Dealer Practices to be Scrutinized by the FTC and CFPB

“Bottom-Feeders” to Be the First Scrutinized...

By: Thomas Hudson


When you are a lawyer, it seems that all your friends insist on telling you every lawyer joke they hear. One of my favorite recent ones: “What’s the difference between a lawyer and a carp?” The answer, after my obligatory “I give up” was, “One’s a scum-sucking bottom-feeder, and the other one’s just a fish.”

I immediately thought of that one when I read that Federal Trade Commission Chairman Jon Leibowitz, in a speech to the U.S. Chamber of Commerce, used the term “bottom-feeder” in describing the FTC’s agenda for the coming year in light of the creation of the Consumer Financial Protection Bureau (CFPB), with which the FTC will share enforcement authority over financial services companies.


Read the rest of this excellent article here: http://www.autodealermonthly.com/79/4078/ARTICLE/Dealer-Practices-to-be-Scrutinized-by-the-FTC-and-CFPB.aspx



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ESC Verses Extended Warranty

By: AFI

Ok, I need to vent for a minute.

Every automotive related website seems to post advertisements offering the sale of “extended warranties”. I even have an affiliate source which I will not allow on this site because they are labeling the products they sell as extended warranties.

A "warranty" is defined as coming with the sale of a product and is included (at no extra charge) in its purchase price.

An "extended service contract" is an optional agreement for product service that is available for purchase. It provides additional protection beyond what the warranty offers on the product.

Extended service contracts are similar to warranties in that both concern service for a product. However, there are important differences.

Section 106 of the Magnuson-Moss Warranty Act describes a warranty as “part of the basis of the bargain”.

Service contracts on the other hand, are agreements that are separate from the contract or sale of the product. They are separate either because they are made some time after the sale of the product, or because they cost the customer a fee beyond the purchase price of the product.

If you offer a service contract for sale, the Magnuson-Moss Warranty Act requires you to list conspicuously all terms and conditions in simple and readily understood language. Unlike warranties, however, extended service contracts are not required to be titled “full” or “limited”. They are also not required to contain the special standard disclosures. Using warranty disclosures, as noted by AFIP, could confuse customers about whether the agreement is a warranty or an extended service contract.

For a booklet containing texts of the Magnuson-Moss Warranty Act, the related FTC Rules, and the FTC Warranty Advertising Guides, send a written request to:

Federal Trade Commission
Consumer Response Center
Washington, D.C. 20580


Let’s all try to do it the right way. Call it an extended service contract not an extended warranty.


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7 Ways to Legally Shield Your Dealership

An excellent checklist for every F&I professional.

By: Joe Bartolone

F&I auditor goes soft, points out the seven best practices he’s seen on the front lines. Employing these tactics will be your best defense.

How many times have you heard, “I’ve got good news and bad news — which do you want to hear first?” As a compliance auditor, I often find myself saying, ‘I’ve got bad news and more bad news — where do you want me to start?’ It’s not that I enjoy being negative, but that’s what my clients pay me to do. As one dealer executive put it to his management team, “I’m not paying him to tell us how good we are.”
This year our firm, gvo3 & Associates, will conduct compliance reviews at hundreds of dealerships across the country, documenting numerous potential compliance issues. At the same time, we do observe many compliance “best practices” dealerships have incorporated into their sales and F&I processes. In this article, I would like to focus on the positive and share some of those best practices.

The Sales Process

Let’s start with the sales process. Most dealers use a four square, a preliminary buyer’s order or some other worksheet to work the deal. The multi-colored Sharpie presentation is also very popular. No matter what style you employ, your presentation can be deemed deceptive if it appears confusing. Trying to figure out what the customer agreed to shouldn’t be like trying to find Waldo.

A best practice is to have the customer initial a summary of the deal terms. This allows you to keep a record of the deal, and eliminate any chance for error. Some dealers refer to this process as the “five square.” The summary should include the selling price, agreed trade value, down payment, rebate, monthly payment, rate and term. The deal terms should agree with the deal terms at the top of the F&I menu, providing evidence that you are not packing payments.

Today, the credit application process has migrated into the sales department with both salespeople and F&I personnel taking credit applications. Our recommendation is to have the customer complete the credit application with the assistance of a trained F&I professional. If you find it necessary to interview the customer and complete the application, then you should have the customer initial his or her income, time in present job and time in current residence. In addition, you should have the customer sign the agreement at the bottom of the application. Dealerships that incorporate this best practice avoid accusations of altering customer information, bank fraud and violations of their dealer/lender agreement.

Electronic Menu Selling

The F&I menu is a great sales tool and a great compliance tool if used properly. Let’s assume you’ve finally convinced your dealer to invest in an electronic menu. It discloses the deal terms, including the base payment, rate and term. It also lists all products, coupled with great benefits statements for each product. The menu also discloses product pricing, as well as the appropriate disclaimers. A best practice is to take it one step further by having your customers acknowledge with their initials that the following elements were disclosed: base payment without products, the final payment with products and all disclaimers.

Another best practice is to recap the final menu structure and have the customer acknowledge the products accepted and the products declined.

The Purchase Agreement

The final buyer’s order/purchase agreement is a document that can easily demonstrate a dealership’s level of compliance. Those willing to embrace the spirit of full disclosure will use this document to recap and finalize all deal terms agreed upon, and use it as a stepping stone to the retail installment sales contract (RISC). They will disclose the list price and additional accessories, any discounts, agreed trade value, trade payoff, down payment, rebates applied and all the F&I products with pricing the customer agreed to on the F&I menu. The cash due at delivery will equal the amount financed on the RISC. With this best practice you have a very logical transition to the RISC, eliminating the confusion most customers feel when they try to figure out the origin of the numbers on the RISC — a problem plaintiff attorneys don’t have.

Book-Out Sheets

Book-out sheets are another area requiring compliance controls. Dealerships with the most control are using automated inventory control applications that allow them to electronically value a vehicle when it comes into inventory. These applications include VIN decoders that automatically determine the standard manufacturer equipment for the model and trim level of the vehicle. The applications are password protected, allowing only the general manager, general sales manager and used-car manager to have access to add any additional options.

Dealership personnel are also required to take digital pictures of the vehicle, confirming the mileage, equipment and condition of the vehicle. A best practice is to print the book-out sheet at the time the vehicle comes into inventory, and then again when the vehicle is sold. If a book-out sheet is required by the lender, then it should be OK’d by the general manager, GSM or U/C manager. Dealerships using this process virtually eliminate any chance of “power booking.”

FTC Used Car Buyer’s Guides

Proper disclosure of the FTC Used Car Buyer’s Guides continues to be one of the top three issues we uncover. The biggest problem occurs when dealerships use an outside service to affix the FTC guide to the window. On average, we find 15 to 20 percent of the dealership’s inventory without the guides prominently displayed.

There are only a couple of choices to disclose the dealership’s warranties: either “as is” or “implied.” That all depends on the state you’re in or the warranty you have, which is usually a LTD Warranty. If you elect to disclose that there is a balance of the factory warranty remaining, you must use very specific language provided by the FTC. You also have the option of checking the box indicating the availability of a service contract. Once you’ve determined how many different versions you’ll need, have them pre-printed with the reverse side — which requires the dealership’s name, address and phone number, as well as the phone number and position of the contact person — included.

The U/C manager determines the appropriate warranty for each vehicle and has the “get-ready” department place a temporary guide inside the vehicle until the outside service or an inventory specialist gets to the lot. The temporary guide is then placed in an inventory file until the vehicle is sold. At the time of sale, the customer is asked to sign the temporary guide and is then given a copy. The original is retained in the deal file. At $11,000 per violation, this should be a no-brainer. If you need to catch up on the dos and don’ts of the FTC Used Car Rule, visit: http://www.ftc.gov/bcp/conline/pubs/buspubs/usedcarc.pdf. You’ll find this to be an excellent tutorial.

The Deal Jackets

The contents of your deal jackets can be your best defense or a smoking gun — the decision is really up to you. Here are some questions you need to answer to get yourself on the right track:

• When was the last time you surveyed all the forms used in the sales and F&I process, especially those in your showroom control system?

• How many of those forms are outdated or redundant?

• How many are photocopied forms?

• If you’re using a generic credit application, does it have all the required ECOA, FCRA and Reg. B disclosures?

• When was the last time you updated your deal checklist?

• Do you have a plethora of disclosures and disclaimers customers are required to sign?

I have two favorites. The first one is having nonprime customers sign that they agree not to quit their job or get fired in the next 30 days, will not disconnect their phone and will not move. Violating any of these terms, the agreement states, means they risk losing their deposit or trade vehicle. The second is having customers acknowledge that you are increasing the selling price and trade allowance on the deal to cover the negative equity and to accommodate their financing needs. When was the last time you had an attorney review all of your forms? Have you ever considered purchasing LAW forms from Reynolds and Reynolds? Reynolds invests hundreds of thousands of dollars each year on legal reviews to ensure their forms are compliant in all 50 states.

Employing the Buddy System

Consider using the “buddy system” if you have a problem with sloppy paperwork, and have two people complete the deal checklist. This will make them both accountable for any errors and omissions. You’ll definitely see rapid improvement.

Check the quality of your programming by entering a test deal that includes all possible deal elements, such as a trade with negative equity, a rebate, cash down and all the F&I products you offer. Then print a copy of the RISC for each lender, a final buyers order and the product enrollment forms. Look for proper disclosures, product descriptions and product pricing. Don’t forget to manually check the math on the final buyer’s order to see if it balances and that it is printing the proper disclosures.

Make sure you can produce at least three documents that confirm that the customer knew the product he or she was buying and the price he or she paid. These documents could include the F&I menu, final buyers order, the retail installment contract and the product enrollment forms.

Encourage the general manager, general sales manager, controller and even the dealer to select five deals a month and have them go through them document by document.

And finally, consider having a formal compliance risk assessment of your sales and F&I departments. It’s a great first step in developing a formal litigation defense strategy at your dealership.

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FTC Used Car Rule - Part 3

by: AFI


FTC Used Car Rule - Part 3


In some states, use of the "As Is-No Warranty" Buyers Guide may be legally sufficient to eliminate implied warranties.

Is the Warranty "Full" or "Limited"?
For a warranty to be considered "FULL":

* Warranty service must be provided to anyone who owns the vehicle during the warranty period.

* Warranty service must be provided free of charge when necessary, even for services like removing and reinstalling a system covered by the warranty.

* The consumer must be able to choose either a replacement or a refund if the vehicle can't be repaired after a reasonable number of tries.

* The consumer is not required to take any action to receive service, except to give notice that service is needed.

* The length of implied warranties must not be limited.

The warranty is considered "LIMITED" if any of these conditions don't apply.


If the vehicle still has Factory Warranty on it: Check the "Warranty" box and include this disclosure: "MANUFACTURER'S WARRANTY STILL APPLIES".
The manufacturer's original warranty has not expired on this vehicle.
Consult the manufacturer's warranty booklet for details as to warranty
coverage, service location, etc."

The FTC requires the disclosure to be stated in the exact language quoted above. Using phrases such as "balance of factory warranty" are not sufficient.

You must give the buyer a copy of this Buyers Guide at the close sale. The guide must reflect all final changes.

If you offer a written warranty, you must also comply with the Magnuson-Moss Warranty Act. This will be discussed in a future post.

Dealers who violate the Used Car Rule may be subject to penalties of up to $11,000 per violation in FTC enforcement actions. Many states have laws or regulations that are similar to the Used Car Rule. Some states incorporate the used car rule by reference in their state laws. As a result, state and local law enforcement officials may have the authority to ensure that dealers post Buyers Guides and to fine them if they do not comply.

To file a complaint or to get free information on consumer issues call toll-free at 1-877-FTC-HELP (1-877-382-4357

*** IN CASE OF AN AUDIT, A COPY OF THE BUYERS GUIDE MUST BE IN EVERY USED CAR DEAL JACKET. SEE ABOVE PENALTY -it is the Finance Manager who will get thrown under the bus if the dealership get's sued. To protect the dealership and yourself, personally make sure that a Buyers Guide is in every used car deal. I had to audit each of my stores for the last five years specifically looking for deals without Buyers Guides. FYI

FTC Used Car Rule - Part 2

by: AFI

IF YOU CONDUCT A USED CAR TRANSACTION IN SPANISH, you must post a Spanish language Buyers Guide on the vehicle before you display it for sale.

* For samples of the legal forms go to: www.ftc.gov/bcp/conline/pubs/buspubs/usedcarc.htm


The Buyers Guide has two versions: One says "As Is - No Warranty;" the other says "Implied Warranties Only."

As Is - No Warranty. If state law allows it, and you choose not to offer a warranty - written or implied - you must ust the "Implied Warranties Only" version.

Warranty. If you offer the vehicle with an express warranty, you must check the box next to the heading "Warranty" and complete that section of the Guide. Warranties required by state law must be disclosed in this section. Contact your state Attorney General about state warranty requirements. In some states, use of the As Is - No Warranty Buyers Guide may be legally sufficient to eliminate implied warranties. To determine exactly which version of the Buyers Guide you should use, contact the FTC or your state Attorney General.

You MUST list the percentage of repair costs are covered by the warranty and if a deductable will be charged. You must list the systems that are covered and the length of the warranty for each system. The Rule prohibits the use of shorthand phrases such as "drive train" or "power train" because these phrases are not specifically clear which components are actually included.

If the manufacturers warranty has not expired, check the "Warranty " box and in the "systems covered/duration" section write: "MANUFACTURERS WARRANTY STILL APPLIES. The disclosure must be stated in this exact language. Using phrases such as "balance of factory warranty" is not sufficient.

You must give the buyer the original copy of the vehicle's Buyers Guide at the close of the sale. The guide must reflect all final changes. The buyer must sign that they have received a copy of the Buyers Guide with all changes reflected.

Two publications are available to help you comply with these and other federal regulations: A Businessperson's Guide to Federal Warranty Law and A Legal Supplement to Federal Warranty Law. Both are available from the FTC. Call toll-free 877-FTC-HELP, or write: Consumer Response Center, Federal Trade Commission, Washington, DC 20580. The full text of each of these can be found at www.ftc.gov.

FTC Used Car Rule - Part 1

by: AFI

Franchised dealers who sell used vehicles must comply with the Federal Trade comission's Used Car Rule including dealers who sell more than five vehicles in a twelve month period. Financial institutions and banks are exempt from the rule.

The used car rule applies in all states except Maine and Wisconsin. These two states are exempt because they have similar regulations that require dealers to post disclosures on used vehicles. The rule applies in the District of Columbia, the U.S. Virgin Islands, Guam, and American Samoa.

You must display a Buyers Guide before you "offer" a used vehicle for sale. A vehicle is offered for sale when you display it for sale or let a customer inspect it for the purpose of buying it, even if the car is not ready for delivery. At public auctions, dealers AND the auction company must comply. The rule does not apply to auctions that are closed to consumers.

Exceptions to the rule are: Motorcycles; Any vehicle sold for scrap or parts; Agricultural equiptment.


THE BUYERS GUIDE is a disclosure document that gives consumers important purchasing and warranty information, the Buyers Guide discloses to consumers:
* whether the vehicle is being sold "as is" or with a warranty;
* what percentage of the repair costs a dealer will pay under warranty;
* that oral promises are difficult to enforce;
* to get all promises in writing;
* to keep the Buyers Guide for reference after the sale;
* the major mechanical and electrical systems on the car as well as some of the major problems that consumers should look out for;
* to ask to have the car inspected by an independant mechanic before they buy.


If a used car transaction is conducted in Spanish, a Spanish language Buyers Guide must be posted on the vehicle before it can be displayed or offered for sale.


The Buyers Guide must be posted PROMINENTLY and CONSPICUOUSLY on or in a vehicle when a car is available for sale. This means it must be in plain view with both sides visible. You can hang the Guide from the rear-view mirror inside the car or from the side-view mirror outside the car. It can also be placed under a windshield wiper. A guide also can be attatched to a side window. A guide cannot be placed under a seat or in the glove compartment because it is not in plain sight.

The Guide can be removed for a test drive, but must be replaced as soon as the test drive is over.


The FTC publishes a free booklet that defines the Rule's requirements. For samples of the legal forms go to: www.ftc.gov/bcp/conline/pubs/buspubs/usedcarc.htm