Challenges Faced by Automobile Dealers
The motor vehicle business is one of the most heavily regulated industries in America. New regulations continue to be enacted and existing regulations revised. The challenge of operating a successful motor vehicle dealership has become increasingly difficult when combined with a sluggish economy, unrest in the Middle East, the war against terrorism and the overall decline in consumer credit worthiness,
It is no secret the number of consumers across the country with credit problems continues to grow, requiring automobile dealerships to search for new sources of financing (subprime lending) to accommodate these customers.
As lending in the motor vehicle industry becomes more difficult, the lender-dealer agreements become more complicated. Remember, many of the standard dealer agreements used by lenders are non-recourse, however these agreements contain other language which may obligate a dealership to repurchase various finance contracts in a portfolio, an event which the dealership thought could not occur. Experience has shown, however, that if dealers understand the structure of the transactions contemplated by these agreements and carefully scrutinize them prior to signing, they can minimize their dealerships’ risk of potential liability and increase profitability by addressing various legal, business and financial issues with the lenders and taking action to protect their interests.
The lengthy conflict overseas has had an impact on the ability of dealers and lenders alike to collect on various consumer financial obligations. Virtually everyone agrees that it is their patriotic duty to support the military who defend our country. In some cases, however, providing relief to military personnel is not only a patriotic duty, it is the law. The Soldiers’ and Sailors’ Relief Act, which dates back to the Civil War, offers protection for individuals called to active duty, in part to eliminate worries about finances, lawsuits, evictions and similar problems at home. One of the Act’s most highly publicized protections permits individuals who are called to active duty to have interest rates on existing debts lowered to a fixed rate of six percent. Additional provisions in the Act protect service members by preventing lenders and retail sellers from declaring a default, exercising an option to rescind or terminate a contract or repossessing personal property. The motor vehicle industry is highly scrutinized and compliance with the Soldiers’ and Sailors’ Relief Act is an area carefully checked for compliance.
The USA Patriot Act, and the evolving rules and regulations concerning customer identification also impact motor vehicle dealers and how their business is conducted. Automobile dealers that assist consumers in obtaining financing from financial institutions covered by this enactment will find their procedures impacted and should modify dealership paperwork and sales related procedures to tighten identification verification procedures.
Compliance with the FTC’s Safeguards Rule became mandatory on May 23, 2003. The FTC has served formal investigative requests on motor vehicle dealerships asking for evidence of compliance, including:
- A description of the type of information collected from or about customers and a sample copy of each form used to collect information.
- A copy of the written information security program and the time period during which it was written and implemented.
- A description of the security risks that were identified in developing the plan and how the final plan addresses each of the risks.
- The name and title of employees responsible for coordinating the safeguards plan; and the name of each service provider together with information regarding the types of customer information they have access to, the manner and form of access and the reasons for access.
- A copy of the contract requiring them to implement and maintain security safeguards and an explanation of how the dealership confirms that safeguards have been implemented and are maintained.
With everything that is going on, there will be no shortage of challenges or, depending upon your perspective, opportunities for both the U.S. and the automobile industry in the upcoming years. If keeping track of the legal, legislative and regulatory initiatives on the horizon isn’t challenging enough, consider their impact on your dealership’s paperwork. If you have not had your dealership’s paperwork and policies reviewed in the past year, now is the time to do so. Paperwork and regulatory compliance are probably two of the most important issues impacting the motor vehicle industry today and, in all likelihood, the future of your dealership.