The California Consumer Privacy Act (CCPA) certainly is complicated. It’s why an entire panel discussion about it was conducted during this summer’s Automotive Intelligence Summit.
Furthermore, a recent PossibleNOW study showed 56% of U.S. businesses polled reported they do not expect to be fully prepared to meet CCPA requirements by the Jan. 1 date of enforcement.
When survey respondents were asked why their organization wouldn’t be compliant, the provider of enterprise consent, privacy, and preference management solutions found
• 35% said their primary reason is the cost of becoming compliant.
• 32% stated they were waiting to see how the CCPA will be enforced.
• 17% said they didn’t think their organization is large enough to face fines.
• 11% said the law is new to them and they are unsure of the requirements, and.
• 4% stated they didn’t think the law applies to them.
PossibleNOW indicated penalties for noncompliance are $2,500 per record for each unintentional violation and $7,500 per record for each intentional violation. So, a company that doesn’t honor or mismanages 1,000 consumer privacy requests could face a fine ranging from $2.5 million to $7.5 million.
While many factors come into play such as the size of a company and the scope of the project, PossibleNOW calculated the average cost for available compliance technology and implementation is typically less than one full time employee.
Businesses face unnecessary financial risks associated with fines by choosing to delay addressing their compliance gaps, according to Eric Tejeda, marketing director at PossibleNOW.
“Just as with GDPR, a significant number of businesses are caught between the cost and effort of complying with CCPA and the probability of enforcement actions against them,” Tejada said. “There are heightened concerns surrounding the CCPA specifically because of California’s strict approach to legislation across all facets of business within the state.
“Companies should actively seek the counsel of a privacy compliance organization as the deadline is quickly approaching. As time draws short, resources become more scarce and implementation becomes more costly,” Tejada went on to say.
A free resource readily available from Cherokee Media Group.
In a few special editions of the show, we’re sharing some of the panel discussions and keynote presentations from the recent Automotive Intelligence Summit in Raleigh, N.C. Next up is a panel discussion titled, "Data Privacy Meets Regulatory Oversight in Debt Collection."
Moderated by Rod Arends, vice president of Southeast Toyota Finance Service Center Operations, this panel includes:
— Rebecca Kuehn, Partner, & Chair of the Credit, Reporting, Privacy and Data Security Practice Group, Hudson Cook
— John Lewis, Founder/CEO, Intellaegis/masterQueue
— David Lincicum, General Attorney, Federal Trade Commission
— Mary Ross, Principal, MSR Strategies; Co-Author, California Consumer Privacy Act
The full discussion can be found below.
One of the regular contributors published within SubPrime Auto Finance News is taking on another industry responsibility.
Linda Robertson, executive director of the Association of Dealership Compliance Officers (ADCO), announced on Wednesday that Randy Henrick has joined ADCO’s board of directors. A highly respected dealer compliance and consumer credit attorney, Henrick has over 30 years of experience in his field.
His company, Randy Henrick & Associates, provides consulting services to help dealers implement compliance policies and best practices to avoid fines and legal problems. His website at www.autodealercompliance.net describes his services and contains numerous dealer compliance blog articles.
Henrick is admitted to three state bars. He is an expert on issues ranging from TILA, ECOA, FCRA and UDAP laws to advertising, data security and digital retailing. In addition to conducting policy reviews, he offers webinar-based training on sales, F&I, privacy and other topics. He monitors and reports on FTC and CFPB enforcement trends.
Prior to starting his consulting firm, Henrick was the associate general counsel and senior director – regulatory and compliance for Dealertrack for 12 years. He authored all the company’s Compliance Guides and was the thought leader for Dealertrack’s compliance product, which was one of the first of its type in the industry.
Before his time at Dealertrack, Henrick worked for GE Capital, Citibank, MasterCard International and Fleet Boston.
“We are delighted to have Randy join our board,” Robertson said. “He’s the preeminent compliance guru in the auto industry and is widely published and a highly popular speaker.”
In addition to his website blogs, Randy writes for SubPrime Auto Finance News that address legal issues and regulatory and compliance best practices for dealers. He also wrote the 2018 NADA guide, Driven: A Dealer Guide to Federal Truth in Lending Requirements.
Henrick has spoken at four NADA conventions, three NIADA conventions and three RVDA conventions. He prepared materials for ADCO’s inaugural seminar back in March and will speak at ADCO’s seminar in Washington, D.C., slated for Oct. 7-9.
Hudson Cook announced this week that nine of the firm’s attorneys were recently selected for inclusion in The Best Lawyers in America 2020, including four who are celebrating 10 years or more on the list.
The firm highlighted attorneys named to The Best Lawyers in America are recognized by their peers in the legal industry for their professional excellence in 145 practice areas. For The Best Lawyers in America 2020, nominees from 22,133 firms resulted in more than 62,000 recognized lawyers in 146 practice areas.
As a testament to their long-standing commitment to client service and practice in the industry, Richard Hackett is being recognized for the 19th time, Thomas Hudson for the 12th time, and Ronald Gorsline and Ryan Stinneford each for the 10th time.
The following Hudson Cook attorneys will be listed in The Best Lawyers in America 2020. The year next to each attorney’s name indicates the first year in which he was included in Best Lawyers:
Robert Cook (partner emeritus) Hanover, Md. (2019)
Financial Services Regulation Law
Ronald Gorsline, Ooltewah, Tenn. (2011)
Financial Services Regulation Law
Richard Hackett (partner emeritus) Portland, Maine (1995)
Financial Services Regulation Law
Thomas Hudson. Hanover, Md. (2009)
Financial Services Regulation Law
Eric Johnson, Oklahoma City (2012)
Banking and Finance Law
Commercial Litigation*
Financial Services Regulation Law
Litigation – Banking and Finance*
Curtis Linscott, Fort Worth, Texas (2019)
Financial Services Regulation Law
Wingrove Lynton, Hanover, Md. (2019)
Financial Services Regulation Law
Thomas Quinn Jr., Fall River, Mass. (2013)
Banking and Finance Law
Ryan Stinneford, Portland, Maine (2011)
Banking and Finance Law
Financial Services Regulation Law
* Eric Johnson’s recognition for Commercial Litigation and Litigation – Banking and Finance is for work done prior to joining Hudson Cook.
The United States District Court for the Central District of California announced on Monday that a notification program began this week as ordered by the court to alert consumers about a proposed class action settlement to remediate auto finance customers of Wells Fargo who may have been financially harmed due to issues related to auto collateral protection insurance (CPI) policies.
The announcement recapped that the proposed settlement resolves a lawsuit originally filed on July 30, 2017 that alleged between Oct. 15, 2005 and Sept. 30, 2016 the defendants unlawfully placed CPI policies on retail installment contracts. CPI is a type of insurance that Wells Fargo purchased from National General to cover potential damage to vehicles that served as collateral for Wells Fargo auto financing.
The lawsuit alleged, among other things, that the CPI policies that the defendants placed on settlement class members’ accounts were duplicative, unnecessary and overpriced.
Under the Settlement, the defendants will distribute at least $393.5 million to settlement class
Officials explained the Settlement Class is defined as Wells Fargo Dealer Services (WFDS) customers who had a CPI policy placed on their account(s) that became effective at any time between Oct. 15, 2005 and Sept. 30, 2016 and Wells Fargo Auto Finance (WFAF) customers who had a CPI Policy placed on their account(s) that became effective at any time between Feb. 2, 2006 and Sept. 1, 2011.
The definition of class and settlement class excludes non-compensable flat cancels, as defined in Exhibit A to the settlement agreement, according to the announcement.
The court indicated notices will be sent to settlement class members and are scheduled to appear in a national online notice campaign leading up to a hearing on Oct. 28 when the court will consider whether to grant final approval to the settlement.
The court has appointed the following law firms to represent the settlement class:
— Baron & Budd in Encino, Calif.
— Robins Kaplan in Los Angeles
— Casey Gerry Schenk Francavilla Blatt & Penfield in San Diego
— Gibbs Law Group in Oakland, Calif.
— Levin Sedran & Berman in Philadelphia
— Weitz & Luxenberg in Detroit
Officials pointed out individuals affected by this settlement can ask to be excluded from, or object to, the settlement and its terms. The deadline for exclusions and objections is Oct. 7.
More details about the agreement are available at www.WellsFargoCPISettlement.com.
Repossession of 113 vehicles and violations of vehicle-lease mandates are going to cost Nissan Motor Acceptance Corp. (NMAC) nearly $3 million.
The Department of Justice recently announced that NMAC has agreed to pay almost $3 million to resolve allegations that it violated the Servicemembers Civil Relief Act (SCRA). The suit alleged that NMAC repossessed 113 vehicles owned by SCRA-protected servicemembers without first obtaining the required court orders, and failed to refund up-front capitalized cost reduction (CCR) amounts to servicemembers who lawfully terminated their vehicle leases early after receiving military orders.
This settlement is the Justice Department’s 10th settlement with an auto-finance provider since 2015 and “exemplifies continued efforts” to enforce the SCRA’s vehicle repossession and lease termination provisions.
DOJ reiterated that the SCRA prohibits repossessing a vehicle from a servicemember during military service without a court order if the individual made a deposit or installment payment on the contract before entering military service. The SCRA also permits servicemembers to terminate vehicle leases early without penalty after entering military service or receiving qualifying military orders for a permanent change of station or to deploy.
When servicemembers lawfully terminate vehicle leases, the SCRA requires that they are to be refunded all lease amounts paid in advance for a period after the effective date of the termination.
The Justice Department acknowledged that individuals who lease vehicles from NMAC often have activities similar to what other captives orchestrate, including a contributing of an up-front monetary amount at lease signing in the form of a cash payment, credit for a trade-in vehicle, rebate or other credit. A portion of this up-front amount can be applied to the first-month’s payment and certain up-front costs such as licensing and registration fees.
The remainder, which is called the CCR amount, reduces the monthly payment the lessee must make over the term of the lease. The Justice Department’s investigation revealed that when servicemembers terminated their vehicle leases early pursuant to the SCRA, NMAC retained the entire CCR amount.
The agreement resolves a suit filed by the Department of Justice in the United States District Court for the Middle District of Tennessee. It covers all repossessions of servicemembers’ vehicles and leases terminated by servicemembers since Jan. 1, 2008.
The agreement requires NMAC to create a $2,937,971 settlement fund to compensate servicemembers whose rights were violated under the SCRA.
Additionally, NMAC must pay $62,029 to the United States Treasury.
The agreement also requires NMAC to revise its policies and procedures to prevent future unlawful repossessions of servicemembers’ vehicles and ensure that servicemembers who terminate their auto leases early receive a full refund of all eligible pre-paid CCR amounts.
NMAC must also provide training to its employees and representatives.
“Men and women in uniform risk their lives to serve our country, and Congress enacted the Servicemembers Civil Relief Act to protect them when they serve our nation,” assistant attorney general Eric Dreiband of the Justice Department’s Civil Rights Division said in a news release.
“The U.S. Department of Justice will continue to enforce the Act vigorously in order to protect servicemembers and to ensure that all covered industries comply fully with the law,” Dreiband continued.
“The SCRA exists to offer protections to our military service members and to minimize undue financial burdens associated with deployments and other instances where our military servicemembers experience a profound and prolonged lifestyle change,” added U.S. Attorney Don Cochran, who serves in the Middle District of Tennessee.
“We will aggressively hold those institutions and businesses accountable who are required to comply with the act. Our military deserves no less,” Cochran went on to say.
While mandated implementation might be delayed, Experian and Oliver Wyman are still looking to help auto finance companies meet the initial set of deadlines for the Financial Accounting Standards Board’s current expected credit loss (CECL) model via a new solution and webinar.
According to a news release distributed on Wednesday, Experian and Oliver Wyman have joined forces to help financial institutions adhere their portfolios to the new guidelines. Delivered through Experian’s Ascend Technology Platform, Ascend CECL Forecaster is a new user-friendly, web-based application that combines Experian’s loan-level data as well as third-party macroeconomic and valuation data with Oliver Wyman’s CECL modeling methodology in an effort to accurately calculate potential losses over the life of a contract.
“Financial institutions across the board feel unprepared and overwhelmed with the new accounting standards on the horizon — in fact, many lack the historical data and technology required to meet the new guidelines,” said Robert Boxberger, Experian’s president of decision analytics, North America.
Our collaboration with Oliver Wyman is designed to streamline the road to compliance — but more importantly, enables lenders of all sizes to continue to properly assess their portfolios and help borrowers secure affordable access to credit,” Boxberger continued.
Built using advanced machine learning and statistical techniques, the web-based application is designed to maximize the more than 15 years of historical credit data spanning previous economic cycles to help financial institutions gauge loan portfolio performance under various scenarios. Experian pointed out Ascend CECL Forecaster does not require additional data nor does it require a secondary integration from the financial institution and enables organizations to more quickly test their portfolios under different economic factors.
Moreover, financial institutions receive guidance from industry experts to assist with implementation and strategy, according to the firms.
“Oftentimes financial institutions need to ask the question, ‘Do I build or buy?’ The former tends to require significant cost, time and resources, such as data and technology,” said Anshul Verma, who leads the CECL product development at Oliver Wyman.
“Ascend CECL Forecaster dramatically reduces the need for additional resources and consolidates necessary data and advanced technology under one umbrella, and ensures the capability remains world class as the regulatory requirements or business needs evolve. Large financial institutions with an existing CECL solution will also find immense value in having an independent tool as the benchmark to provide added comfort in results given the complexity and scrutiny involved,” Verma continued.
Ash Gupta, a senior advisor to Oliver Wyman and former chief risk officer for American Express, shared this assessment.
“Ascend CECL Forecaster is a critical capability needed urgently by all lending and financial institutions,” Gupta said. “The collaboration between Experian and Oliver Wyman allows a frictionless synthesis of industry data, capabilities and experience to serve customers in both first and second line of defense.”
Experian’s Ascend Technology Platform has been helping businesses, including the world’s top financial institutions, stay ahead of rapidly changing consumer behaviors since 2017. Through the platform, customers can build their own predictive models and gain actionable insights by applying machine learning and AI techniques to vast amounts of anonymized credit, client and alternative data sets. Its analytical tools mine rich layers of content to gain unique insights about businesses and consumers.
Results are delivered in near real-time, via flexible self-service tools and powerful visualizations, all supported by industry-leading data security.
To help financial institutions better understand and prepare for the upcoming CECL standards, Experian and Oliver Wyman will host a webinar on Aug. 22 1 p.m. ET. To register, go to this website.
For more information about Ascend CECL Forecaster, visit http://www.experian.com/cecl.
Perhaps accounting specialists at some auto-finance companies and buy-here, pay-here dealerships can exhale a bit as major new mandates involving how they track bad debts might not be implemented for another year.
An update from the Financial Accounting Standards Board (FASB) indicated its board voted unanimously this week to propose delaying the effective date of the its new Current Expected Credit Loss model (CECL). For smaller, publicly traded companies, the delay would be from 2021 to 2023 and from 2022 to 2023 for private companies and nonprofits.
The update SubPrime Auto Finance News received also mentioned that large, publicly traded companies such as nationwide banks still would be expected to implement the standard on Jan. 1.
Earlier this summer, FASB looked to reinforce its position concerning the upcoming mandates placed on banks, credit unions and finance companies in connection with reserving for losses, emphasizing the changes could be implemented without incurring “significant costs.”
In June, FASB issued a proposed Accounting Standards Update (ASU) that included amendments designed to address issues raised by stakeholders, which have triggered proposals by federal lawmakers who are looking to delay these significant accounting changes.
To recap, FASB is looking to ensure that financial institutions have solid measures in place to ensure they have appropriate reserves for any future losses based on the life of each auto loan. As a result, the board has instituted its new Current Expected Credit Loss model (CECL).
The new model will require higher levels of loan loss reserves and lead to changes in lending practices and portfolio management. It will also require a significant amount of data capture, analysis and modeling to meet the implementation deadline.
A day short of three weeks after a proposal surfaced from six members of the Senate, 10 House representatives crafted potential legislation to delay this major accounting shift for auto-finance providers and other lending operations. Rep. Ted Budd, a North Carolina Republican, led the charge for the House bill that was introduced on June. A similar proposal arrived in the Senate on May 22.
“I never knew when I took office that the implementation of accounting standards would prove to be such an important issue, yet I’ve been pleased to see it provide so many opportunities for working across the aisle in this hyper-partisan era,” Budd said in a news release. “The Financial Accounting Standards Board, or FASB, is moving forward with an accounting standard affecting generally every financial institution in the country and the customers they serve, without a proper study of its broader economic impact. To me, this is yet another example of an unaccountable bureaucracy not taking the appropriate steps to ensure that it is helping instead of hurting folks.
“I am particularly concerned about how this new accounting standard will impact lending in economic recessions and affect access to capital for the consumer in financial downturns. It is now up to us in Congress to make FASB complete this common-sense task and that’s what my bipartisan bill would do if enacted,” Budd went on to say.
FASB noted in its update this week that the board expects to issue the delaying proposal in August with a 30-day public comment period to follow. After the public comment period has ended, FASB said its board will discuss the feedback received at another public meeting.
“Depending on the outcome, the FASB could finalize the proposal as early as this fall,” the organization said in its update to SubPrime Auto Finance News.
The latest CECL development came as welcomed news to the industry. Curt Long is chief economist and vice president of research at the National Association of Federally-Insured Credit Unions (NAFCU).
“We appreciate FASB considering credit unions’ concerns and moving forward with a delay of the CECL standard and committing itself to conducting a cost-benefit analysis to better understand this new standard’s impact on consumers, credit unions and the economy as a whole,” Long said in a news release.
“NAFCU will continue to advocate for credit unions to be exempt from this onerous and costly accounting standard as it could adversely affect credit unions’ capital levels immediately upon implementation. Long continued.
“More so, credit unions did not cause or contribute to the financial crisis or the poor lending conditions that led the FASB to consider a new standard,” he added.
Furthermore, Rob Nichols still has plenty of concerns about implementation of CECL. Nichols is president and chief executive officer of the American Bankers Association.
“FASB’s vote to delay CECL for certain smaller banks offers further proof that the required efforts to implement this costly standard are far greater than the board has previously led bankers to believe,” Nichols said. “A partial delay without a requirement for study or reconsideration simply kicks the can down the road — it does not reduce the ongoing data, modeling and auditing requirements facing smaller banks or address the increased procyclicality it will cause.
“The delay should apply to banks of all sizes, and should be used to conduct a rigorous quantitative impact study to properly assess the effect this new standard will have on their ability to serve their customers and the broader economy, particularly during an economic downturn,” he continued.
We encourage Congress to act quickly to ensure this flawed standard is delayed for all institutions until such a comprehensive analysis can be completed,” Nichols went on to say.
Before this week’s vote, FASB previously sought to address four issues along with sharing a summary of its amendments and proposals. The rundown included:
Issue No. 1: Negative allowance for purchased financial assets with credit deterioration
Summary: The proposed amendments would clarify that an entity should include expected recoveries of the amortized cost basis previously written off or expected to be written off in the valuation account for purchased financial assets with credit deterioration (PCD). The proposed amendments also would clarify that recoveries or expected recoveries of the unamortized noncredit discount or premium should not be included in the allowance for credit losses.
Issue No. 2: Transition relief for troubled debt restructurings
The proposed amendments would provide transition relief by permitting entities to adjust the effective interest rate on existing troubled debt restructurings (TDRs) using prepayment assumptions on the date of adoption rather than the prepayment assumptions in effect immediately before the restructuring.
Issue 3: Disclosures related to accrued interest receivables
The proposed amendments would extend the disclosure relief for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis.
Issue No. 4: Financial assets secured by collateral maintenance provisions
The proposed amendments would clarify that an entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing the financial asset to apply the practical expedient.
“The amendments in this proposed update include items brought to the board’s attention by stakeholders. The proposed amendments would clarify, correct, and improve the guidance related to the amendments,” board members said. “Therefore, the board does not anticipate that entities will incur significant costs as a result of these proposed amendments.
“The proposed amendments would provide the benefit of improving the consistent application of GAAP by clarifying guidance that already exists within GAAP,” they added.
This week, SubPrime Auto Finance News secured the affidavit connected with an FBI investigation of a South Carolina Mitsubishi dealership containing scathing details about store management manipulating trade-in values, down payments and income figures in an elaborate fraud scheme that might have impacted at least eight finance companies.
Investigators said witnesses who claim to be a former manager and another employee at Hoover Mitsubishi asserted that two other managers along with the store owner executed the fraud scheme that allegedly ran from November 2013 through last August.
The affidavit indicated the specific finance companies allegedly impacted included:
— AmeriCredit
— Santander
— Global Lending Services
— Exeter Finance
— PNC Bank
— Ally Financial
— Skopos Financial
— Veritas Credit Union
The FBI said in the affidavit that one witness told investigators Veritas Credit Union, which is based in Canton, Miss., “was particularly taken advantage of because Veritas Credit Union blindly matched any financing offer submitted by Hoover Mitsubishi.” The witness added one of the conspirators would “produce and submit fake approval documentation of a competitor to Veritas Credit Union, thereby compelling them to match the offer.”
How the fraud happened
According to the affidavit, the fraud orchestrators prepared two retail installment contracts, with one of the documents containing details about a “phantom” trade-in or down payment. One document was retained in the store’s accounting department and the other stored in a closet somewhere else at the dealership.
FBI investigators learned from a witness that the dealership misled the finance companies by manipulating manufacturer rebates on new models to appear as a customer’s down payment as well as inflating the applicant’s income. The witness said a manager would use a computer at the dealership to produce false cash receipts to fulfill finance company stipulation as proof of down payment, according to the affidavit.
When a trade-in allegedly was involved, the FBI affidavit indicated the applicant’s average interest rate would be lowered by 5%, but Hoover Mitsubishi kept much of that amount to increase gross profit.
Another cooperating witness told FBI about personally paying a store employee to fabricate false proof of residency for potential customers. That witness acknowledged having paid $20 per instance for the employee to generate a fabricated South Carolina Electric and Gas bill to show customer lived at the same residence a co-signor.
This process happened approximately 10 to 15 times during the timeframe of the alleged fraud, according to the affidavit.
The first witness “believed that many customers would never have been provided a loan had it not been for the doctored paperwork.”
The FBI learned from the witnesses that Hoover Mitsubishi retailed 50 to 60 vehicles monthly with approximately 30 of those units connected to the fraud schemes. “Between 2014 and 2018, (the witness) stated that both he and almost every employee of Hoover Mitsubishi benefitted financially from the schemes,” according to the affidavit.
The affidavit included an example of how one of the eight finance companies targeted in the scheme might have added fraudulent paper to its portfolio.
The document stated on approximately Sept. 5, 2016, PNC Bank funded the contract for a vehicle purchased retailed by the Hoover Automotive Group. PNC Bank bought the paper valued at $53,236.
“Approximately six months after the loan was granted, the borrower informed PNC Bank that the income reported on his car loan application was deliberately inflated by the Hoover Automotive Group,” the affidavit said. “In addition to more than doubling his income, the loan application also reported the borrower owned his residence, which was not true.”
Not all applications were approved
The FBI shared through the affidavit a pair of instances where additional due diligence during the underwriting process stopped a contract from being funded.
On approximately Sept. 25, 2015, the affidavit indicated Regional Acceptance declined to fund a contract worth $20,258.50 for a 2015 Mitsubishi Outlander Sport via a delivery Hoover Mitsubishi tried to complete. Regional Acceptance is a subsidiary of BB&T Bank that typically caters to consumers in the subprime credit space.
“After reviewing the loan application and supporting documents to include a suspicious pay stub, Regional Acceptance Corporation contacted the borrower to verify income. The borrower advised he had not provided a pay stub to Hoover Mitsubishi,” the affidavit read.
After contacting one of the alleged conspirators, “Regional Acceptance Corporation ultimately concluded the pay stub was fabricated by Hoover Mitsubishi personnel because the style of the pay stub was similar to that of other borrower’s pay stubs submitted previously,” according to the FBI document.
Investigators recounted another instance earlier in 2015 involving Capital One Auto Finance.
On approximately May 27, the affidavit said a customer attempted to secure financing for a vehicle purchase through Hoover Mitsubishi, which sent documents to Capital One stating the applicant resided at the same residence as the co-applicant.
“However, when the bank contacted and interviewed the applicants for a pre-funding interview, it was learned applicants did not reside together. The bank concluded the information was intentionally distorted in order to qualify for the loan,” the affidavit stated. “In this matter, no loan was provided due to misrepresentation on the loan documents and potential fraud.”
The Magnuson-Moss Warranty Act is the federal law that governs consumer product warranties. Passed in 1975, the act was created to protect consumers from deceptive warranty practices, ensure warranties are easy to understand and make violations legally enforceable. Perhaps one of the more surprising unintended consequences of the act is how it can benefit dealers, not just consumers.
It’s easy to see, for instance, how the dual levers of transparency and accountability behind Magnuson-Moss benefit consumers. The act prohibits implied warranties in most cases, misleading or deceptive warranty terms and “tie-in sales” provisions.
A tie-in sales provision requires the customer to buy an item or service from a particular company to keep the warranty in force. For example, if a customer has modified his or her car with aftermarket parts and takes it to the dealership where it was purchased, that dealership must still honor the warranty. According to Magnuson-Moss, vehicle manufacturers, with some exceptions, are not allowed to void the vehicle warranty just because aftermarket parts are on the vehicle.
So, how can adhering to Magnuson-Moss benefit dealers? In addition to helping to improve customer satisfaction rates, the Act can provide a secondary revenue stream for a dealership.
But there’s a catch.
Who’s on the hook?
At a high level, extended warranties are defined by which party is ultimately responsible: an outside vendor or the dealership itself.
Administrator obligor puts the responsibility of meeting the terms of the service contract in the hands of a warranty administrator, a company independent of the dealership. Dealer obligor, on the other hand, is when the dealer assumes all contingent liability, instead of a warranty administrator.
To a consumer, it may not matter which party is on the hook for fulfilling their service contract. But to a dealer, it is an important distinction.
Dealer obligor service agreements could create new problems for a dealership, with increased risk and liability. A dealer is totally responsible for all current claims as well as for any future contingent liability. This responsibility could become a tall hurdle if the dealer plans to sell the dealership.
The safest route, then, may be to choose the administrator obligor approach, as long as the chosen administrator abides by Magnuson-Moss.
How to avoid consumer lawsuits
Granted, all written consumer service contracts or warranties are regulated by Magnuson-Moss, but not all such contracts are equal. And therein lies the rub. By partnering with the wrong warranty provider, you could find yourself unknowingly in violation of the act and, ultimately, as a defendant in a class-action lawsuit.
Under the terms of Magnuson-Moss, the drafter of the warranty is responsible for any ambiguous statements in it, and breach of warranty is a violation of federal law. For example, if your warranty provider is telling your customers that they have to use your dealer service shops to install only OEM parts or their warranty will be avoided, this would be misleading, as noted above, and you could be at great legal risk.
Winning in court, consumers can recover costs. This means, if your dealership loses in court, you may have to pay the customer's costs for bringing the suit, including their lawyer's fees. Clearly, it’s better to be safe than sorry by partnering with only reputable warranty providers.
Where to find more profit
Customer-friendly extended service contracts can become a cream separator for dealers, giving their business a unique positioning statement in a very competitive market. By offering a lifetime powertrain warranty, for instance, a dealership can help distinguish itself from the competition while, at the same time, building a loyal customer base that can become repeat buyers and referrals.
Before offering extended warranty protection to your customers, remember to protect yourself and your dealership first and pay close attention to the exact service your warranty vendor plans to provide — or not provide. Any warranty program you’re affiliated with should be backed by an A-Rated insurance carrier.
Dealer beware
Cars are products and products can fail and, when they do, extended warranties exist to help minimize the financial impact on both buyer and seller. The real beauty of reinsurance is that it can create another profit channel for your dealership.
But caveat venditor … let the seller beware. If you make the wrong decisions as a dealer and embrace the wrong warranty provider, an extended warranty can turn into an extended legal quagmire. The devil of a class-action lawsuit could be in the details. And that’s the catch.
Jim Binkley is the founder and chief executive officer of Binary Automotive Solutions, providers of an integrated, customized package of programs to help dealerships sell more vehicles, hold gross and retain more customers. You can reach him at jbinkley@binaryauto.com.
Arent Fox is bolstering its compliance offering, and in the process, bringing back one of its experts.
This week, the firm announced the launch of Managing Automotive Compliance, a regulatory, auditing and consulting service that is designed to help auto industry clients manage their regulatory needs.
The firm explained Managing Automotive Compliance is geared to defend automotive clients’ bottom lines against regulatory risk with “unparalleled experience, comprehensive resources and predictable pricing.”
Managing Automotive Compliance is led by automotive compliance director Lisa Singer. With more than 15 years of experience, Singer rejoined the firm’s Los Angeles office, where she will work on regulatory consulting and auditing, employment policies and procedures, training and enforcement matters.
“Lisa is an authority on compliance issues and a key person that we will rely on to expand our Managing Automotive Compliance group,” Arent Fox automotive leader Aaron Jacoby said. “Her practical counsel and real-world solutions are exactly what our automotive clients expect to receive from one of our firm’s signature practice areas.”
Singer was previously executive vice president of Auto Advisory Services (AAS), a leader in regulatory compliance and consulting. Later, upon the acquisition of AAS by KPA, Singer became KPA’s director of legal affairs.
Arent Fox highlighted Managing Automotive Compliance’s services include:
• Advertising review
• Compliance seminars
• Employee handbooks
• Review of finance practices
• On-site training
• Creating policies and procedures
• Wage and hour review
Arent Fox’s national automotive group has been recognized in Chambers USA and by the Daily Journal for “thinking outside the box for automotive clients.”
Firm officials added, “From regulatory enforcement and consumer litigation to business transactions and government investigations, our industry-focused team helps automotive clients navigate a dizzying array of competitive and regulatory roadblocks.”
