Hidden Triggers IN THIS ISSUE ntact.com

Michigan Automobile

Dealers Association

September 2016

Hidden Triggers

As if more evidence is needed that dealers must give attention to FTC requirements to avoid a consent order, a company with three Kia dealerships in the southwest just agreed to an $85,000 civil penalty for violations of a consent order it signed just two years ago.

The dealers agreed in 2014 to the consent orders because of advertising violations. In the words of the agency:

IN THIS ISSUE...

Hidden Triggers

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The CFPB Wants to Increase your Dealership's Potential Liability

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But according to the FTC, Southwest Kia violated that consent agreement by: 1) running

The Push Down on Small Business page 2

deceptive ads, showcasing eye-catching deals

in the headlines that consumers couldn't actually get, burying key terms in hard-to-read

Pay Attention to Insurance Reporting page 4

fine print, or, in some instances, not disclosing

material conditions at all; 2) failing to include

required TILA and CLA disclosures in a clear and conspicuous fashion; and 3) failing to maintain documents required by the original order, including complete versions of ads.

The CFPB Wants to Increase your Dealership's Potential Liability

The CFPB has no jurisdiction over franchised motor

As we have noted before, do not engage in practices

vehicle dealers and many independent dealers.

3

that will lead to an FTC complaint and resulting

That has not stopped the CFPB from taking actions

consent order. That will keep you under the FTC

that dramatically affect dealers. Most know of

microscope for ten years and can lead to civil

the CFPB's actions on dealer reserve. The CFPB's

penalty demands of up to $40,000 per violation

proposed ban on class action waivers in predispute

per day if you do not strictly comply. Almost every

arbitration provisions could have an even more

advertising consent order that the FTC has signed

serious impact.

with dealers includes requirements for complying

with the Truth in Lending Act and the Consumer

The Dodd Frank financial reform act required the

Leasing Act. Dealers, their staff members in charge

CFPB to study predispute arbitration agreements

of advertising, and their advertising agencies must

and authorized the CFPB to take action consistent

understand the advertising requirements of these

with the study. In March 2015, the CFPB released

two acts.

the study which it claimed showed that consumers

did not understand the impact of predispute

TILA and the CLA are federal statutes

arbitration clauses on them.

uncharacteristically straightforward in their

Triggers continued on page 3

CFPB continued on page 2

The Push Down on Small

Business

Big government and big business have much more in common than either has with small business. Big business enterprises are increasingly bureaucratic like the government, they can afford robust processes for compliance with massive and confusing regulations, they can better absorb the costs of cutting edge government priorities, and cooperating with the government to the detriment of small businesses gives them a competitive advantage. Not surprisingly, therefore, the government is increasingly imposing its wish list items through big businesses on which small businesses rely.

Car dealers, small business enterprises in the best meaning of the phrase, are seeing this trend most graphically at the Consumer Financial Protection Bureau. The CFPB has no jurisdiction over franchised motor vehicle dealers and many independent dealers. Yet, the CFPB is using its powers over big banks and finance sources under its jurisdiction to push down its views on finance reserve practices and amounts. Dealers are also seeing this regarding a CFPB proposal to ban big banks and finance sources from using predispute arbitration provisions with class action waivers. The fallout of that prohibition will damage dealers that face increased liability from class actions.

The Department of Labor recently issued further evidence of this trend. On July 26, 2016, the franchisor for Subway restaurants and the Department of Labor's Wage and Hour Division ("WHD"), entered a voluntary agreement. The agreement noted the franchisor and the WHD have been collaborating since 2012 to educate franchisees about their

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responsibilities under the Fair Labor Standards Act. The agreement is an attempt to "build on" the existing collaboration by having Subway circulate WHD assistance and training materials to franchisees, developing compliance support for franchisees through data sharing and technology, committing to regular meetings to share information and evaluate compliance efforts, communicating to franchisees about responsibilities to comply with the investigative process, and emphasizing the consequences for non-compliance. While the agreement appears to just be a formalization of government/ franchisor assistance to franchisees, most recognize the consequences of "we're from the government and we're just here to help."

The agreement continues a trend of big government to push down priorities on small businesses beholden to big business enterprises increasingly aligned with big government. While the provisions of this agreement seem non-controversial, what happens if the WHD wants to push down more trendy goals such as "living wage" requirements? And this is most serious for car dealers because of their dependence on big business franchisors. Small businesses, like car dealers, have much to fear from the collaboration between big government and big business.

CFPB from page 1

On October 7, 2015 it published a proposal for rulemaking which, of most importance to motor vehicle dealers, prevents the use of class action waivers in predispute arbitration clauses by creditors or lessors under CFPB jurisdiction. On May 24, 2016, the CFPB published its proposed rule on class action waivers on the federal register, which had a 90 day deadline to submit comments that ended on August 22, 2016.

On August 15, 2016, Charapp & Weiss filed on behalf of 31 state and metro dealer associations extensive comments concerning the CFPB proposal. It pointed out that the CFPB's proposal

CFPB continued on page 4

September 2016

DRIVING YOUR SUCCESS

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Triggers from page 1

provisions on advertising. Under each Act, if an advertiser uses a trigger term, then it must provide follow on disclosures.

Under the Truth in Lending Act, a trigger term is the amount of a downpayment; the amount of an installment payment; the number of installments (term); or the amount of any finance charge. If any is used, the dealer must then disclose the amount of the installment payment; the amount or percentage of the downpayment; the number of installments (term); and the annual percentage rate. If an annual percentage rate is advertised, it must be accompanied by "APR" or "annual percentage rate".

Under the Consumer Leasing Act, trigger terms are the amount of any payment; the amount of any upfront payment; or that no downpayment is required. If any is used, that must be followed by the fact that the transaction is a lease; the total amount due at lease signing; if a security deposit is required the amount of the deposit or if no security deposit is required the statement "no security deposit is required"; and the number amounts, due dates or periods of scheduled payments.

While those requirements are clear, the fact that a trigger term has been used may not be. Often, dealers provide in advertisements information, disclosures, or descriptions without realizing they are trigger terms. We call those hidden triggers. What are some hidden triggers?

? Buy a new car for as low as $99 a month. You may feel this is just general, standard information that you have vehicles available for payment buyers on a budget. Maybe, but the monthly payment is also a trigger term that requires follow on disclosures.

? 1.9% APR financing available for up to 60 months. You may feel that "up to 60 months" is a disclosure to let customers know that if they want longer financing the lower rate may not be available. However, "up to 60 months" is the number of credit installments and is a trigger requiring follow on disclosures.

? Buy a new car for as little as $99 down. You may feel this is a general, standard example

of how little cash is required to buy a vehicle. However, the amount of the downpayment in a credit advertisement triggers the need for follow on disclosures.

? 1.9% financing available. You have studied the TILA trigger terms closely. You understand that advertising a finance rate is not a trigger term. However, when you advertise a finance rate, that must be accompanied by "APR" or "annual percentage rate".

? No downpayment leases available. You may see this as an informational item to attract customers who don't want to put cash down to drive a new vehicle. However, the fact that no downpayment is required is a trigger term requiring follow on lease disclosures. Also, if there is a reference to the amount due at lease signing, the total amount due at lease signing must be equally prominent in same type size and color and be immediately adjacent to the amount being qualified.

You may ask how to disclose the terms when several vehicles may be available at the advertised offer. You can use an example with the terms you are advertising. In fact, on monthly payment advertisements, some state laws require an example or the number of vehicles that may be available at that price.

The FTC has been hitting dealers hard on Truth in Lending and Consumer Leasing Act requirements. Beware of the hidden trigger terms that can get you on the wrong side of an FTC inquiry.

CHARAPP & WEISS, LLP

8180 Greensboro Drive, Suite1000 McLean, VA 22102 Tel: 703.564.0220 Fax: 703.564.0221



Contents ? 2016 Charapp & Weiss, LLP. Articles are for information only and do not constitute legal advice.

September 2016

DRIVING YOUR SUCCESS

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Pay Attention to Insurance

Reporting

A recent case from New York illustrates the importance of attention to insurance reporting requirements.

When buying insurance, one never expects the entire vehicle inventory to be wiped out. Yet Hurricane Sandy in 2012 proved that sometimes the worst happens. It destroyed the entire vehicle inventory of a New York dealer, causing a loss of more than $9 million. Unfortunately, the dealer's floorplan inventory insurance coverage was a bit over $7 million. The dealer sold salvaged vehicles not covered by insurance to take its net loss not covered by insurance to a bit over $1 million.

The policy provided for an additional 25% coverage if the dealer filed monthly inventory reports showing that its inventory exceeded the policy limit. The dealer sued contending that the additional loss should have been covered by the additional coverage. The insurer claimed the dealer wasn't sending its required reports, so the additional coverage was unavailable.

The insurance company moved for summary judgment. The court relied on a report from an insurance adjuster who found that the dealer was "not required to report [inventory] values on a monthly basis." The court determined there was an issue of fact whether there was a waiver of the monthly reporting requirement. It denied summary judgment for the insurance company.

The dealer can fight another day in a trial over the $1 million loss. However, the case is a valuable lesson. If a calamity happened at your dealership, would you be fully covered? It is not unusual for a dealer to exceed its reported floorplan insurance limits, especially when the franchisor is pushing to move units onto dealers' lots.

What does your insurance policy provide about your limits of insurance on inventory and your duty to report inventory over the limits? Do you know your policy limit on floorplan coverage and what you must do to expand that?

How about the adequacy of the schedule of values on your buildings and other improvements? You may have declared those values years ago when you built your dealership. You may benefit from automatic annual increases in coverage. However, with the increase in construction costs, the limits may not be enough.

If the worst happens, are you fully covered?

CFPB from page 3

was inconsistent with its own study and that even its own study did not support application of the proposed remedy to large balance transactions such as those resulting from car deals. The comments made even more compelling arguments about the potential damage to dealers over which the CFPB has no authority. The proposal will make dealers directly subject to class actions because creditors and lessors will include the rule's required language preserving class actions in form agreements that will bind dealers (who in most states are the initial creditor or lessor). More seriously creditors and lessors faced with liability will pass that onto dealers through the broad indemnification provisions in indirect finance and indirect lease agreements with dealers.

As of publication of this article, the CFPB has posted 5,910 comments on the federal register website, docket?D=CFPB-2016-0020, making this a highly controversial proposal.

The CFPB is expected to announce its final regulation soon with an effective date 30 days after publication that would apply only to agreements entered into 180 days after the regulation's effective date. Therefore, the final regulation would apply to agreements entered into 210 days after the final regulation is published. The result may have a major impact on dealer liability, so stay tuned.

September 2016

DRIVING YOUR SUCCESS

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