The famous Green Bay Packers coach Vince Lombardi once said, “the quality of a person’s life is in direct proportion to their commitment to excellence.” I think this quote translates well to the dealer world especially when it comes to compliance. Dealers that commit to excellence and a culture of compliance should expect to have better and more enduring customer relationships as well as superior capabilities to deal with regulatory agency audits and investigations (if not avoiding them in the first place). Dealers can commit to this culture of compliance by staying on top of recent regulatory actions, knowing exactly what these agencies are looking for, taking preemptive measures to prevent them from having a target on their backs for these agencies, and by making sure to regularly review and audit their procedures. Part 1 of this article will explore some recent regulatory activities by the DMV and BAR, discuss what these agencies were specifically looking at, and will give dealers helpful reminders on proper compliance procedures. Part 2 of this article (coming out shortly) will focus on an FTC action from the end of last year.
Since the end of last year, we have heard that the DMV has increased its auditing activities. In fact, a number of our dealers have informed us that the DMV has recently stopped by for a “surprise” audit. While we heard that the DMV auditors have been looking at a number of potential compliance issues during these audits, a few issues have been flagged repeatedly by the DMV. Below are the three most prevalent issues that the DMV has seemed to focus on during these audits based on the information we were provided.
Intermingling New and Used Inventory
The DMV has been going through sales lots with a fine-tooth comb as of late. The DMV, as in years past, has been critical of vehicle display on the sales lot, specifically when in comes to intermingling used vehicles with new vehicles. Their justification is that such intermingling is an attempt to mislead or confuse customers as to the used status of a vehicle.
Accordingly, when displaying vehicles on your lot, remember to clearly segregate the new vehicles from the used vehicles. Also, when describing used vehicles, be it to a customer or in an advertisement, you must clearly and conspicuously state that the vehicles are “used,” “pre-owned,” or some other similar description. Also, a quick word of caution regarding demonstrators. Remember that demos, by law, are “used” vehicles in California. [Vehicle Code § 665]. Therefore, demos must be displayed with other used vehicles on the lot. Theoretically, if your dealership has the space, you could have demonstrators separated from both new and used vehicles. However, under no circumstances should demos be referred to as “new” or be displayed with new vehicles. Because of these DMV actions, now is as good a time as any to audit your lots and make sure that there is no intermingling of inventory and that your demonstrator vehicles are not grouped with the new vehicles.
Failure to Smog Vehicles
The DMV has also been cracking down on dealers for failing to smog vehicles when required. So, what are the requirements, you ask? Well, upon initial registration and upon transfer of ownership and registration, the DMV requires a valid certificate of compliance or non-compliance. As a general rule, a smog certificate is required on original or transfer transactions for gasoline-powered 1976 and newer year-model vehicles and diesel-powered 1998 and newer year-model vehicles with a gross vehicle weight rating of 14,000 pounds or less. Remember, however, the critical exemption that gas-powered California-registered vehicles four model-years old or newer are exempt from the transfer smog requirements. [Vehicle Code § 4000.1(d)(7)]. Also remember that all non-resident (i.e., out-of-state registered) vehicles must be smogged. [Vehicle Code §§ 4000.1, 4000.2, 4000.3].
So then what are a dealer’s requirements with respect to smog, and when do they arise? Per Health and Safety Code section 44015(f), “…a licensed motor vehicle dealer shall be responsible for having a smog check inspection performed on, and a certificate of compliance or noncompliance issued for, every motor vehicle offered for retail sale.” (Emphasis added). Pay specific attention to the language at the end of the quotation. The statute is written in a way that contemplates that a dealer must smog a vehicle prior to even offering it for sale, and not just prior to selling the vehicle to a customer. If you needed any more statutory language as proof: “[N]o person shall sell, or offer or deliver for sale … a new or used motor vehicle which is not in compliance with…the rules and regulations of the Air Resources Board…” [Vehicle Code § 24007(b)(1)] (Emphasis added.) Accordingly, it would be inappropriate for a dealer to show or even advertise for sale an unsmogged vehicle.
So, what type of penalties can a dealer face for failing to smog vehicles? First and foremost, a dealer license can be suspended or revoked for failing to abide by the smog requirements. [See, e.g., Vehicle Code § 11705(a)]. Dealers can face a variety of different monetary fines as well. Monetary fines can range from $15-$300 for offering a vehicle for sale that was not smogged (per violation) and from $50-$750 for delivering a vehicle with non-compliant smog equipment (per violation). Perhaps most staggering is that any person who violates any rule or regulation, emission limitation, permit condition, or “duty…to…carry out inspection activities” can be subject to a civil penalty of up to $10,000 for each day the violation occurs. [Health & Safety Code § 39674(b)(1)].
Thus, dealers must ensure that they do not sell or offer for sale unsmogged vehicles. Also, dealers must remember to check existing inventory at the end of every year to see if any vehicles have “turned over” (i.e., fallen out of the four model-year or less exemption). This is crucial step that is frequently missed by dealers, who then become victim to the situation where the vehicle is sold to a customer without being smogged. To avoid this, you should go through your existing inventory now, if you did not already at the beginning of the year. Some dealers have implemented the blanket policy of smogging every vehicle that they take into inventory. While doing so can seem excessive, it will prevent vehicles from falling through the cracks (either via being “turned over” or out-of-state vehicles). Just remember that if your dealer decides to do this, you can only charge the customer if the smog was required to transfer the vehicle. Regardless of what your dealer’s smog policies are, take this time to review them and make sure they are being followed.
Failure to Run NMVTIS/No Evidence of NMVTIS in the Deal
Finally, the DMV has been on the lookout for evidence that dealers have been properly obtaining NMVTIS reports on used vehicles. Recall that “[a] dealer shall not display or offer for sale at retail a used vehicle…unless the dealer first obtains a NMVTIS vehicle history report from a NMVTIS data provider for the vehicle identification number of the vehicle.” [Vehicle Code § 11713.26(a)]. If a “hit” appears on the record, most dealers will decide to wholesale the vehicle at that point. However, if a dealer decides to retail the vehicle, a warning notice must be posted on the vehicle and a copy of the NMVTIS report must be distributed to the purchaser upon request prior to sale. Notice that the language in the statute is very similar to the smog requirement discussed above—it is a violation even to offer a used vehicle for sale without first obtaining an NMVTIS report.
Because of the requirement to obtain an NMVTIS report on all used vehicles, it is a best practice for dealers to obtain an NMVTIS report on a used vehicle at the time of acquisition. Dealers should also keep a copy of that report in the deal jacket.
Bureau of Automotive Repair (BAR) Actions
The BAR appears to be in on the fun as well, as reports of BAR audits have been coming in with more frequency beginning this year. The major issue that the BAR appears to be focusing on is the overall failure for automotive repair dealers (ARDs) to obtain customer authorization. ARDs, for the most part, tend to understand that major repairs and services must be recorded and authorized on an estimate. However, the BAR has been cracking down on “podding,” or using a machine to pull codes from a vehicle as a pre-estimate diagnostic tool. Although this action may seem like an innocent and simple courtesy to a customer (after all, one needs to know what is wrong with a vehicle in order to provide a clear estimate of what it will cost to fix it), pulling codes is technically a diagnostic action for which the BAR requires properly documented authorization.
Remember, in addition to requiring that the ARD document the actual repair services performed on a customer’s vehicle, BAR expects pre-repair service diagnostic services, complementary services (such as multipoint inspections), and services that may not be related to the requested repairs, such as checking and inflating the vehicle’s tires, to be documented on an estimate and authorized by the customer prior to commencing work as well. The fact that a service is performed at no cost to the customer does not negate the need for customer authorization to perform the service. Dealers should pay close attention to their service writing procedures and should seriously consider reviewing and auditing these practices in light of the recent BAR activities.
We know that these times are hard, and everyone everywhere has been affected by this global pandemic. We are all in this together, and this too shall pass. Hotline clients are invited to contact us at (800) 785-2880 (then press “4” for hotline) or firstname.lastname@example.org. We are here to answer any questions you may have.