LEGAL COMPLIANCE

It is the desire and intention of quality dealerships today to deal with the public in an ethical and fair manner always within the rules of law.  That is why they go beyond expectations with training and certification requirements and insist that all dealership staff deal effectively within the scope of all Rules and Regulations within our business environment.

Find below many of the regulations we live by and a description of each.

• TRUTH IN LENDING - REGULATION Z

After almost eight years of work in the Senate and House this measure, which initially set out to provide only basic consumer protections, was passed with extensive regulatory control over arrangement and administration of credit and extensive consumer protection via informational requirements.  The act also sets forth and defines terminology, form formats, formulas for calculation of interest/APR, and tolerances though no legal ceiling is prescribed.

DISCLOSURE

The principle element of this act is to inform and thereby protect a potential purchaser from excessive or obscured charges or fees.

“The purpose of this regulation is to promote the informed use of consumer credit by requiring disclosures about its terms and costs.”

“The creditor shall make disclosures     …clearly and conspicuously in writing in a form that the consumer may keep.”

The necessary disclosure elements include:

• Finance charge and annual percentage rate – more conspicuous than any other required disclosure.
• Written copy of disclosures must be given to at least one party in the case of joint or multiple creditors/consumers.
• Any “other charges” must be explained and itemized (i.e. tax, tag fees).
• Security Interests – The fact that the creditor has or will acquire a security interest in the property purchased under the plan, or in the property identified by item or type.
• Creditor, amount financed (itemized), finance charge (amount and APR), payment schedule, total of payments, demand feature, total sale price, pre-payment, late payment, insurance, and additional charges must be set forth and identified.

Adjustments or corrections to the finance documents after the delivery of the disclosure are authorized within certain limitations and if done in writing.

Criminal penalties range from $100 to $1,000 per occurrence or in the case of willful and knowing violation up to $5,000 and imprisonment for one year.

Contracts that are sold and assigned remain the responsibility of your dealership.  The disclosure requirements and burden remain with the dealership – and so does the legal liability.  In case of a legal violation, our lender can demand that we repurchase the contract and handle the situation between the customer and the dealership.

• TRUTH IN LEASING - REGULATION M

As with Truth in Lending, the purpose of this act is to inform, via disclosure, the consumer and thus protect them from misleading or obscured charges or advertising.  A similar set of guidelines is specified as to disclosure from a simpler and less detailed orientation.

The following contractual disclosures are prescribed:

• Identification of the leased property;
• Initial payment at time of contract;
• Total amount charged during the lease term for official fees, registration, certificate of title, license fees or taxes;
• Additional charges, including a statement that the Lessee will be liable for the differential, if any, between the anticipated fair market value of the leased property and its appraised actual value at lease termination if such is the case (open vs. closed end lease);
• Statement of the method of determining what Lessee’s liabilities are at the end of the lease and weather or not Lessee has the right to purchase the property, the price and when;
• Statement of all express warranties and guarantees of the manufacturer and identification of party responsible for maintaining or servicing the property;
• Description of any insurance provided by Lessor or required to  be provided by the Lessee;
• Description of any security interest to be held by Lessor;
• Number, amount, due date and total amount of periodic payments;
• In an open-end lease, fair market value of property an inception of lease, aggregate cost of the lease and difference between them;
• The Lessee must receive a copy of the contract;
• The contract must be written in clear, understandable language.

REGULATION M  

This is a Federal Regulation dealing with specific disclosures and simplification of contracts.

The following are key disclosures required by Regulation M:

• The first disclosure is that it is in fact a lease.
• Amount due at signing.  An itemized list of upfront charges.  These include capitalized cost reduction (down payment) and whether it is by trade in, rebate or cash.  Also any security deposit, bank or acquisition fee, the fees for registration and the first monthly payment.
• On the contract, the amount to be paid will appear in the left hand column and how the amount due at lease signing will be paid appears in the right hand column.
• Monthly payments including total number and when they are due.
• Other charges such as disposition or termination fees if the customer does not purchase at the end of the lease term.  Also items not included in the payment such as sales tax.
• The payment total = the full amount paid by the end of the lease.
• How the monthly payment was determined.  This section will have an itemized value of the vehicle along with disclosure of the gross capitalized cost, the cap cost reduction, the adjusted gross cap cost and the residual value.  The contract must also show the depreciated and rent charges as well as the sales tax and total payment.
• A statement that there may be a substantial charge for terminating a lease early.  (Perhaps several thousand dollars).
• Excessive wear and tear. A warning that there will be charges for excessive mileage and wear and an explanation of what is considered wear.
• Purchase option with a specific price the consumer can buy the vehicle for at the end of the lease term including any fees.

There is no uniform method for calculating lease interest as there is for finance contracts so federal regulations prohibit lease companies from expressing interest as ‘APR’ because it is misleading.  If a customer really needs to know an approximate ‘APR’, multiply the level yield factor by 2,400.

These regulations apply to consumer leases for personal use, however most lease companies utilize a standard form for all leases.

RULES FOR LEASE ADVERTISING

• The transaction is a lease.
• The amount of payment required at inception or that no payment is required.
• The number, amounts, periods of scheduled payments, and the total payments due.
• Lease end liability and whether or not there is a purchase option.

• REGULATION B / EQUAL CREDIT OPPORTUNITY ACT

“The purpose  …  is to promote the availability of credit to all creditworthy applicants without regard to race, color, religion, national origin, sex, marital status, or age…”

In essence, this act requires that all applicants must be equally considered for extension of credit.  It also defines the time frame and format for notification of credit denial and retention of records.

A creditor may not do the following:

• Make statements discouraging applicants on the basis of sex or marital status.
• Request information about birth control practices or childbearing intentions or capability.
• Request information concerning the receipt of alimony, child support, or maintenance payments unless applicant wishes these to be considered included in income for purposes of qualifying for the loan.
• Refuse to grant a separate account to an applicant who otherwise qualifies for one, on the basis of sex or marital status.
• Use credit-scoring systems based upon sex or marital status.  This includes the test of whether or not applicant has a telephone listed in his or her name.  However, the existence of a telephone in the home may be considered.
• Ask questions about the marital status of applicants seeking an unsecured separate account.
• Discount the income of applicant or applicant’s spouse, even if part-time income.  However, creditor may examine the probable continuity of the income.
• Deny applicant’s written request for reasons why credit was denied.
• Automatically close a credit account due to a change in marital status, or require a change in terms or reapplication, unless the account was granted bases solely upon the income of the applicant’s spouse.  If this was the case, the creditor may require a reapplication.
• Discrimination on the basis of race, color, religion, national origin, age, receipt of public assistance, or the exercise of rights under the act.
• Clear documentation of the obligation of each applicant is required.

Creditors can ask about, and consider, whether alimony, child support or maintenance payments affect the applicants ability to pay.

A creditor must, within reasonable time after receiving an application, notify the applicant of the action taken.  In the case of negative consideration, reasons for denial must be given.

Records must be kept for 25 months after notification of action on an application.  The application form and other written or recorded information used in evaluation including any statement by the applicant of complaint about discrimination must all be kept on file.

Penalties for violation range from actual damages plus $10,000 on individual basis up to $500,000 involving a class action suit.

• UNIFORM COMMERCIAL CODE

Effective in all states but Louisiana.  The intent of this doctrine is to enhance understanding and set forth guidelines to smooth the conduct of commercial business:

1. Express Warranty:  Any affirmation or act made by the seller to buyer which becomes part of the bargain.
1. No specific intent to make a warranty is necessary.  The warranty can be oral; it does not have to be written.
2. If a statement was not meant to be part of the bargain, this must be shown by clear and convincing proof.
3. This statement can occur before or after the closing of the deal.  If it occurs after, it constitutes a modification of the terms of the agreement.

2. Implied Warranty of Merchantability:  This means that it is expected that the goods when sold are fit for the ordinary purpose for which such goods are used.

I.E.  Recently an automobile manufacturer advertised their truck line as “Job Rated Trucks”.  A municipality purchased one which was later overloaded, went out of control and killed the driver.  The city has since filed suit.

Since any verbal indications are enforceable, the interests of the dealership are best preserved if the F&I Manager handles supplemental warranty presentations and secures the necessary signatures on disclaimers / waivers.

• MAGNUSON MOSS WARRANTY ACT

This legislation refers to written indications of material or workmanship, freedom from defect, and promise of repair.

Regulates warranty disclosure and requires full disclosure of warranty terms to the purchaser prior to delivery.  Warranty documents must be conspicuously available to consumers for inspection before the close of a transaction.

This law puts all dealership personnel on notice to not make any verbal promises as to the freedom from defect or promise of repair for merchandise that they sell to a retail consumer.  It also further reinforces the key position that the F&I professional plyas in the informational sales and disclosure, disclaimer and waiver process.

• GRAMM LEACH BLILEY ACT - PRIVACY RULE

The content of this act recognizes automobile dealerships as financial institutions and its privacy provisions require financial institutions to protect personal financial information of its customers.  It restricts the disclosure of customer personal financial information to unaffiliated third parties.  Also we must disclose its security and privacy policies to consumers.  Further, the act prohibits the use of fraudulent means to obtain financial data.

To fully comply, dealerships must disclose their privacy policies and practices about sharing certain information with affiliated companies and unaffiliated third parties.  Customers must also be given the right to “opt-out” of having this information shared with unaffiliated third parties.

The privacy statement must be disclosed to consumers as we plan to share consumer information.  Your privacy policy should contain the following:

• The non-public personal information collected by your dealership.
• Categories of affiliates and unaffiliated third parties to whom we disclose such as manufacturer, distributor, etc.
• Your dealership practices regarding the sharing of information about customers with affiliates and unaffiliated third parties.
• If non-public personal information is disclosed to unaffiliated third parties pursuant to a marketing agreement, we need to provide a description of unaffiliated third parties to whom disclosures are made alike advertising agencies and direct mail companies.
• An explanation of the customers’ ability to opt out of such disclosures and the methods to do so (by checking a box on a form etc.)
• Also make any Fair Credit Reporting Act disclosures.
• Information regarding our policies and practices with respect to protecting the confidentiality, security, and integrity of the non-public personal information.

• GRAMM LEACH BLILEY ACT - SAFEGUARDS RULE

This rule deals specifically with protection of consumer information.

It requires us to develop and implement a written Information Security Program.  This applies to the safeguarding of information internally and that of affiliates.  It should include policies and procedures relating to the physical, administrative and technical safeguards in place which protect customer information.

Five required elements of the Safeguards Rule:

• Program Coordinator – We have designated an employee to coordinate our information security program.
• We must identify risks to the security of information which could result in unauthorized disclosure.  Special attention should be given to employee training, management and all information system.
• Risk assessment is the pathway to designing customer information safeguarding and audits should be conducted to ensure effectiveness.
• We must oversee service providers that have access to consumer information through our dealership.  The chain of information must be protected.
• We must regularly review our information security program.

We must make sure our dealerships website is in full compliance as well.  Penalties for non-compliance for either rule include fines up to $11,000 per violation, long-term consent decrees and the possibility of dealer license revocation.

• HOLDER IN DUE COURSE DOCTRINE

The FTC has adopted this ruling which allows a consumer to stop payments on their installment contracts, under preset guidelines, if the goods or services they purchased are defective, misrepresented or fraudulently sold.  Prior to this rule, the consumer was required to continue making payments if the contract had been passed to a third party as in the case of indirect arrangements.

A “Holder-in-Due-Course” is on who takes a negotiable instrument:

• For value
• In good faith
• Without notice that is overdue or had been dishonored, or of any defense against it, or claim to it on the part of any person
• The general rule is that such a holder will take a negotiable instrument free from all claims on the part of any person and free from most defenses for non-payment

Our dealership must for our own contracts and for those of an indirect source ensure that this statement appears in ten-point bold fact type on the contract.

ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF.  RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTORS HEREUNDER.

Failure to insert the above statement is an unfair trade practice carrying a maximum fine of $10,000.

For instances where holder-in-due-course is invoked by the consumer, the dealer/lender reserve agreement normally requires that, if payments will be interrupted for a lengthy period or discontinued altogether, the dealer repurchase the contract from the lender.

Penalties are limited to the amount already paid by the debtor on the installment contract.

• MOTOR VEHICLE WARRANTY ENFORCEMENT ACT - (Lemon Law)

In essence, this act embellishes the federal warranty legislation, requires manufacturers to perform within the context of their written warranty, and prescribes time periods for repair by the dealer/manufacturer and/or refund or replacement if repair is not accomplished.

• Claims are limited to defects that fall under the written warranty and “effect use, market value, or safety of the motor vehicle to the consumer” filed within 6 months of warranty expiration or 18 months after delivery, whichever is first.
• The dealer has three attempts to correct the problem.
• The manufacturer then has one additional opportunity to correct the defect.
• Vehicles that have been out of service for accumulative total of 15 or more working days also are candidates for relief.
• The case is heard by an informal settlement dispute panel to determine qualification.
• If the case qualifies and all other criteria have been met, refund or replacement will be required.
• Additional civil relief is available to the consumer via the courts.

• NOTICE OF RESCISSION RIGHTS

When a complete finance contract prepared by the dealership is executed by the buyer, it is necessary that the customer is fully disclosed and has signed the notice of rescission rights.

• Buyer agrees to furnish seller any documentation necessary to verify information contained in the buyers credit application.
• Buyer understands that it may take a few days for seller to verify the credit of the buyer and assign the contract.  In consideration of seller agreeing to deliver the vehicle, buyer agrees that if seller is unable to assign the contract to any one lender with whom the dealer regularly does business, then the dealer / seller may elect to rescind the contract.
• Should seller elect to rescind, seller shall within ten days of the date of the contract, give buyer notice of the rescission.  Notice is deemed given upon written notice via U.S. Mail directed to buyer at the address listed on the contract or any other method notice is actually given.  Upon receipt of notice buyer shall immediately return the vehicle to the seller in the same condition as when sold, reasonable wear and tear excepted and the contract will be deemed rescinded.  Seller agrees upon rescission to restore to buyer all consideration received in connection with the contract including any trade in vehicle.
• In the event the vehicle is not returned to the seller, buyer shall be liable for all expenses incurred by seller in obtaining possession of the vehicle including attorney’s fees and the seller shall have the right to repossess wherever the vehicle may be found.
• While in possession of buyer, all terms of the contract, including those relating to use of vehicle and insurance shall be in full force.  All risk of loss or damage is assumed by buyer until the vehicle is returned to the seller.

These points represent the main body of Paragraph K on the reverse side of the contract.

• THE PATRIOT ACT

http://www.treas.gov/offices/enforcement/ofac/index.shtml

THE “OFAC” LIST

The Office of Foreign Assets Control (“OFAC”) of the US Department of the Treasury administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction.  OFAC acts under Presidential wartime and national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze foreign assets under US jurisdiction.  Many of the sanctions are based on United Nations and other international mandates, are multilateral in scope, and involve close cooperation with allied governments.

IN LAYMAN’S TERMS…

After 9/11 the federal government, in their efforts to battle terrorism, adopted this act to prohibit U.S. companies from conducting business with entities that may have ties to both domestic and overseas terrorism.  They refer to these entities as:

Specifically Designated Nationals or SDN’s

Banks, credit bureaus & credit unions are doing this to protect themselves which, in turn, may not be as big a concern as your cash customers.  Check with your lenders to insure compliance.

PENALTIES

Individuals                                                      $100,000

Corporations                                                   $1,000,000

Extreme Cases (Intent)                                   $10,000,000

OFAC COMPLIANCE

You are prohibited by law, The Patriot Act, to conduct business with any of the people or entities on the OFAC list.

• IRS/ FinCEN 8300 - CASH REPORTING RULES

Any person in a trade or business who receives more than $10,000 in a single transaction or in a related transaction must file form 8300.

What payments require reporting?

You must file to report cash paid if it is:

1. More than $10,000 in a single payment OR more than one payment within twelve months
2. From the same buyer
3. Received in a single or related transaction