Automobile dealerships must comply with a dizzying array of rules and regulations governing everything from the issuance of credit to the truthfulness of advertisements. Failure to follow these rules can result in substantial fines, and in the most severe cases, even prison terms for dealership owners.
The first step to ensuring compliance with all of the rules and regs is making sure you’re aware of them. These rules fall into several broad categories, including the ones detailed below.
Providing credit to finance the purchase of vehicles is one of the primary services offered by dealerships. Perhaps the most important law governing consumer credit is the Truth in Lending Act, which is implemented by Regulation Z.
Reg. Z is intended to help make sure that credit terms and rates are disclosed to customers in such a way that they can readily make comparisons between lenders. In addition, it requires that certain disclosures be presented to customers clearly in writing and in a form they can keep. These disclosures include the amount financed, the finance charge, the annual percentage rate and the payment total.
Regulation M implements the consumer leasing provisions of the Truth in Lending Act. It’s intended to ensure that lessees receive meaningful disclosures enabling them to compare lease terms between lessors and with credit transactions. Reg. M also is intended to limit the amount of balloon payments in consumer leases.
With the recent proliferation of identity theft, it’s become imperative that dealerships safeguard all “personally identifiable information” they possess about their customers. The Gramm-Leach-Bliley (GLB) Act is intended to protect your customers’ personal financial data.
Specifically, the Financial Privacy rule (part of the GLB Act) sets standards for privacy notices, opt-out notices, and the use and disclosure of nonpublic personal information. Also, the act’s Safeguards rule requires dealerships (and many other types of businesses) to draft a written security plan for protecting the confidentiality and integrity of both customer and employee data. This data includes Social Security numbers and bank and credit card information.
Two other rules related to the protection of customer data are the Disposal rule and the Red Flags rule. The Disposal rule requires you to properly dispose of information contained in consumer reports and records to guard against unauthorized use of or access to the data. And the Red Flags rule requires you to draft a written identity theft protection program designed to detect, prevent and mitigate identity theft.
Most dealerships rely heavily on advertising to help drive customer traffic and boost sales. Dealership advertising is governed by the federal truth in advertising laws, a collection of advertising rules administered and enforced by the Federal Trade Commission. There are three primary rules in this law:
• Advertisements must be truthful and nondeceptive. They must tell the whole truth, not a half-truth or slighted version of the truth intended to make a vehicle look more appealing.
• You must possess evidence to back up any claims (whether express or implied) made in your advertisements.
• Advertising can’t be unfair. An “unfair” ad is defined as an advertisement that substantially injures customers, violates established public policy, or is unethical or unscrupulous.
Dealerships also are subject to fuel economy advertising rules that apply to the new vehicles you sell. According to these rules, if your ad lists fuel economies for both city and highway driving, they must be labeled “estimated city mpg” and “estimated highway mpg.” In addition, fuel economy estimates must match the exact make and model of the vehicle being advertised.
One way to help make sure your dealership remains in compliance with these and other rules is to hire a firm to perform employee compliance training. In fact, compliance training is required for some federal regulations, including the Safeguards rule and the Red Flags rule. Contact your dealer’s association or Dealer 20 Group to learn more about compliance training, including firms that can provide this type of training to your employees.
Also keep an eye on actions by the federal government. The Trump administration has promised to cut back on rules and regulations and those affecting auto dealerships could possibly be revised or eliminated.
A federal law called the Magnuson-Moss Warranty Act requires any manufacturer or seller of a product covered by a warranty to provide customers with detailed information about the warranty coverage. This includes dealerships selling automobiles.
The act contains three main requirements that likely apply to your dealership:
1. You must designate your written warranty as either “full” or “limited.”
2. You must state certain specified information about your warranty coverage in a single document that’s easy to understand.
3. You must ensure that warranties are available at the location where your vehicles are sold (that is, at your dealership) so customers can read them before buying the vehicle.
Magnuson-Moss Warranty Act lawsuits can be filed in federal court by multiple customers as class action suits. So, take extra care to make sure your dealership meets these warranty requirements.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.