Guest Contributor Jim Radogna: F&I Fact vs. Fiction


Fact v Fiction By Jim Radogna. It’s not uncommon for me to be asked to weigh in on the occasional compliance conundrum posed on some social media forum. Many such inquiries involve disagreements about long-held beliefs in F&I and whether or not they’re legally valid. So I’ve decided to take a crack at clarifying some of the issues surrounding these pervasive compliance myths. Now, there’s no legal advice here — just my thoughts based on a bit of common sense and my years of being a compliance car guy. Ultimately, it’s up to you to decide what works best for you, your customers and your dealership.

Myth No. 1: The 300% rule is a compliance tool

Many F&I processes that started out as solid sales techniques have somehow morphed into compliance requirements. The 300% rule is a great example of this phenomenon. I wholeheartedly agree with this rule from a sales perspective. As they say, you’ll miss 100% of the shots you don’t take. But as a compliance requirement, I’m not so sure.

First, let’s look at why failing to adhere to the 300% rule is considered a compliance blunder. A common rationale is that if you don’t offer protection products to your customers that they end up needing, you can be sued. I have, in fact, heard of lawsuits where a customer wasn’t offered credit life insurance, subsequently died and the spouse sued the dealership.

However, this scenario seems far less likely when it comes to other products. For instance, credit life insurance is only available from the dealer at the time of sale, so there may indeed be an obligation to inform eligible customers of its availability. On the other hand, many other products sold in the F&I office are available elsewhere. I recently purchased a new car, and within days my inbox was full of offers from independent service-contract providers. I’m not sure even the most desperate attorney would want to file a lawsuit against a dealer for not offering products that are readily available on the open market.

But some F&I pros insist on practicing the 300% rule without exception and having a signed declination sheet in every deal jacket to avoid claims of discriminatory treatment. Discrimination is defined as treatment of an individual or group based on their actual or perceived membership in a certain group or social category, “in a way that is worse than the way people are usually treated.”

In my view, if you fail to offer all of your customers all of your products all of the time, it would be a big hill to climb to prove that you’re being discriminatory. On the other hand, if you adhere to the 300% rule but offer your products at different prices, that discrimination claim may very well be low-hanging legal fruit. But there are other potential issues that subscribing to the 300% rule could raise.

Let’s say, for example, you present your customer with 100% of your products and she says, “I’ll take it all.” So far, so good, right? But you then discover your lender won’t allow you to finance it all. Besides the obvious customer satisfaction issues, you’ve made an offer on which you can’t deliver. Is it conceivable that a lawyer may try to make a contractual legal issue out of that? It certainly wouldn’t surprise me. The same applies with max loan-to-value (LTV) or amount-financed callbacks. If you present 100% of your products in these scenarios, I suggest you let the customer know up front how much more money he or she will need to come up with.

There are also situations where the customer shouldn’t be offered all of your products. For instance, you wouldn’t sell GAP protection on a cash or low LTV deal (especially when the LTV falls below state or lender limitations), or a service contract on a car that’s exceeded your program’s mileage limit. Offering such products in these situations could result in deceptive practices or fraud claims.

The same principle applies to declination sheets. They certainly come in handy when a customer complains that he wasn’t offered a product that turned out to be needed. But the significance of declination sheets as a compliance tool has been somewhat overstated, in my opinion. From a sales standpoint, declination sheets can provide you with one additional chance to sell products, but they should be used accurately. Products that aren’t available to particular customers shouldn’t show up on their declination sheets. If they do, they should be marked “N/A” or “Unavailable.”

Myth No. 2: It’s illegal to give a customer a copy of their credit report

This myth has no basis in law, as far as I am aware. In fact, the Fair Credit Reporting Act specifically states that a credit bureau provider cannot prohibit a user (the dealer) from disclosing the contents of the credit report to the consumer. However, contracts with some credit bureau providers may prohibit the dealer from giving the consumer a copy of his or her credit report.

Telling customers it’s illegal to give them a copy of their credit report when that information is inaccurate is not a good idea, at least in my opinion. On the other hand, telling the customer you can’t hand over a copy of his or her credit report because your company’s contract with the credit reporting agency prohibits it is accurate and true. There’s never a downside to telling the truth.

Myth No. 3: It’s illegal to highlight a contract

Many automotive professionals believe that this is a no-no because you can be accused of “leading” the customer to sign the highlighted areas without reading the rest of the contract. In reality, you can lead a customer by pointing your finger to the signature sections and saying, “Sign here.” It appears this folklore originated with a case where a creditor utilizing a motor vehicle pawn contract was sued for failure to disclose the APR as conspicuously as other disclosures on the contract.

The court ruled that the creditor violated the Truth in Lending Act (TILA) because it put dashes and arrows pointing to the due date, thereby making the due date disclosure more conspicuous than the APR and finance charge. So there was far more going on than highlighting. In fact, according to the court’s decision, there was handwriting and other markings on the contract, and the annual percentage rate on the contract was 304.24%. No surprise there.

So while highlighting customer signature areas probably isn’t a big issue, make sure certain TILA disclosures aren’t more prominent than others. Of course, if you work with a lender that won’t accept a contract with highlighted signatures, you’ll probably want to avoid the practice altogether.

Myth No. 4: A contract is valid once signed by both parties, even if the customer hasn’t taken physical delivery

The validity of this statement depends on where you conduct business. Some states specifically define when a contract is considered valid. For instance, California law states that “a sale is deemed completed and consummated when the purchaser of the vehicle has paid the purchase price, or, in lieu thereof, has signed a purchase contract or security agreement and has taken physical possession or delivery of the vehicle.”

So before you attempt to hold a customer’s feet to the fire prior to the delivery of the vehicle, you may want to check the laws in your state.

Myth No. 5: Menus are required to disclose the base payment

This has been the subject of much spirited debate in F&I circles. First, menus are not required by law at all. In fact, contrary to popular opinion, even California doesn’t require the use of a menu. All that is required is a “pre-contract disclosure” that shows the monthly installment payment with and without the optional products or services.

So, really, there is no such thing as a legally compliant menu as some vendors claim. But it’s not a bad idea to include the base payment in your menu presentation (and in your write-up as well).

Myth No. 6: Everyone must be charged the same doc fee

This notion again stems from worries about discrimination claims. The thought is that if a dealership charges one customer a fee, it has to charge everyone the same fee to avoid potential litigation.

So, could charging varying doc fees attract the attention of regulators? Well, we’ve certainly heard enough about alleged discrimination in rate markups over the last few years. And as recent actions by the Consumer Financial Protection Bureau (CFPB) and Department of Justice (DOJ) show, even if there’s no intent to discriminate, you can still face fines if protected classes pay more than non-protected classes.

So the easy answer is to just charge everyone the same doc fee, right? Perhaps. But here’s the rub: Doc fees are dealer-imposed charges and therefore not mandatory; only government fees are compulsory. So it is improper to tell a customer that you must charge them the fee, as you could be setting yourself up for a deceptive practices claim. Some states, like Washington, require you to inform the customer that the doc fee is negotiable.

So to avoid potential discrimination claims, be sure you can show proof that any downward deviations in fees are for valid business reasons, such as needing to match the doc fee offered by a competitive dealer in order to close the deal. Remember, documentation is key.

Myth No. 7: Payment ranges up to $XX are allowed

To many regulators and plaintiffs’ attorneys, using a payment range in certain circumstances could be a sign of payment packing. While it’s generally acceptable to quote a range of payments using an average APR before the customer’s credit report is pulled, once a credit profile is accessed, a best practice is to quote an exact payment.

Let’s say you’ve pulled the customer’s credit but aren’t sure what her rate is because you’re waiting for a callback from the bank. If you pencil the deal back with a payment range, it’s a good idea to include an APR range as well. Once you determine the actual terms of the deal, a final base payment should be disclosed. Also, if you’re using a payment range to account for variations in days to first payment, you should disclose the exact payment at each level. In other words, never give any impression that would allow a regulator or court to infer that the payments quoted are in any way misleading.

So there you have it: my take on some of F&I’s most common compliance myths. Again, how you handle these issues may depend on the laws in your state and your individual processes and philosophies. You may agree or disagree with my analysis and that’s OK. My goal here is not to steer you in any particular direction, but to simply give you something to think about beyond the status quo.

The information presented in this article is solely the opinion of Jim Radogna and is not intended to convey or constitute legal advice, and is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any such information without first seeking qualified professional counsel on your specific matter.

Jim Radogna is a nationally-recognized auto industry consultant specializing in dealership sales and regulatory compliance. He is the President of Dealer Compliance Consultants, Inc., based in San Diego, California and a frequent contributor to automotive publications including Dealer Magazine, Automotive News, WardsAuto, Auto Dealer Monthly, DrivingSales Dealership Innovation Guide, AutoSuccess, CBT News Magazine, and F&I Magazine. He can be reached at (858) 722-2726 or by email at jim@dealercomplianceconsultants.com

Posted in Auto Dealer, Indirect Financing, Regulatory Compliance | Tagged , , , | 1 Comment

Auto Coverage: “Absolute” & “Frozen” Liability under the Minnesota No-Fault Act


1273a11By Greg Johnson. A parent completes a personal auto application for automobile insurance and does not disclose that there are any other licensed drivers in the household that will operate the insured vehicle. Later, after the policy is issued, a minor child who was a licensed driver and resided with the parent at the time of the application, permissively operates the insured vehicle and causes an accident injuring an innocent third party. Is the insurer entitled to rescind the policy after the occurrence of the accident based on alleged fraud in the procurement of the policy to avoid coverage for the accident?

Many states have statutes which allow an insurer to cancel a policy based on misrepresentations, omissions, or concealment of facts which are fraudulent and material to the acceptance of the risk, or allow cancellation where the insurer in good faith would have either not issued the policy or would not have provided coverage with respect to the hazard resulting in the loss, if the true facts had been made known to the insurer.

The answer to this question depends in part on where the policy was issued and whether the jurisdiction has enacted a compulsory financial responsibility law as well as a “frozen-liability” (a/k/a “absolute-liability”) statute which makes the coverage “absolute” after an accident. Mandatory liability insurance coverages hold a special status under the law. Like many other jurisdictions, the Minnesota No-Fault Automobile Insurance Act contains a “frozen liability” statute. Minnesota’s statute provides:

(a) The liability of the insurance carrier with respect to the insurance required by this chapter becomes absolute whenever injury or damage covered by the policy occurs. The policy may not be cancelled or annulled as to such liability by any agreement between the insurance carrier and the insured after the occurrence of the injury or damage. No statement made by the insured or on behalf of the insured and no violation of the policy defeats or voids the policy.

Minn. Stat. § 65B.49, subd.3(3)(a).

Statutory frozen-liability provisions bar rescission after an accident has occurred and require the insurer to pay statutorily required liability coverage to an innocent accident victim regardless of an insured’s conduct. See Nimeth v. Felling, 282 Minn. 460, 165 N.W.2d 237 (1969) (applying similar, pre-No-Fault Act absolute liability statute and holding that insured’s failure to comply with policy condition requiring notification of change in vehicles could not defeat injured party’s claim under the policy). The language of the Minnesota frozen liability statute is clear: (1) no “agreement between the insurance carrier and the insured” can defeat or void the policy; (2) no “statement made by the insured” can defeat or void the policy; and (3) no “violation of the policy” by an insured can defeat or void the policy. In short, nothing the insured did or said prior to the accident and nothing the insured does or says after an accident provides a basis for the insurer to avoid liability coverage. Thus, even if the insured misrepresents the risks insured under the policy, violates a policy condition or the insurer fails to collect a premium commensurate with the risks insured, the policy will afford coverage. The liability coverage contained in the policy as written (or as required to be provided by law) is “frozen” after an accident occurs.

Many other states (27 in addition to Minnesota) have enacted similar “frozen- liability” statutes. See e.g., Torres v. Nev. Direct Ins. Co., 353 P.3d 1203 (Nev. 2015 (insured’s violation of notice and cooperation provisions of policy was not binding on injured party as no post-injury violation of a policy releases insurer under the absolute-liability statute); Cowan v. Allstate Ins. Co., 357 S.C. 625, 594 S.E.2d 275 (2004) (noting that breach of a policy’s notice requirements by the insured did not release the insurer from liability); National Ins. Ass’n v. Peach, 926 S.W.2d 859 (Ky. App. 1996) (insurer required to extend mandatory liability limits to accident victim despite fact that insured misrepresented on his application that he would be the sole operator of the motorcycle); Midland Risk Mgmt. Co. v. Watford, 179 Ariz. 168, 876 P.2d 1203 (Ariz. Ct.App.1994) (requiring insurer to indemnify the insured despite misrepresentations on the insurance application because of absolute-liability statute); Harris v. Prudential Prop. & Cas. Ins. Co., 632 A.2d 1380 (Del.1993) (holding that non-cooperation of insured cannot defeat application of absolute-liability statute where innocent third-party is injured); Odum v. Nationwide Mut. Ins. Co., 101 N.C.App. 627, 401 S.E.2d 87 (1991); Safeway Ins. Co. v. Harvey, 36 Ill.App.3d 388, 343 N.E.2d 679 (1976); Allstate Ins. Co. v. Dorr, 411 F.2d 198 (9th Cir.1969).

These holdings are consistent with the public policy underlying mandatory automobile liability systems. Compulsory auto insurance systems are based on an interest in protecting accident victims and were enacted to benefit the public as well as the insured. States that require liability insurance have a strong public policy interest in assuring that individuals who are injured in motor vehicle accidents have a source of indemnification. Frozen-liability statutes are consistent with these purposes by providing a mechanism for an injured party to recover his or her damages despite any wrongdoing or breach of contract on the part of the policy insureds. Allowing rescission of an insurance contract after an accident would strike at the heart of compulsory liability insurance and would operate as the functional equivalent of a contractual exclusion. The result would likewise defeat minimum coverage, with the consequence that an innocent, injured third-party would bear the burden of intentional misrepresentations by the insured. It would shift the loss to one who was entitled to rely on obedience to the law and one who was without any means of determining whether a policy had been fraudulently procured. As between an injured third-party and the insurer, the latter is in the far superior position to protect itself.

Some jurisdictions, which have enacted automobile financial responsibility statutes but not frozen-liability statutes, have likewise prohibited rescission of an auto policy after the occurrence of damage or injury to an innocent third-party. See e.g, Erie Ins. Exch. v. Lake, 543 Pa. 363, 671 A.2d 681 (1996); Munroe v. Great American Ins. Co., 234 Conn. 182, 661 A.2d 581 (1995); Van Horn v. Atlantic Mut. Ins. Co., 334 Md. 669, 641 A.2d 195 (1994); Continental Western Ins. Co. v. Clay, 248 Kan. 889, 811 P.2d 1202 (1991); Ferrell v. Columbia Mut. Cas. Ins. Co., 306 Ark. 533, 816 S.W.2d 593 (1991); Fisher v. New Jersey Auto. Full Ins. Underwriting Ass’n, 224 N.J.Super. 552, 540 A.2d 1344 (App.Div.1988); American Underwriters Group v. Williamson, 496 N.E.2d 807 (Ind.Ct.App.1986); United Sec. Ins. Co. v. Commissioner of Ins., 133 Mich.App. 38, 348 N.W.2d 34 (1984). Cf Colonial Penn Ins. Co. v. Guzorek, 690 N.E.2d 664 (Ind.1997) (holding that financial responsibility act did not abrogate common law right of rescission even after an accident and injury to an innocent third-party because minimum compensation protection for an accident victim could be satisfied by the injured party’s uninsured motorist (UM) coverage).

Whether an insurer can pursue an action against its insured for any amounts it is required to pay an innocent, injured party due to a frozen-liability statute is an open question in most jurisdictions. Some states have statutes which directly address the issue by allowing insurers to recoup such losses. For example, North Carolina G.S. § 20–279.21(h) states: “Any motor vehicle liability policy may provide that the insured shall reimburse the insurance carrier for any payment the insurance carrier would not have been obligated to make under the terms of the policy except for the provision of this Article.” Minnesota does not contain a similar statutory provision. Of course, whether a claim against the insured would be significant or illusory would depend upon the financial resources of the insured. It may not be worth the effort.

In addition, some states have held that their frozen liability statutes bar rescission only to the extent of the minimum liability insurance limits required by law, at least in cases of fraud in the procurement of the policy. Stated another way, an insurer is not barred from asserting the defense of fraud as to any coverage in excess of the statutory minimums. See Prudential v. Estate of Rojo–Pacheco, 192 Ariz. 139, 962 P.2d 213 (1997); Harris v. Prudential Prop. & Cas. Ins. Co., 632 A.2d 1380 (Del.1993); Farmers Ins. Exch. v. Anderson, 206 Mich.App. 214, 520 N.W.2d 686 (1994); Odum v. Nationwide Mut. Ins. Co., 101 N.C.App. 627, 401 S.E.2d 87 (1991); Dairyland Ins. Corp. v. Smith, 646 P.2d 737 (Utah 1982). These holdings are often based on statutes which bifurcate a policy’s stated limits of liability between the minimum liability amounts required by the compulsory financial responsibility law and amounts in excess of those minimum amounts. A North Carolina statute, for example, states that “Any policy which grants the coverage required for a motor vehicle liability policy may also grant any lawful coverage in excess of or in addition to the coverage specified for a motor vehicle liability policy and such excess or additional coverage shall not be subject to the provision of this Article. With respect to a policy which grants such excess or additional coverage the term “motor vehicle liability policy” shall apply only to that part of the coverage which is required by this section.” North Carolina G.S. § 20–279.21(g).

The Minnesota No-Fault Act contains a somewhat similar statute, but it distinguishes between mandatory and optional “benefits” and “coverages,” not between minimum and excess amounts for mandatory coverages that have been purchased. Minnesota Statute § 65B.49, subd. 7, entitled, “Additional benefits and coverage not prohibited,” states: “Nothing in sections 65B.41 to 65B.71 shall be construed as preventing the insurer from offering other benefits or coverages in addition to those required to be offered under this section.” Unlike the North Carolina statute, the Minn. Stat. § 65B.49, subd. 7, does not specifically state that the portion of liability coverage in excess of the minimum liability amounts required by the No-Fault Act may be treated differently than the portion included within the minimum amounts. On the flip side, Minnesota’s frozen-liability statute states that “The liability of the insurance carrier with respect to the insurance required by this chapter becomes absolute whenever injury or damage covered by the policy occurs,” Minn. Stat. § 65B.49, subd.3(3)(a), which could be read to suggest that an insurer is not barred from asserting the defense of fraud as to liability coverage in excess of the statutory minimums.

So is the parent’s insurer entitled to rescind the policy after the accident based on the parent’s alleged fraud in the procurement of the policy to avoid coverage for the accident? As noted above, the answer depends, in part, on the jurisdiction where the policy was issued. In many states, the insurer will not be able to avoid coverage, at least for the minimum liability limits mandated by state law, due to the frozen-liability statute.

But that is not the end of the inquiry. One also has to look into whether the parent’s non-disclosure of the minor-child actually had any material effect on the insurer’s acceptance of the risk and/or whether the insurer would not have issued the policy or adjusted the premium had the true facts had been made known to the insurer. The internal underwriting guidelines of insurance companies vary. Some only require an adjustment of premium when a resident relative will be a “primary” or “occasional” operator of a vehicle and define those terms based on certain usage of a vehicle. In the case of a minor child of divorced parents, some will only require the parent who has primary custody of the minor child to list the child as a driver on their policy. As noted in one insurance website: Now when teenagers split time between divorced parents on a regular basis it is a common question of which parent should include the teen on his or her auto insurance policy. Many insurance providers suggest the parent, who has custody of the teen the most, should add the child to his or her policy. In some cases, insurance companies say it is whichever parent has custody of the teen when the child is attending school.”

So what’s the answer? Can the insurer avoid coverage (or limit coverage to the minimum limits)? Since insurance companies’ underwriting guidelines, rating manuals and insurance policies differ, the ultimate answer is: it depends. Typical attorney answer.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney licensed in your jurisdiction. © All rights reserved. 2016.

Posted in Coverage, Duty to Indemnify, PAP | Tagged , , | Leave a comment

Auto Dealers Entitled to Money Distribution in Auto Parts Antitrust MDL Case


thXO2B22BG By Greg Johnson. On November 19, 2015, U.S. District Judge Marianne O. Battani of the Eastern District of Michigan issued an Order Granting Final Approval of an initial, partial settlement of $59 million to auto dealers in the multi-district (MDL) antitrust litigation against certain Japanese parts manufacturers. The MDL alleges that the parts manufacturers rigged bids and fixed the prices of auto parts to the detriment of auto dealers and retail consumers over the period of January 1, 1998 to September 12, 2015.

My firm, G Johnson Law LLP, represents White Bear Lake Superstore GMC-Buick, one of the lead plaintiff auto dealers in the case. On a national level, the auto dealer class is represented in the MDL by Attorney Shawn Raiter of Larson King LLP in St. Paul, MN as well as the law firms of Cuneo Gilbert & LaDuca LLP and Barrett Law Group PA.

Auto dealers in over 30 jurisdictions (full list below) can make a claim for money benefits from the settlement fund if they purchased certain component parts or vehicles containing the parts and submit a claim. The Notice of Settlement and Claim Form can be accessed on the settlement website at http://www.autodealersettlement.com. The amount a dealership may be entitled to receive from the settlement depends on the number, make and model of vehicles purchased during the period of January 1, 1998 to September 12, 2015.

The process to submit a claim is simple as all information needed to fill out the Claim Form can be derived from the dealership’s year-end financial statements for each OEM.

The Claim Form must be postmarked no later than March 31, 2016 or the dealership will not be eligible.

Auto dealers in the District of Columbia and the following states are eligible: Arizona, Arkansas, California, Florida, Hawaii, Illinois, Iowa, Kansas, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, New York, North Carolina, North Dakota, Oregon, South Carolina, South Dakota, Tennessee, Utah, Vermont, West Virginia, and Wisconsin.

The MDL is In re: Automotive Parts Antitrust Litigation, Case Number 2:12-md-02311 (U.S. District Court for the Eastern District of Michigan). Please note that the MDL is ongoing as some defendants have not settled. The Claim Form submitted by March 31, 2016 can be used to claim money benefits from future distributions as well.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2016.

Posted in Auto Dealer | Tagged , , | Leave a comment

Guest Contributor Jim Radogna: Dealer Fees Under Attack


jimBy Jim Radogna. Two recent actions for alleged dealer fee violations in South Carolina and Indiana are a potential cause for concern in other states due to the likelihood of copycat legal actions. While these states had no caps on dealer fees, a private lawsuit in South Carolina resulted in a $3.6 million verdict and an attorney general action in Indiana resulted in a $625K settlement. Both cases alleged that the dealers overcharged customers because their fees did not reflect expenses actually incurred by the dealers for services.

Although the state doesn’t offer guidance on what dealers can charge, the court in South Carolina interpreted “closing fee” to mean a “predetermined set fee for the reimbursement of closing costs, but only those actually incurred by the dealer and necessary to the closing transaction.” Under that interpretation, the court reasoned that the dealer had to provide evidence it calculated the cost comprising its closing fee, which it could not do. Further, a justice stated “Although we agree that the Closing Fee Statute is a disclosure statement and the department serves as a repository for the required filings, we find that the Closing Fee Statute does more than require disclosure of the ‘Closing Fee.’”

According to a press release from the office of Indiana attorney general “Under Indiana’s Motor Vehicle Dealer Unfair Practices Act, auto dealers cannot require a motor vehicle purchaser to pay a document preparation fee unless the fee reflects expenses actually incurred for the preparation of documents and was negotiated by and disclosed to the customer.” The dealer was found to have charged doc fees around $479, which the AG ruled was higher than could be justified to cover costs.

Indiana law is more specific than South Carolina as far as the requirement that actual expenses be calculated: “It is an unfair practice for a dealer to require a purchaser of a motor vehicle as a condition of the sale and delivery of the motor vehicle to pay a document preparation fee, unless the fee:

1. Reflects expenses actually incurred for the preparation of documents;
2. Was affirmatively disclosed by the dealer;
3. Was negotiated by the dealer and the purchaser;
4. Is not for the preparation, handling, or service of documents that are incidental to the extension of credit; and
5. Is set forth on a buyer’s order or similar agreement by a means other than preprinting.”

Other states, such as Connecticut, have regulations that are similar to South Carolina’s in that they primarily address disclosure of the dealer fee but do not offer guidance on the amount a dealer can charge: “A ‘dealer conveyance fee’ or ‘processing fee’ means a fee charged by a dealer to recover reasonable costs for processing all documentation and performing services related to the closing of a sale, including, but not limited to, the registration and transfer of ownership of the motor vehicle which is the subject of the sale.”

So, in a private lawsuit or AG action in a state like Connecticut, the questions may well be what amount is considered “reasonable” and how are the costs justified?
Although all cases are different, information from the South Carolina court may lend some insight on how to avoid or defend against dealer fee attacks. The following excerpts from the case would seem relevant:

• The dealership’s expert witness in the SC case testified that the dealership’s average closing costs, which were $506.96, greatly exceeded the $299 fee the plaintiff paid. But in calculating the average closing cost, he included expenses for the salaries of finance and sales managers, the building, utilities and outside services.” The court disagreed. “All of these are general operating expenses and not directly tied to the closing of motor vehicle sales. If a motor vehicle dealer wishes to be compensated for these expenses, it may include them as part of the overall purchase price of a vehicle.”
• The court further opined that the term “cost” in the context of the “Closing Fee” Statute “would refer to the amount of money a dealer is required to expend to perform the services it provides to a customer at closing, and to otherwise comply with the disclosure, documentation, and record retention requirements imposed under state and federal law. While we recognize the difficulty a dealer may face in determining the exact amount of a specific purchaser’s closing fee prior to closing, we agree with the trial judge’s interpretation that the amount charged must bear some relation to the actual expenses incurred for the closing.”
• The court emphasized that a “closing fee” is not limited to expenses incurred for document preparation, retrieval, and storage. However, any costs sought to be recovered by a dealer under a closing fee charge must be directly related to the services rendered and expenses incurred in closing the purchase of a vehicle. Given that each vehicle purchase is different, compliance with the “Closing Fee” Statute does not require that the dealer hit the “bull’s-eye” for each purchase. A dealer may comply with the statute by setting a closing fee in an amount that is an average of the costs actually incurred in all closings of the prior year.

Based on the above, some ideas for what may constitute “reasonable costs for processing all documentation and performing services related to the closing of a sale” include:

• Processing and submission of credit applications to finance companies*
• Preparation of finance or lease documents*
• Preparation and submission of vehicle registrations both manually and electronically with the DMV
• Filing and releasing security liens on purchased and traded vehicles as contractually required by lending institutions
• Processing applications for new or duplicate title documents with the DMV
• Processing the pay-off of an existing lien on any vehicle offered in trade
• DMS (Dealer Management System) costs to process paperwork
• Software such as Dealertrack or RouteOne to investigate credit, print required disclosures, and run Red Flags and OFAC checks
• Forms, toner, etc.
• Compliance training and auditing costs
• Fees to attorneys for vetting documents

* Some states prohibit the inclusion of fees to process loan documents in the dealer fee.

OTHER DEALER FEE ISSUES

TILA Disclosures – Other lawsuits have claimed that the dealer fee is a finance charge for federal Truth in Lending Act (TILA) disclosure purposes. To avoid this, it’s important to also charge dealer fees on comparable cash transactions. Since you obviously wouldn’t incur credit-related costs listed above on cash transactions, the SC court’s suggested method of averaging the costs in all closings of the prior year would appear to be beneficial.

Negotiation of Dealer Fees – Although a number of state regulations indicate that dealer fees must be negotiated with customers, this raises concerns about potential discrimination claims. The reasoning is that if a dealership charges one customer a fee of any kind they have to charge everyone the same fee, or they open themselves up to a lawsuit.

Another fear is that charging a different dealer fee to different customers is “illegal”. This does not appear to be the case unless state law specifically prohibits dealerships from charging any customer a different doc fee amount than any other customer. The only state of which I’m aware that has such a prohibition is West Virginia. In a 2014 case brought by the West Virginia Automobile & Truck Dealers Association against Ford Motor Company, the court disagreed that charging different doc fees is prohibited by West Virginia Consumer Credit and Protection Act, but agreed that guidance from the West Virginia Motor Vehicle Dealers Advisory Board prohibits dealerships from charging any customer a higher doc fee than any other customer. (Arguably, this is not a violation of WV law and thus not “illegal” per se, but simply guidance from the WVMVDAB who’s “statutory purpose is to assist and to advise the Commissioner of the Division of Motor Vehicles on the administration of laws regulating the motor vehicle industry; to work with the commissioner in developing new laws, rules or policies regarding the motor vehicles industry; and to give the commissioner such further advice and assistance as he or she may from time to time require.” Regardless, WV dealers are bound to follow the Dealer Advisory Board’s directions).

So the easy answer is to just charge everyone the same doc fee, right? Perhaps. But here’s the rub: Conveyance/Processing fees are dealer-imposed charges and therefore not mandatory – only government fees are compulsory. So it is improper to tell a customer that you MUST charge them the fee – this could lead to a deceptive practices claim.

So how do you avoid potential discrimination claims? By being able to show proof that any downward deviations in fees are for valid business reasons. For example, if a manufacturer limits the doc fee for an employee purchase, that reason should be documented in writing and a copy kept in the deal jacket. Another example would be that a competitive dealer offered a lower doc fee that you needed to match to make the deal. Again, documentation is key. This follows the same line of reasoning as NADA’s Fair Credit Compliance Program for rate markups.

The information presented in this article is solely the opinion of Jim Radogna and is not intended to convey or constitute legal advice, and is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any such information without first seeking qualified professional counsel on your specific matter.

Jim Radogna is a nationally-recognized auto industry consultant specializing in dealership sales and regulatory compliance. He is the President of Dealer Compliance Consultants, Inc., based in San Diego, California and a frequent contributor to automotive publications including Dealer Magazine, Automotive News, WardsAuto, Auto Dealer Monthly, DrivingSales Dealership Innovation Guide, AutoSuccess, CBT News Magazine, and F&I Magazine. He can be reached at (858) 722-2726 or by email at jim@dealercomplianceconsultants.com

Posted in Coverage, Doc Fees, Indirect Financing, Regulatory Compliance, TIL Disclosures, Truth in Lending Act | Tagged , , , , | Leave a comment

Times Change and so do Car Prices: Bring back the Gremlin!!


gremlinBy Greg Johnson. I remember when my dad sold AMC Gremlins for $1,999 in the early 1970’s.  Yes, I grew up with Hornets, Javelins, Matadors, Pacers and Gremlins — probably the most bizarre car line ever produced in America, or anywhere else for that matter. (I was called “Gremlin Greg” when I was a kid.  I guess I had kinda pointy ears). Fortunately, my dad also had the Jeep line.

The Gremlin was introduced on April 1, 1970 and a red Gremlin was featured on the April 6, 1970 cover of Newsweek magazine for an article, “Detroit Fights Back: The Gremlin”. The “base” two-passenger version (no rear seat and a fixed rear window) had a MSRP of $1,879 and the four-seat hatchback (with opening rear window) listed for $1,959.

Now, according to a recent FTC report:

In 2015, the average price of a new car sold in the U.S. was $33,560, according to Kelly Blue Book (see Kelly Blue Book, Average New Car Transaction Prices Rise Steadily, Up 2.6% in April 2015 (May 1, 2015)) while the average price of a used car was $20,057.  See Used Car Prices Hold Up in Strong New-Vehicle Market), J.D. Power (Sept. 8, 2015). Used cars available from independent dealers and from “buy here pay here” dealers were lower in price.  In 2014, over 42% of cars sold by independent dealers had an average sales price of $5,000 – $10,000; the average cost of cars at “buy here pay here” dealers was $7,150.  See 2015 NIADA Used Car Industry Report, at 6 and 16.

On a much more upbeat note, anyone can buy the dilapidated, tax-foreclosed former American Motors headquarters in Detroit for $500 — provided they also pay the back taxes of around $240,000.  (See, The Detroit News, “Wayne County voids $500 sale of former AMC headquarters” (October 26, 2015)).

Perhaps some young automotive entrepreneur will fix up the place and bring back the Gremlin!!  Nah.

PS:  If sold today, the Gremlin would retail for around $11,500 in 2015 dollars.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2016.

Posted in Auto Dealer, Coverage | Leave a comment

Auto Rental News Special Report: The Problem with Renting Fast Cars


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I was a featured commentator in this report, the second highest viewed article of Auto Rental News in 2015:

Traditional rental companies and leasing companies are protected by laws that eliminate vicarious liability (such as the federal Graves Amendment) or state laws that cap vicarious liability. These laws usually only apply to vehicle owners “engaged in the trade or business of renting or leasing motor vehicles” and “are not likely to help the individual who owns an exotic car and wants to make some side income by allowing it to be rented out,” says Greg Johnson, a Minnesota attorney focusing on auto dealers and rental car and transportation companies. “Additionally, the vehicle owner remains on the hook for claims of direct negligence, such as negligent vehicle maintenance or even negligent entrustment.”

You can check out the full article here: Special Report: The Problem with Renting Fast Cars

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2015.

Posted in Rentals | Tagged , , ,

Why do Auto Dealers Purchase Limited Truth in Lending Coverage?


insurance-contracts-300x199By Greg Johnson. Why do dealerships keep purchasing statutory errors and omissions coverage that is not likely to protect the dealership if it is sued by a customer for truth in lending violations?

I’ve been handling dealership insurance coverage disputes for a long time. I thought the following insurance coverage form became obsolete by the early 2000’s, but recently learned I was mistaken:

[A]ll sums which the insured shall become legally obligated to pay as damages solely by operation of Section 130, Civil Liability, of Title 1 (Truth in Lending Act) of the Consumer Credit Protection Act (Public Law 90-321; 82 State 146, et seq.) because of error or omission in failing to comply with said section of said Act.

What’s the problem with this type of coverage form? In addition to not providing any protection to dealerships for liability associated with a variety of other consumer protection statutes (which has been the subject of prior articles on this blog), this form does not even purport to protect the dealership against truth-in-lending liability under state automobile financing acts. It is specifically limited to violations of the federal TILA. More specifically, although state automobile financing acts obligate a dealership to disclose the exact same minimal credit information required to be disclosed under the federal TILA (e.g., total sales price, APR, finance charge, itemization of amount financed, monthly payment, etc.) and most truth in lending litigation against dealerships is based on violations of state auto financing laws as opposed to the federal TILA, this insurance form will likely not protect the dealership.

Several courts have interpreted this type of coverage form and held that an insurer will only have an obligation to protect the dealership if the customer’s complaint specifically alleges (1) a violation of the federal TILA and (2) seeks damages under the federal TILA. See e.g., Luna v. Praetorian Insurance Co., 2015 WL 1539041 (Cal. Ct. App. March 30, 2015); TIG Insurance Company v. Joe Rizza Lincoln–Mercury, Inc., 2002 WL 406982 (N.D. Ill. Mar. 14, 2002); John Markel Ford v. Auto–Owners Ins. Co., 543 N.W.2d 173 (Neb.1996); Tynan’s Nissan v. Am. Hardware Mut. Ins. Co. 917 P.2d 321 (Colo.App.1995); Heritage Mut. Ins. Co. v. Ricart Ford, 663 N.E.2d 1009 (Ohio App. 10 Dist.1995). See also, Sonic Automotive Inc. v. Chrysler Insurance Co., 2014 WL 1382070 (S.D. Ohio Apr. 8, 2014) (discussing cases and finding insurer had no obligation to defend dealerships). Stated another way, this coverage form is not likely to protect the dealership against truth in lending claims which only allege violations of a state auto financing act or only seek damages under the state auto financing act – despite the fact that the violation complained of would also violate the federal TILA.

What can a dealership do? First, make sure you know what kind of insurance coverage you are purchasing to protect your sales and F&I operations risk. Many insurers offer statutory errors and omissions coverage for a dealership’s violation of a “federal, state or local” truth-in lending laws. Second, if your current policy is limited to violations of the federal TILA, ask the insurer to issue a manuscript endorsement extending coverage to “any federal, state or local” truth in lending laws. While such a manuscript endorsement would not protect the dealership against liability associated with the myriad of other consumer protection statutes, it would at least protect the dealership if sued under any truth in lending law.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2015.

Posted in ADCF Policy, Auto Dealer, Truth in Lending Act, Truth in Lending Coverage | Tagged , , , , | Leave a comment