A FEW THINGS YOU CAN’T CONTROL, BUT NEED TO KNOW
BECAUSE THEY COULD HAVE A SIGNIFICANT IMPACT ON YOUR DEALERSHIP
By: Keith E. Whann
We are very aware that the motor vehicle industry is one of the
most heavily regulated industries in America. As if this is not
enough, a number of new regulations have been enacted and existing
regulations revised over the last two years. Combine this with
a sluggish economy, unrest in the Middle East, the war against
terrorism and the overall decline in consumer credit worthiness,
the challenge of operating a successful motor vehicle dealership
has become increasingly difficult.
It is no secret the number of consumers across the Country with
credit problems continues to grow, requiring motor vehicle dealerships
to search for new sources of financing to accommodate these customers.
In the fall of 2002, the IRS issued an updated Audit Technique
Guide for the used motor vehicle industry. In light of the growth
of subprime financing since the initial publication of the IRS
Audit Technique Guide many years ago, this version also included
a brand new Chapter on subprime lending. It explains in plain language
the different tax ramifications for subprime and traditionally
financed transactions, as well as issues pertaining to the sale
of retail installment sales contracts. The information contained
in this Chapter is critical to dealers because it can also have
an impact on the structure of the relationship between the dealership
and lender, which is typically governed by a lender-dealer agreement
drafted by the lender.
As lending in the motor vehicle industry becomes more difficult,
the lender-dealer agreements become more complicated. Remember,
many of the standard dealer agreements used by lenders are non-recourse,
however these agreements contain other language which may obligate
a dealership to repurchase various finance contracts in a portfolio,
an event which the dealership thought could not occur. For example,
virtually all lender-dealer agreements contain language where the
dealership provides various representations and warranties to the
lender. Included are warranties from the dealership for everything
ranging from the purchaser having no claims or defenses against
the enforceability of the contract (whether or not these claims
or defenses are valid), to all documents being used in a transaction
complying with all federal and state laws. Experience has shown,
however, that if dealers understand the structure of the transactions
contemplated by these agreements and carefully scrutinize them
prior to signing, they can minimize their dealerships’ risk of
potential liability and increase profitability by addressing various
legal, business, and financial issues with the lenders and taking
action to protect their interests.
While we are on the subject of motor vehicle financing, the lengthy
conflict overseas has had an impact on the ability of dealers and
lenders alike to collect on various consumer financial obligations.
Virtually everyone agrees that it is their patriotic duty to support
the soldiers and sailors who defend our Country. In some cases,
however, providing relief to military personnel is not only a patriotic
duty, it is the law. The Soldiers’ and Sailors’ Relief Act, which
dates back to the Civil War, offers protection for individuals
called to active duty, in part to eliminate worries about finances,
lawsuits, evictions, and similar problems at home. One of the Act’s
most highly publicized protections permits individuals who are
called to active duty to have interest rates on existing debts
lowered to a fixed rate of six percent. Additional provisions in
the Act protect service members by preventing lenders and retail
sellers from declaring a default, exercising an option to rescind
or terminate a contract, or repossessing personal property. As
everyone is well aware, everything in the motor vehicle industry
is highly scrutinized and compliance with the Soldiers’ and Sailors’
Relief Act is not any different.
A more recently enacted law, the USA Patriot Act, and the evolving
rules and regulations under this Act, also impact motor vehicle
dealers and how their business is conducted. On February 24, 2003,
FinCEN issued an advance notice of proposed rulemaking to solicit
public comments on questions pertaining to the motor vehicle industry
and the types of requirements that would be appropriate in implementing
Section 352 of the Act. FinCEN has not yet released the regulations
that will govern the motor vehicle industry’s customer identification
requirements but, effective as of October 1st, financial institutions
such as banks, securities brokers and credit unions were required
to have their customer identification programs drafted and approved.
Motor vehicle dealers that assist consumers in obtaining financing
from covered financial institutions will find their procedures
impacted and should modify dealership paperwork and sales related
procedures to tighten identification verification procedures.
Speaking of tightening procedures, compliance with the FTC’s Safeguards
Rule became mandatory on May 23, 2003 and the wait is officially
over for those dealers who have been wondering when the FTC would
take enforcement action. The FTC has served formal investigative
requests on motor vehicle dealerships asking for evidence of compliance,
including: A description of the type of information collected from
or about customers and a sample copy of each form used to collect
information; a copy of the written information security program
and the time period during which it was written and implemented;
a description of the security risks that were identified in developing
the plan and how the final plan addresses each of the risks; the
name and title of employees responsible for coordinating the safeguards
plan; and the name of each service provider together with information
regarding the types of customer information they have access to,
the manner and form of access, the reasons for access, a copy of
the contract requiring them to implement and maintain security
safeguards, and an explanation of how the dealership confirms that
safeguards have been implemented and are maintained. As a reminder,
the penalty for noncompliance is $11,000 per day, retroactive to
May 23, 2003. With large monetary amounts at stake and privacy
being at the top of Federal and State Regulators’ agendas, we anticipate
aggressive enforcement of the Safeguards Rule in the immediate
future.
With everything that is going on, there will be no shortage of
challenges or, depending upon your perspective, opportunities for
both the Country and the used motor vehicle industry in the upcoming
year. If keeping track of the legal, legislative and regulatory
initiatives on the horizon isn’t challenging enough, consider their
impact on your dealership’s paperwork. If you have not had your
dealership’s paperwork and policies reviewed in the past year,
now is the time to do so. Paperwork and regulatory compliance are
probably two of the most important issues impacting the motor vehicle
industry today and, in all likelihood, the future of your dealership.
The
information contained herein has been provided by Keith E. Whann
and Deanna L. Stockamp of the Law Firm Whann & Associates,
LLC and is for general information purposes only. You should
contact professional counsel regarding specific application of
the information.
|
