I recently saw a vehicle advertised on a dealer website that caught my attention. This pre-owned car was advertised as a “CarFax One Owner”.  Upon further investigation, I discovered that the “one owner” was a rental car company.

Even though the “one owner” statement may have been technically true, the description of the vehicle blew my mind: “With just one previous owner, who treated this vehicle like a member of the family, you'll really hit the jackpot when you drive home with this terrific car”.  (Now I know that Enterprise has been advertising lately that they are a “family company”, but I’m not sure that this is what they had in mind…).

I was intrigued by this statement, so I kept sniffing around. It turns out that the dealership is part of a large dealer group and I noticed that similar statements were advertised on prior rental vehicles in some of their other stores as well. For example:

“This 2010 Elantra is for Hyundai fans that are searching for that babied, one-owner creampuff.”

“From the looks of it, I'd say this car has been garage kept and babied regularly. If only my wife treated me as nice!!!”

So, are these statements just harmless puffery that is intended to make the vehicles stand out?  Perhaps, but I can’t help but speculate that representing that a rental car has been treated like a “member of the family”, “babied”, and “garage-kept” might not go over too well with an attorney general, judge or a customer who understandably thinks that “one owner” means one private owner.

Depending on the dealership, online advertising may be handled by any number of people such as a used car manager, internet manager, or perhaps an outside vendor. I realize that whoever wrote these ads may not have knowingly tried to deceive anyone. Perhaps they weren’t aware that the cars were rentals and just relied on the fact that CarFax identified the vehicles as “One Owner”. However, if an ad is deemed to be deceptive or misleading, an advertiser will likely have liability regardless of whether there was intent to deceive.  A dealer has the legal duty to investigate the accuracy of any statements made in advertising; therefore it is vital that anyone who is responsible for writing advertisements be well aware of advertising regulations.

Bear in mind that even though the dealerships will likely disclose the vehicles’ previous histories at some point, the dealer may still not be off the hook. Some advertising regulations indicate that if the first contact with a consumer is secured by deception, a violation may occur even though the true facts are made known to the buyer before he enters into the contract of purchase or lease.

It’s important to keep these concepts in mind when preparing an advertisement:

• Advertising is considered deceptive or misleading if “members of the public are likely to be deceived” or the advertisement has a “tendency or capacity to mislead the public”.

• Since statements and representations in advertisements are evaluated based on their tendency to deceive, no actual harm to consumers may need to occur for there to be a violation.

• The fact that others were, are, or will be engaged in like practices will not be considered a defense.

• Statements susceptible to both a misleading and a truthful interpretation will likely be construed to be deceptive.

• Puffery is defined as an advertising or sales presentation relying on exaggerations, opinions, and superlatives, with little or no credible evidence to support its vague claims. Puffery may be tolerated to an extent so long as it does not amount to misrepresentation (false claim of possessing certain positive attributes or of not possessing certain negative attributes).

The rules for good advertising are mostly common sense. Make sure your message is clear, truthful, easy to understand, and not subject to multiple interpretations. It’s not just about staying within legal guidelines either. Show your customers that you play by the rules – chances are they’ll thank you for it.

There are a number of good reasons for operating an ethical and legally compliant dealership, not the least of which is staying out of a courtroom.  Perhaps the most important - and most often overlooked - reason is increased customer satisfaction.  There are times when an employee may feel that he or she came out the winner by bending the rules a little, but what about the dealership’s reputation?  What about the customers who were mislead?  It seems like there might be some losers in the game.

Customers often make decisions during a vehicle sale transaction that they come to regret after the “ether has worn off”.  Perhaps they read the contract more carefully after they got home or showed it to a relative, friend, neighbor, etc.  The customer may notice some imperfections on the vehicle in the light of day and have it inspected by a mechanic or body shop or run a vehicle history report.  If there is a concern, some customers will let the dealer know while others will just chalk it up to (bad) experience.

Now, if the dealer is lucky enough to get a chance to rectify the customer’s concern, how will the complaint be handled?  Will it be “Sorry, all sales are final” or “You signed the contract”?

What about the customer that doesn’t bother to report the concern?  You can be sure they’re telling somebody about the transaction.  Or perhaps they’re telling thousands of people via social media?

Here are some examples of after-sale situations that can cause potential customer satisfaction nightmares:

• The customer sees your advertisement for a price lower than was charged for the vehicle.
• The customer discovers additional charges on the contract for items that he or she thought were included in the price of the vehicle.
• The customer discovers that F&I products were sold at much-higher-than-market prices.
• The customer discovers additional charges on the contract for items that he or she never agreed to purchase.
• The customer gets a call from the lender who asks for verification that the vehicle has a sunroof – and it doesn’t.
• The customer discovers that the price of the vehicle was raised to cover negative equity on the trade-in when after being told that the dealer agreed to purchase the trade-in for the full loan balance.
• The customer gets a call from the lender asking for verification of an income amount which is much higher than what was written on the credit application.
• The customer discovers that the vehicle purchased had undisclosed prior damage.
• The customer runs a vehicle history report and discovers that the vehicle purchased was an undisclosed previous rental, a prior demo, flood damaged, etc.
• The customer brings the vehicle in for repairs and discovers that the warranty or service contract coverage or term was misrepresented.

Sure, you made the deal. But is it really worth putting the reputation that you have worked years to build at risk? Take compliance and ethical behavior seriously.  A commitment to honesty and fair dealing will protect your company, your employees, your customers and, most importantly, your good name.

The new federal regulations that went into effect this year have added to the never-ending compliance requirements that dealerships have to deal with. Fortunately, most dealers have found that the Risk Based Pricing Notice and updated Privacy Notice requirements are pretty easy to handle. Utilizing the Credit Score Disclosure exception to Risk Based Pricing Notices and using the New Model Privacy Notices is relatively simple – just a few more forms to add to the pile. The Red Flags Rule is another story.

Red Flags regulations require a dealership to not only be a good citizen, but to be a cop as well. There’s no two ways about it, if red flags are detected during a credit transaction, certain proactive steps are required that will create extra work and slow down the deal process.

Many dealerships are utilizing automated Red Flags programs to help stay in compliance with the new regulations. These programs, such as those available through DealerTrack, RouteOne and the credit reporting services, are excellent and certainly make it easier to navigate the Red Flags Rule. The challenge begins when potential “red flags” are detected by these systems. Unfortunately, this is not an uncommon occurrence. Fraud or active duty alerts on credit bureaus, address discrepancies, multiple recent inquiries, or multiple new accounts recently opened are just a few of the situations that are considered to be identity theft “red flags”.

During compliance reviews in the last few months, we have been paying particular attention to how dealership employees are handling the new Red Flags requirements. Not surprisingly, we’re finding that in many instances when red flags are detected during a transaction, staff members are struggling with what to do next.

For instance, we’ve found a number of situations where the red flags program has prompted that a “high risk has been detected” and that “out of wallet questions are required”, but the questions have not been asked of the customer. While it can certainly be uncomfortable to ask a customer personal questions or request that they supply additional proof of identity or address, it is important that these steps not be avoided. If an identity theft does occur, and the system-recommended steps were not taken, it’s conceivable that the dealership’s exposure to liability will be increased dramatically. The same holds true in a situation where the dealer’s Red Flags procedures are audited by a regulator. Staff members’ proclamations that they had a ‘gut feeling’ that the customers were who they said they were will not likely be enough to satisfy the investigators. The fact that the employees were prompted to follow a particular procedure and failed to do so would almost certainly make matters much worse.

Training is a mandatory requirement of the FTC’s Red Flags Rule. Employees should be well-trained in all aspects of the company’s Identity Theft Protection Program and features of any automated Red Flags  systems, including the proper procedures necessary if Red Flags are detected. The training should explain the spirit of the law as well. It is important that staff members understand that the Red Flags Rule requires employees to be proactive in attempting to prevent identity theft and that any shortcuts taken in the process can create extreme liability to the dealership.

Even the best Red Flags program is not infallible. Chances are that an experienced identity thief will succeed despite a dealership’s best efforts. That’s okay. As long as the company can show that they have performed their due diligence and did not take any shortcuts, their exposure will likely be lessened dramatically.

A recently filed lawsuit against an auto dealership accused a sales manager of sexual harassment and sexual battery against a salesperson. According to the complaint, the employee was harassed continuously over a ten day period and ultimately quit due to the alleged behavior.  The complaint further stated that the dealership should have known what was going on and tried to correct it.

The dealership responded that the claims have no merit, that it has a zero-tolerance harassment policy and that human resources was not contacted about the situation, as its employee handbook specifies.

I have no idea what the true merits of this particular case are, but it brings to mind what an uphill battle fighting these claims can be.

In some cases, employers may be considered to be “strictly liable” for sexual harassment, meaning that the employer is liable for harassment by an employee or other individual even if the employer did not know about the harassment or acted immediately to stop it. Fortunately, the Supreme Court has recognized a viable defense to this liability. If an employer can prove that it exercised reasonable care to prevent and promptly correct any sexually harassing behavior and the complaining employee unreasonably failed to take advantage of any preventative or corrective opportunities the employer provided or to otherwise avoid harm, the employer may avoid liability for unlawful harassment. Note however, where a supervisor’s harassment includes a tangible employment action (for example, firing the individual); this defense may not be used. An employer is always liable for harassment by a supervisor on a prohibited basis that culminates in a tangible employment action. The Supreme Court recognized that this result is appropriate because an employer acts through its supervisors, and a supervisor's undertaking of a tangible employment action constitutes an act of the employer.

The result in the this case may well come down to whether or not the court believes that the employer exercised “reasonable care” and that the employee “unreasonably” failed to take advantage of opportunities that the employer provided.

Most dealerships have an anti-harassment policy in place that they have all of their employees sign. That’s a great first step, but the questions remain: Have the employees actually read the policy and do they really understand it? Are they really aware of the procedures set forth in the policy to protect them from harassment?

If employees are trained on exactly what to do in the case of harassment (like who to report it to, and so forth) and fail to do so, the dealer will likely be in a better position to defend itself against a claim. On the other hand, if victims of harassment are uncertain about whom to report the harassment to within the company or worse yet, their claims are not taken seriously; they may feel their only recourse is to contact an attorney. That’s when it gets ugly.

The following procedures can be helpful in demonstrating that an employer has taken reasonable care in preventing or mitigating harassment:

• Preparing and adopting an anti-harassment policy and communicating the anti-harassment policies to all employees.
• Clearly communicating that harassment will not be tolerated and clearly explaining prohibited conduct.
• Creating a sexual harassment complaint procedure and explaining the employee’s obligation to report any conduct that may be viewed as harassing.
• Providing every employee with a copy of the harassment policy and complaint procedure, and redistributing it periodically.  The policy and complaint procedure should be written in a way that will be understood by all employees in the employer's workforce.
• Making the anti-harassment policy easily accessible via the company intranet, posters, employee handbooks and including it in the new-hire process.
• Providing sexual harassment training to all employees to ensure that they understand their rights and responsibilities.
• Taking any claim seriously and investigating it.
• Taking prompt and appropriate action.

Unfortunately, being a traditionally male-dominated industry, harassment claims against auto dealerships are not an uncommon occurrence. Having a policy in place and hanging posters may not be enough to adequately protect yourself.

Much of what employees learn in the car business is from watching and listening to their co-workers. This type of education can be invaluable in many areas such as sales presentation, demonstration, and closing techniques. Of course, it can also lead to picking up bad habits like pre-qualifying customers by appearance or shortcutting the sales process.

An area that is frequently learned more by osmosis than by formal training is legal compliance.  Dealers often assume that their employees possess adequate regulatory know-how simply because they’ve been in the business for a while. But who taught them the rules? Have they been properly trained in compliance or are they just winging it? It’s important to realize that at some point in their career, many automotive professionals were taught the “old school” way of doing business. Some dealership practices they’ve learned are not necessarily legal or ethical but the employees simply rely on doing business the way it’s always been done. Many of these old school tactics are so common that employees don’t realize how risky they are:

Sales manager to salesperson: “Your customer has great credit but the bank is going to need more income. I don’t think they’ll ask for proof”.

Sales manager to finance manager: “Listen, these folks are in a hurry. Let’s make them mental owners. Just have them sign a contract real quick and we’ll get the rest of the paperwork done another time. If they leave without signing something, they won’t be back”.

Sales manager to salespeople: “Guys, that ad car is a big loser. Switch your customers to something else unless we can make a ton on the back end”.

Sales manager to finance manager: “Joe’s got this guy committed at $30 a month more then we need.  Let’s make some back-end money!”

Sales manager to salesperson: “We can probably get this guy done, but there’s going to be a big bank fee.  If he wants that Sentra, don’t mention the ad price. We need to sell it for a few grand more for the deal to make sense. He’ll be happy we can get him done”.

Sales manger to sales person:  “It looks like the negative equity is her hot button. Here’s what we’ll do: Tell her that we’ll pay off her trade and get her committed at $379 a month. I’ll just add the negative equity to the price.”

Finance manager to salesperson: “Let your customer know that the bank may call her and ask some questions. Make sure she tells them that the car is for her and not her brother!”

Finance manager to sales manager:  “I don’t care if you take a hold check for the downpayment, but the bank isn’t going to go for a deferred down, so we need to show it as cash on the contract.”

Finance manager to used car manager: “We’re over-advanced on that Tahoe deal. I need a book sheet for $15,500. Book it with premium wheels and sound.”

The vast majority of dealership employees are well-meaning, honest people, but assuming that they know everything they need to about compliance, especially in the current environment, is risky at best. When was the last time you had a comprehensive compliance check-up done? If it’s been a while (or never), now is the time. Once you have identified the areas that are in need of attention, the staff should be properly trained.  Education is a vital step towards protecting your business. After all, if employees don’t know or understand the rules, how can they be expected to follow them?

Chances are, you wouldn’t let someone drive your car unless you were certain that they knew how to drive. It makes sense to be just as careful when you’re handing them the keys to the dealership.

The vast majority of dissatisfied customers who threaten to call an attorney never do. For the few that follow through, the results can be devastating. While it’s true that many customers’ complaints have little or no merit, there can be a real danger if the wrong plaintiff’s attorney gets involved.

You may be thinking “we have lawyers of our own and insurance for that sort of thing, so bring it on”. Well, here’s the problem: many lawsuits that stem from seemingly insignificant complaints snowball into massive class action cases based upon other issues entirely. There are a number of plaintiffs’ attorneys out there who are absolutely brilliant at turning dealer oversights or technical violations into class action lawsuits. For instance, one dealership’s failure to honor its promise to swap rims on a vehicle resulted in a class action lawsuit for backdating rewritten contracts where the court ordered that the over 1,500 class members could elect to return their vehicles and rescind their contracts.

Let’s face it, most common consumer vs. dealer lawsuits or Lemon Law claims don’t pay big attorney fees, but class action lawsuits do. It doesn’t matter if the customer’s complaint is valid or if they have actually suffered any real damage; these attorneys simply want the opportunity to get their hands on your files. A Missouri dealer group recently settled a documentation fee class action lawsuit for over $8 million. The attorneys alleged that the charges constituted the “unauthorized practice of law”.  Ridiculous, yes, but the attorney fees totaled $675,000.

Other lawsuits have begun from mechanical issues, alleged misrepresentation of a vehicle’s condition, lies or unkept promises, undisclosed prior damage or vehicle history, payment packing claims, failure to honor warranties or service contracts, you name it. They’ve ended up becoming class action claims for improper disclosures, overcharging of fees, improper contract rescissions, undisclosed deferred downpayments, backdated contracts, etc.

Even if  class action status is not pursued or granted, attorneys often seek unfair and deceptive acts and practices claims for technical violations by painting a picture of “the greedy dealer profiting from the poor, unsuspecting consumer”.  Believe me; it’s not that tough to sell to most judges and juries, and the ultimate cost to the dealership is often substantially more.

The good news is that these lawsuits are avoidable. Most customers will not seek out an attorney unless they feel that they have no other choice or feel that they are being ignored or mistreated by dealership personnel. Two things that are virtually guaranteed to enrage a customer are unreturned calls or being treated in a confrontational manner by staff members. Many potential legal issues can be avoided by simply responding to customer complaints and perhaps offering a goodwill concession.

All customer concerns should be addressed promptly by qualified personnel, regardless of their perceived validity. It’s vitally important that care be taken when communicating with customers – their attorney may use what you say against you. Many times a customer will contact an attorney after they have felt that they were being ‘bullied” into signing a new contract or threatened with repossession, legal action or consequences to their credit rating. It’s a good idea to have customer complaints reviewed by your legal counsel or compliance officer to make sure that all your ducks are in a row.

Finally, check your ego at the door. While it may be distasteful to let an unreasonable customer “win” when you feel you’ve done nothing wrong, it makes good business sense to take a step back and examine the potential downside. Once an attorney gets involved, your chances of working out the problem directly with the customer diminish greatly. At the end of the day, does it make more sense to give in to the customer and move on with life or dig in your heels and risk a devastating lawsuit?

Employee training can cost a lot of money. Not training your employees can cost even more. In lawsuits, courts and regulatory agencies sometimes impose after-the-fact training requirements in addition to large monetary penalties. Consider these actual cases:

A dealership faced a wide range of complaints, including failure to disclose material defects and misrepresenting sales and extended service contract prices, and was ordered to pay $1.5 million in restitution to victims, plus $300,000 to the state Department of Consumer Protection. As part of the settlement, the dealer also agreed to initiate a mandatory education program for all its employees within 60 days of the settlement, instructing employees on state consumer protection laws.

A jury awarded a $14.4 million wrongful death verdict against a dealership that performed a faulty tire repair and failed to take the tire out of service, leading to a rollover crash that killed a couple. As a condition of the post-verdict settlement, the dealer agreed to implement a training program to better train its technicians about safe tire repair practices to improve consumer safety.

The Equal Employment Opportunity Commission (EEOC), entered into a $1.5 million settlement of a sex and age discrimination lawsuit with an auto dealership. Along with the monetary penalty, under a consent decree the dealership must provide current employees with four hours of EEO training annually and new hires must receive such training within ten days of employment.

The EEOC reached a $700,000 settlement of a national origin, religion and racial discrimination lawsuit against another dealership. According to the Consent Decree resolving the case, the dealership is required to hire a presenter approved by the EEOC to provide annual training to all of its managers and supervisory personnel on all aspects of Title VII.

What’s that old expression about closing the barn door after the horses are out?

As I read through dealer websites, I’m often surprised at how many advertising violations I find. You would think that website providers would make sure that this doesn’t occur, right?

You should never assume that the company that creates and maintains your website follows all the laws and regulations governing advertising compliance. State advertising laws vary and the responsibility for compliance lies with the dealership, not the vendor. Here are some examples of what I’ve run into and issues to look for:

• Disclaimers - Website providers sometimes include boilerplate factory disclaimers on inventory pages that identify vehicles by a specific VIN and price, such as:
  • “Advertised vehicles are subject to actual dealer availability. Certain vehicles listed may not be available, or may have different prices.”
  • “Pricing and availability varies by dealership.”
  • “Prices do not include dealer charges, such as advertising, that can vary by manufacturer or region, or costs for selling, preparing, displaying or financing the vehicle.”
  • “Images displayed may not be representative of the actual trim level of the vehicle.”
  • “Information provided is believed to be accurate but all specifications, pricing and availability must be confirmed in writing (directly) with the dealer to be binding.”

While these types of disclaimers may be appropriate when advertising a model line, they probably shouldn’t be associated with specific vehicles. Advertised vehicles that are identified by VIN are subject to prior sale, but they certainly should not be subject to “different prices”. You should also determine which charges are allowed to be excluded from an advertised price in your state.

• Check to determine if all necessary disclosures are present on your site. For example, “advertised prices exclude tax, government fees, etc.” Again, do not assume that your website provider is utilizing language that is acceptable in your particular state or including all of the required disclosures.
• Be sure that all disclaimers are clearly and conspicuously displayed and not buried away in a difficult-to-find link elsewhere on the site.
• If payments, downpayments or interest rates are advertised, make sure that all of the proper Truth in Lending and state disclosures are included.
• Ensure that lease programs are properly disclosed. Many factory national lease programs contain generic information that may not be sufficient or appropriate in your state.
• Some states require that vehicle history, such as prior rental or demonstrator, is disclosed on vehicle advertisements. Does your website provide a way to include these disclosures?
• Ensure that vehicles are promptly removed from the website after they have been sold. Some sites are linked to the dealer’s DMS and will remove sold units automatically, while others require vehicles to be removed manually. Sold units should always be removed promptly to avoid potential bait and switch advertising claims.

It’s never a bad idea to have your website thoroughly reviewed by a compliance professional. Remember, advertising violations can be easy for regulators to spot and difficult to defend against.

If your sales staff told you that they had a 50% closing ratio, would you take their word for it? I suspect not – you would probably track all of their opportunities to determine the true percentage. Most dealerships measure a vast number of items on a daily basis. After all, you can’t manage what you don’t measure, right?

How about the level of compliance and ethical behavior in your dealership? Is that something you measure or do you just take everyone’s word for it? Have you really thought about how your staff is conducting itself in these areas? Is it possible that some of these thoughts are floating around?

“We’ve always done it this way – haven’t been caught yet”
“Hey, if we get sued, that’s what insurance is for.”
“Compliance is not in my pay plan. I’ll do whatever it takes to make a decent paycheck.”

Sure, you can bury your head in the sand and hope for the best, but is it really worth finding out the hard way that you were mistaken, or that your customers are not being treated the way you expect?

Instead, why not follow a few simple steps?

1. Audit your operation to determine where you really stand.
2. Have your staff properly trained in all aspects of legal compliance.
3. Once trained, have them sign a code of ethics which will not only help protect the dealership, but let everyone know that the organization is serious about compliance and ethical behavior.

These steps are easy and far more affordable than the costs associated with lawsuits, regulatory actions and, most importantly, hits to your valuable reputation. Don’t find out the hard way that your operation isn’t as clean as you thought it was.

Many of the big money, big publicity compliance meltdowns in the auto industry have been the result of vehicle financing issues. Remember the Gunderson Chevrolet news clips showing the management team being convicted and sent to jail? Being a fearless bunch, some F&I folks still walk a fine line when it comes to compliance. Maybe it’s because no one ever showed them a better way?

Becky Chernek of Chernek Consulting, Inc., who is one of the finest F&I trainers in the industry, was kind enough to share some feedback that she received from F&I managers when discussing ethical sales practices in her seminars.

"Never happened before, not going to now."
"Just a bunch of hype for car dealers to buy into."
"We love Becky, but don't pay too much attention to the regulations; she will get to the meat & potatoes."
"Yeah, the minute we implement that policy you might as well shut our doors."
"I know you learned it this way...but this is the right way to do it if you want to make some money."
"Payment packing is legal if you tell the customer afterwards what products they bought."
"I just tell the customer that the payment to include the service contract is only $5.00 difference."
"Consistent pricing? What about the nonprime customers?"
"What do you mean you can't backdate a contract, we do it all the time."
"So what if we give the customer a raise? That's just how we do it here."
"We always use in-house rebates - how else do you a get loan bought."
"Hey, we sell cars here... its up to finance to get them bought... YoYo deals? 50% of our business is that way."
"No way am I telling the bank this customer is $5000 upside down. Itemize what?"
"Base payment is loaded, that’s just how we do it here."
"I love the idea of getting the customer in the "yes" mode but let's not do that with confirming the true buying numbers that will only confuse them more."
"The interview that is just a waste of time and it doesn't serve any purpose... slows me down."
"When we cancel a policy I don't have to give the customer back the profit just the cost?"

Becky went on to say, “Transparent selling is easy... reduces charge backs, keeps the money on the books and a customer coming back for life…what's so darn hard to understand?”

That’s a great point Becky makes. Whatever happened to good old-fashioned principles like salesmanship and value-building? Do you really think dishonesty is the only way to make a sale?

I was fortunate enough to attend a great seminar given by Jim Ziegler a few years back where he taught ethical F&I selling. To be quite honest, at first I was taken aback. Most of the previous F&I training I was exposed to was the “old school” variety. (Of course, I use the word “training” loosely – most of it was “tribal knowledge” from the old-timers). Jim Z, in his inimitable fashion, taught us how to produce big numbers while doing things the right way. No excuses, just salesmanship. And guess what? It works.

Okay, here’s the part where I piss some people off…

If you feel that you need some help becoming a better, more honest F&I practitioner, I recommend that you contact Becky, Jim or one of the other fine F&I trainers out there. But if, on the other hand, you feel that you need to operate unethically and buy into the lame excuses listed above, maybe you’re in the wrong business. Think about it…

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