The Federal Trade Commission (FTC) has recently indicated its displeasure with auto dealers and that is a sign that dealers may need to tidy up their compliance practices.
Recent FTC Consent Order
In May, the FTC entered into a $1.5 million consent order with a New York dealer. The FTC’s lawsuit alleged alleges the company jacked up what consumers had to pay by fabricating fees, inflating charges, and sneaking in stealth add-ons. The lawsuit also alleges the defendants discriminated against African American and Hispanic consumers by charging them higher financing markups and fees, in violation of the Equal Credit Opportunity Act (ECOA) and Regulation B.
According to the complaint, the dealer also overcharged consumers by dinging them for as much as $695 in documentation fees, an amount limited by New York law to no more than $75. In addition, the lawsuit alleges the defendants often gave consumers one figure for the agreed-upon total, but then inflated the price without the buyer’s knowledge in other documents – a practice the dealer’s employees called “air money.”
The FTC assessed the $1.5 million fine against both the dealership and its General Manager personally. The settlement also requires the company to implement a fair lending program that safeguards against discrimination. FTC oversight continues for 15 years. This case alone should serve as a reminder to other businesses that may be overdue for an ECOA compliance check.
FTC Study on Consumer Auto Sales and Financing Processes
But the FTC wasn’t done. In July, the FTC released a study conducted by its Bureau of Consumer Protection concerning auto dealers.[1] Based in large part on interviews with 38 consumers, the study found misleading auto advertising, loan falsification, “yo-yo” financing, deceptive add-on fees, and privacy and data security issues, among other practices.
Advertisements with misleading financing terms (as well as those with deceptive price and discount offers) remain a concern. Some consumers found out belatedly that they did not qualify for these advertised finance offers, that they could not combine a 0% APR offer with other incentives, or that the car they selected did not qualify for the advertised rate.
Negotiating price was another fact cited by the FTC. Customer confusion on the sales negotiating process or being compelled to only negotiate monthly payment were among the factors cited by the FTC study.
Particular criticism was directed at auto dealers’ f & I offices. Many consumers complained that vehicle prices and rebates negotiated by the salesperson were not honored by the f & i office. The FTC study concluded, “In financing negotiations, dealers should honor discounts or other terms sales personnel promise consumers, or sales personnel should not promise them. If there are limitations on the discounts or terms being offered, dealership representatives, whether on the sales floor or in the financing office, should explain those limitations clearly and consistently.”
Aftermarket products were another area of FTC criticism. The study characterized aftermarket (add-on) products as follows:
Most study participants’ contracts included charges for add-ons, but the interviews revealed consumers who were unaware which add-ons they had purchased, were unable to identify add-ons in the paperwork, were unclear what those add-ons included, and sometimes did not realize they had purchased any add-ons at all. Indeed, add-ons were the single greatest area of confusion observed in the study.
Many consumers were left with the impression that aftermarket products were required to get financing or that add-on products were free (payment packing). Undisclosed limitations of add-on products, the absence of the cost of add-on products, and the requirement of bundling add-on products in lieu of being able to buy products separately were also cited by the FTC.
The FTC study also criticized spot delivery practices.
Some participants in the qualitative study were surprised to learn that financing they expected to be final was not. Some participants expressed confusion about the concept of spot delivery. Some consumers had never heard the term, others knew of it but did not know what it meant, and a few thought it meant something that it doesn’t. For example, one consumer thought spot delivery was a cooling-off period. Some consumers were unaware that they had signed forms describing spot delivery and potential cancellation.
Finally, the report criticized how consumers are treated in the sales and finance process. Consumers are overwhelmed with documents and information that dealers pressured them into signing without reading. The process was so lengthy that it left them feeling overwhelmed or experiencing “buyer’s fatigue” by the time they reached the financing portion of the transaction.
What This Means for Auto Dealers
The FTC’s recent actions criticize many common practices of auto dealers and suggest enforcement actions for unfair and deceptive practices for these actions are coming. Also, in the consent decree, two Commissioners wrote statements supporting disparate impact credit discrimination cases against auto dealers. Disparate impact discrimination occurs when you can’t prove intentional discrimination but a statistical analysis shows that members of ECOA protected classes (race, color, religion, national origin, sex, marital status, age, or because you get public assistance) get worse credit terms than non-protected persons, typically white males.
It is recommended that dealers adopt the NADA fair credit policy and program[2] which provides a way to address disparate impact credit discrimination risk by using a standard dealer participation rate (markup of sell rate) and use it for every customer unless you can document a specific business justification for providing a lower rate.
Aftermarket product selling seems to be the biggest issue of the FTC study. You should charge the same price for your aftermarket products and follow the 300% rule—offer 100% of your products to 100% of your customers, 100% of the time. While using a menu is not required by any law, it is a best practice to show the customer considered the costs and benefits of each product or group of products and made an informed decision to accept or reject them.
Advertising is another FTC hot point. Try not to give disclosures in inconspicuous or unreadable mouse type and leave disclosures on the screen for a long enough time for consumers to read and comprehend them. This is especially true for disclaimers and disclosures that not all customers will qualify for an advertised rate or other advertised terms.
Negotiating price tactics were also criticized by the FTC. While there is no legal prohibition on negotiating payment amount, it can be susceptible to payment packing when room is left in the quoted monthly payment for other products to be included and represented to be free. State Attorneys General have been particularly aggressively in bringing enforcement actions against dealers for payment packing.
Again, in most states, spot deliveries are lawful. But make sure the customer understands that the agreed-upon financing is subject to being purchased by a lender and that, if not, either party can return the collateral (the vehicle and the trade-in along with any funds the customer has put down) and walk away. Be careful about pressuring a consumer into new, less favorable terms. Be sure to date the new contract the date it is signed and not backdated to the original deal. Also send the customer an adverse action notice because of a change to terms less favorable to the customer.
The FTC study is definitely worth a read. Now would be the time to look at your compliance in these and other areas and make certain you are not taking the risk of being on the FTC’s enforcement agenda given all the new scrutiny of auto dealers.
__________________
[1] A link to the FTC study is available at https://www.ftc.gov/reports/buckle-navigating-auto-sales-financing
[2] The NADA Fair Credit Policy and Program can be found at https://www.nada.org/faircredit/
Recent FTC Consent Order
In May, the FTC entered into a $1.5 million consent order with a New York dealer. The FTC’s lawsuit alleged alleges the company jacked up what consumers had to pay by fabricating fees, inflating charges, and sneaking in stealth add-ons. The lawsuit also alleges the defendants discriminated against African American and Hispanic consumers by charging them higher financing markups and fees, in violation of the Equal Credit Opportunity Act (ECOA) and Regulation B.
According to the complaint, the dealer also overcharged consumers by dinging them for as much as $695 in documentation fees, an amount limited by New York law to no more than $75. In addition, the lawsuit alleges the defendants often gave consumers one figure for the agreed-upon total, but then inflated the price without the buyer’s knowledge in other documents – a practice the dealer’s employees called “air money.”
The FTC assessed the $1.5 million fine against both the dealership and its General Manager personally. The settlement also requires the company to implement a fair lending program that safeguards against discrimination. FTC oversight continues for 15 years. This case alone should serve as a reminder to other businesses that may be overdue for an ECOA compliance check.
FTC Study on Consumer Auto Sales and Financing Processes
But the FTC wasn’t done. In July, the FTC released a study conducted by its Bureau of Consumer Protection concerning auto dealers.[1] Based in large part on interviews with 38 consumers, the study found misleading auto advertising, loan falsification, “yo-yo” financing, deceptive add-on fees, and privacy and data security issues, among other practices.
Advertisements with misleading financing terms (as well as those with deceptive price and discount offers) remain a concern. Some consumers found out belatedly that they did not qualify for these advertised finance offers, that they could not combine a 0% APR offer with other incentives, or that the car they selected did not qualify for the advertised rate.
Negotiating price was another fact cited by the FTC. Customer confusion on the sales negotiating process or being compelled to only negotiate monthly payment were among the factors cited by the FTC study.
Particular criticism was directed at auto dealers’ f & I offices. Many consumers complained that vehicle prices and rebates negotiated by the salesperson were not honored by the f & i office. The FTC study concluded, “In financing negotiations, dealers should honor discounts or other terms sales personnel promise consumers, or sales personnel should not promise them. If there are limitations on the discounts or terms being offered, dealership representatives, whether on the sales floor or in the financing office, should explain those limitations clearly and consistently.”
Aftermarket products were another area of FTC criticism. The study characterized aftermarket (add-on) products as follows:
Most study participants’ contracts included charges for add-ons, but the interviews revealed consumers who were unaware which add-ons they had purchased, were unable to identify add-ons in the paperwork, were unclear what those add-ons included, and sometimes did not realize they had purchased any add-ons at all. Indeed, add-ons were the single greatest area of confusion observed in the study.
Many consumers were left with the impression that aftermarket products were required to get financing or that add-on products were free (payment packing). Undisclosed limitations of add-on products, the absence of the cost of add-on products, and the requirement of bundling add-on products in lieu of being able to buy products separately were also cited by the FTC.
The FTC study also criticized spot delivery practices.
Some participants in the qualitative study were surprised to learn that financing they expected to be final was not. Some participants expressed confusion about the concept of spot delivery. Some consumers had never heard the term, others knew of it but did not know what it meant, and a few thought it meant something that it doesn’t. For example, one consumer thought spot delivery was a cooling-off period. Some consumers were unaware that they had signed forms describing spot delivery and potential cancellation.
Finally, the report criticized how consumers are treated in the sales and finance process. Consumers are overwhelmed with documents and information that dealers pressured them into signing without reading. The process was so lengthy that it left them feeling overwhelmed or experiencing “buyer’s fatigue” by the time they reached the financing portion of the transaction.
What This Means for Auto Dealers
The FTC’s recent actions criticize many common practices of auto dealers and suggest enforcement actions for unfair and deceptive practices for these actions are coming. Also, in the consent decree, two Commissioners wrote statements supporting disparate impact credit discrimination cases against auto dealers. Disparate impact discrimination occurs when you can’t prove intentional discrimination but a statistical analysis shows that members of ECOA protected classes (race, color, religion, national origin, sex, marital status, age, or because you get public assistance) get worse credit terms than non-protected persons, typically white males.
It is recommended that dealers adopt the NADA fair credit policy and program[2] which provides a way to address disparate impact credit discrimination risk by using a standard dealer participation rate (markup of sell rate) and use it for every customer unless you can document a specific business justification for providing a lower rate.
Aftermarket product selling seems to be the biggest issue of the FTC study. You should charge the same price for your aftermarket products and follow the 300% rule—offer 100% of your products to 100% of your customers, 100% of the time. While using a menu is not required by any law, it is a best practice to show the customer considered the costs and benefits of each product or group of products and made an informed decision to accept or reject them.
Advertising is another FTC hot point. Try not to give disclosures in inconspicuous or unreadable mouse type and leave disclosures on the screen for a long enough time for consumers to read and comprehend them. This is especially true for disclaimers and disclosures that not all customers will qualify for an advertised rate or other advertised terms.
Negotiating price tactics were also criticized by the FTC. While there is no legal prohibition on negotiating payment amount, it can be susceptible to payment packing when room is left in the quoted monthly payment for other products to be included and represented to be free. State Attorneys General have been particularly aggressively in bringing enforcement actions against dealers for payment packing.
Again, in most states, spot deliveries are lawful. But make sure the customer understands that the agreed-upon financing is subject to being purchased by a lender and that, if not, either party can return the collateral (the vehicle and the trade-in along with any funds the customer has put down) and walk away. Be careful about pressuring a consumer into new, less favorable terms. Be sure to date the new contract the date it is signed and not backdated to the original deal. Also send the customer an adverse action notice because of a change to terms less favorable to the customer.
The FTC study is definitely worth a read. Now would be the time to look at your compliance in these and other areas and make certain you are not taking the risk of being on the FTC’s enforcement agenda given all the new scrutiny of auto dealers.
__________________
[1] A link to the FTC study is available at https://www.ftc.gov/reports/buckle-navigating-auto-sales-financing
[2] The NADA Fair Credit Policy and Program can be found at https://www.nada.org/faircredit/
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