A good article by Patty Covington
Long-standing dealership practices aren’t necessarily legal dealership practices. Many of these questionable practices have been around for years - and often dealers keep using them, because “everyone does it.”
Dealers sometimes don’t think twice or consider whether the practices are legally permissible or even if they are good for business. Over time, these practices have simply become part of the dealership's operations.
Referral fees are a good example of these practices.
I’m not talking about leads purchased from a typical lead provider or the purchase of a marketing list. I’m talking about referral fees paid by one dealership to another dealership or payments between sales associates of different dealerships for the referral of a customer who buys a car.
This arrangement could be part of a formal referral fee program between dealerships. let’s say sales associate Frank at franchise dealership X agrees to refer his “turndown” customers to sales associate Tom at independent dealer Y.
The arrangement could even involve an individual not employed by a dealership.
No harm, right?
Well, maybe more than you might expect. If you, or your dealership, is involved with such a program, here are a couple of things you should consider:
State law may prohibit paying for a referral in connection with the sale of a car.
Some states specifically prohibit the practice, commonly called “bird-dogging.”
Louisiana is such a state. Some states, like Ohio, require that any commission or compensation paid for the sale of a car be to a person licensed as a salesperson in the dealer’s employ.
Other states have dealer and salesperson licensing laws that sweep in broker activities. Finally, some states have laws specifically targeted at the “brokering” of cars. Some of these laws require brokers to be licensed, while others simply prohibit the brokering of the sale of a car.
Information exchanged could violate privacy laws.
Even very basic information regarding a customer, like the customer’s name, could be “nonpublic personal information” under the federal Gramm-Leach Bliley Act (GLBA).
Credit applications and a customer’s FICO score also would constitute nonpublic personal information.
Under the GLBA, nonpublic personal information cannot be shared with unaffiliated third parties unless the dealership’s privacy notice specifically states that the dealership shares information in such a way.
If Social Security numbers are shared, other state privacy laws may be violated. A significant number of states have laws that prohibit certain disclosures relating to Social Security numbers.
In addition, if an employee shares customer information with another person against dealership policy, the disclosure could constitute a security breach. Some states have security breach laws that apply only to paper documents, but other states’ laws also cover electronic records.
Information exchanged could constitute a consumer report.
If credit applications or FICO scores are shared, the federal Fair Credit Reporting Act (FCRA) is implicated. These documents constitute consumer report information.
What does this mean?
First, the party giving out this consumer report information may be deemed to be a consumer reporting agency under the FCRA.
Secondly, the party receiving the consumer report information is required by the FCRA to have a “permissible purpose” for the information under the FCRA prior to receiving it.
The FCRA sets forth an elaborate set of rules, requirements, and conditions for consumer reporting agencies and users of consumer reports.
The implications of being a consumer reporting agency are enormous. In addition, some states regulate these practices.
Calling a potential customer could violate “Do Not Call” rules.
You will violate the federal Telemarketing Sales Rule (TSR) if you call a potential customer registered with the Federal Trade Commission’s Do Not Call registry.
State mini-DNC registries and rules may also apply.
Exceptions available under the TSR will likely not apply because the customer initially contacted and dealt with the referring dealership, not the dealership following up on the referral.
Finance and lender broker licensing may apply.
Some states have finance and lending broker laws that are triggered for finance transactions.
Since most cars are financed, these laws may be implicated. Rhode Island has such a law. These laws typically impose licensing requirements.
If your dealership sells its financing contracts to sales finance companies and banks, it has entered into a dealer agreement regarding those contracts.
Typically, dealer agreements contain representations and warranties from the selling dealer to the effect that the dealer is in compliance with all state and federal laws applicable to the sales and financing transactions reflected by the contracts.
If your referral program violates such laws, you might find yourself forced to repurchase those contracts. Not a good day.
Finally, in addition to the above legal issues, there may be some practical matters that should be considered. For instance, are dealership associates referring the “right” deals to another dealership?
Is it possible that a sales associate will earn more on a referral than he would have earned if he’d sold the car himself? That may be possible with subprime discount deals.
It’s better to carefully consider whether what “everybody else is doing,” is first legal and second, makes sense for your business. It’s not that unusual for commonly accepted practices to come under fire.
Patricia E. Covington is a partner with Hudson Cook, LLP, a Hanover, Maryland-based law firm that represents national and state banks, savings associations, credit unions, mortgage bankers, and licensed lenders in the development and maintenance of consumer mortgage, automobile finance, and other credit programs.
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Thursday, December 24, 2009
A good article by Patty Covington