted an impermissible form of down payment:  Indirect finance master agreements typically contain provisions that relate to the forms of down payments that are impermissible.  For example, while some lenders allow consumers to use credit cards to make down payments, others do not.  Just because a lender has accepted credit card payments in the past does not mean your dealership is off the hook.  Your processes should include what forms of down payment are acceptable and what your staff should do if they inadvertently accept an impermissible form of down payment.
• The deal contains a promissory note or a hold check for the down payment:  Read the indirect finance master agreement.  Depending on the language of your agreement, the hold check or promissory note should not be an issue if you collected the balance due before you assigned the retail installment sale contract to the finance company.
• The signature or signatures on the retail installment sale contract are forgeries:  Don’t blindly accept the financial institutions assertion that the contract contains forged signatures, even if the financial institution claims it has an affidavit of forgery.  Consumers may state that their signatures were forged if they are unhappy about the agreement to make the purchase.  If you think you can prove otherwise, challenge the assertion.
• The business did not perfect the lien in time before the consumer declared bankruptcy:  Under federal law, a dealer has 30 days from the time the consumer takes possession of the vehicle or vessel to perfect the lien and protect the financial institution’s security in case the consumer declares bankruptcy.  Under many state laws, the business perfects the lien when the paperwork is processed and filed, not when the state’s DMV finally notes the lien.  Check your state’s laws to see which interpretation applies.
• The trade-in allowance greatly exceeds the trade-in’s actual cash value:  While adjusting trade values to mask negative equity has been impermissible for nearly a decade, many dealers still use trade-in allowances as a means to discount the sale price of the vehicle.  Lenders may challenge dealers when situations occur where the trade-in allowance greatly exceeds the actual cash value of the vehicle as reflected in the dealership’s accounting records.  If there are reasons why the actual cash value changed after taking the vehicle on trade, you should document the adjustments and reasons for them in your records.  You should consider other means by which to modify the sale price of the vehicle being sold instead of relying upon trade-in allowances to close deals.

 

Financial institutions may try to compel your business to repurchase the loan of a consumer that defaults on his or her obligation.  If the financial institution has placed a demand to repurchase a loan, you should understand your rights under the law before agreeing to the demands.

FTC Releases Guidelines For Online Advertisements

The Federal Trade Commission (“FTC”) recently brought enforcement actions against dealerships regarding their online advertising practices.  The most discussed enforcement action targeted dealers who made claims related to negative equity online.  Afterwards there was some confusion as to the extent of the FTC’s application of consumer protection laws to online advertisements.  Last week the FTC issued guidance that clarified its position on what kinds of online advertisements would be considered deceptive and unfair.  While you can obtain a copy of the publication by clicking here, I have provided a brief overview of key parts of the guidelines below:

• The same consumer protection laws that apply to commercial activities in other media apply online, including activities in the mobile marketplace. The FTC Act’s prohibition on “unfair or deceptive acts or practices” encompasses online advertising, marketing, and sales.
• Your advertisements should contain disclosures located close to “trigger terms” like sale price, payments, etc.  It is not enough to include a hyperlink to a separate webpage with the disclosure.  You also should evaluate the effectiveness of these disclosures by staying abreast of where consumers look and do not look on your webpage.
• If limitations of a particular online media make disclosure unfeasible, you should consider not using that media to advertise offers containing “trigger terms.”  For example, the social media website Twitter limits communications to 140 characters.  Any advertisements on Twitter that contain “trigger terms” must include disclosures that fit within the character limit.
• Your disclosures must be legible regardless of the device consumers use to view the advertisement.  You will need to make sure that consumers can view your advertisements and disclosures on a variety of devices, such as desktop computers, laptop computers, tablets, and smartphones.

Image Courtesy of The Rude Baguette

FTC: Advertisers can’t post deceptive tweets/mobile ads – SlashGear

This is an important read for anyone using social media or other digital resources to market to consumers.

FTC: Advertisers can’t post deceptive tweets/mobile ads – SlashGear.

via FTC: Advertisers can’t post deceptive tweets/mobile ads – SlashGear.

There are many factors to consider when setting up a legal entity. This article does a nice job answering some common questions that those setting up businesses ask.