As we all know, in general, the motor vehicle sales business is highly regulated. This is especially true when you focus on the F&I portion of the business. In today’s business and regulatory environment it is important that F&I providers and agents have an understanding of the laws and regulations that impact the industry. While a complete discussion of all the applicable laws is beyond the scope of a single article, below are the top five laws and a brief summary of each that, in my opinion, are a must-know for agents.
Before we jump into my top five, no legal discussion would be complete without addressing the importance of using proper terminology. In general, it is of utmost importance that agents know about and understand the product itself, as well as use the proper terminology when referring to particular products and credit transactions. Unfortunately, it is common practice for key terms to be misused by industry insiders, the media, lawmakers, regulators, attorneys and the courts. As a result, this misuse has resulted in unnecessary increased risk and exposure to dealers, F&I providers and agents. It is important to know and understand the differences between a Retail Installment Sales transaction and a Loan; GAP Waiver and GAP Insurance; Warranty and Service Contract; and Insurance and Non-Insurance Terms. For example, in a Retail Installment Sales transaction the dealer is extending credit to the buyer for the purchase of the vehicle and the dealer is the “creditor.” Contrast this with the Loan scenario where the consumer, through an agreement with a “lender” such as a bank or finance company borrows money (i.e. gets a loan) and uses the proceeds to pay the dealer for vehicle.
The Dodd-Frank Act
The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) in 2010. The law has resulted in significant reforms in all areas of the financial services industry – including the car business. Under the law, there is an exemption for those motor vehicle dealers that have both sales and service operations. However, even though a dealer may not be subject to CFPB regulation, all of the same rules still apply, and the Federal Trade Commission (FTC) still has authority over those dealers exempt from regulation by the CFPB. In addition, as we are recently seeing, the CFPB is indirectly impacting the dealer through the regulation of those banks and financial institutions they do regulate. For example, the CFPB has issued a bulletin addressing discrimination and rate spread for indirect finance transactions through dealers. In addition, it is believed the CFPB is also looking at the pricing of F&I products sold through dealers.
Magnuson-Moss Warranty Act
Warranties are regulated on both the federal and state level; on the federal level, they are governed by the Magnuson-Moss Warranty Act (MMWA). Under the MMWA, manufacturers and sellers are required to provide consumers with detailed information about the warranty coverage on the product purchased, and the rights and obligations of the consumer and warrantor. The MMWA does not apply to oral warranties and does not require the provision of a written warranty, however, if a written warranty is offered it must comply with the MMWA. For example, the warranty must indicate whether it is “full” or “limited,” must be in a single, easy to read document and must be available to the consumer before buying the product. It is important to note that the requirements of the MMWA and the FTC’s Used Car Rule regarding the Buyers Guide on used vehicles are interrelated as they both address import warranty disclosure requirements. As such, the Buyers Guide cannot serve as the written warranty to comply with the MMWA. In addition, understanding the difference between a Warranty and a Service Contract and using the terms properly is crucial. Basically, a Warranty is included in the purchase price of a product, not sold separately, and comes from either the manufacturer or seller. On the other hand, a Service Contract is purchased separately from the product itself, is often administered by a third-party, only covers those items outlined in the contract and is in addition to any warranty.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act (GLB) is the federal law that governs a motor vehicle dealer’s responsibility as it pertains to the non-public personal information that a dealer obtains, possesses and shares. Within the GLB are the Privacy Rule and the Safeguards Rule. The Privacy Rule covers the non-public personal information from customers who apply for, or obtain credit from, the dealer. The Privacy Rule is the source of the dealer requirement to provide the customer with the initial and annual privacy notices that outlines what the dealer will or will not do with the information it obtains. The Safeguards Rule deals with how the dealer protects the non-public personal information provided by the customer. The Safeguards Rule requires a dealer to have a written information security plan to address the various safeguards in place to collect, store and dispose of the non-public personal information it has. Depending upon the dealer’s specific operation, enforcement of the GLB can come from either the CFPB or the FTC. It is also important to know that various states have their own privacy laws too.
Fair Credit Reporting Act
The Fair Credit Reporting Act (FCRA) is the primary law that addresses consumer credit and the gathering, use and sharing of consumer credit information by creditors, consumer reporting agencies and others. The FCRA requires that users of consumer reports have a permissible purpose to obtain a consumer report. The list of permissible purposes is specific in the FCRA, and the best practice to comply with the requirement is to have the written authorization of the consumer to pull their credit.In addition, the FCRA is the law behind the Red Flag Rule, the Risked Based Pricing Rule, the Disposal Rule (requiring the dealer to properly dispose of consumer information) and is also one source of the Adverse Action Notice requirement.
Truth In Lending Act
The Truth in Lending Act (TILA) and its implementing regulations (Reg. Z) requires creditors (i.e. dealers) to provide disclosures regarding the cost and terms of credit to consumers. TILA is not concerned with interest rates, late charges and related fees – that is all governed by state law. However, TILA does specify what fees and charges in a credit sale are considered finance charges. Unless properly disclosed, the cost of F&I products may have to be included in the finance charge calculation. Note that the Dodd-Frank Act increased the threshold for TILA coverage from $25,000 to $50,000, and provides that the threshold be adjusted for inflation every year. For 2013, the threshold amount is $53,000, which means that TILA does not apply when the “amount financed” exceeds this amount. As a result of this threshold increase, more finance transactions will be covered by TILA and Reg. Z
It is impossible to cover every detail of each of these in a single article, but hopefully now you have a better idea of where to start, and why it is important that you educate yourself on these acts and how they effect both your and your dealers’ businesses. For more information on any of these, you can visit the CFPB (consumerfinance.gov) or FTC (ftc.gov) Web sites, or feel free to e-mail me directly with any questions.
