Randy Henrick Quoted in Automotive News: http://www.autonews.com/article/20170712/FINANCE_AND_INSURANCE/170719875/cfpb-arbitration-rule-draws-industry-ire
The federal Consumer Financial Protection Bureau (“CFPB”) published its final rule on consumer arbitration and class action waiver clauses this week. The rule, which would take effect 241 days after being published in the Federal Register, effectively prohibits the use of arbitration clauses that waive a consumer’s right to participate in a class action for essentially any consumer finance transaction including auto finance. The CFPB itself estimates the rule will cause $2.6 billion to $5.2 billion to defend class actions over the next five years.
Despite CFPB Director Richard Cordray’s fanfare in announcing the rule for the alleged protection of consumers (even though the CFPB’s own study revealed that it is class action plaintiffs’ lawyers who make windfalls on fees in class actions with class members getting little of the final ante), I’m betting the rule will never take effect.
First, the Congressional Review Act (“CRA”) gives the Congress an expedited procedure for a simple majority with no filibustering to overturn any federal administrative agency rule or regulation for a period of 60 in-session days. Once signed by the President, the rule is repealed and the agency cannot enact anything similar.
Congressional legislation to reign in the CFPB has also been active independently on Capitol Hill. Representative Hensarling’s bill would fund the CFPB through the Congressional appropriations process, and eliminate its UDAAP and supervisory authority, among other restrictions. To add a clause negating the arbitration rule would seem a fairly simple matter.
Even if Congress doesn’t act, the American Banker reported the U.S. Chamber of Commerce will sue the CFPB on the arbitration rule 241 days after Federal Register publication. They have a number of compelling legal and Constitutional arguments that likely would result in a judge granting a preliminary injunction against the rule while the Court sorts it out. Cordray’s tenure as CFPB Director expires three months thereafter and his successor nominated by President Trump could be expected to revoke the rule even while the preliminary injunction lawsuit was pending.
Already, auto industry and consumer finance lobbying groups have indicated they will lobby their Congress people to use the CRA or enact other legislation to undo the arbitration rule. They too could bring or join lawsuits against it that could delay its effect until after Cordray leaves. I think the likelihood of the rule surviving Corday are not very high.
So you have multiple constituents, a favorable Congress, and a number of avenues to seek a repeal or overturn the arbitration rule. There is no need for panic. A call to your House and Senate representatives and trade association activity yes. If we are diligent in opposition, it is very unlikely that this rule—arguably Cordray’s last ditch effort to get at auto dealers—will ever see the light of day.
Whether it’s the summer heat or the end of the model year, summer advertising for dealers can present risks of unfair, deceptive and abusive practices. In the current regulatory climate, where regulation by enforcement has all but replaced traditional rule-making via notice and comment from the public, literally any ad is at risk for an enforcement action by the FTC, CFPB, or an aggressive Attorney General looking to add to state coffers. Let’s take a look at the standards and some advertising that may not appear unfair or deceptive at first glance but which regulators have challenged and entered 20-year consent decrees with dealerships for the ad allegedly being unfair, deceptive or abusive.
Standards for Unlawful Ads
A deceptive ad is one that misleads or is likely to mislead (in the opinion of the regulator) a consumer acting reasonably. An unfair ad is one that is causes or is likely to cause (again in the opinion of the regulator) substantial injury to a consumer which the consumer cannot avoid and which Is not outweighed by benefits to competition (they never are). Unfair is broader than deceptive and can mean essentially anything the regulator doesn’t like.
The Dodd-Frank Act added a new category of “abusive’ practices which is any practice (including advertising) that takes advantage of a consumer’s lack of knowledge or understanding of a product or service, materially interferes with the consumer’s ability to understand or takes unreasonable advantage of the consumer’s reliance on a dealer to act in the consumer’s interests. The FTC categorizes “abusive” as a subset of ‘unfair” practices.
Fundamental Requirements for Advertising
Honesty and Availability of Advertised Terms
First and foremost, an ad must be truthful and not state terms that are not available to a substantial portion of a dealer’s customer base (unless so qualified) nor omit terms that would change the meaning or disqualify a meaningful number of customers. If a vehicle model is advertised at a low price or favorable credit terms, the number of such vehicles available and the conditions to obtaining the advertised price or terms must be clearly and conspicuously included. For example, “available to well-qualified customers approved for credit by XYZ Finance Company.” “15 available on these terms.” Remember also that if the terms are too favorable and only one or two are available, you are opening yourself up to a “bait and switch” unfair trade practice. Any variations must be clearly and conspicuously disclosed.
We have seen a number of ads offering guaranteed trade-in amounts or 120% of Kelley Blue BookÒ amount. What the ads don’t say is that few, if any, customers will get 120% of the book value after the dealer makes deductions for vehicle condition and otherwise. Same for the guaranteed trade-in amount (“push it, pull it, all trades accepted”) where the amount is indirectly added to the purchase price of the vehicle.
Because these ads misstate the customer benefit and are designed to lure customers into the showroom, regulators have found many of these types of promotions unfair or deceptive, especially if there are no terms and conditions or they are printed in such a small size to be virtually unreadable. Remember also that a disclosure can explain but never contradict the headline in an ad. If it does, it is considered an unfair trade practice.
For example, a dealer that advertised an attention-grabbing $99 per month lease of a new vehicle was hit by the FTC for a 20-year consent decree because in a small, nearly unreadable disclosure, it was stated that the $99 was only for the first two months. After that, the payments increased to $529 per month for the remaining 70 months of the 72-month term.
Failure to Advertise Truth in Lending or Consumer Leasing Act “Triggered Terms”
The federal Truth in Lending Act (and its implementing regulation, Regulation Z) and the Consumer Leasing Act (and its implementing regulation, Regulation M) require that if you advertise certain “triggering” terms, you must also clearly and conspicuously include “triggered terms.” Not advertising the required triggered terms is one of the first things the FTC looks at in evaluating dealer advertising.
For credit sales, if you advertise the monthly payment amount, the period for repayment, the down payment, or any finance charge, then you are required disclose the other of these terms (except for the finance charge) along with the Annual Percentage Rate or APR. Advertising the APR alone, without more, is not a triggering term.
So, if you advertise 0% APR for 72 months, the 72 months triggers the disclosure of the down payment and the amount of each monthly payment (this can be expressed as the cost per $1,000 financed) as well as any irregular payment amount such as a balloon payment at the end,
For leasing, if you advertise the amount of any up-front payments (e.g., $0 down is a triggering term for lases) or any lease payment amount, you must also disclose: the fact that the transaction is a lease; the total amount due at lease signing; the number and amount of scheduled payments; whether a security deposit is required; and whether the customer has any obligations at the back end of the lease (e.g., open-end lease). States add additional requirements such as the allowed mileage and excess mileage charge and the cost for the customer to purchase the vehicle at the end of the lease term.
So, if you advertise “Get it for $299 per month,” you have to clearly and conspicuously state this is a lease, state the total amount due at lease signing (all In except for tax, tags, and registration), disclose the number of payments (and the amount of any that vary from the advertised amount), and whether or not a security deposit is required. As noted, state law may require the additional disclosures noted above.
Remember you must also state who qualifies for the advertised terms (a minimum FICO or credit score is an excellent way to do this) and how many are available on these terms.
The triggering term that seems to trip dealers up the most is monthly payment amount. That is a triggering term for both credit sales and leases. If you are advertising a monthly payment amount, you need to clearly and conspicuously disclose the other triggered terms.
All the rules on advertising in print, television, and radio apply on the Internet, as do more. Required disclosures must be in close proximity to the applicable headlines and be clear and conspicuous in any device in which the ad can be seen or heard. Your agency has to size the ad so the disclosures are clear and conspicuous in an Apple watch as well as a PC screen. Best to build the disclosures in the claim to keep other disclosures minimal.
The FTC has said to avoid social media platforms that do not contain enough space for required disclosures. Advertising lease terms on Twitter would seem to present such a challenge.
Avoid pop-up disclosures because consumers block pop ups or don’t read them. Long scrolling paragraphs of text should also be avoided because consumers don’t read them either. Most consumers read a scrolling message like an “F,” reading maybe the first two or three lines, then scrolling down the left side and reading perhaps only another line or two. Also, different devices have different scrolling patterns, vertical or horizontal that make clear and conspicuous disclosures a challenge. The FTC has said that Internet disclosures should be in close proximity to the headline.
Regulators are similarly skeptical of disclosures contained in click-through linked pages from the ad. If a link is necessary because of legitimate space constraints, the link should indicate it is for additional financing terms and not be captioned “more information” or something equally generic. The link should take the consumer directly to a page containing only the financing disclosures and not to an Internet home page or sales page. A dealer should track the number of click-throughs and make adjustments necessary to get most consumers to exercise the click-through option. And “material” terms should never be contained in click-throughs. Triggered terms described above would most likely be considered to be material.
The FTC has an excellent guide for Internet advertising entitled “.com disclosures: How to Make Effective Disclosures in Digital Advertising.” It is available on the FTC’s Web site, www.ftc.gov.
Being honest, transparent, and disclosing triggered terms described above in plain English are your best general guidelines for advertising, Make sure disclosures are clear and conspicuous and appear on the screen or in a cadence for radio advertising that a reasonable consumer can understand. Are the prices advertised in your “model year end clearance” materially less than your everyday advertised prices? Is your “Labor Day Sales Spectacular” anything more than smoke and mirrors? Can the majority of your customers qualify for the headline-grabbing ads or favorable finance deals and are there sufficient numbers of vehicles (and not just fully-loaded, high end models) to meet the reasonably expected demand? These are just some of the issues regulators focus on when deciding to bring enforcement actions. Be aware and stay cool.
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