Compliance 2006: The Year in Review

December 01, 2006 | No Comments | share on facebook | retweet | share on LinkedIn

by Randy Henrick

As 2006 draws to a close, let's examine some of the key dealer compliance developments over the past 12 months. 2006 was a year in which new challenges emerged to traditional ways dealers do business, driven largely by technology and consumer experiences that made front-page news throughout the year.

Safeguards and Data Security - 2006 set a record for security breaches and wrongful access to nonpublic personal information. The U.S. Veteran's Administration set the all-time security breach record when an employee's home was burglarized and the thieves stole a laptop and external hard drive containing records on more than 26,500,000 current and former armed forces members. Lost laptops were a major source of compromised customer information and they came at a high price. A health care provider in Oregon paid more than $95,000 to the state and incurred $7-9 million in expenses to notify and provide one year of credit protection services to 365,000 health plan members when an employee's laptop containing their personal information was stolen from the trunk of his car.

The FTC made it clear that auto dealers should treat customer information as if it were cash. Banks don't leave cash lying around on tables in their branches nor do they let tellers take cash home for the weekend. Leaving credit applications, credit reports and deal jackets in plain sight in your dealership invites identity thieves to stroll around on a busy Saturday and collect personal information. In one widely-publicized incident, an identity theft ring used garden variety cell phone cameras to photograph credit applications and credit reports that were out in the open in an auto dealership on desks, in fax machines and copiers, and outside filing areas. Using electronic deal jackets can thwart this type of identity theft but make sure computer screens are not left unattended with customer information displayed.

Be wary of allowing your employees to download unencrypted personal information of customers onto laptops, Blackberries, or other PDA devices. And be careful disposing of such devices as even "deleted" information can remain on a hard drive or flash drive. Remember you have an obligation under the FTC Consumer Information Disposal Rule to securely dispose of all customer information, no matter what format it is in. A great website for how to delete personal information from cell phones, PDAs, and other wireless devices is: http://www.wirelessrecycling.com/home/data_eraser/default.asp.

The FTC and banking regulators also published draft "red flag" identity theft guidelines (see our August 2006 Compliance Corner column) that, once adopted, will require auto dealers to develop comprehensive written identity theft protection programs to protect the dealership and its customers from identity theft risks. The regulations will require you to do a risk-based analysis and identify points of vulnerability for data compromises in your organization. You will need to pinpoint and address internal as well as external risks to data security.

According to identity theft studies, wrongful access to customer information by employees and contractors far exceeds external database hacks as a source for identity theft. In anticipating the red flags requirements, consider your user permissions, set up data access logs, and begin to monitor the activity of your employees who can access this information. Be sure to disable access names and passwords not later than when an employee leaves the dealership, and preferably before they leave. The identity theft threat for your dealership in 2007 is probably very close at hand. For tips on how you can reduce your dealership's risk of being victimized by an identity thief, see our August 2006 Compliance Corner column.

State Security Freeze Laws - 23 states enacted security freeze laws in 2006 bringing the total of states that permit consumers to lock down their credit files to 26. As explained in our June 2006 Compliance Corner column, these laws allow a consumer to "freeze" their files at Equifax, Experian, and TransUnion and will prevent you from pulling the consumer's credit report or credit score unless the consumer has taken steps to temporarily "thaw" their frozen credit file prior to entering your dealership.

Security freeze laws pose a particular challenge to spot deliveries. The good news is that a consumer can "thaw" their file fairly quickly by making a phone call to the credit bureau and using a special PIN issued by the bureau when the consumer first froze their file. Attached to this article is a description of how a consumer can do this with each credit bureau. Make copies of this description and have them available to hand to a customer who seeks financing but has forgotten that their credit file is frozen. While the laws allow credit bureaus up to 5 business days to "thaw" a frozen file, a recent Wall Street Journal report found that many customers who followed the steps in the attached description had their files thawed in a matter of hours. By September 2008, credit bureaus will have to thaw a consumer's frozen credit file within 15 minutes after receiving the request.

In the meantime, be careful with consumers whose credit files are frozen. If you want to spot a car to such a person, get alternative evidence of their financial situation such as pay stubs, account statements, and perhaps a bank reference. Write a tight spot delivery agreement requiring the customer to take steps to immediately thaw the file and provide a short window of time (no more than 5 days) to unwind the deal if you cannot obtain the customer's credit report or credit score.

Adverse Action Notices - A series of cases, principally in the states of Virginia and California, resulted in conflicting authority over just when a dealer has to send an adverse action notice to a customer for whom the dealer cannot obtain credit. One such case involving the insurance industry is now before the U.S. Supreme Court.

While it is impossible to reconcile all the cases, you should send adverse action notices in at least the following three situations:

1. When you take a customer's credit application and do not send it to any lender, typically because the customer is credit challenged. In this situation, you the dealer are the creditor and you are declining the customer's credit application. Send an adverse action notice within 30 days of receipt of receiving the complete credit application. In this regard, note that a credit application is not considered complete until you can get access to a frozen credit file.

2. When no lender approves the consumer's credit and you cannot obtain financing for the customer. Failing to approve a credit application on the terms applied for is adverse action. All entities involved in the credit process have to send an adverse action notice including your dealership if you took any active role in the process. When you can't get a customer approved, you should not rely on the lender's adverse action notice to cover your dealership's obligation because, to do so, the lender's adverse action letter has to give the name, address, and a contact person at your dealership. Lender adverse action letters rarely do this. So send your own.

3. When you unwind a spot deal. Unwound spot deals generate more litigation than any other practice at dealerships and they almost always result in an unhappy customer. Tearing up a contract, even in a spot situation where you have the right to do so, and replacing it with a contract that contains less favorable terms to the consumer is adverse action. Hand the consumer an adverse action letter with the new contract you give them to re-do the deal. Don't give an unhappy customer grounds to sue you, legitimately or illegitimately.

The FTC and Federal Reserve Board are expected to issue "risk-based pricing" guidelines in 2007 that will require dealers to inform customers when they do not qualify for the best rate for similarly-situated customers. This will further change the rules for adverse action notices.

Dealer Marketing and Advertising - State Attorneys General were very active in 2006 against auto dealers, particularly auto dealers that marketed pre-approved credit offers and other financing terms.

Marketing credit is tricky. If you are going to tell a consumer they are pre-approved for credit, the credit offer must be meaningful (not an assurance of only several hundred dollars for an auto purchase) and you have to accurately state the terms of the offer such as the contract length, the APR, and other credit terms. The federal FACT Act also requires you to include conspicuous notices giving the consumer the right to "opt out" of future pre-approved credit mailings and make other disclosures as well. Numerous dealers were hit for large penalties for making sham offers of credit or not including all the required disclosures. Our October 2005 Compliance Corner column contains additional information on making pre-approved offers of credit.

Also manage customer opt-outs from telemarketing, fax, and email solicitations when doing marketing campaigns. Your dealership should maintain its own list of customers who have told you they do not want to be contacted by these types of communications and you should scrub those consumers from any marketing lists. Also scrub customers who are on the FTC ‘s National Do Not Call Registry and state "do not call" lists and get assurances from your list vendors that the lists have been sanitized to remove consumers who have opted out of information sharing under the Gramm-Leach-Bliley Act and the FTC Privacy Rule.

Truth in advertising terms is a must. In 2006, numerous state Attorneys General imposed fines on companies that operated off-premises sales events for dealerships using misleading statements (e.g., court-ordered repossession sales), high pressure sales tactics, false statements on the need to buy extended warranties and aftermarket products, marking up vehicles to advertise large discounts, and failing to disclose salvage and other vehicle history problems. One company that operates such events, G & A Marketing (also known as Fleet Liquidators) agreed to pay over $500,000 in settlements with 11 state Attorneys General for their practices in conducting these sales. Unfortunately, these companies are quickly out of town and it will be your dealership doing after-the-fact damage control if deceptive practices occur at the sales event.

Car Buyers Bill of Rights - A new California law that is being watched by legislators in other states provided a series of new rights to consumers. In California, car buyers must be given a 2-day option to cancel the purchase of a used car having a price of less than $40,000. The law also requires dealers to disclose the consumer's credit score (along with the range of possible scores from the credit bureau) and requires certain aftermarket products to be itemized and disclosed with the cost of each product and the effect on the consumer's monthly payment set forth in a separate disclosure document that the customer must sign. The law also caps a dealer's ability to mark up the "buy rate" offered by finance sources to dealers. See our May 2006 Compliance Corner column for more information on the California Car Buyer's Bill of Rights.

These were some of the highlights-and lowlights-from 2006. We will continue to keep you informed of new compliance developments in our monthly Compliance Corner columns in 2007. Also be sure to pick up a copy of our updated 2007 Compliance Guide at DealerTrack's booth at the NADA Convention in Las Vegas or you can request a copy by emailing us at compliance@dealertrack.com. Happy New Year everybody!

Randy Henrick is Associate General Counsel and lead Compliance Counsel for DealerTrack, Inc. Compliance Corner is intended for information purposes only and does not constitute the giving of legal or compliance advice to any person or entity.

Instructions for Removing a Security Freeze from a Credit File

EQUIFAX

You may request a temporary lift of the security freeze on your Equifax credit file by calling the telephone number provided in your Equifax security freeze confirmation letter or by sending your request in writing to the address provided below.

In many states you may request that your security freeze be temporarily lifted for a specific credit grantor/report user or for a specific period of time, such as 5 days. Equifax recommends you request a temporary lift of your Equifax security freeze for a specific period of time to facilitate credit applications with a prospective credit grantor/report user.

To request a temporary lift of the security freeze on your Equifax credit file, please provide the following information when you call the telephone number provided in your confirmation letter or when you write Equifax to request a temporary lift your Equifax security freeze:

1. Your 10 digit security freeze confirmation PIN that Equifax provided in your initial Equifax security freeze confirmation letter

2. The date range of your temporary lift of the security freeze (e.g. March 5-March 10), or

3. The name of the specific credit grantor/report user you would like to receive your Equifax credit file.

4. Payment of any applicable fees to temporarily lift your Equifax security freeze. Equifax accepts checks, American Express, MasterCard, VISA and Discover cards for payment. If you are paying by credit card, please include the following information:

1. Exact name of the person as it appears on the credit card.
2. Type of credit card (American Express, MasterCard, VISA, or Discover Card).
3. Complete account number.
4. Expiration data (month and year).
5. For American Express - 4 digit Card Identification Number (on front of card above the account number).
6. For MasterCard, VISA, or Discover Card - 3 digit Card Identification Number (on back of card at the end of the account number).

Please do not send cash through the mail.

To mail your request for a temporary lift of your Equifax security freeze, please send the information above to the address listed below:

Equifax Security Freeze
P.O. Box 105788
Atlanta, Georgia 30348

More information is available at:

https://www.econsumer.equifax.com/consumer/sitepage.ehtml?forward=cs_cpo_howto#top

EXPERIAN

To temporarily remove an Experian security freeze for a period of time in order to apply for credit or for any transaction that requires that another party access your personal credit report, you may log on to www.experian.com/tempfreezeremoval or call 1 888-EXPERIAN (1-888-397-3742), then enter your identification information and personal identification number that Experian issued to you when it first froze your Experian credit file.

To temporarily remove an Experian security freeze for a specific party, provide your personal identification number to the party you wish to grant access to your credit report.

More information Is available at:

http://www.experian.com/consumer/security_freeze.html

TRANSUNION

To temporarily lift your TransUnion security freeze by phone, you can call 888-909-8872. Please have ready your TransUnion file identification number (FIN), security freeze PIN, lift type, start and end dates and credit card number to be used to pay the applicable fee, if any, for the service.

To temporarily lift your TransUnion security freeze by mail, complete the Lift section of the Security Freeze Form that was sent to you with the TransUnion security freeze information letter after you requested the TransUnion security freeze, and mail it to the address shown at the bottom of the form. When selecting the start date for your temporary lift, be sure to allow mail delivery time for your request to reach TransUnion.

It may take up to three business days to process your request to temporarily lift the TransUnion security freeze. It may take longer if you have lost the TransUnion security freeze file identification number (FIN) or security freeze PIN that TransUnion provided to you when you first requested the security freeze to be placed on your TransUnion credit file.

More information is available at:

http://www.transunion.com/corporate/personal/fraudIdentityTheft/preventing/securityFreeze.page

Originally published December, 2006

 

thecomplianceguide.com is intended for information purposes only and does not constitute the giving of legal or compliance advice to any person or entity. Because of the general nature of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on your particular situations and circumstances.

You Can and Should Sell More Lease Finance

December 01, 2006 | No Comments | share on facebook | retweet | share on LinkedIn

by Randy Henrick

Are we on the verge of a new renaissance in vehicle leasing? We definitely are. Not since 2002 has vehicle leasing activity been as attractive as it is now.

Today’s resurgence of leasing is being driven by three important conditions:

1. More accurate residual values.
2. Lease terms that are more understandable by consumers and easier to present by dealers.
3. Consumer sticker shock over monthly retail fi nance payments… which is offset by more reasonable monthly lease payments.

Granted, not all dealers have embraced leasing again. Some remember the old days when lease terms stretched beyond reason, leaving customers feeling stuck with cars they no longer liked and angry with dealers for putting them in those vehicles.

Others simply don’t like that lease deals make it harder to realize backend gross profi ts.

This article outlines why your dealership should embrace leasing today and how you can leverage it to actually build stronger customer loyalty and more profi ts.

We suggest that you make this article available to both your sales and F&I teams. Many of them may not clearly remember the last time leasing was so important to dealerships – or they may not have been in the industry at all.

 

What is the bottom-line information your staff should know?

• Leasing is a tool to help your dealership sell more vehicles.
• Leasing allows your buyers to drive more prestigious vehicles than they are able to under retail installment deals.
• Leasing reduces your customers’ vehicle maintenance costs and monthly payments, and often eliminates the need for a down payment.
• Leasing helps you grow your business; it is a stronger driver of customer loyalty than retail fi nancing.
• Leasing should be presented during the sale as confidently as you present traditional four-square options.
• Leasing is often the option that makes a difference between a sold customer and a customer who has to walk.

Why lease?
Leasing can and should play an important role in how your dealership does business in the months ahead.

Given the MSRP of most vehicles today, only a few buyers can comfortably fit monthly retail payments into their budgets. Additionally, an increasing number of owners have negative equity in their trades, so they struggle to make a down payment on their next vehicle.

Given these conditions, only leasing offers a sales technique whereby your dealership can put a qualifi ed consumer into a $34,000 vehicle for as little as $400 a month, often with little or no money down. By comparison, the monthly retail finance payments on that same vehicle with 0% down would render a monthly payment of almost $1,000.

Just on the difference in payments alone, notes Elaine Litwer, legislative coordinator for the National Vehicle Leasing Association, “leasing makes for an easy close.”

Even though the lower consumer cost favors leasing, and sales teams can move more units per month as a result, many front-line managers and sales consultants are skeptical of leasing. Why? Leasing is not as lucrative as retail, and therefore tends to be downplayed.

Chris Saraceno, vice president of operations for the multi-state, multidealership, Pennsylvania-based Kelly Management Corp., says that in the group’s stores skeptics had better get excited about leasing anyway, because leasing allows dealerships to meet their unit sales goals, profit from manufacturer incentives and reduce their floorplan costs.

Notes Pete Shaheen, a 35-year leasing manager at George Waikem Ford, Massillon, OH: “If a dealership is not heavy into leasing, it is just not going to be competitive.”

Leasing drives repeat business
Managers and consultants aren’t the only ones who shun leasing. Some owner-operators and general managers also prefer retail sales because the margins tend to be higher. But when you take a longer view of your dealership operation, leasing makes sense for your security.

Consider the perspective of Larry Merriam, President, Key Auto Group, Inc., a seven-store operation headquartered in Bridgeport, CT.:

“The way I view it, there is a defi nite difference in the total gross between a lease and fi nance deal. The lease is probably about $500 less on average. That’s because there is no fi nance reserve on a lease and it is harder to sell an extended warranty.

“But the lease has a distinct advantage which I am willing to trade off for the $500 difference. The lease customer has to return the car to the dealership – and if you’re smart about it you will solicit the customer several months before the lease expiration for a new lease. The repeat percentage is much higher,” he said.

Unlike typical retail deals, which today have terms that stretch beyond 60 months, most lease terms last between 24 and 36 months. As such, leased vehicle customers come back in-market sooner, and this brings the buying cycle closer to the traditional two-and-a-half-year trend. This means customers have to return to your dealership at some point at the end of their term, and they have to do it sooner rather than later.

“Historically,” notes Kelly Management’s Saraceno, “our lease-vehicle customers return to our stores for their next vehicle nearly three times more than do retail customers.

“With leasing we get the customer back into the two- to three-year turn cycle. And our company is in a better fi nancial situation, like the last time leasing was so strong,” he said. As the old merchant once said: It’s easier to keep a customer than to go get a new one.

How to harvest your share
Now is the time to reinvest in creating a leasing culture in your dealership. Aggressive dealers and leasing experts agree that lease options should be presented with equal enthusiasm as dealership personnel present foursquare retail options (See sidebar article: It’s All in the Presentation).

In other words, to maximize your dealership’s opportunity to sell more vehicles, leasing must be penciled alongside retail and balloon options on every deal. If your dealership treats the lease option like an afterthought, customers will dismiss it, too.

When presented with clarity and confi dence, customers will understand how leasing can help them achieve their dream – a new car in the driveway every few years.

“Leasing works extremely well for everybody concerned,” said Litwer of the National Vehicle Leasing Association. “It has advantages for the consumer and a big advantage for the dealer body: Consumer loyalty follows a lease far more readily than it follows a retail sale.”

 

thecomplianceguide.com is intended for information purposes only and does not constitute the giving of legal or compliance advice to any person or entity. Because of the general nature of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on your particular situations and circumstances.