A number of years ago, a stock brokerage firm’s advertisement had the tag line similar to the following: “When Abra and Cadabra speaks, people listen!” That statement certainly applies to organizations such as the Federal Trade Commission (FTC), American Bar Association (ABA), Consumer Federation of America (CFA), and the National Consumer Law Center (NCLC), when they opine about alleged questionable practices in the car business.
The great reality and comfort for the industry is that it can steel itself from all these risks.
All four of these organizations have issued reports, statements, and recommendations in the past year and a half targeting dealer practices. Dealers and their trade associations should take note as to what these organizations are asserting as their recommendations are similar. If implemented, these recommendations could cost the industry millions of dollars in compliance risk and administration. They should be taken quite seriously.
In chronological order, these are the reports, statements, and recommendations. Dealers should consider what they portend.
Time to Stop Racing Cars: The Role of Race and Ethnicity in Buying and Using a Car – NCLC
It is alleged, in this report, that certain demographic groups pay more for vehicles than other groups or, for that matter, cannot afford vehicles. The report states that certain races and ethnicities confront more challenges than other such groups regarding financing, pricing, voluntary protection product pricing, negotiations, and insurance rates. In order to facilitate more equitable results, this report issued a number of recommendations to create “…a more consistent and transparent marketplace that would not only benefit consumers of color, but all marketplace participants, including car dealers, finance entities, and insurers that want to compete fairly and openly on price and quality on a level playing field.” These recommendations, in the terms used in the report, include:
- Ban dealer interest rate markups by statute or rulemaking. Any compensation paid to the dealer as part of the financing process should not be based on the interest rate or other financing terms, and should be consistently applied to all transactions.
- Amend the Equal Credit Opportunity Act (ECOA) regulations (Regulation B) to enable and require the collection and analysis of race and ethnicity data for auto financing transactions.
- Prohibit discrimination in the pricing of goods and services. The ECOA prohibits discrimination in the terms of credit, but there is no similar protection for the pricing of goods and services.
- Increase enforcement of the ECOA and state fair lending laws.
- Increase enforcement against general abuses in the sale and financing of cars. Given the evidence of discrimination in the sale and finance of cars, it is likely that many other abuses, from yo-yo sales to failure to pay off existing liens, are more likely to affect people of color. Stepped-up enforcement against all abuses in the sale and finance of cars could help address disparities and level the playing field for everyone.
- Take action on insurance rate setting.
These recommendations, if enacted, would provide a fertile setting for potential disparate impact enforcement actions and class actions. In addition, dealers would lose money in assisting consumers in financing and leasing vehicles as there would be no reserve. Finally, increased enforcement always increases the cost of compliance and can do so, significantly. The FTC cites this report. It would appear that the FTC might agree with these conclusions.
Statement of Commissioner Rebecca Kelly Slaughter: In the Matter of Liberty Chevrolet, Inc. d/b/a Bronx Honda Commission, File No. 1623238, May 27, 2020
Commissioner Slaughter’s comments speak for themselves. Here are a few of the more telling quotes:
- “The automobile-financing market in the United States is profoundly broken.”
- “In my view, far-reaching structural reform to the automobile-financing and -sales markets is long overdue and urgently needed. First and foremost, the Commission can start by initiating a rulemaking, under the Dodd-Frank Act, to regulate dealer markup.”
- “On that score, dealer markup has got to go. And I would like to help.”
In other words, eliminate the reserve as a means to combat discrimination, a previous view held by the Consumer Financial Protection Bureau.
Consumer Federation of America’s (CFA) 2019 Consumer Complaint Survey Report: Top Ten Complaints
On July 27, 2020, the CFA issued a press release regarding the nation’s most frequent consumer complaints. Once again, complaints about the car business were the most frequent, based upon reports from over 30 consumer protection agencies. This annual report has posted the car business in the number one position, in numbers of complaints, for a number of years. The CFA press release stated the following complaints most frequently cited as the top problems reported to state and local consumer agencies last year.
- Auto: Misrepresentations in advertising or sales of new and used cars, deceptive financing practices, defective vehicles, faulty repairs, car leasing and rentals, towing disputes.
The problem with this survey is that the car business is comprised of many industries and is, simply, not monolithic. Franchise dealers, used car dealers, BHPH dealers, rental car agencies, wreckers, and repair shops are all different in their products and services. Aggregating complaints from such dissimilar businesses produces a disingenuous result.
The CFA Survey provided recommendations for consumers that dealers certainly can accommodate. These recommendations include having a vehicle evaluated by the consumer’s mechanic before deciding to purchase it, requesting a vehicle history, and getting all promises in writing. Cooperating with consumers in these several manners, and others, of course, provides legal protection. Moreover, it improves the relationship and reputation of dealers. These practices should be part of a dealer’s compliance protocol.
FTC’s Buckle Up: Navigating Auto Sales and Financing
The FTC has been enforcing the Federal Trade Commission Act since 1914, the infancy of the car business. It has focused considerable time and resources in policing dealer practices, which includes numerous prosecutions. The FTC often cooperates with state attorneys general offices in prosecuting dealers. Consequently, when the FTC highlights dealer practices it considers questionable, dealers should expect that these are the issues they need to evaluate in their own operations. These issues, identified in this report, are the targets for enforcement:
- Advertising: The favorite issue for every consumer protection agency is advertising. Every dealer should understand that advertising deceptive prices and misleading financing terms are subjects of some of the most common agency prosecutions. Dealers should be providing clear and conspicuous disclosures, and limitations of their offers, when appropriate. For regulators, advertising cases are also the easiest cases to advance. It is a form of Russian roulette to advertise a vehicle falsely.
- Negotiating a Price: The FTC advocates for dealers to present the out the door price early in the negotiation, and before any discussion of financing alternatives, to clarify the transaction. It is asserted, that since the transaction is complex, this form of presentation would be helpful. Dealers may be able to accommodate this suggestion depending upon their sales presentation approach without too much difficulty.
- Negotiating Financing Terms: The FTC laments that consumers are not conversant regarding interest rates or the fact that they can negotiate them. The report encourages consumers to become educated about these matters. There is a slight obligation for dealers to educate consumers about these issues. Dealers should, however, support the NADA’s AWARE program (Americans Well-informed on Automobile Retailing Economics).
- Ancillary Products and Services (Add-Ons): There is a seemingly veiled threat regarding selling voluntary protection products. The FTC asserts that consumers do not understand these products and the related pricing. As with understanding interest rates, consumers may not study these products before purchasing them as part of the transaction. Consequently, the FTC warns dealers to present them carefully. Is the implication that dealers must educate consumers about these products including pricing? Deception is always actionable, but just so long as dealers do not mislead consumers about these products, there should not be much potential for liability. Dealers should implement the NADA’s Model Dealership Voluntary Protection Products Policy as part of their protocols. However, the CFPB, FTC, and state agencies will be revisiting this issue.
- Reviewing and Signing the Documents: The closing or signing ceremony, where all the documents are signed, is a lengthy process and can be complex. The FTC recognizes this fact. It also recognizes that consumers complain that this process is rushed and some consumers are concerned that the transaction is not binding. No one likes paperwork, except attorneys, but dealers may wish to reduce the anguish associated with the signing ceremony by intentionally providing time and full cooperation in this process. It may lead to a greater Consumer Satisfaction Index score and reduced potential liability.
- Renegotiation of Financing: The FTC acknowledges that failed spot deliveries exist. It recommends that dealers should not force consumers to re-contract for the vehicle and should return the consumer to his legal position before he took possession of the vehicle in these circumstances. Moreover, the FTC recommends that dealers employ a spot delivery process that is fully documented, so that consumers understand the potential of the retail installment sale contract or lease not being successfully assigned. Dealers should follow these recommendations to avoid possible liability.
The Great Reality and Comfort
The great reality and comfort for the industry is that it can steel itself from all these risks. If dealers would only observe a modicum of compliance protocols, they can contain almost all these perils. Dealers and their trade organizations are a formidable political force and should be lobbying against these proposals. It is evident, as well, that several of these proposals and remarks can be rebutted with dealer-led education.
GOVERN YOURSELVES ACCORDINGLY.
Terrence J. O’Loughlin, J.D., M.B.A., is director of compliance for The Reynolds and Reynolds Company.