VADA/HRADA ANNUAL PRESENTATION

PREVIEW OF HOT ISSUES FOR 2019

• VA and Federal Compliance Update

• MVDB and DMV

• Federal Alphabet Agencies

• DoD: MLA and SCRA

• Personnel Issues

• Franchise Issues

• Dealer Fees

• 2019 General Assembly Preview

• Mark Tysinger, Tysinger Automotive

2019 VADA Chairman

• Dan Banister, Banister Nissan

MVDB Representative

• Bill Baker, Hall Automotive

• Tom Bates, RK Auto

Treasurer

• James Church, Priority Auto

• Eley Duke, Duke Automotive

• Rick Gallaer, Pomoco Auto Group

Legislative Chair, Past Chairman

• Mike Suttle, Suttle Motor Corp

DEAC Chair, Past Chairman

• A board made up of motor vehicle dealers (nine franchised and eight used car dealers), a consumer representative, and the DMV Commissioner

• The Motor Vehicle Dealer Board is the licensing agency for each dealership and for sales personnel (including F&I)

• The Motor Vehicle Dealer Board has oversight authority on all dealership advertising, licensing issues, and practices

• It has the authority to issue civil penalties, license suspensions and license revocations

• It operates through field agents

Daniel Banister

Banister Nissan

Chesapeake

Randy Harris

Ultimate Buick

Spotsylvania

Liza Borches

Carter Myers Automotive

Charlottesville

Ron Kody

Richmond Ford

Richmond

M. Gardner Britt, Jr.

Ted Britt Ford

Fairfax

Geoff Malloy

Malloy Auto Group

Vienna

David P. Duncan

Duncan Auto Group

Blacksburg

Hamid "Senior" Saghafi

Dulles Motor Cars

Leesburg

9 Franchised Car Dealer Members

1 Current Vacancy

Serve 4 Year Terms – Maximum of 2

Appointed by Governor

• The Department of Motor Vehicles is run by the Commissioner of Motor Vehicles, appointed by the Governor

• It has authority over selected aspects of dealership operations most notably:For franchised dealerships, it has authority over the relationship between dealers and their

franchisors

It has oversight on proper use of permanent tags and temporary tags

• DMV has oversight of the electronic tag and title systems

• The DMV works through enforcement agents, who are considered law enforcement personnel with police powers.

• The critical federal agency overseeing auto dealer practices

• Invigorated and funded specifically to oversee car dealer issues by the Dodd Frank Act

• Hot buttons

Sales and F&I practices

Advertising

Spot delivery

Protection of Military

Used Car Rule

• Federal agency created to oversee consumer credit issues

• Has oversight on consumer financial issues

• Does not have regulatory or enforcement authority over franchised auto dealers

• It does have authority over banks and finance companies that provide the vast majority of consumer financing to buyers of motor vehicles

• Presently run by an acting director who is more dedicated to education than enforcement

• In charge of federal law enforcement

• Operates either through main DoJ attorneys or through U.S. attorneys

• Investigations done primarily through FBI

• Has authority to bring civil actions and criminal enforcement actions

• Traditionally was the agency to enforce equal credit laws

• Appears to be back in that role with change in direction of CFPB

• Dealer activities are on DoJ’s radar for criminal enforcement

• A consent judgment entered by the FTC in March 2017 with a CA new car dealer group shows FTC aggressiveness

• Federal court complaint alleging yo yo sales, misrepresenting vehicles and terms, false testimonials of dealer performance, false advertising

• Many of the practices targeted by the FTC go on in many other dealerships on a day to day basis

• $3.6 million payment and crushing oversight and monitoring for 20 years

• Filed in the summer of 2018 against a dealer group with two franchised dealerships and two independent dealerships operating in Arizona and New Mexico near the Navajo nation reservation

• AllegationsMisrepresented the income of applicants

Falsified downpayments

Used deceptive advertising

Violated TILA and the CLA

• Complaint seeks preliminary and permanent injunctions to prevent the alleged practices. Relief sought includes disgorging all “funds and assets, or the value of the benefit” received

• Announced August 2018 against a Chevrolet dealership in northwest

Pennsylvania by the U.S. Attorney for Western Pennsylvania

• Felony charges: Bank fraud and conspiracy to commit bank fraud because of

false downpayments, coaching customers how to respond to calls from

finance sources

• Dealer agreed to pay $1.4 million in civil penalty and restitution of $730,000

• Prosecution deferred to determine whether procedures put in place to prevent

violations are effective

• The FTC has concentrated its authority and increased budget over car dealers under the Dodd Frank Act on advertising

• Train managers with ad responsibility and ad agencies

• TILA and Leasing ads non-compliance. If you use a trigger term, use the follow on disclosures

• Bait and switch – This is the FTC’s hot button. Do not advertise net of incentives of limited availability without adequate disclosure, do not advertise deals that are not available, and keep proof of availability of deals when advertised. Know the vehicles advertised and their advertised prices. Selling the vehicle for more, even if the customer did not know of the advertisement at the time, can be the basis for a bait and switch claim

• Advertising in all media involved, but internet advertising is the key

• In 2016, the FTC took action against three dealer groups that advertised used cars with open recalls under general marketing representations that they were “certified” or had been subjected to multi-point pre-delivery inspections

• For a used car with an open recall a dealer must not:Advertise it as certified;

make general claims of safety and reliability

• In 2018, the FTC took action against a dealer group that sent out urgent recall notices regardless of whether the recipients’ vehicles were under recall as marketing tools

• The FTC claimed that these and similar claims that vehicles were “certified” or had been subjected to multi-point pre-delivery inspections were representations of vehicle safety and reliability. If you sell used cars with open recalls be careful in your advertising.

Do not certify them.

Many manufacturer certification programs prohibit sales of vehicles with open recalls.

Do not claim that they were subject to a multi-point safety inspection

Do not make general claims of safety and reliability

• ANY marketing campaign built around recalls or factory campaigns are inherently suspect since FTC has expressed the position that only manufacturers issue recall notices and anything else may be confusing

• VA MVDB position on advertised offers similar to FTC

• When advertising a price of a vehicle that is eligible for rebates/incentives, that price may be based on incentives and rebates that are available to ALL purchasers.

• If other incentives/rebates are available based on specific criteria (e.g. military rebate) these additional incentives/rebates can be listed but not subtracted from the advertised price except as specifically provided by MVDB.

Example of a Compliant Ad

Removal of Vehicles from Website

In addition to the Commonwealth's advertising laws and regulations, guidance is being provided to dealerships regarding the removal of vehicles from the dealer's website once the vehicle has been sold.

Upon selling a vehicle listed on its website, the dealer should take action to remove the vehicle from the website within 5 business days. This is recommended to allow the dealership time to coordinate the removal of the vehicle from the website, to avoid misleading the customer and the appearance of bait and switch practices.

Freight Charges/Shipping Charges/Delivery Charges/Destinations Charges

This fee is commonly associated with new vehicles being delivered directly from the manufacturer to the franchise dealership or customer. It is included in the Manufacturer's Suggested Retail Price (MSRP). This fee must be properly disclosed on all advertisements and will appear on the invoice from the manufacturer. The advertised price should ensure that customers are properly informed if the advertised price includes freight and destination charges; if the advertised price does not include freight and destination charges it must be clearly and conspicuously disclosed.

This fee cannot be charged on any preowned vehicle, nor can it be charged to the customer for the movement or transport of the vehicle from another location to the licensed dealership location.

Vehicle Location

Dealers are responsible for their advertisements, regardless of the format and media (print, internet, videos, electronic, YouTube, etc.).

In addition to the Motor Vehicle Dealer advertising laws and regulations, clarity is being provided to dealerships regarding advertising of vehicles for dealerships with more than one location, and vehicles being advertised at a location when the vehicle is physically located somewhere else.

When a dealership advertises vehicles for sale the advertisement should clearly identify the location of each vehicle listed for sale in the advertisement and each vehicle that is advertised for sale should physically be located at the advertised location.

Transfer Fees

This fee is allowed when a dealership has multiple locations and the customer requests the vehicle be transferred to a specific location for potential purchase. The customer should be given the option of purchasing the vehicle at the dealership where the vehicle is located. However, if the customer requests that the vehicle be transferred to a dealership other than where the vehicle is located, the dealership may charge a transfer fee. The transfer fee should be reasonable and should be disclosed to the customer prior to the transfer of the vehicle.

Social Media Advertising

Be aware that information about vehicle for sale that is posted on Social Media by the dealership – AND your employees individually – is advertising.

The MVDB has begun reviewing postings by salespersons.

The dealer and the salesperson can both be held responsible for violations, including not disclosing everything that needs to be included in an ad, like processing fee.

• Use the new form

• There is a substantial difference in disclosing non-dealer warranties. In selling

under the revised Rule, one must either disclose the vehicle is being sold as is

or that a dealer warranty is being issued. If a dealer warranty is being issued,

that is when the box for “dealer warranty” is checked. If there is a warranty

other than a dealer warranty, the as is box must be checked

• A non-dealer warranty may be described in the “Systems Covered/Duration”

but it must be clear this is not a dealer warranty

• If there is no dealer warranty, you must check the “AS IS – NO DEALER

WARRANTY” box

• From April to June 2018 FTC did compliance sweeps with “12 partner

agencies”

• 20 cities, 94 dealerships inspected, over 2300 vehicles

• A little over a third of the vehicles displayed the new buyers guides

• 33 of 94 dealerships had new buyers guides on more than ½ their vehicles

• 14 of 94 dealerships had new buyers guides on all their vehicles

• Translation: “I’ll be back!”

• With the prevalence of electronic submission of customer qualifications, dealers are often not getting customer hand written reports of income

• Some employees may see this as a license to use amounts they need to make a deal

• More frequently it gives customers who overstated income an opportunity to say they never provided the income reported.

• A pattern will cause a finance source to insist on customer interviews, slowing down the finance process

• ALWAYS GET A HANDWRITTEN CREDIT APPLICATION WITH CUSTOMER INCOME IN THE CUSTOMER’S OWN HANDWRITING. SAVE IT IN THE DEAL FILE

• Misrepresentations of downpayments are mushrooming throughout the industry

• Misrepresentation of a downpayment is a breach of the representations and warranties accompanying assignment of the RISC or lease.

• If the deal goes bad, this gives the finance source the right to demand the dealership buy back the contract.

• DOWNPAYMENTS REPORTED TO FINANCE SOURCES MUST BE VALID AND COLLECTED

• Powerbooking is overstating the model or equipment on a vehicle, usually

used

• Finance sources have developed methods to detect powerbooking from the

VIN

• Sources are using these only to create leverage for buy back of deals. They

are not using these processes when they are buying deals to create buy back

leverage or demands for payment

• THE YEAR, MODEL, AND EQUIPMENT OF A VEHICLE MUST BE

ACCURATELY REPORTED TO FINANCE SOURCES

• A compliance plan is essential

• A compliance plan built solely around training is insufficient

• A plan must add per transaction compliance and auditing

• How does a dealer inspect compliance?

• Use a deal completion checklist!

• It is a roadmap through deals

• It is a basis for auditing deals

• Enacted in 2006

• Due to DoD interpretation on 12/14/2017 sale of credit

related products or cash out financing triggers the MLA

• DoD has apparently come up with a solution, but it is

delayed for review by other agencies

• The delay does not indicate a desired outcome

Sale of vehicle to covered person

Includes GAP and/or

credit insurance and/or

cash out

Does not include GAP or

credit insurance or cash

out

Covered by MLA Not covered by MLA

• Dealers avoid the obligations and penalties of the MLA if they avoid application of the MLA to deals.

• Why avoid coverage of the MLA - The penalties for violating the MLA are draconian.

It is a misdemeanor for a knowing violation.

Any contract in violation of the MLA is void from the inception.

There is civil liability for actual damages with of least $500 per violation, punitive damages, and attorneys’ fees and costs.

• To avoid application of the MLA to deals, implement a process to determine whether a customer is a MLA covered person. Sale of GAP and/or credit insurance and/or providing cash out financing will cause application of the MLA to the deal.

• Service member rightsMay terminate lease for change of status

Provides rights to those who financed vehicles as civilians and joined the military

Provides rights on enforcement of liens, including repair and storage during service and 90 days after

• Difference between finance and lease rights makes lease to finance conversion a potential problem

• Federal DoJ has been active in enforcing these rights including 2 recent consent ordersBMW Finance on Refunds of Lease upfront payment

City of Honolulu on enforcement of liens for vehicles impounded

• Dealer Reserve – Attempt to regulate dealer reserve

• KILLED by Congress under the Congressional Review Act

• Do not abandon Fair Lending Programs

• Class Action Waivers – CFPB published a regulation to prevent waivers of class actions in predispute arbitration provisions in agreements acquired by finance sources under its jurisdiction

• KILLED by Congress under the Congressional Review Act

• At some point, VPP pricing will come under scrutiny by CFPB, FTC, or DoJ

• The U.S. Supreme Court has ruled that class action waivers in employment arbitration agreements do not violate the National Labor Relation Act. It effectively paves the way for validity for employment arbitration agreements

• EEO-1 reporting of wages is due March 1 of each year. OMB killed the requirement to report wages

• Changes in NLRB will change pro-union activism, and why that is important to even non-union dealers

• I-9 Workplace investigations increasing

• Use the most current version of Form I-9 updated 07/17/2017.

• Follow the instructions on Form I-9 for proper employee completion. New employees should complete Section 1 of Form I-9 on the first day of employment. Employees also must document their identity (List B) and authorization to work in the U.S. (List C), or a provide a document that establishes both their identity and employment authorization (List A) within three business days of their first day of employment.

• Follow the instructions on Form I-9 for proper employer completion. Complete Section 2 within the first three days of a new employee’s commencement date. An employer representative must sign and date the form.

• Maintain completed Forms I-9 for every current employee in a central location.

• Maintain completed Forms I-9 for separated employees for one year after termination, or three years after hire, whichever is longer.

• Conduct regular audits of Form I-9 files to be sure employees have followed the policy.

• Take remedial action for any deficiency.

Know Your Rights to Use Your Rights

• In franchise matters, a dealer must assert itself to take advantage of franchise laws

• Virginia has some of the most effective franchise laws in the country

• You must know your rights to decide how to deal with your franchisor on many issues

Dealer: you are in violation of your dealer agreement!

Always respond in writing!

• What does the dealer agreement say? Consult the agreement and related exhibits, schedules, and communications

• What protections does state law afford?

• A dealer must be proactive

• A dealer is NEVER IN VIOLATION OR BREACH until a tribunal says so

• A dealer MUST BE RENEWED unless the franchisor wants to go through state termination process

• There are critical factors in performance measurements which are not just

termination issues because of disqualification for new deals and for incentives

Sales Effectiveness

• #1 Allocations – the dealer cannot sell cars it cannot get

• #2 PMA – Hard to penetrate markets where the dealer does not have an advantage. A

PMA that is too large or with census tracts of residents resistant to buy dealer’s vehicles will

negatively affect the performance results

• #3 Failure to adjust for geographic, demographic, brand or vehicle choice, traffic or work

travel issues

CSI

• Every factory program is statistically suspect

§ 46.2-1571. Warranty and sales incentive obligations

• Any chargebacks for warranty parts or service compensation and service incentives shall only be for the six-month period immediately following the date of the claim and, in the case of chargebacks for sales compensation only, for the six-month period immediately following the date of claim.

• However, such limitations shall not be effective if a manufacturer, factory branch, distributor, or distributor branch has reasonable cause to believe that a claim submitted by a dealer is intentionally false or fraudulent. For purposes of this section, "reasonable cause" means a bona fide belief based upon evidence that the material issues of fact are such that a person of ordinary caution, prudence, and judgment could believe that a claim was intentionally false or fraudulent.

Challenge the Audit findings• The dealership’s representative should engage the auditor on questions and

comments• Prepare for the closing meeting and challenge improper conclusions

Challenge through the franchisor’s internal process and through state administrative or judicial process

• Virginia had the first statute of its kind in the country – the manufacturer cannot debit the dealer’s account if the dealer files challenges

• The law changes the leverage in negotiations

• A manufacturer, factory branch, distributor, or distributor branch may not collect chargebacks, fully or in part, either through direct payment or by charge to the dealer's account, for warranty parts or service compensation (including service incentives) or for sales incentives or other sales compensation until 40 days following final notice of the amount charged to the dealer following all internal processes of the manufacturer, factory, factory branch, distributor, or distributor branch.

• Within 30 days following receipt of such final notice, the dealer may petition the Commissioner, in writing, for a hearing.

• If a dealer requests such a hearing, the manufacturer, factory branch, distributor, or distributor branch may not collect the chargeback, fully or in part, either through direct payment or by charge to the dealer's account, until the completion of the hearing and a final decision of the Commissioner concerning the validity of the chargeback.

VA Code § 46.2-1573.01. Recovery of attorney's fees.

• Any party to a proceeding under § 46.2-1573 who is found to have violated any provision of this article may be ordered by the circuit court before which an application therefor is pending to pay the reasonable attorney's fees and costs incurred by the complaining party, including those attorney's fees and costs incurred as a result of any appeal. .

• GM is offering what it says is an extension of its limited warranty if a customer

is willing to pay for it

• Serious challenge to dealers VPP offerings, couched as a benefit to dealers

who can charge what they wish

• Problems

• It appears to be a service contract

• This makes GM a service contract provider under VA law

• GM says disclose it as part of the vehicle price but is this a violation of TILA?

• Because of the difference in taxation of a vehicle and a service contract, is this a tax issue?

• Does adding a factory option violate the Monroney law?

• A franchisor may not “require or coerce a motor vehicle dealer, whether by agreement, program, incentive provision, or otherwise, to submit or to provide a manufacturer, factory branch, distributor, or distributor branch access to consumer data maintained by the dealer (i) by any method that violates or would violate the dealer's chosen policies and processes for complying with obligations to protect consumer data under laws of the United States or the Commonwealth or (ii) through franchisor access to the computer database of the dealer if the dealer chooses to submit data specified by the franchisor.”

• “If a [franchisor] offers incentives or other payments under a program … and available to more than one dealer in the Commonwealth that are premised wholly or in part on dealer participation in [franchisor] programs under which consumer data is provided to or accessed by the [franchisor], a dealer that exercises its rights under this subdivision shall be deemed to be in compliance with the program requirements pertaining to providing consumer data….”

VA Code § 46.2-1569(11)

• Manufacturers testing the waters for limited direct distribution and where that may lead

The Tesla case

• Franchisor incentive programs, and the need for a national “bully pulpit”

• OEMs Disregard of state franchise laws, and the importance of dealer resistance

• Protecting state licensing laws is critical

• Processing fees have been a lightning rod for complaints for years. • Virginia dealers have the privilege of charging processing fees based on the business

decision of each dealer. • The processing fee is a privilege that should not be abused. • The only other fee that MUST be charged is the electronic titling fee• Other than those two fees and pass-throughs, NO other fees are permitted

Used vehicle preparation and reconditioning fees

Sales compensation fee

Transportation fees on used vehicles, although under an upcoming MVDB bulletin a fee from transferring a specific used vehicle from one location of the dealer to another location of the dealer may be permitted under limited circumstances

Protect Your Right to Charge the Fee

It is an amount the dealership is allowed to charge to compensate for services

not otherwise paid for in the transaction.

Enhanced Process for Action by the DMV Commissioner

• The skinny:Current VA law directs the Commissioner to “initiate investigations, conduct hearings, and determine the

rights of parties” whenever a violation of the franchise law is reported to him.

• Why is this relevant?Current law is overly general and does not lay out a formal process of action by the Commissioner to

handle the determination of these franchise issues.

• What do we want to do?One potential approach would require an analysis and response when such a complaint is received. This

would formalize a process for this exercise of DMV’s oversight of franchise matters. This does not enhance the DMV Commissioner’s power or responsibility; rather, it helps facilitate the Commissioner’s review and response process under the Virginia Code.

Discontinuation of a Manufacturer• The skinny:Car makers use different corporate structures to supply vehicles to dealers. Some

manufacturers supply the vehicles directly to dealers and some set up distributors to provide the vehicles to dealers. Functionally there is no difference and the two are treated the same way in most instances.

• Why is this relevant?Current VA Code provides that if a distributor loses its agreement with a manufacturer or

importer of motor vehicles, the franchise rights of a VA motor vehicle dealer holding a sales and service agreement from that distributor will continue with the new distributor. The statute, on its face, applies only to distributors, not manufacturers. There is no reason to make this distinction.

• What do we want to do?Our proposed changes would provide rights to dealers whenever a manufacturer or distributor is

eliminated or loses its rights through sale, merger, or otherwise.

Association Standing

• The skinny:VA law regulates the franchise relationship between motor vehicle manufacturers and dealers.

Dealers who seek to enforce their rights in either administrative or judicial forums face many obstacles. These obstacles include retaliation by their manufacturer and an imbalance of the financial resources.

• Why is this relevant?Our association does its best to represent our dealers at the General Assembly however we do

not currently have the standing power to challenge violations by a manufacturer administratively or in court.

• What do we want to do?Our proposed change would allow the Virginia Automobile Dealers Association to pursue the

defense of dealers’ rights by establishing that VADA has standing to challenge manufacturer violations of VA law.

The Right of First Refusal

• The skinny:The current law states that a dealer may not sell their business without allowing the manufacturer a

“right of first refusal.” This means the dealer must give the manufacturer the first shot at buying the dealership “on the same terms and conditions.”

• Why is this relevant?Dealer groups are increasingly integrated, multi-franchise operations. Under current law, essentially manufacturers have the right to reject the original buyer on a dealership transaction and assign the sale to a dealer of its choosing. The problem is when there is more than one

manufacturer involved in the transaction. One recent decision permitted a single manufacturer to require a dealer to split off its franchise from a multi-franchise sale, putting the entire transaction at risk.

• What do we want to do?Our proposed change would prohibit the exercise of the right of first refusal except in certain cases.