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    State Attorneys General Cracking Down on Dealer Advertising

    4/22/2019

    1 Comment

     
    State Attorneys General (“AGs”) are being very aggressive in going after auto dealer advertising.  State unfair and deceptive practice (“UDAP”) laws as well as Section 5 of the FTC Act allow for the recovery of damages, attorney’s fees, and restitution for wrongful conduct.  Let’s take a look at some of the activity from this year.

    Indiana

    We’ve all seen them and most of us have probably used them to attract customers.  Mailing pieces to consumers indicating that if a scratch-off number on the mailing matches a prize number on the mailing (and they all do), they have won a sweepstakes.  Large photos of prizes such as a new vehicle, a large amount of cash, a big screen color TV, and the like are blasted across the top.  All the customer has to do is come to the dealership to match their prize number against a board at the dealership to see what they have won.

    Only in small mouse type, frequently not on the same page, does the mailing indicate that no purchase is necessary and the odds of winning the prizes.  One of these pieces that I reviewed recently gave the odds of winning the vehicle and other displayed prizes at 1,000,00:1.  The odds of winning a $5 gas gift card were 1:999,996 meaning only four people in a million would win a large prize and all others the gift card.  Unclaimed prizes were not awarded and were deemed to be forfeited.   By making everyone a “winner” of a prize, I was told the sweepstakes eliminated the element of chance and thus was not an illegal lottery.   But that is not the end of the story.

    The Indiana AG recently saw a similar piece and apparently was not amused.

    Instead of suing individual dealers (over 56 of whom sent these pieces to over 2.1 million Indiana consumers), the AG sued the promotional advertising agency that designed the pieces.  The AG alleged an unfair trade practice under Indiana law which has the same standard for an unfair trade practice as does a violation of Section 5 of the FTC Act.

    The complaint alleges that all the mailings contained game pieces purporting to determine whether recipients had won prizes – which included such valuable items as vehicles, TVs or $1,000 in cash. Each mailing, however, contained identical game pieces with winning numbers. Thus, each mailing allegedly communicated to all recipients that they had won significant prizes when they had not. Recipients who went to dealerships to claim winnings were awarded “prizes” much less valuable than those advertised – typically such items as a $5 Walmart gift card, a scratch-off lottery ticket, a cheap MP3 player or a mail-in rebate coupon for $10 off the purchase of a turkey.

    The Indiana AG seeks a permanent injunction; $500 per consumer who was mailed a piece and went to a dealership; civil penalties under Indiana law; and reimbursement of the AG’s investigative and other costs.

    Pennsylvania

    Pennsylvania has established a mini-Consumer Financial Protection Bureau in its AG’s office and the Bureau of Consumer Protection has been taking dead aim on dealer advertising.

    In a recent action, the AG sued 20 dealers as part of an advertising sweep that targeted auto dealers and their salespeople who advertised vehicles for sale without disclosing that the sale was being conducted by a dealer, as is required under Pennsylvania law. All auto dealers in this sweep advertised on Craigslist as individual sellers, rather than as dealers, providing insufficient information to consumers viewing their postings.

    The Office of Attorney General has so far collected more than $10,500.00 in civil penalties and costs for the illegal advertisement of at least 178 vehicles to Pennsylvania consumers.  A few the lawsuits remain outstanding.

    New Jersey

    Another state that is establishing its own mini-Consumer Financial Protection Bureau sued (and put out of business) two buy-here-pay-here dealers and their owner personally for deceptive and unconscionable business practices which included deceptive advertising.

    Violations alleged that defendants sold high-mileage, used autos at grossly inflated prices with excessive down payments; financed the sales through in-house loans with high interest rates and “draconian” terms that created a high risk of default; and then repossessed and resold the vehicles over and over again to different consumers in a practice they refer to as “churning.”

    The AG also alleged that defendants engaged in deceptive advertising, failed to disclose the damage and/or required substantial repair and bodywork required for used motor vehicles, and failed to provide consumers with complete copies of signed sales documents, including financing agreements. 

    In addition to significant civil money penalties, the State is seeking to permanently close the two subject car dealerships and ban the owner from ever operating a car dealership again.  The case also seeks restitution for affected consumers.

    Ohio

    The Ohio AG felt it necessary to issue guidance to auto dealers describing advertising requirements under Ohio law and warning about the consequences of deceptive advertising.  Ohio also allows consumers to sue auto dealers under a private right of action for triple their damages and their attorneys’ fees.

    Among other things, an advertised purchase price must include the total amount that a consumer is required to pay the dealer pursuant to the contract. Only tax, title, and registration fees and documentary service changes may be excluded, and the exclusions must be referenced in a disclosure. If a rebate, discount, or price reduction is not available to all consumers, the amount may not be subtracted to arrive at an advertised price.

    Massachusetts and Delaware

    These two states jointly settled an action with Exeter Finance for unfair trade practices in providing subprime auto financing to dealer customers.  Exeter was fined $6 million, $5.5 million by the Massachusetts AG and $500,000 by the Delaware AG.  As part of the settlement, Exeter will waive deficiency balances and other post-default charges on some of its loans and ask major credit reporting agencies to delete trade lines associated with the accounts of affected borrowers.

    Exeter, a subprime lender, was accused of facilitating the origination of auto financing in Massachusetts and Delaware that the company knew or should have known were unfair and in violation of the state consumer protection laws. Officials explained courts have held that lending is unlawful under the state UDAP statutes if finance companies do not have a basis for believing that borrowers will be able to repay their loans in normal course. 

    Previously, the Massachusetts AG settled with Santander Bank in the sum of $22 million for similar conduct.

    While directed at the lender, the allegations of putting customers into financing a reasonable dealer knows they cannot afford (an example being an unwound spot deal with worse credit terms for the customer) could apply to dealers as well.

    What This Means for Auto  Dealers

    These are not the only states that have shown aggressive policing of dealer ads.  Many states are establishing watchdog groups focusing on dealer ads that in the past may have been on the bubble such as the sweepstakes ads.  And the FTC too has identified auto dealer advertising as a priority for 2019.

    Here are ten best practices for all dealer ads:

    • Make sure your ads contain all triggered terms required by federal Regulations Z (credit sales) and Regulation M (leases);
     
    • Make sure your ads are accurate and for the advertised price, omit only tax, title, registration and the document fee permitted by your state’s law.  Indicate in a conspicuous disclosure that those items are extra;
     
    • Don’t advertise terms that most of your customer base will not qualify for such as price reductions or low APRs for customers with high credit scores;
     
    • Make sure you have enough of the advertised vehicles to meet the reasonably anticipated consumer demand.  If not, give the exact number available.  A very low number of such vehicles may be interpreted as a “bait and switch” ad;
     
    • Many states require you to give the advertised price to any qualified customer even if the customer has not seen the ad;
     
    • Don’t stack rebates especially unconditional rebates (available to everyone) with conditional rebates (available only to certain groups like recent graduates, military or first responders, or returning customers), Itemize the rebates you want to advertise;
     
    • Don’t put disclosures in mouse type, text that bleeds into the background, or are not in proximity to the headine the disclosure explains.  Putting a disclosure on a different page from the headline is not recommended;
     
    • Be careful with sweepstakes ads.  They are easily shown to be come-ons designed to get the customer into the showroom with no real possibility of winning a meaningful prize.  See Indiana above;
     
    • For Internet ads, place the disclosures in close proximity to the headline, don’t use pop-up disclosures unless absolutely necessary, make disclosures clear and conspicuous and put an expiration date on every Internet ad; and
     
    • Don’t bury Internet disclosures in long columns of text and be sure the disclosures are optimized to be clear and conspicuous on any device that can access them.

    Expect more regulatory enforcement actions and more lawsuits involving dealer advertising.

    1 Comment

    CFPB Finds Unfair and Deceptive Practices in Not Crediting Consumers with Ancillary Products Rebates

    4/5/2019

    1 Comment

     
    The Consumer Financial Protection Bureau ("CFPB")  indicated in recent Supervisory Highlights that is examining “unfair and deceptive practices” regarding rebates for certain ancillary products after examining the behavior by at least one captive finance company.

    The CFPB found that vehicle buyers sometimes also finance the purchase of ancillary products such as an extended service contract when they enter into a retail installment sales contract for a vehicle. Then as finance companies know, if the contract holder later experiences a total loss or repossession, the servicer or contract holder may cancel the ancillary products in order to obtain pro-rated rebates of the premium amounts for the unused portion of the products.


    In these situations, the Bureau acknowledged the rebate is payable first to the servicer to cover any deficiency balance and then to the borrower.
     
    “Generally, the servicer contractually reserves the right to request the rebate without the borrower’s participation, although it does not obligate itself to do so. The borrower also retains a right to request the rebate,” the CFPB said.


    During its examinations of extended warranty products and policies used by this unnamed captive, the CFPB found the amount of a potential rebate for the products depended on the number of miles driven. The Bureau said its examiners observed instances where one or more servicers used the wrong mileage amounts to calculate the rebate for extended service contract cancellations.
    “For some borrowers who financed used vehicles, the servicers applied the total number of miles the car had been driven to calculate rebates,” the CFPB said. “However, the servicer(s) should have applied the net number of miles driven since the borrower purchased the automobile.”


    The CFPB concluded that “The miscalculation reduced the rebate available to certain borrowers and led to deficiency balances that were higher by hundreds of dollars. The servicer(s) then attempted to collect the deficiency balances.”


    The CFPB stated that “One or more examinations found that servicer attempts to collect miscalculated deficiency balances were unfair   Collecting inaccurately inflated deficiency balances caused or was likely to cause substantial injury to consumers. And these borrowers could not reasonably have avoided collection attempts on inaccurate balances because they were uninvolved in the servicer’s calculation process.”  These findings are the predicate for an unfair and deceptive practices action.


    The CFPB concluded that the injury of this activity is not outweighed by  countervailing benefits to consumers or competition. For example, officials emphasized the additional expense the servicers would incur to train staff or service providers to make certain that refund calculations are correct would not outweigh the substantial injury to consumers.


    In response to its findings, the CFPB said the finance companies conducted reviews to identify and remediate affected consumers based on the mileage they drove before the repossession or total loss of their vehicles. The Bureau added that the finance companies also began to verify mileage calculations directly with the issuers of the products subject to rebate.


    Additionally, the CFPB indicated its examiners observed instances where one or more servicers did not request rebates for eligible ancillary products after a repossession or a total loss. The finance company then sent these consumers deficiency notices listing a final deficiency balance claiming to net out available “total credits/rebates,” including insurance and other rebates. The notices also stated that future additional rebates may affect the amount of the surplus or deficiency, but that “at this time, we are not aware of any such charges.”  This behavior too resulted in overstating deficiencies.


    The CFPB said that the servicers’ records contained information that it had not sought the eligible rebates. Examinations showed that the average unclaimed rebate was roughly $1,700.


    “One or more examinations identified these communications as a deceptive act or practice. The deficiency notices misled borrowers because it created the net impression that the deficiency balance reflected a setoff of all eligible ancillary-product rebates, when in fact, the servicers’ systems showed that it had not sought one or more eligible rebates,” the CFPB said.


    The CFPB further concluded that “It was reasonable for consumers to interpret this deficiency balance as reflecting any eligible rebates because the servicers were both contractually entitled and financially incentivized to seek and apply eligible rebates to the deficiency balance. And the misrepresentation was material to consumers because they may have pursued rebates on their own had the servicers not represented that there were not additional rebates available.”


    “In response to these findings, the servicers conducted reviews to identify and remediate affected borrowers. The servicers also changed deficiency notices to clarify the status of eligible ancillary product rebates,” the CFPB concluded.


    It is critical that consumer deficiencies first take into consideration rebates from ancillary products based on the net mileage driven by the consumer at the time of repossession or total loss.  Failing to credit the consumer with the net rebates can lead to an unfair and deceptive trade practice by the CFPB or FTC.    
     

    1 Comment

      Author

      Randy Henrick is a leading auto industry compliance consultant. This article is not intended as legal or compliance advice due to the unique nature of a dealer's situation in each state. Randy's articles do provide issues and best practices that you may want to discuss with your attorney or compliance advisor for possible adoption in your dealership. Email Randy at AutoDealerCompliance@gmail.com
      Follow us on Twitter @randyh44

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