Due Diligence Can Help Reduce Risks for Noncompliance
Most dealerships, regardless of size, location and types of vehicles sold, work with third-party service providers. These relationships can be mutually beneficial for the companies involved, but they can also lead to potential compliance issues if you’re not careful. With that in mind, it’s important for dealers to complete their due diligence to help ensure they are working with strong, reputable industry partners.
There are risks involved with all third-party relationships, whether they involve “back-end” products that dealers sell to buyers, such as credit life insurance, GAP insurance, extended warranties or service contracts, or “operational” products that dealers buy or license from third parties, such as consumer credit information, loan documents or software.
When it comes to products the dealer is reselling, the dealer needs to consider a number of questions regarding not only the product itself, but the vendor’s ability to offer the product. For example, in your state, GAP might be insurance if a loss results in the vendor paying the dealer (or finance company if it has been reassigned) the gap amount, but it might not be insurance if the dealer (or finance company it has been reassigned to) simply agrees to waive or forgive the amount of the gap.
How products and services are delivered may affect whether and how they are regulated. Make sure your vendor knows its products and services well enough to know how they are regulated in your state. Make sure your vendor is licensed to sell insurance if the products and services it provides are treated as insurance in your state.
It is also important for dealers and vendors to understand the responsibilities each is assuming and not assuming. For example, are you having the buyer sign a separate vendor agreement at closing? Or are you only receiving the money and the vendor later contracts directly with the buyer? When the buyer drives off the lot, is the vehicle covered by the vendor’s products and services, or is there a period of no coverage while the vendor reviews and considers the buyer’s application for products and services? The buyer may sue you if there is a misunderstanding about when coverage begins and he suffers a loss because of it. It’s critical to know how the vendor’s product works (and when coverage begins and ends) so that you can clearly communicate that information to your buyers.
Another aspect of vendor coordination is to make sure that your sales and financing documentation integrates well with the vendor’s products and services documentation. For example, products such as property insurance and GAP coverage will likely require certain disclosures or contract terms be provided to the consumer. The law may allow flexibility to give disclosures in the sales order, retail installment contract or vendor product agreement, but they need to be somewhere. You and your vendor might each think the other is providing the disclosures, resulting in failure to provide them at all. Make sure that between your documentation and your vendor’s, you have covered all required disclosures.
While these are all primarily concerns for the dealer’s F&I manager, it’s important to remember that third-party relationships also impact the sales team. For example, let’s say a dealer sells a car and at the point of sale, the customer also purchases an extended service plan. In the coming months, if something goes wrong and the customer makes a claim, the salesperson will likely be the first one to hear about it if the third-party provider fails to come through. The negative experience can impact the salesperson’s ability to sell to that customer in the future. It can also affect the overall reputation of the dealership itself (especially in a hyper-connected world of Internet message boards, social networking and online customer review/ratings sites).
To protect the dealership’s reputation, make sure you complete due diligence on your third-party vendors. Make sure they have stable management, knowledgeable and well-trained staff, solid financial backing, required licenses and authorizations in your state, comprehensive understanding of their products and services, comprehensive understanding of the laws and regulations that apply to their products and services, and make sure they have been in business long enough to suggest that they will be around in the years to come. If something goes wrong with the vendor’s performance, your buyers will blame you. So take steps to make sure third-party vendors match your dealership’s standards for high quality and integrity.
Vol. 8, Issue 9