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FEBRUARY/MARCH 2013

DEALER NEWS N E W

J E R S E Y

I N D E P E N D E N T

A U T O M O B I L E

D E A L E R S

A S S O C I A T I O N

Embrace the Green Revolution

BECOMING ENVIRONMENTALLY CONSCIOUS CAN BE COST-EFFECTIVE – AND FINANCIALLY REWARDING

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inside u

• USED CAR RULE CHANGES: HAVE YOU WEIGHED IN? • UNDERSTANDING BANKRUPTCY • COMPLIANCE OVERDRIVE

DALLAS, TEXAS Permit No. 2079

PAID

PRSRT Standard U.S. Postage

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INDUSTRY NEWS

Framework to Achieve a Provisioning Mindset inside

MAGAZINE CONTENTS

04 08 10 12 14 20 26

The Environmentally Conscious Dealer eTemp Tag System Money Matters Proposed Used Car Rule Changes Washington Update BHPH Perspectives Compliance Overdrive

inside WHAT’S NEW

www.niada.tv - Free Dealer Education 24/7

TAKE US WITH YOU Certified Master Dealer Program - Feb. & April 2013 Educates dealers on how to manage and grow a profitable business “Effective Management Practices”, “Business Planning”, “Human Resources”, “Merchandising”. “Financial Management” Call (800)756-4232 to sign up.

ADVERTISERS INDEX ADESA........................................ Inside Front Cover Ally..................................................................... 17 Auto Auction of New England................................ 7 AutoManager........................................................ 9 Auto Use.............................................................18 Manheim.com.....................................................15 Manheim New York............................................... 5 NEXTGEAR Capital........................................21, 23 Protective...........................................................11 STARS GPS..................................Inside Back Cover United Acceptance..............................................19. VAuto.....................................................Back Cover Westlake Financial..............................................13

OFFICE FOR INFORMATION ON HOW TO BECOME A MEMBER, PLEASE CONTACT PAULA FRENDEL (855) 694-2324 PAULA@NEWJERSEYIADA.ORG WWW. NEWJERSEYIADA.ORG NATIONAL INDEPENDENT AUTOMOBILE DEALERS ASSOCIATION WWW.NIADA.COM • WWW.NIADA.TV NIADA HEADQUARTERS: 2521 BROWN BLVD. • ARLINGTON, TX 76006-5203 PHONE (817) 640-3838 FOR ADVERTISING INFORMATION CONTACT: TROY GRAFF (800) 682-3837 OR TROY@NIADA.COM.

The New Jersey Dealer News is published bi-monthly by the National Independent Automobile Dealers Association Services Corporation, 2521 Brown Blvd., Arlington, TX 76006-5203; phone 817-640-3838. Periodicals postage paid at Dallas, TX and at additional offices. POSTMASTER: Send address changes to NIADA State Publications, 2521 Brown Blvd., Arlington, TX 76006-5203. The statements and opinions expressed herein are those of the individual authors and do not necessarily represent the views of New Jersey Dealer News or the National Independent Automobile Dealers Association. Likewise, the appearance of advertisers, or their identification as members of NIADA, does not constitute an endorsement of the products or services featured. Copyright © 2013 by NIADA Services, Inc. All rights reserved. STATE MAGAZINE MGR./SALES Troy Graff • troy@niada.com EDITOR Andy Friedlander • andy@niada.com ART DIRECTOR Christy Haynes • christy@niada.com PRINTING Nieman Printing

About a year ago, I introduced the idea of “provisioning” inventory as a replacement for the long-held practice of dealers “stocking cars” to feed their used vehicle operations. The basic concept is that stocking cars doesn’t sufficiently capture the more holistic nature and needs of retailing used vehicles to achieve maximum return on investment and profitability in today’s more competitive and Internet-driven marketplace. If you’re still out there stocking cars, you’ll get crushed. You’re competing against dealers who use market-specific supply and demand data to know the right cars, the right price to pay and the right retail asking price to sell cars quickly and achieve their profit goals, again and again. Beyond the laser-like focus on each used vehicle’s ROI and profitability potential, those dealers have also adopted what I call a provisioning mindset for their entire dealerships. It’s a mindset that starts in used vehicles and, given early successes and roadblocks there, extends to each dealership department. I address this intra-dealership dynamic in greater detail in my soon-to-be-published book, Velocity Overdrive: The Road To Reinvention. At each provisioning-minded dealership, there are at least one or two people who effectively become the provisioning managers for the dealerships. They are often general managers, general sales managers or used vehicle managers who lead the reinvention of people and processes to achieve a significant change in the dealership’s culture. Over time, everyone becomes focused on ROI and profitability, department “silos” disappear and the dealership’s bottom line looks better than ever. All of that got me thinking: I haven’t yet seen a provisioning manager job description for a car dealership. I wondered what one might look like from a different industry. How do other businesses define a role that is, for the moment, largely a nascent collaboration between select, likeminded souls within dealerships? A quick Google search for “provisioning manager job description” yielded some extremely relevant results. For example, the responsibilities for the provisioning manager position at Cisco Systems struck me as an effective framework for the leadership required to develop a provisioning mindset at dealerships for three reasons: The scope: The job starts with a broad vision and empowers the individual to reinvent people and processes to achieve it. It also empowers the individual to change people and processes to realize the strategic vision. That is exactly the scope of the role GMs, GSMs and used-vehicle managers play as they initiate provisioning efforts at their dealerships. They often ask, “Where can we go from here?” and, “How do we get there?” to craft a broad strategy and guide the implementation of day-to-day details. The degree of collaboration: It’s pretty fair to envision the provisioning manager as someone who knows how to get buy-in and motivate other people. The job requires the person to actively engage multiple departments and get everyone on the same page. The same is true in dealerships where provisioning is standard operating procedure. When a used car hits the lot, the managers in used vehicles, service, parts, detailing and sales know the next steps. The backstops: Cisco requires the provisioning manager to provide “second-level incident management support, and ensure incidents are minimized through design, tools and processes.” This strikes me as a fancy way of saying “anticipate problems and have a process in place to prevent them, and use technology whenever possible.” For dealers, the potential problems in used vehicles are legion – auction purchases, appraisals, online merchandising, reconditioning, pricing and sales processes can all be profitability trouble spots. That’s why provisioning-minded dealers change people and processes, and adopt technology and tools, to ensure every decision drives the maximum profitability of each used vehicle at each stage of its life cycle. I’m not necessarily advocating that dealers need to create a bona fide provisioning manager position at their dealerships. But I do believe dealers who pursue and perfect a provisioning mindset will outpace other dealers who are still stocking cars.

BY DALE POLLAK 3

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COVER STORY N O T O N LY I S I T C O S T - E F F E C T I V E , I T C A N B E F I N A N C I A L LY R E WA R D I N G T O E M B R A C E T H E G R E E N R E V O L U T I O N .

THE ENVIRONMENTALLY CONSCIOUS DEALER Each day, consumers and businesses grow more environmentally conscious. Yet we are a long way from where we need to be. Make no mistake. This is a call for action. For all of us in the auto industry, each car deal is part of a gigantic revenue machine. Our focus is on retail market value vs. wholesale cost. Subtract recon expenses, advertising expenses, commissions, etc., and we’re left with net profit. The question many of us fail to ask: What is the impact on the environment? Fact: The second-leading cause of global warming is carbon dioxide emissions from burning gasoline. Our industry is married to the internal combustion engine. Our success is predicated on profits from selling large volumes of gas-guzzling, oil-burning hunks of metal to consumers. Often we gauge our performance on volume. The more, the better. Given the nature of our industry, it’s vital that we all embrace, with open arms, the need for a heightened level of environmental responsibility. There are countless ideas each of us can implement today that will make a difference to the environment while feeding our bottom lines. Green Solutions Recycle: In my travels and visits to dealerships, I’m constantly surprised – and disappointed – by the lack of recycling bins at dealerships. That is the easiest way imaginable to have a positive impact on the environment. Electronic fax: There are several companies that provide the service. Using an e-fax service drastically cuts down on paper and ink, and is super easy to implement. Forget traditional mailers: Typical response rate on mail advertising is a mere

2 percent. Save the paper, ink, fuel and money. Allocate those resources elsewhere. Turn off the printer: We print so many things that just don’t need to be printed. Credit reports, for example. Instead try saving them on your computer along with the customer’s email address. Turn off excess lighting. Use a green demo: Take the Prius for a spin instead of the Yukon. Most of us drive without passengers a large majority of the time. Driving a smaller, more efficient vehicle will save you gas money while reducing toxic greenhouse emissions. Walk or cycle: Go by foot or bike to work or to your favorite lunch or coffee spot. Smartphone apps: Use the extremely broad selection of apps to replace paper whenever possible. Do business with green businesses: Ask your body shop how it disposes of waste. Choose companies and vendors that act in an environmentally responsible manner. Eliminate bottled water: Bottled water is extremely inefficient. Instead, install and use a water filtration system. Hit the switch: Turn off and/or unplug unused appliances and computers when they’re not in use. Lot lights: Be diligent about adjusting the timer that controls your lot lights. Every one of these items can be easily implemented today with little or no negative impact on your business. In most cases, you will experience a significant cost savings, especially when that savings accumulates over the course of one or more years. Simply put, we can no longer ignore the fact we are depleting the world’s natural resources. We are driving at a very fast pace toward a hotter and hotter future. Why ignore the facts when you can benefit

in numerous ways by making some positive changes? In addition, the consumer climate has changed to the point that it is not only costeffective, but it can be financially rewarding to embrace the green revolution. Be green and make sure the world knows! You will attract better talent along with more customers as a result.

Electric Vehicles and Hybrids A major industry shift is staring all of us in the face like a hungry bear fresh out of hibernation, and the electric/hybrid market segment is growing rapidly. Nearly every major manufacturer is getting into the space, and new competitors are emerging with cutting-edge products that use state-of-theart technology to meet consumer demand. The products currently on the market are extremely compelling, and the future of the segment is exciting. Here’s a lineup with some information about several of the products available now: Tesla Model S: The first full electric vehicle to (mostly) overcome consumers’ No. 1 concern – range anxiety. There are different battery options designed to go up to 160, 230 or even 300 miles per charge at 55 mph. Consumer interest in the product is phenomenal. The fast, sporty and beautiful sedan is expensive for the average consumer, but will be attractive to the masses on the remarketing side. Tesla Roadster: Similar to the Model S, but not as practical. This is a pure sports car. Fisker Karma: Electric/hybrid with extended range. It can go up to 50 miles on 100 percent electric power, then the internal combustion engine engages for another 250 miles. It averages about 58 mpg. BMW ActiveE: BMW’s first full electric vehicle is only available in select markets on a two-year lease.

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THE ENVIRONMENTALLY CONSCIOUS DEALER

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Toyota Prius: Arguably the most costeffective solution on the market. Though not a full electric vehicle, it deserves a spot in the lineup based on its massive success in the U.S., coupled with its extreme efficiency at 50 mpg. Chevrolet Volt: The Volt can go up to 50 miles on full electric power before engaging the gasoline engine for up to another 350 miles. Range anxiety is a thing of the past with this electric/hybrid vehicle. Ford Focus Electric: The Focus can go up to 100 miles on a charge and is more affordable than any of its luxury counterparts. Super-fast charging, and 100 percent electric. Nissan Leaf: The Leaf was the first mainstream pure electric car offered for sale in the U.S. It is an excellent urban commuter vehicle but falls short when it comes to the range anxiety concern. Consumers are more informed and environmentally conscious today than ever. They are actively seeking out and going out of their way to find green solutions that meet their needs. Additionally, gasoline prices are still historically high, so the financial and environmental need for alternative fuel

solutions is growing by the minute. As more products emerge that meet the demands of the modern “eco-sumer,” those products will inevitably gain more traction. When it comes to pricing, most of those vehicles are at the top end or just outside the reach of the average consumer. But as they flow into the remarketing space, a majority of them will fall right into the sweet spot. Unfortunately, a large portion of our electric power comes from coal-burning sources. According to the Energy Information Administration, the most predominant sources of electricity in the U.S. come from coal (48.7 percent), natural gas (21.5 percent) and nuclear power (19.4 percent). Because so much of our energy is created by coal-burning power plants, it is arguable that electric vehicles consume similar amounts of energy and as a result produce nearly as much greenhouse emissions as gas-powered vehicles. Until we create more clean and renewable energy sources, electric vehicles will remain an imperfect solution, But they represent a big step in the right direction. In the end, innovation without

Annual Scholarship Program The National Independent Automobile Dealers Association Foundation was founded in 2006 by the National Independent Automobile Dealers Association, a 66-year-old trade association, to “improve the independent motor vehicle industry by informing and educating consumers of the general public and training individuals associated with our industry.” Historically, the association’s scholarship program was the responsibility of the NIADA’s auxiliary. Now, however, as an IRS-approved 501(c)(3) nonprofit organization, the foundation has assumed the oversight of that scholarship program’s functions. Submit the completed application form with the required attachments in a 10 inch-by-13 inch envelope with adequate postage to:

SCHOLARSHIP SELECTION COMMITTEE NIADA FOUNDATION 2521 BROWN BLVD ARLINGTON, TX 76006 All information MUST be included with the original application. No additional information will be accepted at a later date. Staff will review the applications for completeness and will forward them to the Scholarship Selection Committee within NIADA and at Northwood University in Midland, Mich. They will be reviewed by region. One applicant will be selected from each of the four NIADA regions based on the merit of his or her scholarship application and will be notified by the foundation office no later than mid-May 2013. FIND THE SCHOLARSHIP APPLICATION AT WWW.NIADAFOUNDATION.ORG

capitalization will die. But if enough of us buy in and support the movement, the sky is the limit. The question remains: Where do you stand on the matter? Are you going to be one of the dealers with your hand raised when an electric vehicle crosses the block? Or are you going to stand on the sidelines and watch your competitors lead the charge? Technology and the environment are two major items that influence and change how our industry looks and feels. DSC remains committed to providing you not only with the best financing options, but also cutting edge technological solutions to enhance and take your business to the next level. We are also committed to shifting with your business as environmental needs and consumer demand dictates. We are confident we have the most flexible floorplan finance solutions in the industry, designed to empower you and your business to embrace change and grow green.

BY GARRETT JOREWICZ

NORTHWEST REGIONAL DIRECTOR OF DEALER SERVICES CORPORATION.

EDUCATION FOUR REGIONAL SCHOLARSHIPS ARE AWARDED ANNUALLY AT THE ANNUAL NIADA CONVENTION IN JUNE. REGION I: MAINE, VERMONT, NEW HAMPSHIRE, MASSACHUSETTS, CONNECTICUT, RHODE ISLAND, NEW YORK, PENNSYLVANIA, NEW JERSEY, DELAWARE, MARYLAND, VIRGINIA, WEST VIRGINIA, INDIANA, OHIO AND MICHIGAN. REGION II: KENTUCKY, TENNESSEE, NORTH CAROLINA, SOUTH CAROLINA, GEORGIA, FLORIDA AND ALABAMA. REGION III: NORTH DAKOTA, SOUTH DAKOTA, MINNESOTA, WISCONSIN, ILLINOIS, IOWA, MISSOURI, KANSAS, NEBRASKA, OKLAHOMA, ARKANSAS, LOUISIANA, MISSISSIPPI AND TEXAS. REGION IV: WASHINGTON, OREGON, CALIFORNIA, NEVADA, IDAHO, MONTANA, WYOMING, UTAH, COLORADO, ARIZONA, NEW MEXICO, ALASKA AND HAWAII. The foundation invites you as an eligible student to complete this application in pursuit of scholarship funds to be paid to the college of your choice in the fall of 2013. Applications must be POSTMARKED NO LATER THAN MARCH 1, 2013 AND RECEIVED NO LATER THAN MARCH 11, 2013.

Looking to improve your bottom line, manage more effectively, improve employee retention, and leverage the newest and most effective marketing techniques? NIADA can help!

CERTIFIED MASTER DEALER TRAINING

CMD training positions you to take your success to the next level. The CMD designation serves as recognition of your dedication to the industry, and of your proven record for stability, reliability, and ethical business practices.

February: Dallas April: Atlanta July: Arizona September: Atlantic City

DEALER 20 GROUPS

Share successful ideas and best business practices in this unique, cost-effective 20 Group, designed for BHPH and retail dealers alike.

January: Atlanta April: Dallas August: Atlanta December: Dallas

F O R M O R E I N F O R M AT I O N , V I S I T : W W W. N I A D A . C O M / E D U C AT I O N . P H P

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N E W S Y S T E M E N A B L E S D E A L E R S T O P R I N T T E M P TA G S O N D E M A N D

VENDOR HELPS DEALERS MOVE TO ELECTRONIC TAG SYSTEM The New Jersey Independent Auto Dealers Association (NJIADA) announced a new vendor partnership and is encouraging dealers to contact the association for help in working with the state’s electronic temporary tag system. The New Jersey IADA has partnered with Dealertrack to manage the electronic temporary vehicle registration tag (eTemp Tag) system put in place last year, said Paula Frendel, executive director of the New Jersey IADA. Beginning in July, dealers were no longer permitted to issue the old-style temp tags, nor were non-resident temp tags allowed. The new eTemp Tag, piloted by the state’s Motor Vehicle Commission, allows dealers to print tags at their dealership as opposed to traveling to a motor vehicle agency to get new tags. The Motor Vehicle Commission has said the eTemp Tags are more costeffective for dealerships than the previous system. It also eliminates the need for

dealers to mail hard copies of the issued eTemp Tags to the MVC and the need to worry about securing temp tag inventory. Now dealers can print the items as needed, Frendel said. Each dealer can securely control employee access to the system by assigning certain functions, and is able to view reports of all temp tag activity occurring at the dealer location. The system also allows dealers to create the tags 24 hours a day/seven days a week at a dealer’s convenience.

The New Jersey IADA’s partnership with Dealertrack will benefit association members because of its ease and flexibility. “Dealertrack integrates with 30 different dealer management systems,” Frendel said. It also simplifies the process since dealers who use it go directly to a dingle screen, she said, as opposed to multiple screens that open normally, which could be confusing to some, Frendel said. Dealertrack’s Michael Audette said the company’s specialty is automation and this new system is an example of that. He said the company has started advertising to the independent market. Sal Enea, president of Route 46 Auto in Lowdi, N.J., is hoping the Dealertrack system will make things easier. “(The new process) really is harder than the old system,” he said.

THE NEW JERSEY IADA’S PARTNERSHIP WITH DEALERTRACK WILL BENEFIT ASSOCIATION MEMBERS BECAUSE OF ITS EASE AND FLEXIBILITY.

BY JEFFREY BELLANT

THIS ARTICLE ORIGINALLY APPEARED IN USED CAR NEWS, DECEMBER 17, 2013.

NEW PRODUCTS

Test Drive Generator Does All the Work One of the great things about the Internet invading the dealership business is the innovative new ways it helps sell cars. Certainly the availability of information about every vehicle on your lot has complicated the business – but sometimes it’s for the better. An example is the simple idea that customers visiting your website should be able to make an appointment to test drive the car they like without any effort on the part of the dealer. That’s a good thing, because every day there are thousands of leads in your market, and it is pretty tough to engage them all. Test Drive Generator, a company based in Mukilteo, Wash., has perfected software that allows any dealer, on any type of automotive website platform, to allow customers to schedule their own test drives without any human intervention. Customers just click the button next to the car they like and schedule the test drive on their own. Why is that a good thing? Think about it. If the customer is scheduling his or her

own test drive, and Test Drive Generator appointments show up 90 to 95 percent of the time, why, oh why, would you want a salesperson to stick his nose in and screw that up? Once the customer has scheduled a test drive, the folks at Test Drive Generator say, “Leave them alone!” Nothing good will come of an email or phone call from a salesperson. At best, the customer will still show up. At worst, something the salesperson says or writes will give the customer second thoughts about coming. Now, you might say your salespeople are tremendous, but why mess with a good thing? Customers are coming for a test drive. Leave them alone and let them arrive. Have you ever seen a salesperson talk a person out of a sale by talking too much? It’s not a pretty sight. Test Drive Generator takes care of scheduling the test drive appointment. It sends email confirmations and reminders and text reminders. The Test Drive Generator system has a 90 to 95 percent

VISIT WWW.TESTDRIVEGENERATOR.COM

show ratio and a 60 to 70 percent sold ratio. Perhaps the best thing about Test Drive Generator is the price: $250 per month for a dealership, billed month-tomonth, with no long-term contract and no setup fees. Seems like a pretty good deal to me, whether you get 10 test drives per month or 100. If you want to hear more, call Test Drive Generator at 877-696-0415, email info@TestDriveGenerator.com or visit www. TestDriveGenerator.com to book a demo.

BY BRETT STEVENSON DEALER MARKETING MAGAZINE

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MONEY MATTERS T H E F I R S T O F A T H R E E - PA R T S E R I E S O N T H E B A S I C S O F B A N K R U P T C Y P R O C E D U R E S A N D W H AT I T M E A N S T O D E A L E R S / L I E N H O L D E R S .

Understanding Your Customer’s Chapter 13 Bankruptcy Congress enacted the federal Bankruptcy Code in 1978, and it has been amended several times since. The procedural aspects are governed by bankruptcy rules and the local rules of each bankruptcy (BK) court. There are 90 BK courts – one in every federal judicial district in the country. The court official with the decisionmaking power in each district is a United States bankruptcy judge. Much of BK process is administrative and conducted away from the courthouse. In Chapter 7 and 13 cases, the ones that affect dealers and lien holders, the process is carried out by a trustee.

could lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on “consumer debts,” a provision than can protect co-signers. Chapter 13 acts like a consolidation loan under which the individual makes payments to a trustee, who then distributes payments to creditors. Any individual, even if self-employed or operating an unincorporated business, is eligible for Chapter 13 relief as long as the individual’s unsecured debts are less than $360,475 and secured debts are less than $1,081. A corporation or partnership cannot be a Chapter 13 debtor.

What’s the Difference? The consumer bankruptcies that affect you most will be filed as Chapter 7 or Chapter 13.

How Chapter 13 Works A Chapter 13 case begins by filing a petition with the bankruptcy court serving the area where the debtor has a residence. Unless the court orders otherwise, the debtor must also file schedules of assets and liabilities, a schedule of current income and expenditures, a schedule of contracts and unexpired leases, and a statement of financial affairs. When an individual files a Chapter 13 petition, an impartial trustee is appointed to evaluate the case and serve as a disbursing agent, collecting payments from the debtor and making distributions to creditors. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor. Between 21 and 50 days after the debtor files the petition, the trustee will hold a meeting of creditors. The debtor, the trustee and those creditors who wish to attend will then come to court for a hearing on the repayment plan. The debtor must file a repayment plan with the petition or within 14 days after the petition is filed. The plan must be submitted for court approval and must

Chapter 7 – liquidation: A chapter 7 case does not involve the filing of a plan of repayment, as in chapter 13. Instead, the trustee gathers and sells the debtor’s nonexempt assets and uses the proceeds to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code. Chapter 13 – wage earner plan: Chapter 13 offers individuals a number of advantages over Chapter 7 liquidation, including an opportunity to save their homes from foreclosure. By filing under Chapter 13, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time, though they must still make all mortgage payments that come due during the Chapter 13 plan on time. Chapter 13 allows individuals to reschedule secured debts, other than a mortgage for their primary residence, and extend them over the life of the plan. That

provide for payments of fixed amounts to the trustee on a regular basis, typically biweekly or monthly. The trustee then distributes the funds to creditors according to the terms of the plan, which can offer creditors less than full payment on their claims. If the debtor wants to keep the collateral securing a particular claim, the plan must provide that the holder of the secured claim receive at least the value of the collateral. If the obligation underlying the secured claim was used to buy the collateral – such as a car loan – and the debt was incurred within certain time frames before the bankruptcy filing, the plan must provide for full payment of the debt, not just the value of the collateral. If the court confirms the plan, the trustee will distribute funds received under the plan “as soon as is practicable.” Making the Plan Work Once the court confirms the plan, the debtor must make the plan succeed by making regular payments to the trustee either directly or through payroll deduction, which requires living on a fixed budget for a prolonged period. While confirmation of the plan entitles the debtor to retain property as long as payments are made, the debtor cannot incur new debt without consulting the trustee. Next: The basics of Chapter 7 filings.

Note: The information presented should not be cited or relied upon as “legal authority” and should not be used as a substitute for reference to the U.S. Bankruptcy Code and the Federal Rules of Bankruptcy Procedure.

BY ROD HEASLEY

ROD HEASLEY IS EXECUTIVE VICE PRESIDENT OF PERITUS PORTFOLIO SERVICES , A SOUTHLAKE, TEXAS-BASED SPECIALTY FINANCE COMPANY THAT SPECIALIZES IN THE PURCHASING OF OPEN BANKRUPTCY ACCOUNTS.

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U S E D C A R D E A L E R S , C O N S U M E R G R O U P S , I N D U S T R Y A S S O C I AT I O N S A N D G O V E R N M E N T A G E N C I E S F I L E D C O M M E N T S A B O U T H O W T H E USED CAR RULE IS WORKING.

USED CAR RULE CHANGES: HAVE YOU WEIGHED IN? Dealers are familiar with what it takes to comply with the FTC’s Used Car Rule, but are you aware of the key role you play in drafting the regulations that apply to your industry? Officially known as the Used Motor Vehicle Trade Regulation Rule (though only its mother calls it that), the rule requires dealers to display a Buyers Guide on used cars offered for sale. But FTC regulations aren’t written in stone. To ensure that rules keep up with the times, every 10 years or so the FTC revisits what’s on the books. Is there a continuing need for the rule? Have there been changes to the technological or regulatory landscape that need to be addressed? As part of that ongoing review, the FTC asked for feedback about the future of the Used Car Rule – and boy, did we get an earful. Used car dealers, consumer groups, industry associations and government agencies filed comments about how the Used Car Rule is working. From what we heard, a lot has changed in how people shop for used cars and how you do business. Based on what we heard, the FTC has proposed modifications to the Buyers Guide and is again asking you to weigh in on suggested revisions. What’s under consideration? You’ll want to read the complete document on the Automobiles page of www.business. ftc.gov, but as the FTC explained in a Dec. 4 announcement, it’s proposing four primary changes to the Buyers Guide. Adding a reference to how consumers can get information about a vehicle’s history: There’s more information available these days about a vehicle’s history and the FTC wants to help empower consumers without burdening businesses. Therefore, the agency is proposing to add a statement

to the Buyers Guide encouraging consumers to seek vehicle history information and directing them to a new FTC website for more information. As the FTC notice makes clear, “Dealers would not be required to obtain vehicle histories or to display specific vehicle history information on the proposed revised Buyers Guide. The Buyers Guide would continue to recommend to consumers that they protect themselves by obtaining an independent inspection before making a purchase.” Revising the list of systems on the back of the Buyers Guide: Dealers are familiar with the list of systems included on the Buyers Guide, and the FTC thinks it’s a good idea to keep it. It helps consumers compare warranties on different cars or from different dealers – and it’s a handy checklist for the mechanical and safety systems prospective buyers might want to have inspected. But the FTC wants to revise the list to include catalytic converters and airbags. Adding a reference to the Spanish-language Buyers Guide: The Used Car Rule already requires dealers to display Spanish-language Buyers Guides when they conduct sales in Spanish. But to ensure the Spanish guide reaches its intended audience, the FTC is proposing to add a sentence in Spanish on the face of the English-language Buyers Guide, alerting Spanish-speaking consumers that they can ask for a copy in Spanish. Adding more information about warranties: The FTC is proposing to place boxes on the back of the Buyers Guide where dealers will have the option to say whether the manufacturer’s warranty still applies, the manufacturer’s used vehicle warranty – such as a certified

pre-owned warranty – applies, or some other used vehicle warranty applies. The FTC would like your feedback on those suggested revisions, including your thoughts about the kind of information that should be available on any new FTC site dealing with vehicle histories. But that’s not all the agency is asking for this time around. The FTC also would like to hear what you have to say about Internet sales of used vehicles. Have you spotted deceptive practices? If deceptive practices are prevalent, are there regulatory steps the FTC should consider taking? The deadline for comments is Feb. 11. By the way, the days of submitting documents in triplicate are over. It’s easy to file a comment online. In addition, the FTC announced a final rule that makes some technical corrections to the Spanish translation of the Buyers Guide. That portion of the rule takes effect Feb. 11, so you’ll want to make sure your dealership is using the new version of the Spanish-language Buyers Guide, available on the Automobiles page of www.business.ftc.gov. Editor’s note: NIADA met with the FTC attorneys responsible for oversight of the Used Car Rule in December to discuss the proposed changes, and after soliciting input from its members, the association is preparing comments to submit to the FTC. If you have any additional comments or ideas about the rule, please contact NIADA’s Georgia Brown at 1-800-682-3837 or georgia@niada.com.

BY LESLEY FAIR

LESLEY FAIR IS A SENIOR ATTORNEY WITH THE FEDERAL TRADE COMMISSION’S BUREAU OF CONSUMER PROTECTION AND HAS REPRESENTED THE FTC IN DECEPTIVE ADVERTISING INVESTIGATIONS. SHE NOW SPECIALIZES IN BUSINESS EDUCATION AND COMPLIANCE.

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WA S H I N G T O N U P D AT E

NIADA GOVERNMENT REPORT

Here’s a rundown of some of the latest governmental issues and activity affecting the used car industry from NIADA lobbyist Sante Esposito and NIADA regulatory counsel Shaun Petersen.

LEGISLATIVE REPORT Congress rang in the new year by passing the American Taxpayer Relief Act of 2012, which was signed by the President on Jan. 2. The bill contains a series of tax rate cuts that restored marginal tax rates for certain income thresholds to their 2012 levels as set by Congress in 2001 and 2003 and extended in 2010 (the so-called Bush tax cuts). The marginal tax rate for individuals with taxable income of $400,000 per year, or $450,000 if married filing a joint return, is 39.6 percent. The capital gains tax rate for taxpayers in that bracket rose from 15 percent to 20 percent. Perhaps the most noticeable impact of the legislation is that the new law did not renew the Social Security payroll tax cut that has been in place for the past two years. During 2011 and 2012, the employee portion of the Social Security tax was reduced from 6.2 percent to 4.2 percent, and the selfemployment tax was reduced from 12.4 percent to 10.4 percent. Because those rates expired on Jan. 1, workers’ Social Security withholding increased by 2 percent beginning with the first paycheck of 2013. The new law contains several tax benefits for small businesses, such as a provision that allows small businesses to recover the costs of qualified new equipment faster than the ordinary schedule by permitting the depreciation of 50 percent of the cost in the first year. It also extends through 2013 tax credits for employers who hire military veterans or individuals from underserved communities. Other extended tax credits include a credit for two- or three-wheeled plug-in electric vehicles. 2012 RECAP Here’s a reminder of a few of the issues considered by Congress in the past year and some of the proposals made during the previous session. It is worth noting that any bills proposed by the previous Congress “died” at the end of the session. Any subsequent action on them requires the new Congress to begin anew – that is, bills must be introduced again to start the legislative process.

H.R.527, THE REGULATORY FLEXIBILITY IMPROVEMENTS ACT OF 2011 The bill passed the House in December 2011 and was referred to the Senate Homeland Security and Governmental Affairs Committee. H.R. 527 would ensure that federal agencies comply with the 1980 Regulatory Flexibility Act and close loopholes used by agencies to avoid compliance with the RFA. It would also require a better assessment of the impact regulations have on small businesses, forcing agencies to perform better periodic review of rules, and granting the Chief Counsel for Advocacy at the Small Business Administration greater powers for enforcement of the RFA. And it would mandate stricter analysis of the economic impact any proposed rules would have on small entities, including businesses, organizations and governmental jurisdictions. A similar bill, S.474, the Small Business Regulatory Freedom Act of 2011, was introduced in the Senate in March 2011. It sets forth criteria for review of a rule, including the continued need for the rule, the complexity of the rule, and the impact of the rule on small entities. It terminates any rule if the issuing agency has failed to complete a required periodic review. It would also allow small entities to seek judicial review of initial regulatory flexibility analyses and to obtain an injunction of a proposed rule that is noncompliant with RFA requirements. S. 3468, THE INDEPENDENT AGENCY REGULATORY ANALYSIS ACT OF 2012 Under the bill, the White House would receive explicit authority to influence the rulemaking process of regulatory agencies, including the Federal Trade Commission and the Consumer Financial Protection Bureau. The President, through an executive order, would be allowed to mandate at the minimum a 13-point test for rulemaking, including finding “available alternatives to direct regulation,” evaluating costs and benefits, and periodically reviewing existing rules to make agencies “more effective or less burdensome.” For rules with an annual effect of $100 million or more on the economy, agencies would submit their proposals to the White House’s Office of Information and Regulatory Affairs. A negative review from the office would delay a rule for up to three months and force the agency to explain its approach.

H.R.1449, THE MOTOR VEHICLE OWNERS RIGHT TO REPAIR ACT OF 2011 The bill would require car manufacturers to provide to the vehicle owner and service provider all information necessary to diagnose, service, maintain or repair the vehicle; to offer for sale any related tool or equipment; and to provide the information that enables tool companies to manufacture tools with the same functional characteristics. The legislation provides car companies with protection for trade secrets, only requiring them to make available the same nonproprietary diagnostic and repair information they provide their franchised dealers. H.R.229, THE MICHAEL JON NEWKIRK TRANSPORTATION SAFETY ENHANCEMENT ACT OF 2011 The bill would withhold a percentage of federal-aid highway funds to states that do not enact or enforce a law that requires annual vehicle inspections, including seat belts and speedometers. H.R.164, THE DAMAGED VEHICLE INFORMATION ACT The bill would require greater disclosure of information relating to the market value and safety of damaged motor vehicles, requiring anyone who terminates a motor vehicle contract due to flood or water damage, collision, fire damage, theft and recovery, or any other circumstance that adversely affects the fair market value to disclose to the public the VIN, the date of contract termination, the odometer reading, whether the vehicle’s airbags deployed in the incident that led to the termination, and the cause of termination. REGULATORY REPORT Consumer Financial Protection Bureau The CFPB announced plans to share consumer complaint data with various state regulatory bodies. The current plan will only allow states to access information from the CFPB, while the CFPB will not have access to state information. The long-term goal of the information sharing is to give the CFPB and state agencies access to each other’s consumer complaints, as well as access to local agencies, congressional offices and other appropriate agencies.

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MONEY MATTERS T H E S E C O N D O F A T H R E E - PA R T S E R I E S O N T H E B A S I C S O F B A N K R U P T C Y P R O C E D U R E S A N D W H AT I T M E A N S T O D E A L E R S / L I E N H O L D E R S .

THE INS AND OUTS OF CHAPTER 7 A chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in chapter 13. Instead, the bankruptcy trustee gathers and sells the debtor’s nonexempt assets and uses the proceeds to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code. To qualify for relief under chapter 7 of the Bankruptcy Code, the debtor can be an individual, a partnership, or a corporation or other business entity. Subject to the means test for individual debtors, relief is available under chapter 7 regardless of the amount of the debtor’s debts or whether the debtor is solvent. The debtor has no liability for discharged debts. In a chapter 7 case, however, a discharge is only available to individual debtors, not to corporations or other business entities. While an individual chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and some types of debts are not discharged. How Chapter 7 Works A chapter 7 case begins with the debtor filing a petition with the bankruptcy court serving the area where the individual lives. The debtor must also file schedules of assets and liabilities, a schedule of current income and expenditures, a statement of financial affairs, and a schedule of contracts and unexpired leases. The debtor must also provide: • A list of all creditors and the amount and nature of their claims. • The source, amount and frequency of the debtor’s income. • A list of all of the debtor’s property. • A detailed list of the debtor’s monthly living expenses – food, clothing, shelter, utilities, taxes, transportation, medicine, etc. Filing a petition under chapter 7 automatically “stays” (stops) most

collection actions against the debtor or the debtor’s property. In some situations, the stay is effective only for a short time. The stay requires no judicial action. As long as the stay is in effect, creditors generally cannot initiate or continue lawsuits, wage garnishments or even telephone calls demanding payments. Between 21 and 40 days after the petition is filed, the case trustee will hold a meeting of creditors. The debtor must attend the meeting and answer questions regarding the debtor’s financial affairs and property. Role of Trustee in Chapter 7 When a chapter 7 petition is filed, the U.S. trustee (or the bankruptcy court in Alabama and North Carolina) appoints an impartial case trustee to administer the case and liquidate the debtor’s nonexempt assets. In the typical no-asset chapter 7 case, there is no need for creditors to file proofs of claim because there will be no distribution. If the trustee later recovers assets for distribution to unsecured creditors, the bankruptcy court will provide notice to creditors and will allow additional time to file proofs of claim. The primary role of a chapter 7 trustee in an asset case is to liquidate the debtor’s nonexempt assets in a manner that maximizes the return to the debtor’s unsecured creditors. The trustee accomplishes this by selling the debtor’s property if it is free and clear of liens.

Chapter 7 Discharge A discharge releases individual debtors from personal liability for most debts and prevents the creditors owed those debts from taking any collection actions against the debtor. Because a chapter 7 discharge is subject to many exceptions, debtors should consult competent legal counsel before filing to discuss the scope of the discharge.

Generally, excluding cases that are dismissed or converted, individual debtors receive a discharge in more than 99 percent of chapter 7 cases. If a debtor wishes to keep certain secured property, such as an automobile, he or she may decide to “reaffirm” the debt. That’s an agreement that the debtor will remain liable and will pay all or a portion of the money owed, even though the debt would otherwise be discharged in the bankruptcy. In return, the creditor promises not to repossess the automobile or other property so long as the debtor continues to pay the debt. The debtor must reaffirm a debt before the discharge is entered, and must sign a written reaffirmation agreement and file it with the court. An individual receives a discharge for most of his or her debts in a chapter 7 bankruptcy case. A creditor may not initiate or continue any legal or other action against the debtor to collect a discharged debt. Your customer has three options in a chapter 7 filing: surrender the vehicle, redemption or reaffirm the note. We recommend that when you as the lien holder receive a chapter 7 notice of filing, you call the customer’s attorney and ask the customer’s intention. That conversation will dictate your next move prior to discharge. Next: Your options when a customer files bankruptcy. Note: The information presented should not be cited or relied upon as “legal authority” and should not be used as a substitute for reference to the U.S. Bankruptcy Code and the Federal Rules of Bankruptcy Procedure.

BY ROD HEASLEY

ROD HEASLEY IS EXECUTIVE VICE PRESIDENT OF PERITUS PORTFOLIO SERVICES , A SOUTHLAKE, TEXAS-BASED SPECIALTY FINANCE COMPANY THAT SPECIALIZES IN THE PURCHASING OF OPEN BANKRUPTCY ACCOUNTS. 866.831.5954 OR RODH@PERITUSSERVICES.NET

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C O N S U M E R P R O T E C T I O N U P D AT E

S A F E T Y U P D AT E

NHTSA WANTS ‘BLACK BOXES’ IN ALL CARS The National Highway Traffic Safety Administration has proposed a new rule that would require event data recorders – so-called “black boxes” – to be installed in all light passenger vehicles beginning Sept. 1, 2014. EDRs track vehicle information – specifically, when it is in an accident, capturing speed, forces at impact, air bag timing, whether seat belts were in use and whether the brakes were applied. The majority of vehicles produced today already have such devices on board, and they have aided in recent investigations into safety issues, such as the so-called Toyota unintended acceleration scare, when they revealed the real problem was often driver error. But the use of the technology has also raised some concerns with privacy advocates. EDRs are expected to be installed in 96 percent of 2013 model year vehicles. Congress failed to pass legislation that would have required EDRs in 2010, prompting the NHTSA to consider its own mandate. NHTSA has listed the use of black boxes as a “priority,” and a spokesperson insisted the devices are critical to “continued improvements in vehicle safety.” The proposed rule is available for public comment for 60 days from date of publication.

CFPB to Share Complaint Data

Buy-Here, Pay-Here dealers or auto finance companies who have had complaints filed against them with the Consumer Financial Protection Bureau (CFPB) can soon expect state regulatory agencies to be informed of those complaints, as well. At the end of 2012, CFPB announced that it was intensifying its efforts to coordinate with state-level departments and share complaint data. “Our goal in sharing consumer complaints with state agencies is to enhance efficient, transparent, and effective government to better protect American consumers,” Scott Pluta, assistant director for the Office of Consumer Response, noted on the CFPB website. Complaints will be shared over a secure channel, with identifying consumer information removed. While the data will initially only flow from the CFPB to state agencies, in time the agency also plans to accept complaints and information from state agencies, and make that data available to other federal agencies as appropriate.

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Jump-Start Your Compliance Training

OSHA requirements, workplace diversity, Gramm-Leach-Bliley, Red Flags Rules… Keeping up with all of the compliance demands can be overwhelming for any dealer. And now, with the FTC and the CFPB starting to more closely scrutinize the auto industry, it’s even more vital than ever for your entire staff to help keep your dealership compliant. NIADA wants to help ease the burden. Starting in February 2013, dealers can jump-start their compliance training with NIADA’s online suite of dealer compliance training materials. Subscribers will have access to videos, checklists, key forms, documents, and more…all at their fingertips, on demand. Don’t worry – for dealers who prefer, content is also available on disc. You’ll even be notified when new training is added, so you can stay ahead of the curve. FOR A DDI T I O NA L I N FO R M AT I O N V I S I T W W W. NI A DA . C O M O R C O N TAC T G EO RGI A @ N I A DA . C O M .

A S S O C I AT I O N N E W S

United Acceptance Joins as a Bronze Partner United Acceptance, Inc., a financial organization founded in 1991 that provides capital and servicing solutions to Buy Here-Pay Here vehicle dealerships, captive finance companies and independent finance companies, has joined NIADA as a Bronze level National Corporate Partner. UAI’s strong long-term relationships with auto dealers and its employees have contributed to its growth from a local company in Atlanta to an organization that purchases receivables nationwide. UAI’s mission is to be a strong financial partner to used car dealerships, allowing them to accelerate their profits though the sale of their receivables – its slogan is “Profits Through Partnership.” At a time in which it is becoming increasingly difficult to secure credit facilities, selling contracts can be a viable source of raising capital. United Acceptance purchases automobile installment sales contracts (bulk receivables) from BHPH dealers, franchise dealers, finance companies and banks. Its bulk purchase program is simple, and quick funding is available to assist with immediate cash flow needs. UAI can turn uncollected receivables into liquid cash, reduce risk and repossession costs, improve yield, improve profit versus point-of-sale financing and reduce stress by allowing dealers to sell vehicles instead of collecting debts. FO R MO R E I N FO R MAT I O N , V I SI T W W W. UA I D I R EC T. C O M O R CA LL 877 - 2 81 - 2 3 6 0 .

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BHPH PERSPECTIVES

COMPLIANCE MOVES TO MAKE IN 2013 Bob Hollenshead says to Dealers: “I’LL PAY!!!* Join Your State Independent Automobile Dealers Association. Get Benefits Galore from a United Voice, Services, Products, Discounts.” (* I will credit you $30 dollars per vehicle you purchase from my lanes until you reach your State IADA initial annual membership fee! “The rest is up to you.”)

With the close of another year, most Buy Here-Pay Here operators will evaluate last year’s performance by comparing their financial results with the past. They will base their goals and strategy for the next year by looking at financial and operating metrics like unit sales, gross sales revenue, the growth of their installment portfolio and their net income. Although these represent the standard benchmarks for planning, they omit a critical element: compliance. The BHPH industry faces some important new legal and regulatory challenges from the newly formed Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC) and state attorney generals’ offices. All of those regulatory authorities will be monitoring consumer complaints to identify regulatory violations and operators who are violating the rules. The regulators will investigate complaints and have the authority to levy substantial fines for noncompliance. During 2012, regulatory activity and monitoring of subprime auto compliance violations increased significantly, and more scrutiny should be anticipated in the future. Overall BHPH industry compliance will be judged on how each individual operator complies with the rules and regulations. To date, I have noticed operators taking different approaches to complying with the new challenges. Some are waiting to see what 2013 will bring. Others are more proactive in their approach to compliance. A few are ignoring the compliance threats altogether. Given the current circumstances, I recommend all BHPH operators: • Carefully scrutinize their advertising and websites for statements that could be construed as false or misleading. • Determine if documentation matches their internal policies and practices. •Make written disclosures of all important contractual terms to every consumer. • Update and document internal collection, underwriting and compliance policies and procedures in writing and ask employees to sign a written acknowledgment that they have read and understand them. • Establish written consumer complaint resolution procedures and protocols. In 2012, many operators addressed the first four points and appointed a chief compliance officer, as required. Written consumer complaint resolution procedures and protocols have not been a priority in the past but need to be in the future. Dealers should have a competent attorney review their disclosures and contract documentation and help them develop a compliance management system. It will be money well spent. I also recommend establishing a welcome calling program shortly after each sale to ascertain whether the consumer had a positive buying experience. During that call, all consumer complaints should be taken seriously and addressed by the operator at that time. Consumer complaints are best resolved before they become a compliance issue with regulators. In cases in which the consumer is being unreasonable, an operator’s written policies and procedures can be used as evidence to show how that operator deals with consumer complaints. On investigation by a regulatory authority, the documented policies and practices will be considered in those circumstances. Complaint resolution is important in building a positive bond between operators and their customers. The old saying, “Treat others as you would like to be treated,” applies here. Both the consumer and the operator must work together over the life of the deal to be successful. In 2013, the regulatory authorities will carefully scrutinize collection procedures. Collectors must be particularly careful to avoid violations of the Fair Debt Collection Practices Act. That will require more individual knowledge and training. Although the year ahead is full of legal and regulatory uncertainty, prudent operators should start the year with a proactive approach to compliance. You can’t control what others do but each operator must be responsible and accountable for his or her own actions. Best wishes for a prosperous New Year! Note: The National Alliance of Buy Here-Pay Here Dealers (NABD) will host its 15th annual National Conference for Buy Here-Pay Here and Dealer Academy at the Wynn in Las Vegas on May 19-23. For registration and for more information, visit www.bhphinfo.com or call 832-767-4759.

BY KENNETH B. SHILSON

KENNETH B. SHILSON, CPA, IS FOUNDER AND PRESIDENT OF NABD, THE ONLY GROUP EXCLUSIVELY FOR THE SELF-FINANCE INDUSTRY. MEMBERSHIP IS OPEN TO ANYONE IN THE BHPH INDUSTRY AND TO SERVICE PROVIDERS. MEMBERS PAY NO DUES.

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LHPH L E A S E H E R E - PAY H E R E P U T S A N E W T W I S T O N T H E B H P H M O D E L

THE NEXT BIG THING? In recent years, the Lease Here-Pay Here (LHPH) business model has generated some buzz in the world of subprime auto sales – and for good reason. LHPH is an offshoot of the Buy HerePay Here (BHPH) concept, but the dealer retains the title to each vehicle and charges usage fees to each customer. While the difference might seem subtle at first, it can radically change how the vehicle transaction is managed, taxed and regulated.

THE ADVANTAGES OF LHPH The LHPH model offers some distinct advantages over BHPH, including: • Deferred sales tax. • A federal income tax deduction for depreciation of your assets. • Doesn’t require a related finance company (RFC). • Less burdensome regulations. • Faster repossession times. • Vehicles can’t be claimed in a bankruptcy. Probably the most commonly cited advantage of switching to a lease program is the ability to defer sales tax payment on your vehicles. Instead of paying sales tax up front – long before you’ve received all of the customer’s money – you’re allowed to pay the sales tax in installments, every time your customer pays you. That lessens the risk of losing money when a customer defaults early, and it makes cash flow more even and manageable. George Klinke, vice president of business development for the aptlynamed San Diego-based company LHPH, LLC, said the deferred tax is LHPH’s greatest advantage.

“There are 32 states where there’s a real cash flow incentive,” Klinke said. “When you buy a car in California, you pay an 8.75 percent sales tax on that vehicle. On a $20,000 car, you’re paying $1,750. That’s money that comes out of the dealer’s or the consumer’s pocket today.” But in California and 31 other states, dealerships can pay the sales tax on each leased vehicle as payments are collected, rather than at the lease inception. Additionally, lessors can collect a security deposit, which is not subject to taxation. “This is a pool of money where if there are other expenses that come up in the lease, the security deposit can be applied against those,” Klinke said. Unless state law mandates otherwise, the only up-front tax on a lease is paid on the cap cost reduction. For years, BHPH dealers have avoided income taxes on “phantom income,” through the use of a related finance company. An RFC is a legally separate corporation an auto dealership establishes to handle financing, often for customers who would have difficulty obtaining credit from traditional lenders. Usually, the dealership sells the note from each vehicle transaction to its related finance company at a discount, thereby eliminating most of the profit on the sale for the dealership, which otherwise would have been taxable income even though no payments have been collected from the consumer. The RFC’s income on the note purchase, however, is taxed as the payments are collected, avoiding a large income tax on profits that haven’t been earned yet and creating a substantial cash flow advantage. If executed correctly, that setup is entirely legal. The IRS has even written

a guide for it, available at www.irs.gov/ businesses. But the IRS also examines RFCs carefully for evidence that they’re substantive businesses that remain at “arm’s length” from dealerships, rather than thinly disguised shell corporations. One small misstep could place you in line for an audit. For dealers wanting to avoid that compliance headache and the difficulty of establishing a legitimate RFC, LHPH is an attractive option. Because of the inherent tax advantages of leasing, it’s not necessary to have a related finance company to handle LHPH deals – though dealers can still choose to keep their RFC as a buffer against bad publicity, lawsuits and financial risk. Because the dealer is the lessor and therefore the owner of the asset (vehicle), he can claim depreciation over the term of the lease based on IRS guidelines and use it as an income tax deduction, reducing the overall tax bill. According to Jason Berger, managing partner of AK Acceptance, an RFC in Pittsburgh, LHPH deals aren’t constrained by the tougher regulatory requirements that affect BHPH dealers. At the federal level, LHPH deals fall under the less restrictive Regulation M rules that govern auto leasing, rather than the notoriously tough Regulation Z rules that govern auto sales. Under Reg M, the dealer is not obligated to disclose an annual percentage rate (APR), because there is no interest rate in a lease – just a “rent” or “lease” charge. The lack of an interest rate means you’re not encumbered by state usury limits. You can impose mileage overage charges to protect the value of the vehicle. C O N T I N U E D O N PA G E 2 4

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And if the lessee declares bankruptcy after starting an LHPH deal, he won’t be able to avoid repossession because he never had ownership of the vehicle. For the same reason, if a lessee breaches the contract, there’s no mandatory grace period to comply with for repossessions. “We pull the trigger faster,” Berger said, noting that dealerships can technically repossess a vehicle if a payment is even one day late – though that might not be a great way to build goodwill in the community. “My target turnaround time is 21 days from the time of default [to when the car is available to lease again]. With a loan, we’d usually let it go a little bit longer.” LHPH has some definite appeal for consumers, too. Because they aren’t paying for full, lifetime ownership of the vehicle, drivers can normally afford a better quality automobile than if they insisted on purchasing. Like the dealer, they can usually pay less cash up front. And when a customer is done with the car, he can simply return it and get another car, or become the owner by paying or financing an agreed-on residual value. Klinke said given the choice, customers should prefer to pay the security deposit on their lease rather than a down payment on a loan. “If the lessees do everything correctly,” Klinke said, “they can roll that [sum] over into a new lease or get their money back [at end of term].” Many dealers cite reasons like these when attempting to explain a rising national interest in the LHPH model. Berger’s dealership partner had operated on the BHPH model since 1999, but never saw the growth it has since it switched to LHPH. “Year-over-year, I’ve seen a 73 percent jump in originations,” Berger said. “The primary reason for that is leasing.” THE CHALLENGES OF LHPH But before taking the plunge, you should also consider the challenges: • Expensive retraining process. • Requires more advanced dealer management software. • Vicarious liability issues – requires contingent liability insurance. • Less liquidity than BHPH. As advantageous as LHPH can be, it’s not a simple change for dealerships to make. LHPH deals require more advanced dealership management systems that can perform complex lease calculations like depreciation schedules and payments that include rental charge, depreciation and sales tax. Often, those programs cost a bit

THE NEXT BIG THING?

more than the basic deal software. Allen Lentsch, executive director of the Northland Independent Automobile Dealers Association – the NIADA affiliate for Minnesota and North Dakota – stressed that there is also some liability risk involved. “When you do LHPH, you own the title of the car, so you can be held responsible for things your customers do with it,” Lentsch said. Most notably, that includes causing an accident, a concept called vicarious liability. To protect themselves against vicarious liability and the risk of lawsuits, dealers must purchase contingent liability insurance, which many turnkey LHPH solutions provide for their dealers. The Graves Amendment, passed by Congress in 2005, was written to prevent unlimited vicarious liability lawsuits, but the law has been challenged frequently. And despite the Graves Amendment, there is still potential vicarious liability for dealers/lessors up to the state minimum financial responsibility limits. Because of that risk, it is incumbent on each dealer to make certain each lessee has proper insurance coverage. “We always make sure customers have insurance, just as much as we make sure they’re keeping up with payments,” Berger said. “We disable vehicles if [a customer’s] insurance lapses.” If you’re a BHPH dealer who sells loan portfolios to investors, you might have a tougher time drumming up interest in your LHPH leases, partly because the product is less commonly understood. “Some lenders are opening up to this,” Berger said. “From what we see, there are going to be more in the near future.” To dodge potential complications, many LHPH dealers use consulting organizations such as Northland Auto Enterprises (affiliated with the Northland IADA), LHPH, LLC and Lease It Own It to advise them on compliance issues and provide training materials, forms and access to specialized insurance. Those services can assume various levels of responsibility for a dealer’s compliance with lease regulations. LHPH, LLC even goes as far as to adopt the responsibilities of the lessor, shielding the dealership from some legal risks. Before switching, it’s a good idea to contact some LHPH services to learn the different approaches and costs associated with outsourcing LHPH implementation. Often, working with experts of some kind is the smartest way to go.

IMPLEMENTING LHPH If LHPH sounds like the right way forward for your business, there are a few things you should focus on right out of the gate. “I would recommend to any dealer to try to set the most accurate residual [value] possible,” Berger said. “If you do that, you’ll get that vehicle back and put that vehicle back on the road. [You] can get eight years out of it and lease it three times.” However, dealers should also remember that the IRS imposes limits on how low residual values can be set and still remain a “true lease.” Because dealers want to keep leased vehicles in good condition for the next lessee, high-maintenance autos are not recommended for an LHPH program. In addition to requiring lessees to purchase comprehensive coverage for their vehicles, many LHPH dealers try to package in a warranty or service agreement so they’re able to keep their vehicle in good shape while profiting from the reconditioning. Berger said the biggest challenge for the dealership he works with was persuading customers – and employees – to go along with the LHPH plan. “Your customers need to understand that the vehicle isn’t really an asset, it’s an expense for them,” Berger said. “At the end of [a three-year lease], how much will this vehicle actually be worth? “ Berger recalled employees at the dealership he works with taking about two months to get fully used to the terminology differences between BHPH and LHPH. “When you have people who have been selling cars for 16-17 years and all of a sudden you hand them a new model, of course there’s a transition,” he said. “But when they see how much this helps us sell cars, they really want to learn it.” In the end, for many dealers, the challenges involved in switching to the LHPH model are far outweighed by its rewards. “I’ve never seen anybody switch back,” Klinke said. “The benefits for the dealer, RFC and the customer are really compelling, and to switch back would just be a real headache for everybody.”

BY ALEX BRAUN

ALEX BRAUN IS MARKETING MANAGER FOR AUTOMANAGER, A PROVIDER OF INTEGRATED DEALER MANAGEMENT SOFTWARE, DEALER WEBSITES AND ONLINE VEHICLE MARKETING. HE CAN BE REACHED AT ALEX@ AUTOMANAGER.COM.

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NJIADA eTemp Tag Paper – TTP

Approved by the New Jersey Motor Vehicle Commission (NJMVC), the New Jersey Independent Automobile Dealers Association (NJIADA) has available for purchase the paper that meets all specifications of the NJMVC and NIC, the eTemp Tag vendor. To place an order, please complete the form below and return to NJIADA by fax to (201) 581-0226 or email to orders@NJIADA.com. Prices do not include sales tax or shipping. Contact us to become a NJIADA Member on NewJerseyIADA.org or call (855) 694-2324.

ORDERED BY:____________________________________________________ _______________________________________________________________________

DEALERSHIP:_____________________________________________________

Quantity

_______________________________________________________________________ 5-digit Dealer ID (MVC Requirement):_____________________________________

25 50 100 200 500 1000

Price NJIADA Member

$22.50 $38.70 $70.20 $123.30 $270.00 $495.00

Price - Non-member

$25.00 $43.00 $78.00 $137.00 $300.00 $550.00

SHIP TO: Street______________________________________________ City___________________________________State ___________ Zip Code________________________

PAYMENT INFORMATION:

Circle one:

VISA

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PAY PA L

AMERICAN EXPRESS

Credit Card # __________________________________________________ Exp. Date (Month/Year): ____/____ Cardholder Name: _______________________ Credit Card Billing Address: [ ] Same as Shipping Address Street_____________________________________________________ City______________________________________State _________Zip Code_________________ R e c e i p t ( e - m a i l o r f a x ) : ___________________________________________________________________________________________________________________________________ I A M A N A U T H O R I Z E D U S E R O F T H E A B O V E M E N T I O N E D C R E D I T C A R D A N D N J I A D A I S A U T H O R I Z E D T O C H A R G E T H I S C A R D T H E T O TA L A M O U N T D U E . C A R D H O L D E R S I G N AT U R E : _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ D AT E : _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

New Jersey Independent Automobile Dealers Association ∙ 115 Franklin Turnpike, Mahwah, NJ 07430 ∙ www.NewJerseyIADA.org ∙ (855) 694-2324

R U L E S A N D L AW S

KEEPING UP WITH COMPLIANCE

WHAT’S NEW

Have you kept up to date with the rules and laws that could affect your dealership? The start of the New Year is the perfect time for a quick compliance refresher, and the Bureau of Consumer Protection’s Automobiles site is a quick and comprehensive reference source. Designed with dealers in mind, the site has compiled a variety of resources discussing things like the Used Car Rule, labeling guidelines for alternative fueled vehicles, and how the Privacy Rule applies to auto dealers. Examples of dealer resources available on the site include: • A Dealer’s Guide to the Used Car Rule, which provides valuable compliance tips • Copies of the required Buyers Guide, in English and Spanish • Fillable versions of the English and Spanish Buyers Guides. V I S I T HT T P : / / B U S I N ES S .F T C .GOV / S EL EC T ED - I N D U S T R I ES / AU T O M O B I L ES FO R M ORE I NFO R M AT I O N . 25

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COMPLIANCE OVERDRIVE

Unintended Express Warranties: What Sales Staff Says Matters There’s no question that what a dealer says to a customer as part of the sales process matters. But it’s not just about what is said by the F&I department and what’s documented on a sales contract to finalize a deal. It’s also about what is being communicated outside, on the car lot. No matter how accurate and compliant your finance documentation is, if it disconnects from promises made during the sales process, you could be facing a problem. Though the law is different in every state, most have passed some version of the model Uniform Commercial Code (UCC) § 2-313. It provides that an express warranty is created by the seller when it makes a statement of fact or promise to the buyer relating to the goods, which becomes part of the basis of the bargain. The elements are pretty broad and cover a wide range of common statements a salesperson might make when discussing a vehicle with a potential buyer. For example, if a salesperson says to a potential buyer, “This car comes with a new spare tire,” as part of the sales discussion, the promise is probably an express warranty. What happens if the customer picks up his or her car after the sales contract is signed and a used spare tire is in the trunk? Contrary to what some might think, express warranties generally can’t be waived or disclaimed. UCC § 2-316 provides that words or conduct creating an express warranty and words or conduct disclaiming or limiting the warranty must be interpreted in a way that makes them consistent with each other. If that’s not possible, then the disclaimers or limitations will not be enforced. In short, you can’t give with one hand and take away with the other. If a salesperson promises the car comes with a new spare tire and a used one is delivered, a written warranty disclaimer will not help. Note that the express warranty doesn’t have to be in writing and it doesn’t require using the word “warranty.” As a result, what

the salesperson says can affect a transaction just as much as the documents produced by the F&I department. That’s why it’s important to know what your sales team is communicating and, more important, promising to customers. Sometimes the situation involves a simple mistake on the sales lot. A car could be presented as a six-cylinder when it’s actually an eight-cylinder. Or maybe the customer is told the car had two prior owners but there were really three. An uninformed or mistaken salesperson might also tell a customer the car has never been in an accident when in fact he or she doesn’t really know if it has or not. The new spare tire example may sound farfetched, but a dispute about whether new or used tires were delivered was just one of numerous inconsistencies between promises and documentation by the seller and what was delivered to the buyer in the California case of Sanchez v. Valencia ( 201 Cal. App. 4th 74 (2011)). The case is known for its decision on arbitration clauses and wasn’t about warranties. Still, it is a good example of how discussions on the lot can have a big effect on the dealer’s liability. Those kinds of express warrantycreating mistakes can be avoided by simply being careful about representations about vehicle features and facts. While services like CARFAX and certain branding of vehicle titles can help prevent some of those mistakes, or at least bring them to light before an agreement is finalized, dealers are still facing situations in which customers are unhappy because an expectation that played a key factor in their decision to buy has not been met. So what can you do to help prevent this from happening? Tell your sales staff that what they say matters and why: A salesperson is a liability risk if he or she thinks all promises are wiped out by a disclaimer in the sales contract. Train your staff on proper sales techniques: That includes arming them

with facts about the inventory available for sale. Encourage potential buyers to take a test drive: Also encourage them to take the vehicle to a mechanic or get a vehicle history report and other information about the car so they have the best opportunity to know the features, functionality and condition of the vehicle without relying on information from you. Some dealerships have installed Internet kiosks for customers to conduct on-thespot research. This is a complex area of law, littered with exceptions and replete with court decisions that are very fact-specific and findings that are not always consistent. For example, in some situations, disclaimers or waivers can be enforced if the sales contract includes a provision saying it is the all-inclusive and exclusive agreement covering the sale. Whether a given statement is a statement of fact or promise (creating an express warranty) or merely sales puffery (not an express warranty) is regularly litigated. Many case decisions exist and entire books have been written on the subject. The key point is that what your sales team says on the lot is important. If there is conflict between what was promised during the sale and what was delivered, the dealer has a problem. The problem could be characterized as the breach of an express warranty, but it could also be a fraudulent misrepresentation, unfair or deceptive act, etc. – keep in mind that 15 causes of action were alleged in the Sanchez case based on the tires and other inconsistencies. Creating consistency throughout the entire sales process and making sure the lines of communication between the sales staff and F&I team are open can help mitigate risk for your dealership, ultimately saving time and money.

BY CHIP ZYVOLOSKI

CHIP ZYVOLOSKI IS A SENIOR ATTORNEY FOR INDIRECT LENDING AT WOLTERS KLUWER FINANCIAL SERVICES. FOR MORE INFORMATION, VISIT WWW.WOLTERSKLUWERFS.COM/INDIRECT.

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New Jersey Dealer News Feb/Mar 13  

New Jersey Independent Automobile Dealers Association magazine for February and March 2013

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