Worse than Worthless

Recently, while at NABD convention two of my partners, another lawyer and I had just finished an hour-long presentation and Q&A session before a large group of dealers. Our topics had included Red Flags, privacy, collections, starter interrupt devices, the sale of aftermarket products, state Attorney General actions, bankruptcy, the FTC Used Car Rule, federal and state disclosure requirements and pending federal legislation.

Then I headed for the Exhibit Hall, because we’d extended an open invitation to come to our booth if dealers had more legal questions. I always look forward to these informal Q&A sessions, because the level of legal sophistication of the dealers ranges from very high to very low, and there is no telling what you’ll hear next.

A lot of dealers took us up on the invitation, and we were close to getting talked out when a young man (he’d have looked at home in high school) approached me.

“I have a question,” he said.

“Shoot,” said I.

“My Dad and I have a buy-here, pay-here operation. We started it about three years ago. We’ve got about 80 contracts outstanding. Does that Truth in Lending stuff apply to us?”

“Uh, oh,” I thought.

“Yes,” I said. “And so do the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, the FTC’s privacy regulations, the FTC’s Used Car Rule, the Red Flags Rule and a raft of other federal and state laws and regulations. He didn’t look happy.

Sensing that his question about the Truth in Lending Act reflected the general sophistication and level of compliance of his operation, I grilled him a bit. In short order, he revealed that he had no privacy policy or privacy notice, no Safeguards Policy, no Red Flags policy and no written operations manuals of any sort, and that he had never received any compliance or F&I training.

“A guy lighting matches trying to find his way out of the dynamite factory,” I thought.

Then I asked another question. “What form of retail installment sales contract do you use?” I was hoping against hope that he’d respond by saying, “The LAW 553 form,” or “the AutoStar Solutions form.” When he hesitated, I got a cold chill, and thought, “This isn’t going to be pretty.”

“We don’t use one of those,” the child replied. “We use a promissory note and security agreement. We got it off the Internet.”

Oops. That means the document he’s using does not have the required federal Truth in Lending disclosures. It probably also is shot through with other state and federal violations.

“Let me get this straight,” I said. “You are selling cars on credit, right? You aren’t making loans to consumers who use the money to buy cars from others. You are the seller, correct?”

“That’s right. Is there anything wrong with that?”

By this time, my head was spinning. Here’s a guy (and his dad), who knew zip about the state and federal laws that regulate the credit sale of vehicles. He hops on the Internet and creates a promissory note (Why not? Nearly everyone in the business erroneously calls retail installment contracts “loans.”), and then using that document, builds a portfolio of 80 transactions, a portfolio that is worse than worthless.

Worse than worthless because no one in the car finance business would touch it with a 20-foot pole, and worse than worthless because every one of those 80 buyers has grounds for a lawsuit with potential damages that would obliterate the principal owed on their contracts. He’s a sitting duck for a class action lawsuit, and I’d be really surprised if some of the laws he has ignored don’t have criminal penalties that could put him in jail.

Well, to answer his question, I had to start somewhere, so I opened our F&I Legal Desk Book to the table of contents and started scrolling down the chapter titles, giving him a couple of sentences of explanation for each topic. When his eyes started to glaze over, I sent him on his way, book in hand.

I really felt for the guy and his dad. Life is difficult enough when you at least know what you don’t know. But when you don’t know what you don’t know, life gets downright dangerous.

Then I thought, “Wait a minute. I know that car dealers are, ahem, shall we say, frugal, but for the cost of a fairly inexpensive big-screen TV set, this guy could have bought an hour’s time from me or from somebody like me. That few hundred dollars wouldn’t have given him all the legal advice he needed, of course, but it would have at least taught him what he didn’t know, and he might well not have proceeded to develop that worse-than-worthless portfolio.”

It is better to know what you don’t know and try to figure it out than be completely blind in business. But, score one for the kid; at least he bought a book – now he’s just gotta read it.

Vol. 7, Issue 7