The disparity between the cost of new vehicles versus used vehicles has been increasing over the past 10 years. The average price of a new vehicle in 2010 was $29,000 versus $19,000 for a used one, or a $10,000 difference. In 2020, the average new vehicle price is now $37,000 whereas the average used vehicle price is $20,000, or a $17,000 difference. Many thrifty consumers recognize this cost disparity, and the resulting increased monthly payment, which will strain their budgets. Consequently, they are purchasing more used vehicles now more than ever.
Dealers and F&I managers should ensure that they are addressing these distinct compliance needs.
With this changing sales dynamic, compliance issues regarding used vehicle sales are growing in significance. Dealers and F&I managers should ensure that they are addressing these distinct compliance needs.
In general, the same legal requirements pertain to retailing new and used vehicles. However, there are various distinctions between retailing these types of vehicles. This distinction may be developing in importance due to a number of factors. This article will address this growing phenomenon focusing on relevant legal standards, primary compliance challenges, and secondary legal risks.
What are the Relevant Legal Standards?
There are varying federal and state-specific statutes and regulations governing used vehicle sales. Generally, the all-encompassing law is the Unfair and Deceptive Trade Practices Act (UDTPA) on both the federal and state levels. This basic standard for the UDTPA is the following question: Does the dealer business practice have the tendency or capacity to mislead a consumer? Violating federal law, the Federal Trade Commission (FTC) Act, for example, could produce a penalty per violation of $43,280. State agencies could possibly apply harsher penalties. As with any compliance protocol, dealers should always consider the concept of “good, better, and best.” Best practices should be the goal, as potential liability will be better corralled.
There are various primary compliance challenges associated with used vehicle sales: the Used Car Buyers Guide, prior use and damage disclosures, warranty of title, certified pre-owned vehicles, “as is” sales and warranty requirements, and odometer tampering.
Used Car Buyers Guide
This guide is a 1985 creation of the FTC that was revised in 2017. (The term “buyer” is plural and, hence, there is no apostrophe as there would be if this form was similar to a buyer’s order.) It must be completed and displayed on every used vehicle offered for sale, except in Maine and Wisconsin. The language and format of the guide is draconian in nature and dealers must strictly follow its mandates. A 2018 FTC audit found only seven of 94 dealers compliant with this form. These non-compliant dealers, 87 of them, could have faced those fines of $43,280 per violation. State attorneys general are an even greater threat than the FTC, as they routinely monitor used vehicle lots for compliance. These are easy cases to make and also readily avoidable. Every dealer should have a protocol for these documents.
Prior Use and Damage Disclosures
In various states, it is deceptive to misrepresent or fail to disclose the nature of a car’s prior use, such as that it had been repossessed or was used as a demonstrator, executive car, taxicab, police car, driver’s education car, or rental vehicle. Misrepresenting the number or prior owners is a UDTPA violation. Affirmative misrepresentations are central to this problem, such as representing that a vehicle is new when, in fact, it has been previously owned. This practice occurs more frequently than one might expect.
Warranty of Title
The implied warranty of title applies in every sale unless effectively disclaimed. It guarantees that the seller has the legal right to transfer the goods, and they will be delivered free from liens or encumbrances that the buyer did not know about at the time of contracting. It is a UDTPA violation to sell a vehicle with a lien against it without disclosure. It can also be a UDTPA violation for a licensed dealer, even if the dealer is unaware of the lien.
Selling ‘Certified’ Pre-Owned Vehicles
The requirements for certified pre-owned vehicles are relatively simple. If posted as a “certified” pre-owned vehicle it must have a manufacturer or dealer warranty. A manufacturer’s representative must certify the vehicle if it is to comport with the manufacturer’s program. Dealers are also advised to document any additional inspections and cure outstanding recalls. Certain states, such as California and Minnesota, may have other state mandates.
“As Is” Sales and Warranty Requirements
Most states allow “as is” sales, meaning that a dealer can convey certain risks of the vehicle’s performance to the purchaser. F&I managers should be conversant with the law regarding what the terms "express warranty” and “implied warranty” mean, which is a convoluted subject.
Odometer tampering can occur in both new and used vehicle sales, but the crime is far more common in used vehicle sales. It is a federal felony and can be accompanied by monetary fines: possibly three years in jail and a $10,281 fine per incident pursuant to the Federal Odometer Act. It can also be prosecuted by state authorities. Dealer principals who are aware of such tampering can be held liable for the actions of dealer personnel. Remarkably, inexpensive devices can be purchased online to readily roll back digital odometers. As a corollary to prohibiting odometer tampering, the Federal Odometer Act mandates that dealers disclose the odometer reading.
Secondary Compliance Risks of Vehicle Sales
There is a laundry list of secondary legal issues that demarcate new vehicle versus used vehicle sales, which includes advertising, missing airbags, appraisals, gray market, recalls, licensing, maintaining records, disclaimers, insurance, Lemon Law vehicles, leasing, hurricane and water damaged vehicles, and salvage and rebuilt vehicles. Several of these topics raise unusual issues.
Replacing utilized airbags is an expensive repair. Certain vendors provide kits to cover the missing airbags and give the appearance that the airbags are extant. This is clearly a UDTPA violation and has been the subject of state attorney general investigations.
Gray Market Vehicles
Vehicles from Canada are not designed for the U.S. market and the manufacturer’s warranties may be void. Such vehicles also may fail to meet U.S. safety and environmental standards.
Dealers have a pronounced set of obligations as a consequence of being licensed. For example, in states such as California, prior vehicle use must be disclosed. Advertising standards are broadly construed for licensees and may impact used vehicle advertisements. Dealers must be keenly aware of the demands of state licensing, as they may impose broader obligations than one might surmise.
Lemon Law Vehicles
The process of laundering is the failure to disclose that the vehicle has been repurchased through a state Lemon Law program. Dealers need to know the Lemon Laws in their states and oblige them. A few states have used vehicle Lemon Laws such as Massachusetts.
Leasing used vehicles and “lease here, pay here” vehicles have grown in popularity. However, dealers need to assign a realistic residual value to avoid the allegation that the lease contract is a disguised retail installment sale contract.
Salvage and Rebuilt Vehicles
It can be legal to sell cars with a salvage title, but the salvage title must be clearly and conspicuously disclosed to the buyer. This must be an actual disclosure and not buried in the fine print. A vehicle with a salvage title may be rebranded as a rebuilt title. In most cases, a rebuilt title is only provided after the vehicle has been fixed and inspected by the jurisdiction that issues titles. If the repairs were satisfactory, the title is changed from "salvage" to "rebuilt" in order to reflect the repairs that were performed and note that the car is now fixed.
More than one franchise dealer has remarked that selling used vehicles is more lucrative than retailing new vehicles. In addition, other franchise dealers have said that selling used vehicles provides much greater control over the inventory and protocols. These observations may be true, but, as one can readily see, selling used vehicles presents distinct legal challenges not to be dismissed.
Govern yourselves accordingly.
Terrence J. O’Loughlin, J.D., M.B.A. is director of compliance at The Reynolds and Reynolds Company.