You have probably been reading a lot lately about the Consumer Financial Protection Bureau (CFPB). Its regulation of the companies that provide financing and leasing for your customers will have an impact on your business in the future. Franchised dealers, however, are not subject to direct regulation by the CFPB. That is because the Dodd Frank financial reform legislation that created the CFPB exempted franchised dealers and some independent dealers from oversight by the agency, except under limited circumstances.
That does not mean that that dealers walked away free from direct regulatory oversight at the federal level, however. As a trade-off for exempting dealers from CFPB regulation, the Dodd-Frank law expanded the powers of the Federal Trade Commission and directed the FTC to intensify oversight of car dealer activities.
In the past, dealers have had to be concerned about state laws regulating their advertising, but they have not seen much enforcement of advertising rules by the FTC. That is changing.
In March 2012, the FTC issued administrative complaints and consent orders involving five car dealers who had used some variation of the advertising claim that they would pay off customers’ trades no matter how much they owed. This was a clear signal by the FTC that it will use its expanded authority to look closely at car dealer advertising.
What Practices May Be Scrutinized by the FTC?
As a federal agency with the consumer protection mission of protecting against unfair or deceptive acts or practices, the areas in which the FTC can potentially take action are widespread and diverse. However, there are a number of areas in which the FTC has provided guidance over the years. Here are some areas in which the FTC may very well concentrate.
• Deceptive or unfair ads. In announcing the March 2012 complaints and settlements, the FTC made clear that it focused on the deceptive nature of the ads. According to the FTC, the dealerships that were advertising that they would pay off consumers’ trades no matter how much they owed led consumers to believe that their obligations would be extinguished, even the negative equity portions. Instead the deficiency balances were rolled into new loan amounts, and the FTC charged that this was unfair and deceptive. The FTC has always looked to whether an ad is likely to mislead a consumer acting reasonably under the circumstances to his or her detriment, and these five dealers’ ads flunked the test. While deception and unfairness are concepts that may be hard to apply when reviewing an ad, given the FTC’s consumer protection mission one can expect that the FTC will continue to target ads it deems deceptive or unfair to reasonable consumers under the circumstances. One aspect of that is the FTC’s substantiation requirement – a dealer should have a reasonable basis for objective assertions in ads, and it should be able to produce that proof if challenged.
• Bait and switch. All dealers have heard this term thrown around loosely. However, there are some situations that may catch the attention of the FTC as bait and switch tactics.
o Conditional Offers Not Adequately Disclosed. The FTC has traditionally criticized ads with aggressive offers available only if a condition is met where the condition is not properly disclosed. Are you advertising something that is only available to a certain class of customers (for example, recent college graduates or present owners of the same brand vehicle) or on attractive terms subject to conditions (for example, a low interest rate only for short term financing)? Make sure that all conditions are clearly and conspicuously disclosed to protect against charges that the aggressive offer is being made with an intention to sell some other vehicle at more favorable terms to the dealer. Under Virginia law, disclosures must be clear and conspicuous, and the Motor Vehicle Dealer Board will warn a dealer if an ad does not comply.
o Advertising Without Disclosure of Limited Quantities. Three decades ago, the FTC focused heavily on advertisements of loss leaders by supermarkets and big box retailers. A retailer that advertises loss leaders must be sure it either has sufficient quantities to meet reasonably anticipated demand or that it adequately discloses the limited quantities. A car dealer should follow those same requirements. A dealer that advertises a price for a vehicle should have sufficient quantities to meet reasonably expected demand or it must disclose limited quantities. Virginia law clearly requires disclosure of limited quantities of available vehicles on the terms advertised, including advertising by stock number or vehicle identification number.
o Misleading Descriptions. A dealer must avoid misleading descriptions of the vehicles it offers for sale. Two examples of past FTC interest provide some guidance. Advertising a low price for a vehicle without disclosure that all vehicles of the model the dealer had in inventory had dealer installed equipment raising the prices, as well as advertisements in which the picture of a vehicle was of a different model or differently equipped and substantially higher priced than the vehicle actually advertised, drew the FTC’s attention.
• TILA Disclosures. If a trigger term is used in a credit sale advertisement (the amount or percentage of down payment, the amount or percentage of any payment, the number of installments, the period of repayment, or the amount of the finance charge), it must also disclose the required terms: (1) the amount or percentage of down payment; (2) the term of repayment obligations over the full term, including any balloon payment; and (3) the “Annual Percentage Rate,” or abbreviation “APR.” Virginia law also requires this.
• Consumer Leasing Act Disclosures. If a trigger term is used in a lease advertisement, (the amount of any payment, or a statement of any capitalized cost reduction — meaning the amount of any down payment — or other up front payment or that no down payment is required), the ad must also disclose: (1) that the transaction is a lease; (2) the total amount due at lease inception; (3) whether a security deposit is required and how much; (4) the number, amounts, and due dates or periods of scheduled payments; and (5) whether an extra charge may be imposed at lease end based on the difference between the residual value of the leased vehicle and its realized value at the end of the lease term. Virginia law also requires this.
• Use of the word “free” or similar terms. The FTC has a rule that prohibits use of the word “free” or terms of similar import in negotiated transactions. The theory is that if the price is negotiated, the retailer can easily include within the negotiated terms the price of the “free” merchandise. Since car deals are generally negotiated, that prevents dealers from advertising “free” goods or services in connection with the sale of a vehicle. Virginia has a very similar law concerning use of the word “free” and a number of similar terms.
What Kind of Advertising May Catch the FTC’s attention?
Historically, dealers have concentrated on compliance in their newspaper ads. However, the FTC is as aware of the changing advertising environment as anyone else. Newspapers are no longer the dominant advertising medium, nor should they be the main focus of your compliance efforts. Virginia dealers have the good fortune of having the Motor Vehicle Dealer Board review dealer advertising, and the Board warns dealers whose advertising runs afoul of the law. However, the Board cannot monitor ads in all media, and dealers must self-police to avoid FTC attention.
• Internet. The internet is now the dominant advertising medium. But many dealers do not recognize that the internet is an advertising medium. All advertising compliance requirements apply to internet postings. Internet ads must be truthful and substantiated. Of particular concern must be the failure to adequately disclose conditions and disclaimers in internet ads. It is actually easier to advertise those disclaimers on the internet because one can use hyperlinks to condition offers, and those are preferable to disclaimers that may appear in some other area of a large internet ad.
• Radio. One of the classic concerns with radio advertising is the failure to disclose terms and conditions at a speed that will allow a reasonable consumer to understand what is said. Jamming disclosures hurriedly at the beginning of an ad, followed by aggressive offers conditioned by the hurried preamble, are diversionary tactics that may lead to trouble.
• TV. The “clear and conspicuous” standard applies to conditions disclosed in TV ads. Disclosures should be in type large enough to be seen, in a contrasting color to the background, and should be visible for a sufficient time so that a reasonable consumer can view and understand them.
• Direct Mail. Historically, direct mail ads have escaped regulatory scrutiny, and this has resulted in lack of care to ensure compliance with even the most basic advertising requirements. All rules applicable to advertising apply to direct mail offers. Because of the historically abusive nature of direct mail, don’t be surprised if direct mail is one of the types of dealer advertising most heavily scrutinized by the FTC. And don’t expect to escape because you use a direct mail company. While the FTC may seek to involve that company in any case, your dealership is the advertiser against whom the FTC will take action