The Past is Prologue- Regulatory Retribution Against Dealers

Terrence J. O'Loughlin, J.D., M.B.A.

The Past is Prologue- Regulatory Retribution Against Dealers

To paraphrase the Bible, there is nothing new under the sun. This is also true of consumer law as it relates to the car business. In spite of a new consumer protection agency, the Consumer Finance Protection Bureau or CFPB, and a newly empowered FTC, these agencies pursue the traditional cases against dealers, as they both have done recently, in prosecuting dealer advertising, discrimination, and the failure to use Buyers Guides. It is instructive to note that in the 1953 The Household Encyclopedia in the Housewives Beware section, most of the indicated scams continue unabated to this very day, in 2015, regarding advertising, bait and switch, contract issues, evanescent MSRP's and so forth.

The bottom line is, quite simply, what regulators have done in the past, in prosecuting dealers, is what they are going to be doing now and into the future. In other words, it is old wine in new bottles. Dealers can prepare themselves by knowing what regulators will probably do and how to respond.

It was reported recently that the average franchise dealer spends $183,000 on compliance annually. This equates to $2,400 per employee. Knowing what to look for could reduce this cost.

What can government regulators do?

Government agencies are empowered in three ways. They can prosecute, regulate, and supervise. Not all agencies are granted all three powers. For example, the CFPB has these three powers. But, state Attorneys General can prosecute and regulate commerce in certain states but do not supervise merchants, generally.

What should a dealer prepare for?

Dealers should prepare for the most likely issues and be especially careful with them. They need to sort out the issues which will probably get them into trouble as opposed to those issues which have a lower potential for creating an actionable legal issue. Under no circumstances am I recommending that dealers not observe the law, in all respects, as it relates to them. Dealers should be observing the Safeguards Rule, Privacy Rule, Red Flags Rule, and so forth, but are they the most likely issues to be prosecuted by regulators?

The Basic Rules

There are two basic rules which I would advocate all dealers to follow. First, don't get noticed. Secondly, if a dealer becomes the target of any government inquiry or investigation be prepared by adopting sound business protocols in advance. A dealer strategy will be different based upon whether he is being prosecuted, regulated, or supervised.

I pursued cases against dealers for sixteen years for the Florida Attorney General's Office. In addition, I have worked for the industry for almost the past ten years and have observed carefully the types of cases being brought against dealers. Based upon my experience and observations consumer complaints, by far, trigger the most governmental actions. I would guess that at least 60 to 70% of all government investigations of dealers begin with consumers' complaints. The CFPB is not oblivious to this issue as it has a comprehensive section on its website for consumers to file complaints. The obvious remedy for this problem is for dealers to address consumer complaints as soon as they are reported so that these same consumers don't send their complaints to a governmental agency, website, or even worse, their personal attorney. Dealers can, and should control these complaints with a protocol and maintain records of in-coming complaints and the attempted resolution of them.

The second most common basis for government action is based upon advertising. I would speculate that at least 20% or more of all regulator cases are based upon advertising. Why dealers make mistakes with advertising is difficult to explain considering all the free guidance there is available. If dealers are choosing to falsely advertise it is simply not a good business strategy as it could prove very costly. Misrepresentations in print, radio, television, mailers, and internet advertisements are readily identified by regulators. In fact, regulators appreciate these cases because they are so easy to advance. At many state Attorney General's Offices, it only takes a day to identify the advertisement violation and then send a demand letter to a dealer specifying the financial penalties, usually in the thousands of dollars. For example, in many states, there is a statutory penalty if the Unfair and Deceptive Acts and Practices (UDAP) statute is violated. This means that the measure of the financial penalty will be that amount. An advertising violation would be a UDAP violation. In Florida, sending a demand letter for $10,000 to a dealer based upon such an advertising violation was not uncommon, even for a minor violation. And, there are no compelling defenses to these types of cases.

Other cases brought by regulators are usually based upon newspaper articles, other media, anecdotal experiences, or predilections of the chief regulator. These cases probably account for 10 to 20% of the cases advanced.

If You Get Noticed Be Prepared

Most regulators will be somewhat deferential to a dealer if that dealer is making an effort to comply with the law. This attempt to comply, no matter how modest, may be an effective defense and may mollify the financial penalties or other demanded remedial actions. For example, if a dealer attempted to professionally respond to a valid consumer complaint, and documented how he attempted to assist the consumer, the regulator may close the investigation of that complaint. If a dealer, who has been cited for a deceptive advertisement, can show that he has a sound procedure for reviewing his advertisements before they are released, and the offending advertisement is an aberration, he may possibly evade the fine or have it reduced. The lesson to be learned here is that dealers need to have a written procedure in place for these contingencies and follow that protocol. Secondly, they need to document (i.e., keep careful records) that they have tried to discharge their responsibilities in a professional manner. The same is true for all the books and records which a third-party may review such as a visiting Department of Motor Vehicles inspector. If the records are organized and easily available the inspector may presume that the dealer is observing the requirements of the law. Disorganized records, such as a disheveled deal jacket, will pique much more interest.

The concept of a Compliance Management System is relevant here. A Compliance Management System would include the following:

  • Establish a compliance program
  • Establish a board with management oversight
  • Appoint a permanent compliance officer who reports to that board
  • Respond to consumer complaints with a protocol
  • Have routine audits examining how the program is functioning and can be improved.

Dealers should adopt such a program as it makes good business sense.

The Parade of Horribles – Which regulators are the most to be feared?

Without question, the state Attorney General is the most likely regulator to pursue legal actions against dealers. In fact, enforcing statutes such as UDAP, civil theft, civil fraud, and civil RICO (civil racketeering) is their mandate. Moreover, other state agencies refer cases for legal action by the Attorney General. The state Attorney General also has the most resources to prosecute cases. The CFPB recognizes state Attorneys General as a resource for its purposes and is attempting to leverage them to advance its agenda.

The second group of regulators most likely to take action against dealers is other state and local government entities. The DMV, Departments of Consumer Services, Taxation, and the Controller's Office all have reason to investigate dealers. If these regulators uncover issues which are not within their purview they will refer them to the Attorney General.

In third place, is the class of plaintiffs' counsel. There are over 1,000 attorneys in the U.S. who dedicate their practices to suing dealers including many class action attorneys. They are essentially "private Attorneys General" and use that title in their pleadings. It is most likely that certain aspects of arbitration will be abolished in the coming year. This will mean that class actions against dealers will probably increase significantly.

The FTC would be in fourth place, followed by the CFPB and the U.S. Department of Justice. Although quite powerful and large, these agencies do not have the manpower to police the tens of thousands of franchise and independent dealers which operate in the U.S. They must be selective in which dealers to prosecute. However, if they do identify a dealer it is a grim and serious matter. As a reminder, and good news, the NADA was able to extricate franchise dealers, and certain other dealers, from the direct CFPB jurisdiction.


Dealers should pay heightened attention to those issues which attract the most attention and legal action: consumer complaints and advertising. Secondly, they should have sound business procedures so that if a third-party has reason to review dealer activities it will be obvious to the third-party that the dealer has been mindful of his obligations under the law. To not follow this advice may invite costly errors.


As seen on P&A Magazine.

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