Which Federal Laws Do Auto Dealerships Need to Know About

Running a dealership is about more than acquiring great inventory and closing sales. Auto dealers must comply with various federal rules and regulations to protect their employees and customers, especially when handling sensitive personal data. This guide will point you to a few car dealership laws to help you avoid costly penalties and keep your operation running smoothly.

Some Important Federal Laws for Dealership Operations

1. Disposal Rule

All dealerships collect a great deal of personal data from clients during any transaction, from credit backgrounds to loan applications. Even though this information is necessary during the purchase process, customers still have the right to privacy. To address potential privacy and security concerns, the Federal Trade Commission (FTC) created the Disposal Rule. According to the rule, dealerships must destroy or erase all the personal information obtained from consumer reports. This includes paper and digital copies of background checks, credit reports, and other related documents.

Failure to properly dispose of information can lead to penalties, which vary from state to state. Potential civil lawsuits and reputational damage may occur if the information ends up in the wrong hands. Additionally, the federal government can fine dealerships up to $46,517 per violation¹.

It's best to train employees on disposal procedures so everyone is on the same page. The FTC has outlined several proper data destruction methods², including using cross-cut shredders for paperwork and security wiping all devices before disposals.

To make the process easier, some dealerships prefer to hire a compliance officer or contract with an information disposal company. These companies are certified by a recognized trade association to handle document disposal tasks for businesses that handle sensitive financial and personal information. Both options ensure professionals are taking care of the matter, allowing you to focus on other important responsibilities.

2. Equal Credit Opportunity Act (ECOA)

Dealerships are considered creditors under federal laws, meaning they must comply with the ECOA. This means they can't discriminate against potential buyers due to their age, race, color, gender, religion, or national origin, or if the buyer's income derives from public assistance. Dealers must reach out within 30 days to inform applicants of the credit decision. If credit can't be approved at this time, the dealer must explain the reason.

Discrimination is taken very seriously, with possible civil penalties of up to $10,000 in individual lawsuits or $500,000 or 1% of the creditor's net worth if found liable in a class-action lawsuit³.

Dealerships should use a standardized credit evaluation procedure to help ensure each applicant is treated fairly. Be sure to include written policies for credit operations and establish rate markup policies and pricing that are consistent across all demographics. It may also help to monitor dealer participation rates across these different demographic groups to see if there are any discrepancies. Most of all, it's important to provide staff members with anti-discrimination training, which benefits potential customers and your dealership's reputation in the community⁴.

3. Gramm-Leach-Bliley Act (GLBA)

As digital technology becomes more common, laws like the GLBA are here to prevent sensitive data from being shared. Dealerships are responsible for protecting each customer's nonpublic personal information (NPI) by providing notices explaining what is collected, how it's used, and who the data will be shared with. To that end, dealerships must also have a security program that protects each customer's data and gives them the right to opt out of sharing collected data with third parties.

To combat the growing problem of data breaches, the federal government has established significant penalties for those who violate the GLBA. These penalties can include⁵:

• Civil penalties of up to $100,000 per violation
• Criminal fines of up to $500,000
• Imprisonment for up to 5 years for knowing violations
• Individual liability for those held responsible

Given how often technology evolves, it's best to conduct risk assessments to identify possible vulnerabilities. One of the first actions a dealership should take is to develop a security program that details to customers exactly how their data is protected. Staff should be given training on how to properly handle this information so breaches are less likely to occur⁵. Be sure to include instructions on maintaining paper, digital, and other records to ensure each customer's NPI.

4. Magnuson-Moss Warranty Act (MMWA)

This Act prevents dealers from placing special conditions on their warranties. For example, they can't demand the use of parts from a specific company. The same goes for services. The Act also mentions that warranties are to be written in simplified language so that they're easy to understand. Finally, dealers must make the distinction between "limited" and "full" warranties abundantly clear, so potential clients are in the best position to make an informed choice.

Failing to comply with the MMWA can mean significant civil and state-level penalties, lawsuits, and warranty repairs. There may also be reputational consequences, like corrective advertising, which can damage the trust customers have in the dealership.

It's easy to maintain MMWA compliance as long as warranty documents are written to be clear and concise. This includes communicating maintenance issues that might impact warranty coverage, so customers understand the limits of the agreement. As time goes on, be sure to update and review changes to the warranty before making them available to clients so everyone is on the same page.

5. Used Car Rule

The Warranty Information section of the FTC's Used Car Rule promotes transparency for customers by requiring dealers to prominently place a Buyers Guide on each used vehicle, including light-duty trucks^6,, before displaying the vehicle for sale or to let a customer inspect it for the purpose of making a purchase. The sticker should state whether the car is being sold as is or not. If it comes with a warranty, the sticker should detail the car's major systems, potential problems that the car may have, and how much of the repair costs the dealer will pay under said warranty.

The FTC can take enforcement action against a dealership that isn't complying. They may fine dealers $51,744 per violation, force corrective advertising, and demand restitution be paid or provide injunctive relief. Depending on the circumstances, violations of the Used Car Rule may also result in an investigation from the state attorney's office.

To maintain compliance with the Used Car Rule, dealerships should train staff on the proper completion and placement of the stickers and complete the buyer's guide forms for every used car on the lot.

It's important to note that this rule applies in all states except Maine and Wisconsin.

6. Truth in Advertising Regulations

While the Monroney label was developed to build trust between car dealers and their customers, it's not the only regulation focused on dealer transparency. The Truth in Advertising is one of the most essential dealership regulations need to comply with. Dealerships must be clear and honest in their advertisements across channels and mediums. All terms and conditions that impact the deal, price, or service must also be disclosed. Include restrictions, limitations, and qualifications. All disclaimers have to be placed prominently and near the claims they modify.

The FTC will issue a Notice of Penalty Offenses to any company found to be violating these regulations before issuing a fine; the subsequent fine is $50,120 per knowingly committed violation⁷. Non-compliers can also expect cease and desist orders and may be subject to restitution, civil lawsuits from consumers, and possible criminal charges for fraud.

Maintaining compliance can be difficult, which is why dealerships should establish a robust review process for all their advertising materials before they're printed, aired, or shared. Marketing staff should be trained and remain updated on car dealership laws, regulations, and changing requirements on advertisements. Many dealerships also reach out to marketing, advertising, and promotions attorneys who have specialized insights and can catch small but important mistakes.

7. Truth in Lending Act (TILA)

TILA is very similar to the advertising, used cars, and MMWA regulations. Under these guidelines, dealerships must make their credit terms clear to consumers before agreeing to financing. As a rule of thumb, tell customers the finance charges, the financed amount, the total payments, late fees, and the annual percentage rate (APR), along with providing the payment schedule. They should also be made aware of any prepayment penalties, which can inform their decision to pay off the loan early.

Additionally, TILA requires creditors to use specific terminology and formatting in credit disclosures; consumers should receive the disclosures before completing the transaction. The disclosures should include all the terms, charges, and fees using standardized calculations.

Non-compliance with TILA can come with significant civil and criminal repercussions, including:

• Criminal charges for willful violations
• Statutory damages up to $5,000 and/or imprisonment for up to a year³
• Actual damages to consumers, who are also in their rights to file a class-action lawsuit
• Required rescission rights

TILA compliance begins with your staff. They should be thoroughly trained on the disclosure requirements and calculations. It's crucial that they also stay updated, as regulations tend to change over time.

Since this can be complicated, many dealerships keep detailed documents of all their credit transactions and the timing of disclosures. Others use standardized Regulation Z forms, which save staff time on formatting and spacing and are compliant with TILA regulations. Finally, it's a good idea to regularly audit your credit files. This will allow you to find minor mistakes and rectify them before they become accidental violations.

Build Your Dealership With ACV Auctions

Knowing how to comply with federal dealership advertising, lending, and consumer protection laws is essential to running a successful car dealership. But it all starts with having the inventory your customers want to browse and buy. ACV Auctions makes it easy to search for fully vetted used cars, trucks, and SUVs and place bids with the click of a button. We simplify payments and title transfers by handling everything within the platform and even offer transparent financing for your dealership to acquire more inventory. Register today to get started.

This site is provided for informational purposes only and should not be construed as legal advice. ACV is not liable for reliance on the information provided herein. We do not endorse, nor are we responsible for the privacy practices or the content of the sites linked in this blog.

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Sources

1. Stonehill, E. (February 9, 2023). Encryption Requirement for Dealerships in 2023. DigitalDealer. Retrieved October 30, 2024, from https://digitaldealer.com/dealer-ops-leadership/encryption-requirement-for-dealerships-in-2023/
2. Disposing of Consumer Report Information? Rule Tells How. Federal Trade Commission. Retrieved October 30, 2024, from https://www.ftc.gov/business-guidance/resources/disposing-consumer-report-information-rule-tells-how
3. Can You Afford to Pay Penalties for Non-Compliance? Total Dealer Compliance. Retrieved October 30, 2024, from https://www.totaldealercompliance.com/penalties.html
4. Equal Credit Opportunity Act. Total Dealer Compliance. Retrieved October 30, 2024, from https://www.totaldealercompliance.com/equal-credit-opportunity-act.html
5. GLBA Compliant Document Management & File Sharing Solution. SmartVault. Retrieved October 30, 2024, from https://www.smartvault.com/security-and-compliance/glba/
6. Dealer's Guide to the Used Car Rule. Federal Trade Commission. Retrieved October 30, 2024, from https://www.ftc.gov/business-guidance/resources/dealers-guide-used-car-rule
7. Advertising without proper proof can prove costly under new Notice of Penalty Offenses. Federal Trade Commission. Retrieved October 30, 2024, from https://www.ftc.gov/business-guidance/blog/2023/04/advertising-without-proper-proof-can-prove-costly-under-new-notice-penalty-offenses

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