FTC fires warning shot throughout retail automotive industry

Summary: On Friday, March 13, the Federal Trade Commission announced that it sent 97 dealerships warning letters about advertising and sales practices. This was the warning shot to the auto industry that needs to be heard — and not just by those 97 dealerships. The FTC, in its letter, states that advertisements are deceptive and in violation of the FTC Act if the price of a vehicle is not the “offering price” from the CARS Rule. To comply with the FTC Act, the advertised price of a vehicle should be the total price the consumer is expected to pay, which shall include all fees and charges (i.e., processing fee and freight) and only excludes governmental fees (i.e, tags, title and taxes):

“The FTC is committed to ensuring that the price consumers see in advertising is the actual price they will pay (aside from required government charges, like taxes). This is what the FTC Act, which prohibits deceptive or unfair acts or practices, requires.”

Dealers need to take this warning and move quickly to change their advertising. For example: A screenshot of an improper advertisement, or selling the vehicle at a price over the advertisement is a “gotcha” by a regulator, consumer, or even another dealer. Dealers, on their own websites as well as third party sites, need to follow the roadmap of proper advertising to avoid very costly advertising violations.

The FTC’s warning also does not just affect advertising. Dealers need to train new and used salespeople on sales practices, specifically what is included in the price of vehicles and how to convey that price accurately to consumers. For example, when a consumer calls the dealership and asks what the out the door price will be, the salesperson must provide the total price, which needs to include the processing fee/charge and freight (if your dealership formerly removed it from the advertised price). Dealers, who operate in states like Virginia and Maryland, must have addendum stickers to display the vehicle’s price with the processing fee/charge, and they need to be accurate, display the total price of the vehicle and match the advertised price.

With the support of our external counsel Barrett "Barrie" Charapp Beaty, VADA has prepared a full analysis of the FTC announcement, along with a compliant sample advertisement and federal advertising checklist. For further questions, contact VADA general counsel and executive vice president Anne Gambardella, Esq.

Sample Compliant Advertisement
FTC Act Advertising Checklist

Price

  • Everyone Gets the Advertised Price. The price advertised must be available to everyone. The failure to sell the vehicle at the advertised price is the cardinal sin of bait and switch. Even if a consumer does not know of the advertised price at the time of purchase, the failure to give that advertised price can still lead to a bait and switch claim or regulators launching an investigation. The advertised price shall not include any manufacturer incentives or rebates that are not available to everyone. Some dealers believe that advertising a price that is not available to everyone may be solved by a disclaimer. That is a wrong belief and such a disclaimer is used by the FTC and regulators as proof that the dealer did not intend to sell vehicles at the prices advertised.
  • Processing Fees/Charges. As a federal agency, the FTC Act regulating advertising trumps state law on advertising processing fees/charges. As such, it is irrelevant how your state allows processing fees/charges to be advertised (i.e., Virginia allows processing fees in the disclosure and Maryland allows for it to be in reasonable proximity to the price). The FTC has spoken and processing fees/charges need to be in the advertised price. As a reminder to dealers in states like Virginia and Maryland, with the processing fees/charges in the advertised price, you need to be careful when the deal is written up on the buyer’s orders. In states like Virginia, the buyer’s orders have a preprinted line for the processing fee and it’s required to be listed separately on the buyer’s order. As such, the line for “Price of Vehicle (including Freight, Handling & Delivery)” should not include a price that is the same as the advertised price, but it should be less than the advertised price because the processing fees/charge (that was included in the advertised price) will be separately stated on the buyer’s order on the “*Processing Fee (for consumer services)” line. Staff should be properly trained on this.
  • For those dealers that remove freight from the advertised price, those days are gone. Freight is not a governmental fee and needs to be in the advertised price. The freight charge should be the exact amount charged to the dealer. Dealers should consider freight similar to a pass-through charge (paid by dealer when invoiced and reimbursed by consumer upon purchase of the vehicle). Customers should not be double charged for freight. For those dealers that are adhering to the FTC’s warning and putting freight in the advertised price of the vehicle, the freight is already included in the price and dealers should not see pencils that have an added charge for freight. 
  • No bait advertising. Bait advertising is a deceptive sales tactic in violation of section 5 of the FTC Act, which prevents unfair or deceptive acts or practices. However, many state laws also prevent bait advertising. For example, under Virginia law, bait advertising is an unfair, deceptive, or misleading act practice:

Va. Code §46.2-1581 states that “For purposes of this chapter, a violation of the following regulated advertising practices shall be an unfair, deceptive, or misleading act or practice….”

"Bait" advertising, in which an advertiser may have no intention to sell at the price or terms advertised, shall not be used. By way of example, but not by limitation:

  1. If a specific vehicle is advertised, the seller shall be in possession of a reasonable supply of said vehicles, and they shall be available at the advertised price. If the advertised vehicle is available only in limited numbers or only by order, that shall be stated in the advertisement. For purposes of this subdivision, the listing of a vehicle by stock number or vehicle identification number in the advertisement is one means of satisfactorily disclosing a limitation of availability.
  2. Advertising a vehicle at a certain price, including "as low as" statements, but having available for sale only vehicles equipped with dealer added cost "options" which increase the selling price, above the advertised price, shall also be considered "bait" advertising.
  3. If a lease payment is advertised, the fact that it is a lease arrangement shall be disclosed.
  • MSRP: If you list the MSRP only on the advertisement, the MSRP is the price of the vehicle and should be sold at that price (or lower). FTC does not look kindly at advertisements that have the MSRP for the vehicle but due to market conditions, the consumer pays over that price. If you want to charge over the MSRP, the “Dealer’s Price” must state the price you want to sell the vehicle at (even if its over MSRP). Listing a disclaimer that states you are charging $10,000 over MSRP due market conditions is nothing more than evidence that you advertised a price you never intended to sell the vehicle at. Newsflash, the FTC’s warning just told dealers that if you list MSRP as the vehicle’s price that you either (i) sell at MSRP, and thus are not able to charge the processing fee/charge, or (ii) advertise the vehicle correctly with a total price that includes the MSRP plus the processing fee/charge. As a reminder, the Monroney Sticker on vehicles only has MSRP, so dealers will need addendum stickers on vehicles to display the price of the vehicle to include the processing fee.
  • Manufacturer Incentives that Require Qualifications: Dealers should avoid telling a consumer that they are not eligible for the vehicle’s advertised price because they don’t meet the rebates or incentives that the advertised price includes.  If there are rebates and incentives offered by manufacturers that are not available to everyone (i.e., not all consumers are qualified to receive it), or rebates are mutually exclusive (example: $1,500 loyalty rebate and $1,500 first time buyer rebate), those incentives or rebates are deceptive and should not be included in dealer’s advertised price. There may be manufacturer rebates and incentives available based on specific criteria (e.g. military rebate) which can be listed, but not subtracted from the advertised price since it may not be available to everyone.
  • Internet Price: There is no such thing as an “Internet Price.” Advertising on the internet is the norm and is plain advertising. Under the law, if a dealership advertises a price for a vehicle, that price should be made available to customers whether or not they mention the internet special advertising. That is why sales staff should understand what you are advertising. A sales manager that did not know that a vehicle was advertised at a price lower than which it was sold to a customer will not insulate the dealer from a lawsuit if a customer later discovers the lower advertised price. It makes no difference whether the customer knew of the lower internet price at the time of purchase or not.
  • Geographic Price: There is no such thing as a “Geographic Price.” Dealers shall only advertise the price of the vehicle that is available to ALL consumers/purchasers whether the consumer lives in your PMA or not. The law does not differentiate between those purchasers in the Dealer’s state from those that are out of the state. Dealers cannot give a disclaimer to disclaim the price they are advertising from one group of purchasers from another. This is similar to the violation of having a disclaimer that the advertised price is $X but due to market conditions the price may be increased at point of sale. Dealers must be prepared to sell the vehicle at the advertised price regardless of the geographic location of the consumer. There is no disclaimer that can absolve a dealer from advertising a price that won’t be available to ALL consumers.
  • Add-Ons: For dealer installed add-ons prior to sale such as roof racks (i.e. hard adds), the advertised price needs to reflect those add-ons so that the consumer is not deceived into additions to the advertised price. If there are voluntary add-on packages that the consumer may purchase at point-of sale, they can be advertised but should be disclosed as “optional” and not be a required purchase by the consumer to get the price advertised. For example, an add-on package that includes 10 oil changes, all-weather mats, unlimited car washes and rental vehicles is a voluntary package and should not be added to the vehicle’s advertised price but chosen by the consumer at point-sale. Dealers also need to train their staff properly on add-ons. It is not farfetched that dealers may have a rogue employee that tell consumers that the optional add-ons are already installed or required to be purchased in order to get the advertised price, which is completely in violation of the FTC Act. Add-ons are an FTC hot button item and dealers should be wary of preinstalling add-ons to increase the sale price of the vehicle. The FTC does not look favorable on add-ons such as the paint protection and etching to vehicles to increase prices for which the consumer has no option but to purchase because they cannot be removed from the vehicle. Dealers should reconsider pre-installing add-ons to vehicles prior to purchase. Dealers need to ensure their staff are properly trained on add-ons as well as are adhering to the sales processes that you have in your dealership on add-ons.

With this bulletin, we provide an example of a compliant advertisement. As shown, the “Dealer’s Total Price” is one that is available to every consumer. When someone walks through your doors and is looking at that vehicle, the customer’s price starts at the “Dealer’s Total Price” (whether they have seen the ad or not) and the only additions to that should be tax, tags/title, and add-ons that the consumer voluntarily purchases (at point-of-sale and separately itemized on the buyer’s order). If the consumer meets the qualifications for other incentives offered, the “Dealer’s Total Price” is reduced for those incentives. Dealers should not be adding qualifying incentives that buyers cannot qualify for (i.e., military or college grad) back into the price and thus increasing the “Dealer’s Total Price.”

"Trigger Terms" for Sales and Leases

In vehicle sale advertisements, a Regulation Z “trigger term” is:

  • The amount or percentage of a down payment
    1. (i.e., “10% down”, $1,000 down”, “90% financing”, trade-in with $1,000 appraised value required”); OR
  • The amount or percentage of any payment OR
    1. (i.e., “Monthly payments less than $250 on all our loan plans”, “Pay $23.44 per $1,000 amount borrowed”, “$210.95 per month”);
  • The number of payments; OR
  • The period of repayment, OR
    1. (i.e., “up to four years to pay”, “48 months to pay”);
  • The amount of any finance charge,
    1. (i.e., “financing costs less than $300 per year”; “Less than $1,200 interest”).

If any Regulation Z “trigger term” is in a vehicle sales advertisement, then the following disclosures must appear “clearly and conspicuously” and in proximity to the trigger term in the advertisement.

  1. The amount of the installment payment; AND
  2. The amount or percentage of the down payment; AND
  3. The number of installments for repayment (term); AND
  4. The “annual percentage rate,” which may be abbreviated as “APR”. Dealers also must disclose if an APR can be increased after the credit transaction is complete.

Dealers should not advertise “No down,” “$0 down” or the equivalent in an advertisement unless, in fact, no payments or trade in of any kind is required at delivery (not even sales tax, license fees or use of any manufacturer’s rebate). Likewise, if manufacturer captives want dealers to advertise “no interest” loans but said offer is “no interest” because the consumer is buying down his or her own rate through the life of the loan, it is technically not a “no interest” loan and should not be advertised as such.

In vehicle lease advertisements, a Regulation M “trigger term” is:

  • A statement of any capitalized cost reduction or other payment required before or at lease consummation, or by delivery if delivery takes place after consummation, or that no payment is required; OR
  • The amount of any payment.

If any of the above Regulation M trigger terms appear in a vehicle lease advertisement, then the following disclosures must appear “clearly and conspicuously” and in proximity to the trigger term in the advertisement.

  1. A statement that the transaction advertised is a lease; AND
  2. The total amount of any payment (such as security deposit or capitalized cost reduction) required before or at the consummation of the lease, or by delivery if delivery takes place after consummation, or a statement that no such payment is required; AND
  3. The number, amounts, and due dates or periods of scheduled payments under the lease; AND
  4. Whether or not a security deposit is required; AND
  5. In leases where the consumer’s liability is based on the difference between the vehicle’s residual and its realized value at the need of the lease term, that an extra charge may be imposed at the end of the lease term.

Many manufacturers are requiring dealers to advertise through their chosen third-party sites that dealers may not have control over all terms and conditions advertised. In the event the third-party site is advertising a “trigger term” such as the amount of any payment, if the follow-on disclosures cannot appear or they aren’t accurate with the third party, dealers should look at changing how they advertise with the third party such as using the advertised price of the vehicle instead.

Disclosures

Disclosures in advertisements should be “clear and conspicuous” and used to explain an advertised term, not to negate it.  Disclosures should:

  • Tell the consumer what is included and excluded from the advertised price (i.e., processing fees and freight are included but tax, tags, and electronic titling fee are excluded).
  • State that the MSRP is the Manufacturers Suggested Retail Price, and that the price is set by the dealer.
  • Have the consumer contact the dealership to verify the vehicle’s availability, options, price, and incentive eligibility prior to purchase.
  • State the processing fee as voluntary and the price dealer charges for that fee.
  • Let the consumer know that financing and leasing are subject to credit approval. However, it is noted that dealers should never tell a customer that they must finance through the dealership to get the advertised price. The vehicle should be sold at the advertised price to ALL customers whether the customer is paying cash, using dealer arranged financing, or who have their own financing.
  • Disclose whether the pictures online are stock photos or actual images of the vehicle being sold. If stock photos are used, tell the consumer that it’s a stock photo example and not the actual car itself, and thus, the photos may not reflect the exact vehicle color, trim, options, or other specifications.
  • Freight and processing fee included in the advertised pricing. Tax, Title, Tags, and electronic titling fee are not included in vehicle prices shown and paid by the purchaser.
  • Disclose an expiration statement for the price such as “Dealer’s Total Price expires at the end of each business day.”

For proper disclosures, dealers should seek legal advice from experienced dealer counsel to determine if their disclosures are appropriate.

"Clear and Conspicuous" Disclosures

Whether disclosures in vehicle advertisements meet the standard of “clear and conspicuous” depends on whether consumers actually perceive and understand the disclosure in the overall context of the vehicle advertisement.  Essentially, there is no set formula prescribed to determine whether a disclosure is clear and conspicuous, the following recommendations should be considered:

  • The placement of the disclosure in an advertisement should be in close proximity to the claim they qualify (i.e., “trigger” term, the incentive to be met).
  • Consumers should likely notice and understand the disclosures and that they are in connection with the representations that the disclosures modify. Simply making the disclosure available somewhere in the ad, where some consumers might find it, does not meet the clear and conspicuous standard.
  • The prominence of the disclosure.
  • Whether there are items that distract and draw attention away from the disclosure in other parts of the advertisement.
  • If the disclosure is understandable to the intended audience.
  • For disclosures in audio messages, they must be presented in an adequate volume and cadence.
  • For visual disclosures in televised messages, they must appear for a sufficient duration.
  • Size of the font of the disclosure should be readable
  • Hyperlinks
    • The hyperlink’s label should make it not only obvious to consumers to click on it for more information, but it should also show the consumer that the hyperlinked information relates to the qualifying information.
    • Label the hyperlink appropriately and in a style that is a typical hyperlink.
    • Since different web sites use different signals for hyperlinks, dealers should use similar text, graphics, format and color throughout a single web page to for easier identification of hyperlinks by consumers.
    • If you use a click-through page, it should display the complete disclosure prominently.  It should not provide distracting visuals or extraneous information. Any “close” or “click-away” opportunities should be displayed discreetly and not blocking the disclosure information.
  • Consumers should not have to scroll to the entire bottom of the page to determine if they qualify for an incentive or financing offer.
  • If consumers have to scroll, then
    • use text and visual design cues to indicate that scrolling is required.
    • Text prompts such as explicit instructions should be used to alert the consumer that more information is available.
    • Avoid placing disclosures at the bottom of the screen with blank space between the disclosure and the product because consumers may not continue reading or may not scroll to the bottom.