FTC to Dealers: “Pay Us a Penalty No Matter How Much You Owe”

You’ve seen (and maybe even used) ads claiming that a dealer will pay off customers’ trades no matter how much they owe. The Federal Trade Commission has announced consent agreements with five auto dealers who ran variations of those ads.  The FTC charged that they deceived consumers into thinking they would no longer be responsible for paying off the loan balance on their trade-ins, even if the customers were “upside down”.

The consent orders prohibit the dealers from misrepresenting that they will pay the remaining loan balance on a consumer’s trade regardless of the balance owed. The orders also prohibit them from misrepresenting any other facts related to leasing or financing a vehicle, and they require dealers to agree to comply with TILA and its implementing regulations.

These types of orders are serious for dealers who enter them. They last for 20 years, and if a dealer engages in activities that the FTC claims are contrary to its order, the FTC can seek substantial civil penalties of up to $16,000 per day for each violation.

Dealers should give attention to these consent orders for several reasons.

  1. They signal that the FTC is committed to take action on practices identified in the dealer practices roundtables that took place during 2011. The FTC press release notes that the types of advertisements that were the subject of these consent orders were discussed in those roundtables.

  2. The orders also signal that the FTC will concentrate on the consumer understanding of dealer representations. The advertising slogan “We will pay off your trade no matter how much you owe” is literally true. A dealer can do so legally by paying off the trade and showing any deficit balance as negative equity being financed by the customer as part of the new purchase. The FTC, however, concentrated on what it viewed as the consumer misapprehension that negative equity would be forgiven. Because of these settlements and consent orders, the truth of or substantiation for the FTC’s position will not be explored.

  3. The FTC is clearly committed to using administrative lawsuits against dealers to address its priorities. There were alternatives to administrative actions against the dealers who signed these consent orders such as education or rulemaking. The FTC chose not to pursue those but instead chose to make an example of these dealers to send a message to others who might use similar advertising claims.

One final note: these consent orders address the negative equity issue that has always been a hot button for regulators. As part of the press release announcing these consent orders, the FTC issued a consumer alert advising potential vehicle buyers about dealing with negative equity. Dealers should examine their own practices with respect to negative equity to be sure that the refinancing of any negative equity is adequately disclosed as an amount to pay off a prior credit balance in each retail installment sale contract where appropriate