Agents’ Liability for Dealer Actions

You’re an F&I trainer representing one or more product lines. You educate dealer F&I personnel about the products you represent (and that they will sell) and offer guidance on selling techniques that have proven successful with your products.

What is your potential liability for this activity? And how can you minimize it? To find out, let’s explore the multifaceted relationship between dealers, product providers and the authorities that seek to regulate them.

Regulatory Scrutiny of Aftermarket Product Selling

You should have your presentations reviewed by your providers’ legal or compliance staffs. The federal Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC) and state attorneys general (AGs) have indicated they are making unfair and deceptive aftermarket product selling to consumers a priority area for enforcement actions against vehicle dealers and their service providers.

Last year, the CFPB imposed a $700,000 reimbursement obligation and fine against a buy-here, pay-here dealer. The CFPB alleged that the dealer required credit customers to purchase an automobile repair policy and a GPS payment device costing $1,650 and $100, respectively, but did not include these costs in the contract disclosures. According to the CFPB, the dealer “took unreasonable advantage of this by exploiting its customers’ misunderstanding of the credit and sales terms for its own financial benefit.”

The CFPB has described its view of aftermarket product selling as follows: “[T]he Bureau has found or alleged that some companies offering ancillary products failed to accurately describe those products, [and] offered products that provided little or no benefit to consumers without disclosing this fact.” The agency has warned consumers that “the sales tactics may be high-pressure and confusing [and] the benefits you receive from the product may not match the benefits that you thought you were offered.”

The fines and penalties levied for unfair or deceptive aftermarket product selling have been substantial. New York’s attorney general has imposed fines and reimbursement obligations totaling in excess of $17 million since 2015 against auto dealers for unfair and deceptive selling of credit repair and identity theft service products.

But it’s not just dealers the regulators are going after. It is the product providers — especially when the products are considered to be of little or no value to the consumers or the product seller fails to disclose the full facts about the product that might give consumers caution.

In connection with its enforcement actions involving the credit repair product noted above, the New York AG entered into a consent decree with the product provider and its two principals dissolving the company and prohibiting the principals from participating in the “credit services business.” It also required them to instruct all dealerships to which they distributed contracts for credit-repair services to stop selling those services and remove all promotional materials and contracts from their dealerships. This requirement is backed by an immediate payment of $50,000 and a $2 million fine against the principals if they do not comply with these terms.

The FTC is also bringing actions against dealers and product providers for unfair and deceptive aftermarket product selling. In March 2015, as part of “Operation Ruse Control”, the FTC brought two enforcement actions against dealers and product providers for the deceptive sales of extended service contracts, payment programs, GAP, credit life insurance, road service, identity theft protection and undercoating.

The FTC brought one action directly against a service provider. The FTC alleged that the California-based service provider violated Section 5 of the FTC Act, which prohibits unfair and deceptive practices by deceptively pitching consumers an auto payment program that it claimed would save consumers money. The program — both online and through a network of authorized auto dealers — purported to save consumers money by making half a payment every two weeks instead of making a full payment at the end of the month, thereby reducing finance charges due over the life of the credit term.

The provider failed to disclose that the significant fees it charged to participate in the service often exceeded any actual savings to the consumer. The fees to enroll in the program averaged $775 on a standard five-year auto finance agreement and that exceeded any finance charge savings.

The provider was ordered to refund more than $1.5 million to consumers and waive another $949,000 in fees to current customers. A New Jersey dealer that sold the product was ordered to pay a $184,000 penalty.

So it is not only the dealers the regulators are pursuing. They are pursuing the product providers with a requirement of giving full refunds to all consumers who purchased the products. As the New York AG’s action exemplified, a number of product providers have been put out of business as a result.

Your Obligations in a New Regulatory Environment

As the product provider’s representative “on the ground,” a regulator is going to look closely at your actions both in structuring the product and how it is sold. Transparency and “value” to consumers are two critical components. Do your presentations fully and simply explain to the consumer what the product does and does not cover? While the dealer sets the price, does your suggested retail price provide fair value to the customer? Could you defend it to a regulator?

An extended service contract may provide value due to the increasingly sophisticated and computerized systems in vehicles that cannot be repaired with simply a wrench or a shop machine tool. Replacing an entire system can be an expensive proposition. Give examples of systems that your service contract covers and note the average replacement cost in reference to the price of your product.

The regulators believe other products do not have value to the customer. Vehicle etch is one example.

Other examples are products unrelated to the vehicle ownership like credit repair. This product is expressly prohibited from being sold by automotive dealers in New York. Credit repair products will run afoul of the Credit Repair Organizations Act (CROA) which prohibits accepting any money from a consumer until the credit is repaired. Putting a credit repair product on a motor vehicle retail installment sales contract will violate the CROA.

Transparency means the customer is told what exactly they are buying and what is the cost in plain language terms. One dealer and the product provider incurred FTC penalties for selling GAP products that did not cover the customer’s entire liability in the event of a loss or theft. The policy covered only losses under a certain loan to value formula leaving the consumer liable for any additional payoff amount.

Selling your products solely in relation to the consumer’s monthly payment can open the dealer up to a charge of payment packing. Payment packing occurs when a dealer and the customer agree on a monthly payment amount into which the dealer includes add-on products asserting they are required or are free.

One way dealers do this is by negotiating a monthly payment amount for the vehicle that is in excess of the allowed rate participation by the financing source. This leaves room in the monthly payment to add aftermarket products the consumer may not want or need. Payment packing is an unfair and deceptive practice under federal and state law.

Dealers vs. Product Providers

While the facts that led to these consent orders are not public, it is certainly reasonable to believe that the regulators looked carefully at the product sale training materials and how the product providers instructed the dealers to sell their products. The fact that in many cases the product providers were assessed higher penalties and reimbursement obligations than the dealer suggests the regulators may have found the providers and their suggested sales techniques to be at principal fault.

Even where there is no regulatory investigation, consumer lawsuits or arbitration actions may pit the dealer against the product provider when a customer can show unfair or deceptive selling practices. State laws give consumers the right to sue for unfair or deceptive practices, some provide for treble damages and almost all of these laws provide for the consumer to recover their attorney’s fees which are usually a large component of a class-action award.

A dealer was sued in a class action for selling etch for $175 concealed with paint sealant and other products. The dealer settled for $6.5 million, about half of which was reimbursement of the plaintiffs’ costs and attorneys’ fees to bring the lawsuit.

Best Practices with Dealers Selling Your Products

Dealers who sell your products in an unfair or deceptive manner — which includes the absence of transparency to consumers or at a markup where it is difficult to defend the product’s value to the consumer — will invariably get you caught up in any lawsuit or regulatory enforcement action concerning the product’s sales. Your training documents, scripts and recorded presentations, as well as the products terms and conditions, will be closely scrutinized in pre-trial or administrative discovery as the regulators and attorneys look for multiple parties on which to assess liability.

Look at how your training scripts and videos could be viewed by a consumer. Remember the average consumer in the U.S. reads at between a 7th- and 9th-grade education level. If you make confusing or fallacious claims or illogical numeric examples, and fail to indicate what your product does not cover as well as what it does cover, you may be at risk. This is where the need for legal and compliance review can be a lifesaver.

Training should not be a one-time event. F&I personnel change frequently, so repeat training or mandatory online training that tests and documents the personnel who undergo it is another critical step you can take. You’re not in the F&I office with each customer. But you can require each F&I salesman who sells your product to undertake training (either in person or online) before selling your product and keeping records of their doing so.

Your provider’s contract with the dealer should require such training and retraining at least annually and prohibit your product from being sold other than in accordance with the training. Your training should cover the sale of your product individually as well as in product package arrangements. Both should be straightforward and transparent to the consumer identifying the cost and limitations.

You also need to make sure your dealer clients are following your instructions and not making inaccurate claims or marking up the wholesale cost of the product to where its value cannot reasonably be defended. In one enforcement action, a dealer marked up an identity theft protection product from $200 wholesale to $2,000 retail.

Ultimately, as between you as the product provider and the dealer, your respective liability for a claim may come down to your contract with the dealer. Liability caps and dealer indemnities for not following your selling instructions can be important to determine who will ultimately bear the burden of any lawsuit or regulatory fines.

What happens if you learn your dealer client is selling your product in an unlawful manner, such as by packing it? One example is where a dealer might require etch as mandatory on every vehicle sale. If it is your product and if you are aware of the unlawful selling and effectively benefitting from it financially, it is not difficult for a plaintiff’s attorney or regulator to seek to hold you liable as a co-wrongdoer or knowing beneficiary of the unlawful acts.

If you learn that a dealer is misrepresenting or inaccurately selling your product, whether through direct interaction with the dealer, consumer complaints or regulator inquiries, your legal or senior management staff should promptly get in touch with the GM of the dealership. Your contract should give you the right to terminate the dealer’s ability to sell your products if the wrongful selling practices are not quickly cured. Document this step and require the dealer to certify that the selling practices have stopped. If not, you may have to terminate the dealer’s right to sell your products. You may lose a sales channel, but that’s a small price to pay to avoid the attorneys’ fees, reputation risk, and possible fines and penalties if a lawsuit or regulatory enforcement action is commenced.

In summary, federal and state regulators have emphasized aftermarket product selling as a primary enforcement priority. Product providers as well as the selling dealers have been fined and ordered to pay refunds. Your duty is to make sure that your products offer fair value to the consumers and to make sure your training to dealers on how to sell the products are open and transparent to the customer and provide the details on the product’s price and what it does and does not offer to the customer.

Your legal or compliance advisors should review all product and training materials in advance. Obligate the dealers to follow your training, require and document training and re-training of employees, and make sure the dealer is the responsible party for any transgressions. Take swift action if you learn of any wrongful selling practices. The fines, penalties, reimbursements, and attorney’s fees are just too great for you to risk being liable for dealer transgressions.