There is growing concern and uncertainty in the automotive industry regarding recent sanctions by the Federal Trade Commission and Consumer Financial Protection Bureau. As our industry labors to forecast the future actions and intent of these regulators, it is worthwhile to examine the central issue of what is considered false and deceptive (and/or abusive).

The legal definition of false and deceptive has evolved over the years, as all laws do. Currently, the FTC, in its role as a consumer protection agency, operates under the definition that an act or practice is false and deceptive if it will likely mislead a consumer, acting reasonably under the circumstances, to that consumer's detriment.

You don’t need to be a legal scholar to understand this definition. It basically paraphrases the Golden Rule that demands people treat others the way they would like to be treated. Simple enough. So why the great anxiety in our industry? Two reasons.

First, the automotive industry has a dubious reputation and, in some cases, deservedly so. Anyone reading this article likely knows a few stories about fraud committed on a consumer at a dealership. That said, it is understandable why some might fear these regulators will overreach, if given the chance, to compensate for past sins.

Second, the CFPB has already extended its reach by adding the term “abusive” to its version of the definition. This would seem to imply that even in the light of full disclosure, an act or practice could still be deemed abusive.

FTC Regulation

Under the FTC definition, full disclosure is a complete defense. If a consumer is fully advised of the costs and benefits of a product or service and makes a reasoned decision to purchase, there is no violation. We make buying decisions every day. If you sell something to someone in the same manner you would like to have something sold to you, I do not believe you will ever have a problem with the FTC.

Now, consider Hyundai and Kia. These automakers paid tens, if not hundreds, of millions of dollars as compensation for advertising inflated horsepower numbers for their vehicles. The people who purchased these cars were clearly misled. More recently, the FTC fined numerous dealers for misleading advertising. You cannot advertise a vehicle price of $6,000 and then bury an asterisk somewhere that states “with a $5,000 down payment.” Who honestly thinks any consumer would respond favorably to this tactic? The dealers who ran those ads (or perhaps the people who work for them) knew full well they were deceptive.

The companies in these two examples deserved to be sanctioned for their actions. Dealers who fully disclose the costs and benefits of their F&I products and then let the consumer make a reasoned buying decision do not.

CFPB Regulation

The CFPB’s addition of “abusive” to their definition of false and deceptive opens the door to wild speculation about just how far this regulator might expand its reach; especially considering there is no case law yet as to what constitutes “abusive” acts and practices. The ultimate fear is government regulation of profit margins. What is the threshold for how much profit an F&I product provider can make? Is 20 percent actionable? What about 50 percent or even 100 percent? At what point does it become “abusive”?

Despite its checkered past, I do not believe the automotive sector should be judged differently than almost any other industry. Take that cup of joe we buy each morning from the popular coffeehouse company. It has about a 2,900 percent markup. Restaurant wine? Anywhere between 100 and 400 percent. The phone charger that inevitably gets left in the hotel room comes in a little under 700 percent, and those flowers you just ordered for Mother’s Day represent more than a 200 percent markup.

Does anyone consider these industries abusive? Should the government take action against them? Of course not. The market determines what consumers are willing to pay for those products and services; even if the markup is insane. The customer can always walk out of Best Buy if the 2,500 percent markup on a big screen TV seems like a lot.

Problems arise when the seller does not give the buyer all of the relevant information necessary to make a reasoned decision or when the seller’s actions are seen as bordering on (or crossing over to) predatory. Again, there is a common misperception that the buyer does not have an equal negotiating position when dealing with a dealership or an F&I office. In fact, the consumer can always walk out. Nonetheless, the perception exists.

Recent actions by the FTC have focused on the training materials and sales collateral of product providers. I believe this is telling because it goes to intent. If an F&I product has to be sold with set word tracks or half-truths, what does it say about the product, the product provider or the dealer who is selling it? The regulator is going to assume the intent is to mislead the consumer and will look for ways to take action.

The CFPB has created a great way to accomplish this by adding the word “abusive” to the mix. Does any product provider want to be the pioneer who litigates the definition of abusive? Does the industry want to have that definition on the books? What if it’s tried in front of a judge whose best friend is Elizabeth Warren?

Government serves an important role in the regulation of business and protecting consumers is one of them. Usury laws are a good thing. Price fixing should be outlawed. However, assuming that consumers are not smart enough to make a reasoned buying decision without government intervention is a bridge too far. Unfortunately, that reality now exists, and change needs to happen.

Our industry must be proactive in reviewing its sales and marketing practices. We need to stop acting like our products don’t carry enough value to be sold transparently. After receiving a full description of a product’s value, if the consumer thinks the price is too high, they can attempt to negotiate it down or they can say, “No, thank you.”

In a world where consumers knowingly purchase products with high markups every day, I do not believe any government agency can come into the automotive space and say, “That’s too much.” Let’s not give them the opportunity by resorting to questionable sales tactics and materials.