The FTC and the State of Illinois recently announced a new collaboration. A collaboration you ask? Is it a new social media partnership or an advertising campaign? While these may have been quite amusing, unfortunately, it was the bad kind of collaboration for dealers—they filed an action against a large auto dealer group and announced a settlement with that group for an eye-popping $10 million. According to the FTC, this is a “record-setting monetary judgment for an FTC auto lending case.” The dealer group allegedly discriminated against Black customers by charging them more for financing and also allegedly slipped in “junk fees” for unwanted add-ons onto customers’ bills. You can read the FTC’s press release about this case here. The FTC is extremely detailed in its allegations in the complaint, and so it may also be worthwhile to actually read the entire complaint if you have the time. This article will further explore the allegations against the dealer defendants and discuss what dealers can learn from this case going forward.
The FTC’s Allegations
Unauthorized and Deceptive Add-on Charges
The FTC alleges that the dealer defendants inserted charges for add-on products (i.e., optional products) without obtaining consent from customers. The customers would be told that these products were required to purchase the vehicle and/or to obtain financing even though advertised prices for the vehicles would not include these products. In fact, in many instances, customers never agreed to, and sometimes specifically declined, to purchase these products. Many times, the dealerships would wait until the end of hours-long negotiations to sneak these fees into the sales documents, which would frequently be over 60 pages.
A survey cited in the Complaint showed that 83 percent of customers were charged these junk fees without authorization, or through deception. The FTC claims that the dealer defendants had charged over $70 million in unauthorized or unwanted add-on fees since 2017.
The FTC also alleges violations of the Equal Credit Opportunity Act (ECOA) against the dealer defendants. The FTC claims that the dealer defendants imposed higher costs on Black credit applicants on average than similarly situated non-Latino White applicants. Specifically, the dealer defendants allegedly maintained policies that allowed sales personnel, at their discretion, to markup consumer transactions. On average, Black finance customers were charged approximately $190 more in interest. Black customers were also charged approximately $99 more on average for similar add-on packages and products than similarly situated non-Latino White customers. The FTC claims that these disparities are “statistically significant and cannot be explained by factors related to underwriting risk or credit characteristics of the applicants.”
The FTC also alleged numerous advertising violations, including Regulation Z violations for failing to make proper finance disclosures when advertisements presented a “triggering term.” In one example cited by the FTC, the dealer defendants advertised “$90 down” without clearly and conspicuously disclosing the required finance disclosures anywhere on the advertisement.
What We Have Learned
Assumptive Sales and Other Deceptive Sales Practices Are on FTC’s Radar
Most of you probably already know what an assumptive sale is, even though you may not have directly heard of the term. For those who have not heard the term before, an assumptive sale is one where a contract is placed in front of a customer that already shows additional charges for items not agreed to or even discussed with the customer. In other words, the salesperson “assumed” that the customer wanted these items included in the sale. Thankfully, California has built-in requirements to counter this practice that you are (or should) already be following. California law prohibits dealers from negotiating the terms of a contract and then adding charges for goods or services without disclosing the charges to the customer and obtaining their consent prior to contract signing. [Vehicle Code § 11713.19]. As such, this law is among the reasons why dealers in California use a Pre-Contract Disclosure form. Since discrepancies on Pre-Contract Disclosure forms are regularly seen in our onsite audits, this should also serve as a reminder that a form is only useful and compliant if it is filled out correctly by properly trained staff.
Another derivative deceptive sales practice highlighted in the FTC action concerned how optional products were classified to customers. Remember, optional products are just that—optional! You need not look beyond the LAW 553 Retail Installment Sale Contract itself to confirm this. In fact, the lines for theft deterrent devices, surface protection products, services contracts, and debt cancellation agreements all have the word “optional” to start them. Accordingly, these products must not be conveyed to the consumer as mandatory. Doing so is a misrepresentation and an unfair business practice. Similarly, doing so can violate the Truth in Lending Act (TILA). Regulation Z defines a finance charge as “the cost of consumer credit as a dollar amount. It includes any charge directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction.” [12 CFR § 226.4]. If, for example, a dealer characterizes a service contract or GAP as “required in order to finance a vehicle,” the cost of the product can be characterized as an undisclosed (or hidden) finance charge, and therefore a TILA violation.
ECOA is Still in the Crosshairs
The ECOA made a resurgence last year in another FTC action against an auto dealer, and it seems that it is still on the FTC’s regulatory landscape. As you know, the ECOA prohibits credit discrimination based on race, color, religion, national origin, sex, marital status, age, or because someone gets public assistance. [12 CFR § 202.4]. I am sure that over the past year or two, many of you have received communications from your lenders regarding markup policies and compliance with the ECOA. While we could spend an entire article on this subject, in short, these communications from lenders and the ECOA claims in this action underscore the importance of having a Fair Credit Policy and a Fair Credit Compliance Program. We have, and continue to, recommend that dealers work with competent counsel to install such a policy and program. NADA members also have the benefit of access to NADA’s Fair Credit Compliance Policy & Program templates.
The FTC Always Seems to Include Advertising Violations in Dealership Actions
False and deceptive advertising claims have always been on the FTC’s radar. Accordingly, here are a couple of important reminders.
Regarding Regulation Z, remember that if a “triggering term” is advertised (i.e., the downpayment, number of payments, amount of any payment, or the amount of any finance charge), then the advertisement must disclose all of the following: 1) the amount or percentage of the downpayment; 2) the terms of repayment (i.e., XX monthly payments of $XXXX per month per $1,000 financed); and 3) the annual percentage rate (APR). [12 CFR § 226.24(c); Vehicle Code § 11713.16(d)].
Furthermore, always keep in mind that a dealer has a duty to sell a vehicle at or below the advertised price regardless of whether a specific customer has seen the advertisement. [Vehicle Code § 11713.1(e); 13 CCR § 260.04(b)]. Importantly, the advertised price of the vehicle should include all pre-loaded accessories or options on the vehicle. In other words, the price should reflect the vehicle as it sits on the lot at the time of the advertisement. Optional products that are not pre-loaded on the vehicle at the time of sale are just that—optional. They should not be included in the advertised price nor, as discussed above, should the customer be made to think they are required in order to purchase the vehicle.
The FTC is Still Active on the Enforcement Front Against Dealers
If you take away one thing from this article, it probably should be that the FTC continues to have a watchful eye on dealerships. And the FTC doesn’t just fixate on one specific violation or type of violation, but rather they attempt to build as broad of a case as possible, encompassing as many different violations as possible. While many dealers’ thoughts are quickly becoming preoccupied with the revisions to the Safeguards Rule, now is not the time to become so myopic that we forget our compliant selling and advertising practices.
If you have any questions regarding this, or any other situation that may arise in your sales or service departments, hotline clients are invited to contact us at (800) 785-2880 (then press “4” for hotline) or email@example.com. KPA is here to help you navigate these kinds of compliance issues and to remain on the good side of regulatory agencies.