iiada street smart feb/mar 13

• WHAT IS THE FTC “UP TO?”• PROPOSED USED CAR RULE CHANGES

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FEBRUARY/MARCH 2013PRSRT Standard

U.S. Postage

PAIDDALLAS, TEXASPermit No. 2079

V i s i t u s a t w w w . i o w a i a d a . c o m

I O W A I N D E P E N D E N T A U T O M O B I L E D E A L E R S A S S O C I A T I O N

STREET SMART10 Things You Must Know About Service Contracts

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FEBRUARY/MARCH 2013 S T R E E T S M A R T

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insideMAGAZINE CONTENTS04 President’s Letter06 All About Service Contracts08 What is the FTC “Up To?”12 CarLawyer15 Proposed Used Car Rule Changes18 Compliance Overdrive

WHAT’S NEW

ADVERTISERS INDEXADESA ....................................... Inside Front CoverAlly ....................................................................11CarMax Auctions ................................................15Manheim.com ......................................................9Manheim Minneapolis .................Inside Back CoverManheim Northstar ....................Inside Back CoverNEXTGEAR Capital .........................................5, 13Protective ............................................................7VAuto ....................................................Back Cover

Certified Master Dealer Program - Feb. & April 2013 Educates dealers on how to manage and grow a profitable business “Effective Management Practices”, “Business Planning”, “Human Resources”, “Merchandising”. “Financial Management” Call (800)756-4232 to sign up.

TAKE US WITH YOUwww.niada.tv - Free Dealer Education 24/7

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NATIONAL INDEPENDENT AUTOMOBILE DEALERS ASSOCIATIONWWW.NIADA.COM • WWW.NIADA.TVNIADA HEADQUARTERS: 2521 BROWN BLVD. • ARLINGTON, TX 76006-5203 PHONE (817) 640-3838FOR ADVERTISING INFORMATION CONTACT: TROY GRAFF (800) 682-3837 OR [email protected] Smart is published 6 times per year by the National Independent Automobile Dealers Association Services Cor-poration, 2521 Brown Blvd., Arlington, TX 76006-5203; phone 817-640-3838. Periodicals postage paid at Dallas, TX and at additional offices. POSTMASTER: Send address changes to NIADA State Publications, 2521 Brown Blvd., Arlington, TX 76006-5203. The statements and opinions expressed herein are those of the individual authors and do not necessarily represent the views of Street Smart or the National Independent Automobile Dealers Association. Likewise, the appearance of advertisers, or their identifica-tion as members of NIADA, does not constitute an edorse-ment of the products or services featured. Copyright© 2013 by NIADA Services, Inc. All rights reserved.STATE MAGAZINE MGR./SALES Troy Graff • [email protected] Andy Friedlander • [email protected] DIRECTOR Christy Haynes • [email protected] Nieman Printing

OFFICEFOR INFORMATION ON HOW TO BECOME A MEMBER PLEASE CONTACT JUDY WILSON IIADA • 409 EAST MARKET • PANORA, IA 50216(641) 755-4177 • [email protected]

BOARD OF DIRECTORSPRESIDENTDouglas Livy, Jr.Quality Motors of Ames, Ltd.705 S. Duff AvenueAmes, Iowa 50010Ph: 515-232-1780

CHAIRMAN OF THE BOARDLouise Cordes Jim Cordes Motors, Inc.104 E. Main St., P.O. Box 68New London, Iowa 52645 1-319-367-2271

VICE PRESIDENTDavid A. FarmerDavid A. Farmer, Inc.1613 FranklinCenter Point, Iowa 522131-319-849-2432

TREASURERJudy Wilson409 E. Market StreetP.O.Box 337 Panora, Ia. 50216Ph: 641-755-4177

REGIONAL REPRESENTATIVESMerrill HitchcockMerrill’s Garage317 N. 8th StreetWinterset, Ia. 50273Ph: 515-462-1683

Roger PoulsenThe Car Guys1301 S.W. 7th StreetAtlantic, Ia. 50022Ph: 712-243-6915

Robert PippertPippert Cars & Trucks2047 Highway T-47P.O. Box BGladbrook, Iowa 50635641-473-3121

Clay WinterboerCarroll Car Credit Co.409 E. 6th St., Box 805Carroll, Ia. 51401Ph: 712-792-0140

Jim HarbachJ’s Auto945 E. MainManchester, Ia. 52057Ph: 563-927-2811

Doug WilsonLake Country Auto409 East Market St.P.O. Box 341Panora, Iowa 50216641-755-3048

Linda KilgoreKilgore’s Enterprises Inc.501 E. TownlineCreston, IA 50801641-782-5512

Jeff SchneiderPocahontas Sales & Service205 E. Elm Ave. P.O. Box 66Pocahontas, IA 50574712-335-4470

Kim NelsonNelson Automotive LLC300 Sandpiper Court P.O. Box 466Polk City, IA 50226515-984-9600

Administrative Offices409 East Market StreetP.O. Box 337Panora, Iowa 50216Ph: 641-755-4177Fax: 641-755-3247Email: [email protected] Free: 866-962-9202

THIS TELEPHONE LINE RECEIVES NUMEROUS CALLS DURING THE DAY, SO AN EMAIL ADDRESS HAS BEEN ESTABLISHED WHERE QUESTIONS CAN BE SENT. THE EMAIL ADDRESS IS: [email protected].

The motor vehicle investigations information line provides a way for the public to request information, ask questions or file a complaint related to investigative duties and responsibilities.

This line is the primary point of contact to reach an investigator who is responsible for investigations in a specific area of the state of Iowa. To ensure accurate information is provided, the motor vehicle investigations information line is answered by a motor vehicle enforcement investigator.

The hours of operation are Monday through Friday 8:30 a.m. to 3:30 p.m. As this line receives numerous calls during the day, please leave a message if the line is busy and your call will be returned promptly.

KNOW WHERE TO LOOK FOR RECALL INFORMATION ON VEHICLESVehicle dealers needing information on factory recalls can visit www.recalls.gov or find manufacturer

toll-free numbers by going to www.autopedia.com/html/HotLinks.html and making contact with the respective automaker.

Know what recalls are pending on vehicles before you purchase them and give your customers peace of mind by checking out possible recalls before you retail the vehicle.

FOR FURTHER INFO PLEASE VISIT WWW.SAFERCAR.GOV.

INVESTIGATIONS INFORMATION LINE TOLL FREE: 1-866-908-4636

IIADA has two distributors who will provide the Wolters Kluwer Financial Services retail installment contracts for Iowa dealers.

These retail installment contracts have a compliance warranty. In some cases, you will need to have your software provider reprogram for you. You may order by phone or online and these will be shipped directly to the dealership. Thank you for working with these distributors.

PLEASE CONTACT: WILSON DISTRIBUTOR SERVICE • 1-800-634-0974 • WWW.WDS-USA.COM OR ADG - AUTOMOTIVE DEVELOPMENT GROUP • 952·937·9222 • WWW AUTOMOTIVEDEVELOPMENTGROUP.COM

RETAIL INSTALLMENT CONTRACTS

I N D U S T RY R E S O U RC E S

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IIADA Members and Friends of IIADA,As I write this letter as your President

for the last time, I would like to say how much fun these past two years have been. I have enjoyed the opportunity to meet so many of you – either at the State Conventions, auctions, or simply on the phone while answering a question you may have had. (Though I think I referred most of these questions to Judy Wilson. If Judy doesn’t know the answer, then she surely knows where to find it.)

I would like to thank all of the approved Approved Benefit Providers and auctions, without whose help the State Conventions wouldn’t happen. I urge each and every one of you to attend the next convention. It is one of

the cheapest, most fun weekends you will spend with the Benefit Providers and your fellow dealers. You will gain knowledge and go home with a renewed faith in the automobile business.

I also want to thank the IIADA Board members that I have had the pleasure to work with for their time and support.

I urge you to become active in our association. It will elevate your knowledge of the industry, plus you will come to know a lot of great people who are happy to share their knowledge, and who will help you with any problem that pops up, at the drop of a hat. In general, you will have an all-around great time getting to know them.

I would like to challenge each of our

nearly 300 current members to sign up at least one new member during 2013. It really doesn’t take much effort on your part. We’ve even provided the membership application in this publication. The more members we have, the more people and resources we have to work with to accomplish our goals. Imagine how much we could accomplish if we had 450 to 500 members by the end of 2013!

In conclusion, I wish all of you a happy and prosperous 2013. May you achieve all of your goals this year.

Happy Selling,

Doug LivyPresident, IIADA

LETTER FROM THE PRESIDENTA S S O C I AT I O N N E W S

E D U CAT I O N U P DAT E

REMEMBER TO DISPLAY YOUR DEALER EDUCATION CERTIFICATE

Did you complete the 5-hour Dealer Education Renewal class in order to renew your license for 2013-2014? If so, remember to display your attendance certificate beside your dealer’s license. You will be required to show this certificate to the DOT investigative officer during a DOT audit.

Also, don’t forget that you’ll need to take the class again in 2014 in order to renew your license for the next renewal period. IIADA will hold renewal classes at the community colleges throughout Iowa during 2014, and we also hope to make a class available online. This would help dealers take the class at their leisure, rather than having to travel.

For individuals looking to become a dealer, IIADA will also be offering an 8-hour Pre-Licensing class each month. Dates and locations are available online at www.iowaiada.com.

You’re Invited!

ANNUAL IIADA

MEETING & SCHOLARSHIP

AWARDSApril 26-27, 2013Jester Park Lodge

Granger, Iowa – Saylorville LakeDetails at: www.iowaiada.com

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M A N Y D E A L E R S ( M I S ) I D E N T I F Y S E RV I C E C O N T R AC T S A S E X T E N D E D WA R R A N T I E S

1. Defining “Service Contract”A service contract is an agreement for the

repair, replacement, or maintenance of a product, or for payment to repair, replace, or maintain a product for a specified period of time for a cost that is in addition to that paid for the product. Many dealers (mis)identify a service contract as an “extended warranty.” However, this is a misnomer because the dealer is not warranting the vehicle, but insuring it against certain problems.

2. Service Contract RegulationUnder certain state laws, such service

contracts are subject to the jurisdiction of the state’s department of insurance.

3. Financial Security Requirements for Service Contract Providers

If your state regulates service contracts and there are no special exemptions pertaining to dealerships offering service contracts for their own vehicles, your dealership must first obtain a separate license from the department of insurance prior to offering such a contract. Frequently, provider applicants have to show financial security in one of three ways: a reimbursement insurance policy with the required endorsements; a funded reserve account, security deposit and audited financial reports; or proof that the dealership has a specified minimum net worth. Under most circumstances, reimbursement insurance policies are the simplest and least expensive option.

4. Contractual or Financial Responsibility Matters

Many states have special rules for motor vehicle dealers. If a motor vehicle dealer is only selling another company’s service contracts, but is not contractually or financially responsible under those contracts, the motor vehicle dealer is frequently considered a seller not subject to registration. However, if the motor vehicle dealer is selling its own service contracts and is contractually and financially responsible

for those contracts, the motor vehicle dealer is a service contract provider, and must usually register unless the dealer is selling service contracts only on the vehicles the dealer sells.

5. “Service Contract Providers” Versus “Service Contract Sellers”

Under many state statutes, the person, company, or entity contractually obligated to the service contract purchaser under terms of the contract is the service contract provider. This differs from the service contract seller, which is the entity other than the provider or administrator of a service contract that markets, sells, offers to sell, negotiates or issues a service contract to a consumer on behalf of a provider but is not contractually obligated to a service contract holder under the terms of a service contract. Service contract sellers are not normally required to be registered.

6. The Administrator Might Need Its Own Registration

Please note that if the service contract administrator of your contracts is a separate legal entity from the service contract provider, the administrator might need its own separate administrator registration.

7. Identity Recovery Service Contract Providers

Under many state laws, you do not need a separate provider registration if you are already registered as a service contract provider and want to add identity recovery services to existing automobile service contracts that are sold to consumers at the time of a vehicle purchase where the vehicle and the service contract are financed. However, you often will need a separate identity recovery service contract provider registration if you plan to offer a stand-alone identity recovery service contract to consumers at the time of a vehicle purchase where the vehicle and the contract are financed.

8. Required Terms and ConditionsIn addition to entity registration, the

service contract itself must have terms that meet the requirements of the governing statutes and regulations. That usually includes the amount of time a consumer has to cancel the service contract, whether and when the service provider can cancel the contract, the terms of cancellation and whether and how much of a refund the consumer is to receive. Statutes also require that records be maintained for a specific period after expiration of the service contract.

9. Returns and Cancellations of Service Contracts by Consumers

The amount of time a consumer has to cancel the service contract and the terms for cancellation are often determined by when the contract was purchased. Most states require the contract to contain those terms. Some state laws take into account any claims the consumer made under the service contract prior to cancellation. The amount of the refund is then determined by the date of the contract and the amount paid for claims.

10. PenaltiesFailure to register as a service contract

provider or administrator, or to comply with any of the statutory terms, frequently results in significant fines and penalties. In addition, consumers who purchased service contracts from unregistered providers could be entitled, at their election, to retain the contract or receive a refund for all monies paid.

BY ANDREW GARCIA Dealer Business JournalANDREW GARCIA IS AN ATTORNEY WITH AUTOLAW GROUP AND SERVES AS ASSOCIATE LEGAL COUNSEL FOR THE LEEDOM GROUP. HE HAS WORKED IN THE AUTOMOTIVE REALM FOR HIS ENTIRE LEGAL CAREER AND IS EXPERIENCED IN BANKRUPTCY, BUSINESS LITIGATION, COLLECTIONS, CONTRACTS, CORPORATE GOVERNANCE AND REGULATORY COMPLIANCE. HE IS ALSO PROFICIENT IN CONSUMER FINANCE AND PAYMENT PROCESSING LAW. YOU CAN CONTACT HIM AT ANDREW@ AUTOLAWGROUP.NET

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N E W A DV E R T I S I N G G U I DA N C E F RO M T H E G OV E R N M E N T

WHAT IS THE FTC “UP TO”?You see them all the time, and maybe you

use them yourself – advertisements claiming that a product or service will achieve or provide a benefit of “up to,” “as much as,” or “as low as” a specified figure. Car dealers and finance companies, for example, may promote prices “as low as $16,995,” rates “as little as 3% APR,” or savings “as much as $5000.” Claims of this sort are usually lumped together under the term “up to” claims.

Typically, what advertisers are trying to say when they use a phrase like “up to” is that individual results will vary and that the stated figure is a best-case scenario that not everyone (or even most people) will receive. Unfortunately, that message may not be what consumers – or the government – receive, and it is consumer perception, not advertiser intent, that ultimately counts. A recent action by the Federal Trade Commission (FTC) – which holds the authority to prosecute deceptive advertising by auto dealers and non-bank finance companies – indicates that the FTC believes that consumers interpret “up to” claims differently from what advertisers have assumed.

The bottom line is this: Be careful in applying such claims when a significant percentage of your customers may not achieve the optimum result.

The Copy TestOn June 29, 2012, the FTC published a

report that summarized the results of a copy test it had conducted on how consumers interpret “up to” claims. A copy test is a type of consumer survey in which consumers are shown an advertisement and asked questions to elicit how they interpret the ad’s messages. The test included three versions of an advertisement for replacement windows:

1. Ad 1 stated that the windows are “PROVEN TO SAVE UP TO 47% ON YOUR HEATING AND COOLING BILLS” (emphasis in original).

2. Ad 2 was identical to Ad 1, but omitted the words “UP TO.”

3. Ad 3 was identical to Ad 1, but with an added disclosure: “The average Bristol Windows owner saves about 25% on heating and cooling bills.”

Consumers who took part in the test were divided into three groups, each of which was shown one of the three versions, and the consumers were asked how they interpreted

the claims the ad was making. By comparing the results from the three groups of consumers, we can learn whether or not adding the words “up to” to the 47% savings claim or including a prominent qualifying disclosure about the average result changed the ad’s meaning for consumers. The FTC found that neither addition changed how consumers interpreted the 47% claim. About half of the consumers in each group understood the claim to mean that users of the windows generally could expect to achieve the full 47% savings.

In releasing the report, the FTC provided the following guidance: “The FTC believes the report will help guide advertisers to avoid the use of misleading ‘up to’ claims. It reinforces the FTC’s view that advertisers using these claims should be able to substantiate that consumers are likely to achieve the maximum results promised under normal circumstances”. This is a new, tougher standard than the FTC has applied to “up to” claims in the past.

The New StandardKeep in mind that the FTC has not issued

a formal, legally binding interpretation of “up to” claims, such as might appear in an FTC rule. Nonetheless, it is important for advertisers to understand the FTC’s views and to conform their practices to the extent possible. Taken literally, “likely” is a synonym for “most.” Therefore, to comply with this standard, you must show that most (more than 50%) of your customers will achieve the specified, maximum result. If those customers can achieve that result only under particular or limited circumstances (for example: the best rate only applies to consumers in certain geographic areas), you must disclose the limited circumstances in conjunction with your claim.

How Broadly Does the New Standard Apply?

Since it released the copy test, the FTC has offered a bit of clarification on how broadly its new standard might apply beyond the situation it tested – energy savings claims for replacement windows. The FTC has acknowledged that not all “up to” claims necessarily convey the same message to consumers.

To take an extreme example: When a casino advertises that people who play the slots at their casino can win “up to $50,000,” reasonable consumers wouldn’t

expect that they were “likely” to win that amount. Or, if a marketer of weight-loss remedies advertises that users can lose “up to 100 pounds,” reasonable consumers would recognize that these would be unusual results and that most people wouldn’t lose anywhere near that amount – and probably don’t need to! The FTC has also acknowledged, in other contexts, that including qualifying disclosures might sometimes be sufficient to dispel the impressions that consumers are likely to obtain the best possible results.

What Does This Mean for Auto Dealers and Finance Companies?

What we want to know is how the FTC intends to apply this new standard to the types of advertising claims that auto dealers and finance companies might make – for example, advertising prices or rates “as low as ….” The short answer is that we don’t know for sure at this point. But as a long-time FTC official, I can make an educated guess. The FTC typically does not waste its scarce resources on trivial cases that involve minor or technical violations. Its focus is on practices that cause substantial harm to consumers.

So, if you advertise rates “as low as 2.99%” and a substantial percentage (say 30 or 40%) of your customers would qualify for that rate, you probably can avoid FTC enforcement even if you don’t technically meet the “likely” standard. To reduce the risk even further, you should make clear how and why the results may vary and the range of possible outcomes (for example, “For well-qualified borrowers. Rates for other borrowers between 3% and 10%, depending on your credit history.”). Remember – to be useful, disclosures of this sort need to be clear and prominent, not buried in a footnote somewhere.

So, be careful how and when you make “up to” claims. The higher the proportion of customers who will achieve the maximum result and the clearer you make the qualifications, the greater the likelihood that you will avoid FTC scrutiny. Needless to say, that’s a good goal to have!

BY JOEL C. WINSTON, CounselorLibrary.comJOEL C. WINSTON IS A PARTNER IN THE WASHINGTON, D.C., OFFICE OF HUDSON COOK, LLP. HE CAN BE REACHED AT BY EMAIL AT [email protected].

A FULL VERSION OF THIS ARTICLE APPEARED IN THE ANTITRUST SOURCE (OCTOBER, 2012)

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C O N S U M E R SA F E T Y A DV I S O RY

The National Highway Traffic Safety Administration (NHTSA) issued a consumer safety advisory to alert vehicle owners and repair professionals to the dangers of counterfeit airbags. NHTSA has become aware of a problem involving the sale of counterfeit airbags for use as replacement parts for vehicles involved in a crash. While these airbags look nearly identical to certified, original equipment parts—including bearing the insignia and branding of major automakers — NHTSA testing showed consistent malfunctioning, ranging from non-deployment of the airbag to the expulsion of metal shrapnel during deployment.

NHTSA has identified certain vehicle makes and models for which these airbags may be available. While the full scope and scale of the problem of counterfeit airbags is uncertain, NHTSA estimates that the issue affects less than 0.1 percent of the U.S. vehicle fleet.

Consumers who may be at risk include the following:

• Consumers who have had airbags replaced within the past three years at a repair shop that is not part of a new car dealership

• Consumers who have purchased a used car that may have sustained an airbag deployment before their purchase

• Consumers who own a car with a title branded salvage, rebuilt, or reconstructed

• Consumers who have purchased replacement airbags from eBay or other non-certified sources—especially if they were purchased at unusually low prices (i.e. less than $400)

Anyone who thinks they might be at risk should contact their auto manufacturers’ call center to have their vehicle inspected. Inspections and any necessary airbag replacements will be at the consumer’s expense.

“Anytime equipment that is critical to protecting drivers and passengers fails to operate properly, it is a serious safety concern,” said Transportation Secretary Ray LaHood. “We want consumers to be immediately aware of this problem and to review our safety information to see if their vehicle could be in need of inspection.”

“We expect all motor vehicle equipment to meet federal safety standards — and airbags in particular play a central role in keeping drivers and passengers safe in the event of a crash,” said NHTSA Administrator David Strickland. “That’s why it’s critical that vehicle owners work with their automotive dealers and repair professionals to ensure they use the appropriate, original equipment parts in the event they need to replace their airbag.”

NHTSA is currently gathering information from automakers about their systems for verifying the authenticity of replacement parts, and is working with the industry to make consumers aware of the potential safety risks posed by counterfeit airbags. Moving forward, the agency will continue to monitor consumer complaints, police accident reports, and other sources for additional information.

MAKE MODEL YEAR(S) MODEL(S)Acura 2009-2011 TSXAudi 2006-2009 A3, A4, A6, A8, Q5, Q7BMW 2007-2011 X5, E70, E60, E61 2008-2010 5-series, 528i, 535i 2004-2007 5-series, 525i, 530,

535, E60, E61 2007-2011 E90, E91 Not listed E92, E93 2007-2011 X5, E70 2011-2012 X3Buick 2010-2011 LacrosseChevrolet 2011-2012 Cruze, Volt 2006-2010 Aveo 2012 CamaroFord 2012 Focus 2005-2009 MustangHonda 2003-2012 Accord 2006-2011 Civic 2002-2011 CRV 2007-2011 Fit 2009-2011 Pilot, Insight, Crosstour 2011 OdysseyHyundai 2007-2011 Elantra Not listed Genesis, SonataInfiniti 2007-2011 G35, EX35Kia 2010-2011 Sole/Forte 2004-2009 SpectraLand Rover 2012 Ranger Rover EvoqueLexus 2006-2011 IS250, IS350, IS-F 2003-2008 GX470 2007-2009 RX350 Not listed ES350Mazda 2004, 2010-2012 Mazda 3Mercedes 2009-2011 C, GLK 2010-2011 E350, E550 2007-2008 S550 2006-2009 ML 2009-2010 GL, MLMitsubishi Not listed OutlanderNissan 1992-2002, 2010-2011 Quest 2009-2011 Cube 2007-2077 Versa 2009-2010 Murano Not listed AltimaSubaru 2008-2009 Forester, Imprezza,

Outback 2010-2011 LegacySuzuki 2007-2010 SX4Toyota 2002-2006, 2012 Camry 2009-2011 Corolla, Matrix 2007-2011 Yaris 2004-2011 Sienna 2004-2011 Tacoma 2010-2012 Prius 2003-2011 Tundra 2003-2006 Sequoia 2003-2010 Land Cruiser 2004-2010 Highlander 2004-2009 4Runner 2007-2009 Solara 2005-2011 RAV4Volkswagen 2006-2010 JettaVolvo Not listed XC60, XC70,

V70, S60, S80

As of the date of publication, NHTSA was aware of counterfeit airbags available for the following vehicle makes and models:

For additional information, including a list of manufacturer call centers, visit www.SaferCar.gov.

During a dealer audit, Iowa Department of Transportation (DOT) investigators may find violations requiring enforcement action. Examples of violations that may be found include:

• Offering a vehicle for sale without a title, or having a title not properly assigned

• Improper use of dealer plates, or improper use of registration applied for cards

• Failing to deliver a title or transfer title within 30 days

The typical fine for these types of violations is $100 plus court costs and surcharges. A dealer may choose to plead guilty and pay the fine(s) to the clerk of court, or may opt to appear in court.

More serious violations are also sometimes found during an audit, including odometer fraud, title fraud, and other fraudulent practice activity. These violations can stem from false or no odometer statements, or from failing to report accurate vehicle sales information when collecting registration and title fees. These types of violations typically require a court appearance. If a dealer is found guilty, the court can administer fines ranging from $300 to several thousand dollars. There is even a potential for jail time.

Besides criminal charges, investigators may recommend administration action be taken against the dealer’s license because of the serious nature of violations found. This could result in a suspension of the dealer license or a more serious action, such as a 5-year ban from being associated with a licensed dealer.

If violations of the Iowa Consumer Credit Code are found during an audit, this information is also recorded and provided to the Iowa Attorney General’s office for follow-up.

Major Paul J. SteierOffice of Motor Vehicle Enforcement – InvestigationsIowa Department of Transportation

IOWA DOT MOTOR VEHICLE ENFORCEMENT- AUDITING ENFORCEMENT ACTIONS

NHTSA Alerts to Dangers of Counterfeit Airbags

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L E G I S L AT I V E A N D R E G U L AT O RY H I G H L I G H T S

The CARLAWYER ©Here’s our monthly collection of selected

legislative and regulatory highlights, and a recap of some of the many auto sale and financing lawsuits we follow each month.

Remember, what we report here is not even close to being every recent development. We select those we think are important or interesting to car dealers. Note that this column does not offer legal advice. You should consult your dealership lawyer with any legal questions.

We include items from other states. Why? We want you to be able to see new legal developments and trends. Also, another state’s laws might be a lot like your own state’s laws – if AGs or plaintiffs’ lawyers are pursuing particular types of claims, those laws and claims might soon appear in your state.

As always, though, there is no substitute for checking with your own lawyer before you rely on anything we report or if you have any questions.

FEDERAL LAWInflation Alert! On November 21, 2012,

the Consumer Financial Protection Bureau (CFPB) and the Federal Reserve Board published final rules amending Regulation Z (TILA) and Regulation M (Consumer Leasing Act, or CLA) by increasing the dollar threshold for exempt consumer credit and lease transactions. The Dodd-Frank Act provided that the dollar amount thresholds for TILA and the CLA must be adjusted annually by any annual percentage increase in the consumer price index.

Based on the adjustments, in 2013 TILA and CLA protections generally will apply to consumer credit transactions and consumer leases of $53,000 or less. Although the Dodd-Frank Act generally transferred rulemaking authority under TILA and the CLA to the CFPB, the Federal Reserve retains authority to issue rules for certain motor vehicle dealers – that’s why they were involved with this. The adjustments to the thresholds took effect on January 1, 2013.

CFPB Report Card: The CFPB released its Supervisory Highlights report on October 31, 2012. The CFPB periodically issues a Supervisory Highlights report to inform the public and the financial services industry about its examination program. Between July 2011 and September 2012, the CFPB visited banks with more than $10 billion in assets, their affiliates, and nonbank lenders. The CFPB reported problems with certain

credit and lending disclosures, including creditors who sometimes increased credit card limits without notifying co-signers. In addition, the CFPB highlighted that creditors have reported inaccurate information to credit bureaus. The CFPB also assessed the institutions’ efforts to develop and maintain effective compliance management systems.

Dealer Targeted for Privacy Violations: On October 26, 2012, the Federal Trade Commission announced that it accepted a final settlement with Franklin’s Budget Car Sales, Inc., a Georgia car dealership, resolving allegations that it illegally exposed consumers’ sensitive personal information by allowing peer-to-peer (P2P) file-sharing software to be installed on its computer network. Installation of the software was in violation of the FTC Act; the Safeguards Rule, which implements Section 501(b) of the Gramm-Leach-Bliley (GLB) Act; and the Privacy Rule, which implements Section 503 of the GLB Act. Franklin’s also allegedly failed to provide annual privacy notices and failed to provide a mechanism by which consumers could opt out of information sharing with third parties, in violation of the GLB Privacy Rule. The settlement bars misrepresentations about the privacy, security, confidentiality, and integrity of any personal information collected from consumers, and also requires Franklin’s to establish and maintain a comprehensive information security program.

STATE DEVELOPMENTSWe have only one state development to

report this month: The Texas Department of Banking and Securities amended the bulk of the rules in Chapter 84 concerning motor vehicle installment sales to improve consistency, grammar, punctuation, capitalization, and formatting and to provide clarification, more precise legal citations, and improved references to other state agencies.

LITIGATIONVehicle Buyer in Ordinary Course of

Business Has Priority over Floor Plan Lender: A collector of classic automobiles engaged a company to help him locate, buy, sell, and trade cars. The collector bought three vehicles, but they were titled in the company’s name for marketing purposes. After the company defaulted on its floor

plan agreement with a bank, it transferred title to the three vehicles to the collector for a nominal purchase price, but continued to store the vehicles for the collector. The bank subsequently sued the company, and the three vehicles were seized.

The collector sued the bank in the U.S. District Court for the Southern District of Ohio, seeking possession of the vehicles. The collector moved for summary judgment, arguing that he had a superior interest as a “buyer in the ordinary course.” The court noted that a perfected security interest will often prevail over a subsequent motor vehicle purchaser unless the purchaser is a “buyer in the ordinary course of business,” who takes the vehicle free and clear of any lien on the seller’s property.

The bank argued that the collector did not fall within the definition of a “buyer in the ordinary course” because he never took possession of the vehicles, and the issuance of the titles occurred only after the company defaulted on its loan obligation. The court disagreed. It found that the statute does not necessarily require that the buyer have possession, so long as the buyer has the right to possession, which the collector had. The court then found that the late titling of the vehicles was insignificant because the collector clearly used his own funds to purchase and insure the vehicles and had complete control over the manner in which they were restored. See Hockensmith v. Fifth Third Bank, 2012 U.S. Dist. LEXIS 154036 (S.D. Ohio October 26, 2012).

Car Buyer Must Show Injuries to Recover against Repossessing Lienholder for Violations of Maryland Law: An individual executed a retail installment sale contract in connection with her purchase of a used car from a Maryland dealership. When the buyer defaulted, the assignee of the contract repossessed the car and sent the buyer a notice stating that the car would be sold by a private sale. After the car was sold, the assignee sent the buyer a notice informing her that the car had been sold at a private sale and that a deficiency balance remained.

The buyer sued under a number of theories, including that the notices violated state law governing the extension of credit and the Maryland Consumer Protection Act. The U.S. District Court for the District of Maryland dismissed these two counts of the complaint because the buyer did not

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show any actual injury. While the assignee charged the buyer for the costs of the sale, her payments and proceeds from the sale did not cover the principal of her debt, and the assignee had already promised not to seek a deficiency.

The court allowed the buyer to proceed on her breach of contract claim for which no actual damages were required because nominal damages are available for breach of contract. See Epps v. JPMorgan Chase Bank N.A., 2012 U.S. Dist. LEXIS 153549 (D. Md. October 22, 2012).

Creditor Liable for Non-Compliant Credit Contract and Notice of Disposition: An individual signed a retail installment contract to buy a used truck, with no finance charge. After she stopped making payments, the creditor repossessed and sold the car. The individual sued for violations of the Truth in Lending Act and Nevada law. The individual claimed that the creditor failed to disclose the Amount Financed and the Finance Charge as

required under Regulation Z, which requires that the credit contract include a brief description of the Amount Financed, such as “the amount of credit provided to you or on your behalf,” and a brief description of the Finance Charge, such as “the dollar amount the credit will cost you.”

The U.S. District Court for the District of Nevada granted the individual summary judgment on this claim. The court concluded that the contract’s term “unpaid balance – amount financed” did not sufficiently describe that this amount was the amount of credit provided and that the contract’s term “finance charge” did not sufficiently describe that this amount was the dollar amount the credit would cost the individual, even though the contract provided that the individual would pay no finance charge.

The individual also claimed that the creditor violated the Nevada version of the Uniform Commercial Code by failing to use the correct form of notice of disposition. The court granted the individual summary

judgment on this claim as well, where it determined that the creditor’s notice of disposition did not include a statement that the individual was entitled to an accounting of the unpaid indebtedness, as required by Nevada law. See Limtiaco v. Auction Cars.com, LLC, 2012 U.S. Dist. LEXIS 148474 (D. Nev. October 15, 2012).

So, there’s this month’s roundup! Stay legal, and we’ll see you next month.

BY THOMAS B. HUDSON AND NICOLE FRUSH MUNROTOM ([email protected]) AND NIKKI ([email protected]) ARE PARTNERS IN THE LAW FIRM OF HUDSON COOK, LLC. TOM IS THE AUTHOR OF SEVERAL BOOKS, AVAILABLE AT WWW.COUNSELORLIBRARY.COM. TOM IS ALSO THE PUBLISHER OF SPOT DELIVERY®, A MONTHLY LEGAL NEWSLETTER FOR AUTO DEALERS, AND THE EDITOR IN CHIEF OF CARLAW®, A MONTHLY REPORT OF LEGAL DEVELOPMENTS IN ALL STATES FOR THE AUTO FINANCE AND LEASING INDUSTRY. NIKKI IS A CONTRIBUTING AUTHOR TO THE F&I LEGAL DESK BOOK AND FREQUENTLY WRITES FOR SPOT DELIVERY. SPOT DELIVERY, CARLAW AND THE BOOKS ARE PRODUCED BY COUNSELORLIBRARY.COM LLC. FOR INFORMATION, CALL 410-865-5411 OR VISIT WWW.COUNSELORLIBRARY.COM. COPYRIGHT COUNSELORLIBRARY.COM 2012, ALL RIGHTS RESERVED. SINGLE PUBLICATION RIGHTS ONLY, TO THE ASSOCIATION. (11/12) HC# 4834-7622-9905.

MIDWEST AUTO AUCTION DIRECTORYADESA DES MOINES1800 Gateway DriveGrimes, IA 50111(515) 986-1200Fax: (515) 986-1201www.adesa.comGeneral Manager: Jeff LisleFleet/Lease Manager: Kevin ParmenterConsignment Sale every Tuesday at 9:30 a.m.Fleet/Lease Sale Tuesday 10:30 a.m.

ADESA KANSAS CITY101 S.W. Oldham RoadLee’s Summit, MO 64081(816) 525-1100(800) 950-2350Fax: (816) 525-4714General Manager: Harold ChapmanDealer Sales Manager: Tamara Kunkel Tuesday 9:30 a.m.

ADESA MINNEAPOLIS18270 Territorial RoadDayton, MN 55369763-428-8777763-428-8701Sale: Tuesday, 10 a.m.www.adesa.com

ADESA SIOUX FALLS46893 271st StreetP.O. Box 218Tea, SD 57064(605) 368-5364 Fax: (605) 368-2808 General Manager: Bob HolmWednesday Sale 10:00 a.m. IAAI SALVAGE SALE EVERY OTHER WEDNESDAY – 8:30 A.M.

ADESA ST.LOUIS7858 Highway 61-67Barnhart, Missouri 63012636-475-9311

ADESA WISCONSINW 10415 State Road 33Portage, WI 53901608-742-8245608-742-4415 (f)Tony Manwarren, general managerSale: Thursday, 9:30 a.m.www.adesa.com

AMERICAS AUTO AUCTION14001 S. KarlovCrestwood, Il 60445(708) 389-4488Fax: (708) 389-4558General Manager/Owner: Larry Hero Wednesday 10 a.m.

DEALERS CHOICE AUTO AUCTION, INC.503 South Wapello RoadMediapolis, Iowa 52637319-394-3510(888) 771-6810319-394-3511 (fax)www.dcaa.comPresident: Monte DelzellNationwide Transportation:EZ Auto ShippersSteve Miller: 866-310-5936Sale Every Tuesday – 6:00 p.m.

DES MOINES AUTO AUCTION1530 S.E. McKinley RoadDes Moines, Iowa 50320(515) 285-8911 Fax: (515)256-9161FRIDAY AT 9:30 A.M. Todd Givant, General Manager

GREATER QUAD CITY AUTO AUCTION4015 78th AvenueMilan, Il 61264(309) 787-6300Fax: (309) 787-4541Tuesday 10 a.m. – Thursday – 6 p.m.General Manager: Larry Anderson

GREATER ROCKFORD AUTO AUCTION5937 Sandy Hollow RoadRockford, Il 61109(815) 874-7800(800) 830-4722Fax: (815) 874-1325 General Manager: Mark Capriola Wednesday 10 a.m.

KCI AUTO AUCTION11101 N. CongressKansas City, MO816-502-3318816-801-8565 (f)Doug DollConsignment Sale: Thursday,9:30 a.m. www.kciaa.com

MANHEIM ARENA ILLINOIS200 West Old Chicago DriveBolingbrook, Il 60440(630) 759-3800(630) 759-9668General Manager: John OlejniczakDealer Sales Manager: Louis Palermo Tuesday 9 a.m.

MANHEIM CHICAGO20401 COX AVENUEMATTESON, ILLINOIS 60443815-806-4222Mike Cesta, General Manager

MANHEIM KANSAS CITY3901 North Skiles RoadKansas City, MO 64161(800) 247-7163Fax: (816) 452-2393 General Manager: Peggy SprengerDealer Sales Manager: Kevin Rhoads Wednesday 9:30 a.m.

MANHEIM MINNEAPOLIS 8001 Jefferson HighwayMaple Grove, MN 55369-4924(763) 425-7653(800) 622-7653Fax: (763) 493-0310www.manheim.comGeneral Manager: Jerry AmanAuction Manager: Carter TheissenAssistant General Manager: Jon EisenmannFleet Manager: Commercial Accounts MGR: Candice CrockettSale every Wednesday; 9am Ford Credit, 9:30am TD Auto Finance, Select Lane and Fleet/Lease/Rental Groups, 9:45am Dealer Consignment. Ford Factory Sale bi-weekly Wednesdays at 12 Noon. TRA Sale weekly, Tuesdays at 1:00pm. Specialty Sale (Heavy Trucks/Equipment/Powersports) bi-weekly, Wednesdays at 12:30pm.

MANHEIM MILWAUKEE561 South Highway 41 - 27th StreetCaledonia, WI 53108(262) 835-4436(800) 662-2947Fax: (262) 835-2684 General Manager: Dennis Worthy Dealer Sales Manager: Kimberly Schure Wednesay 9 a.m.

MANHEIM NORTHSTAR MINNESOTA4908 Valley Industrial Blvd. NorthShakopee, MN 55379(952) 445-5544(888) 445-2277Fax: (952) 445-6773General Manager: Jerry AmanThursday 9 a.m.

MANHEIM OMAHA9201 S. 144th StreetExit 440 off of I-80Omaha, NE 68138(402) 896-8000(800) 218-4192Fax: (402) 896-6758 General Manager: Todd Pfeifer Assist. Gen Manager: Korey Grell Thursday 9:30am.

MID-STATE AUTO AUCTION100 Bach Ave.New York Mills, MN218-385-3777218-385-3232 (f)Rob Thompson, presidentSale: Friday, 10 a.m.www.msaanym.com

MISSOURI AUTO DEALERS EXCHANGE5912 Mitchell Ave.St. Joseph, MO 64507816-232-7653816-232-3019 (f)Pam and Scott WallConsignment Sale: Wednesday, 5:45 p.m.www.moautoexchange.com

NEBRASKA AUTO AUCTION7500 N. 56TH St.Lincoln, NE 68514402-466-8477402-466-7932 (f)www.nebraskaautoauction.comDave LaFleurConsignment Sale: Tuesday, 10:30 a.m.

PLAZA AUTO AUCTION, INC.320 Highway 30 West P.O. Box 147Mt. Vernon, IA 52314(319) 895-6232Fax: (319) 895-6727www.plazaaa.comOwner: Mark GrebOffice Manager: Debbie WelshBecky Thuerauf: Fleet/Lease AdministrationConnie Van Ginkel: Consignment ManagerConsignment Sale every Wednesday at 6:30pm. Fleet/Lease/Repo Sale Wednesday at 7pm.

MANHEIM ST. LOUIS13813 St Charles Rock RoadBridgeton, MO 63044(314) 739-1300(800) 533-5414Fax: (314) 298-3347 General Manager: Victor Ferlaino

TRI-STATE AUTO AUCTIONJct. Highway 11 & 80P.O. Box 735Cuba City, WI 53807(608) 744-2020 (608) 744-3418(800) 356-0625Fax: (608) 744-7425 Owners/Managers: Gerald and Helen BrogleyThursday 6:30 p.m.

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L E G I S L AT I V E A N D R E G U L AT O RY H I G H L I G H T S

FTC Proposes Modifications to Used Car Buyers GuideIt’s not too late to give your feedback

regarding proposed changes to the Used Car Buyers Guide.

Under the Used Car Rule (formerly known as the Used Motor Vehicle Trade Regulation Rule), which has been in effect since 1985, dealers are required to display a Buyers Guide on used cars offered for sale. The Buyers Guide gives consumers important information about the car — for example, whether it’s being sold “as is” or with a warranty, what percentage of the repair costs a dealer will pay under the warranty, and the systems the warranty covers. In states that do not permit sales of used cars “as is,” dealers must display an alternative version of the Buyers Guide.

As part of a systematic review of all of the agency’s rules and guides to ensure that they are up-to-date, effective, and not overly burdensome, in 2012 the Federal Trade Commission (FTC) asked for feedback about the future of the Used Car Rule, which was last reviewed and amended in 1995. Based on what people said, it was concluded that the Rule still benefits consumers. However, the FTC is proposing

some changes to the Buyers Guide.The FTC is seeking comments on the

proposed changes, which it believes will benefit customers without placing an additional burden on businesses. The proposed changes include:

• Adding a statement encouraging consumers to seek vehicle history information and directing consumers to an FTC website for more information about vehicle histories

• Adding a statement in Spanish directing Spanish-speaking consumers to ask for a copy in Spanish, if they desire

• Adding catalytic converters and airbags to the List of Systems on the back of the Buyers Guide

• Placing boxes on the back of the Buyers Guide where dealers will have the option to indicate whether (1) the manufacturer’s warranty still applies; (2) the manufacturer’s used vehicle warranty, such as a manufacturer’s certified used car warranty, applies; or (3) some other used vehicle warranty applies.

• Minor changes to improve readabilityIn addition to these proposed changes, the

FTC is issuing a final Rule that makes minor corrections to the Spanish translation of the Buyers Guide. The revised Spanish-language versions will take effect on February 11, 2013, but dealers may use up any remaining supplies of the current Buyers Guide. The revised Spanish translations can be found on the FTC’s website at business.ftc.gov.

The FTC is also soliciting input to help determine what information should be made available on the newly proposed vehicle history website, and is inviting comments on topics such as the nature and prevalence of deception in Internet used car sales.

The deadline for comments about the Used Car Rule is February 11, 2013.

Comment online at https://ftcpublic.commentworks.com/ftc/usedcarrulenprm/. To comment by mail, write “Used Car Rule Regulatory Review, Project No. P087604” on comments and send them to Federal Trade Commission, Office of the Secretary, Room H-113 (Annex T), 600 Pennsylvania Avenue, N.W., Washington, DC 20580.

ALL COMMENTS RECEIVED WILL BE POSTED AT WWW.FTC.GOV/OS/PUBLICCOMMENTS.SHTM.

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ADVANCED BUSINESS PRODUCTS, INC. Printing, Promotional Products, & WearablesContact: Scott Jayne PO Box 71547 Des Moines IA 50325Phone: 515-225-6343Toll Free: 888-464-2274Fax: 515-225-6510Toll Free Fax: 877-987-3514Website: www.go4abpi.com

ASHTON BONDING AGENCY7505 NE Ambassador Place, Suite APortland, OR 97220800-452-2663503-253-1353 (fax)[email protected]

ASSOCIATIONS MARKETING GROUP INCHealth Insurance Jesse Patton1112 Maple StreetWest Des Moines, Iowa 50265Toll Free: 800-798-6772Phone: 515-270-8178 Fax: 515-270-0398E-mail: [email protected]

AUTO OWNERS INSURANCE 10% DISCOUNT TO ALL IIADA MEMBERSCorcoran & Associates, Inc.Mick and Teresa Corcoran2525 E. Euclid, Suite 102Des Moines, Iowa 50317Phone: 515-262-3141Fax: 515-262-3086Toll Free: 877-518-4051E-mail: [email protected]

AUTO OWNERS INSURANCEEASTERN BORDER OF IOWAAmy GoodnightLOHMAN COMPANIES3901 15TH STREET DMOLINE, IL 61265800-747-8431309-764-5967 (fax)[email protected]

AUTOJINI.COMWebsites for Dealers Contact: Syed Azam310 Main Street Ste 201Ames IA 50010Phone: 515-232-2024E-mail: [email protected]

AUTOMOTIVE DEVELOPMENT GROUP, LLCDealer Compliance Education,F & I Compliance and Training, ServiceContracts, GAP and Protective CoatingsContact: Scott Erikson100 Prairie Center Drive, Suite 200Eden Prairie, Minnesota 55344Scott: (402) [email protected]

CITIZENS COMMUNITY CREDIT UNION2012-1ST AVENUE SOUTHFORT DODGE, IOWA 50501Phone: 515-955-5524, Ext. 202Fax: 515-955-8241

CORCORAN & ASSOCIATES INC.Various Types of InsuranceContact: Teresa Corcoran18-2nd St., N.E.Mason City, Iowa 50401Phone: 877-518-4051Phone: 515-262-3141Fax: 515-262-3086Email: [email protected]

CYCLONE AUTOMOTIVE TRAINING INC.F&I Training, Sales Training, Service Contracts, Rob Miller and Chris Hochstein515 N Jefferson Way Ste HIndianola IA 50125Phone: 515-962-0099 or 515-962-0100Fax: 515-961-8400Rob: 515-205-5900 cellChris: 515-205-5800 cellE-mail: [email protected]

FLOORPLAN XPRESSDealer Floor PlansFast, Flexible and Still Independent3220 99th StreetUrbandale, IA 50322Phone: 515-276-1770Fax: 515-331-8099www.floorplanxpress.com Contact: Nicki Christianson

FOLLOW-UP PLUS“Customers for Life”Repeat Sales, Referrals & Customer LoyaltyContact: Terry & Sue NewellP.O. Box 294Carthage IL 62321Ph: 888-353-2668Fax: 217-357-9076E-mail: [email protected]

FRAZER COMPUTING, INC.2564 W. Main St., P.O. Box 569Canton, New York 13617Phone: 888-963-5369Fax: 888-963-3366E-mail: [email protected] Rep: Mike Frazer -Dealer Management Software for Used Car Dealers

FRAZER COMPUTING, INC.Contact: Scott Erikson, Iowa Rep100 Prairie Center Drive, Suite 200Eden Prairie, Minnesota 55344Scott Erikson: [email protected]

GLOBE ACCEPTANCE INCSub-prime LenderContact: Beth DieterP.O. Box 65400West Des Moines, Iowa 50265Phone: [email protected] Website: www.GlobeAcceptance.com

GOLDSTAR GPS2093 20th Ave. S.E.DYERSVILLE, IOWA 52040PHONE: 866-655-8825 Ext. 120Fax: 866-655-8285Contact: Mark VanDykee-mail: [email protected]: www.goldstargps.com

GREATER IOWA CREDIT UNION1630 – 22nd StreetWest Des Moines, Iowa 50266-1407Gene Holtorf, Dealer Direct ManagerPh: 515-954-1666 F: [email protected]

INNOVATIVE DEALER SERVICES, INC.Dealer Software Management SystemsP.O. Box 23189Shawnee, Kansas 66283913-312-7344 – Ext. 11Fax: 810-821-1718Website: innovativedealer.comContact: Deems Peterson, Sales [email protected]

NADA BOOKS Official Used Car Guides, Subscription Discounts, Annual Subscription through IIADA, Save $$ Contact IIADA at Phone: 641-755-4177E-mail: [email protected]

PROSOURCE FINANCE, LLC3126 1044th StreetUrbandale, Iowa 50322Jeff Rubino [email protected]

RELIABLE AUTO FINANCE INC. 954 28th St. SWP.O. Box 9700Grand Rapids, MI 49509800-814-9294Brian [email protected]

REYNOLDS & REYNOLDS INC.Dealer BondsLong Term Care InsuranceVarious types of insuranceContact: Dean M Clark300 Walnut Street Ste 200Des Moines IA 50309Phone: 515-243-1724Toll Free: 800-767-1724Fax: 515-243-6664E-mail: [email protected]

S & C AUTOMOTIVE, INC.Service Contracts, GAP, Aftermarket ProductsSales & F & I Training thru Star Training Group3828-70th StreetUrbandale, Iowa 50322515-276-9622800-776-9622515-276-8472 (fax)e-mail: [email protected]: www.scautoia.com Contact: Doug Eckhart

SECURITY AUTO LOANS (SAL)Sub-prime LenderContact: Scott Erikson/Joe Ruhland4900 Highway 169 N., Suite 205New Hope, Minnesota 55428P: 763-559-5892F: 763-559-7549website: www.securityal.com Scott: 402-639-0664e-mail:[email protected]: 612-804-0720e-mail: [email protected]

ALLY SMART AUCTION 4300 SW Cambridge AvenueTopeka, Kansas 66610785-249-4166Iowa Rep: Seth Fair [email protected] 515-777-4592

WILSON DISTRIBUTOR SERVICE IIADA DEALER CAP FORMSCar Brite Products Forms, Detail Supplies, Equipment & More Jason & Lisa Goody 105 N McCoy Mt. Pleasant IA 52641Phone: 800-634-0974Fax: 319-385-2927 E-mail: [email protected]: www.wds-usa.com

ZURICH Garage Keepers, Property, Garage Liability Dealer Bonds7045 College Blvd.Overland Park, Kansas 66211Michael Novak – Western Iowa [email protected], Ext. 3909Scot Smith – Eastern Iowa [email protected] Free: 800-840-8842, Ext. 3944

APPROVED MEMBER BENEFIT PROVIDERS

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BY CHIP ZYVOLOSKICHIP ZYVOLOSKI IS A SENIOR ATTORNEY FOR INDIRECT LENDING AT WOLTERS KLUWER FINANCIAL SERVICES. FOR MORE INFORMATION, VISIT WWW.WOLTERSKLUWERFS.COM/INDIRECT.

There’s no question that what a dealer says to a customer as part of the sales process matters.

But it’s not just about what is said by the F&I department and what’s documented on a sales contract to finalize a deal. It’s also about what is being communicated outside, on the car lot.

No matter how accurate and compliant your finance documentation is, if it disconnects from promises made during the sales process, you could be facing a problem.

Though the law is different in every state, most have passed some version of the model Uniform Commercial Code (UCC) § 2-313. It provides that an express warranty is created by the seller when it makes a statement of fact or promise to the buyer relating to the goods, which becomes part of the basis of the bargain.

The elements are pretty broad and cover a wide range of common statements a salesperson might make when discussing a vehicle with a potential buyer. For example, if a salesperson says to a potential buyer, “This car comes with a new spare tire,” as part of the sales discussion, the promise is probably an express warranty.

What happens if the customer picks up his or her car after the sales contract is signed and a used spare tire is in the trunk?

Contrary to what some might think, express warranties generally can’t be waived or disclaimed. UCC § 2-316 provides that words or conduct creating an express warranty and words or conduct disclaiming or limiting the warranty must be interpreted in a way that makes them consistent with each other. If that’s not possible, then the disclaimers or limitations will not be enforced.

In short, you can’t give with one hand and take away with the other. If a salesperson promises the car comes with a new spare tire and a used one is delivered, a written warranty disclaimer will not help.

Note that the express warranty doesn’t have to be in writing and it doesn’t require using the word “warranty.” As a result, what

the salesperson says can affect a transaction just as much as the documents produced by the F&I department.

That’s why it’s important to know what your sales team is communicating and, more important, promising to customers.

Sometimes the situation involves a simple mistake on the sales lot. A car could be presented as a six-cylinder when it’s actually an eight-cylinder. Or maybe the customer is told the car had two prior owners but there were really three. An uninformed or mistaken salesperson might also tell a customer the car has never been in an accident when in fact he or she doesn’t really know if it has or not.

The new spare tire example may sound farfetched, but a dispute about whether new or used tires were delivered was just one of numerous inconsistencies between promises and documentation by the seller and what was delivered to the buyer in the California case of Sanchez v. Valencia ( 201 Cal. App. 4th 74 (2011)). The case is known for its decision on arbitration clauses and wasn’t about warranties. Still, it is a good example of how discussions on the lot can have a big effect on the dealer’s liability.

Those kinds of express warranty-creating mistakes can be avoided by simply being careful about representations about vehicle features and facts.

While services like CARFAX and certain branding of vehicle titles can help prevent some of those mistakes, or at least bring them to light before an agreement is finalized, dealers are still facing situations in which customers are unhappy because an expectation that played a key factor in their decision to buy has not been met.

So what can you do to help prevent this from happening?

Tell your sales staff that what they say matters and why: A salesperson is a liability risk if he or she thinks all promises are wiped out by a disclaimer in the sales contract.

Train your staff on proper sales techniques: That includes arming them

with facts about the inventory available for sale.

Encourage potential buyers to take a test drive: Also encourage them to take the vehicle to a mechanic or get a vehicle history report and other information about the car so they have the best opportunity to know the features, functionality and condition of the vehicle without relying on information from you. Some dealerships have installed Internet kiosks for customers to conduct on-the-spot research.

This is a complex area of law, littered with exceptions and replete with court decisions that are very fact-specific and findings that are not always consistent. For example, in some situations, disclaimers or waivers can be enforced if the sales contract includes a provision saying it is the all-inclusive and exclusive agreement covering the sale.

Whether a given statement is a statement of fact or promise (creating an express warranty) or merely sales puffery (not an express warranty) is regularly litigated. Many case decisions exist and entire books have been written on the subject.

The key point is that what your sales team says on the lot is important. If there is conflict between what was promised during the sale and what was delivered, the dealer has a problem. The problem could be characterized as the breach of an express warranty, but it could also be a fraudulent misrepresentation, unfair or deceptive act, etc. – keep in mind that 15 causes of action were alleged in the Sanchez case based on the tires and other inconsistencies.

Creating consistency throughout the entire sales process and making sure the lines of communication between the sales staff and F&I team are open can help mitigate risk for your dealership, ultimately saving time and money.

C O M P L I A N C E OV E R D R I V E

Unintended Express Warranties: What Sales Staff Says Matters

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