The FTC’s Shot Across the Bow

On March 26, 2015, the Federal Trade Commission had a major press conference to announce six new motor vehicle sales cases. The FTC took the occasion for a press splash about a campaign it dubbed “Operation Ruse Control”.1024px-US-FederalTradeCommission-Seal.svg

The FTC claimed to be working with 32 law enforcement “partners”, in a “nationwide and cross-border crackdown to protect consumers when purchasing or leasing a car, encompassing 252 law enforcement actions.” The majority of the actions appear to be regular enforcement actions across the country by various state enforcement agencies without direction from the FTC.

The six new FTC cases by the FTC are a continuation of the FTC’s upswing in in activities involving auto sales.

  • One case involved an auto loan modification company that the FTC claimed charged consumers upfront fees to negotiate auto loan modifications while providing no assistance.
  • Two cases involved a program in which the payments of customers were restructured based on claims of saving consumers money. The FTC charged there were no savings because the fees charged exceeded savings. Both the restructuring company and New Jersey dealers using the program were charged with violations. The companies agreed to settle with the restructuring company paying funds and forgiving debt in an amount close to $2.5 million, and the dealerships agreeing to pay $184,000.
  • Three cases involved advertising in which the dealerships marketed vehicles at prices the FTC claimed were not available to all buyers. The three dealerships entered consent orders similar to other FTC orders about advertising prices reflecting rebates and incentives. According to the FTC, the companies can either advertise prices available to all or they cas clearly and conspicuously disclose the qualifications to achieve the prices.

While one can never claim that the FTC was modest in its splashy announcement, one must not underestimate the power and reach of the agency. Here are some important lessons auto dealers should take from “Operation Ruse Control”.

  • FTC Aggressiveness. When the Dodd Frank financial reform legislation was enacted, Congress increased the authority of the FTC and provided it a substantially increased budget to deal with automotive sales matters. While the FTC has always been an agency of which dealers should be cognizant, the increased authority and budget, with a Congressional direction to concentrate on auto sales matters, makes the FTC’s pronouncements something to which auto dealers must give attention in their advertising and sales practices. The FTC has aggressively pursued its goals on auto sales matters.
  • FTC Control. The dollar figures and terms of FTC consent orders entered in the auto dealer area have been impressive. And the FTC, as is its custom, has made a major splash each time consent orders have been entered to use them as object lessons to other dealers. One should not underestimate the impact of an FTC consent order on a car dealer’s business. An FTC consent order gives the FTC direct control over a dealer’s business practices for ten years, the usual duration of a consent order. An auto dealer subject to a consent order must live strictly under its terms, usually with regular required reports to the FTC and sometimes with appointment of an outside monitor to oversee the dealer’s compliance. A dealer that violates an order does so at great risk, as two dealers who earlier signed consent orders over advertising practices saw recently. The FTC threatened those dealers with an action seeking civil penalties of up to $16,000 per day for alleged violations of their consent orders. They subsequently settled the claims. An FTC complaint and subsequent consent order can restrict the ability of a dealer to do business and can impose expensive compliance obligations.
  • The majority of the auto sales cases filed by the post-Dodd Frank FTC have involved advertising. There have been twenty consent orders. There have been two civil penalty actions against dealers whom the FTC charged violated their consent orders. What should dealers be careful about?
  • Truth in Lending Act. Most of the consent orders have involved allegations of Truth in Lending violations. These are easy violations for the FTC to spot. Dealer personnel involved in advertising and the dealership’s outside advertising agency should understand trigger terms and the follow on disclosures if there is a trigger.
  • Bait and Switch. The focus of the three latest consent orders and of many of the previous consent orders is so called “bait and switch”. The FTC focuses on pricing or sales terms it believes are not available to all potential buyers. Advertised vehicles prices and terms should be available to all buyers. If offers are not available to all, for example new car prices based on manufacturer rebates and incentives that have limitations, a dealer must make sure that the qualifications to achieve the savings are clearly and conspicuously disclosed.
  • Negative Equity. Early in its post-Dodd Frank consent orders, the FTC charged violations by dealers who used some variant of the claim they would pay off a trade “no matter how much you owe.” The FTC signaled that it would look closely at claims that failed to disclose that negative equity would be rolled into the new finance balance, and this is a continuing FTC hot button.
  • The Internet. The FTC is not looking only at newspaper advertising. It knows that dealers concentrate marketing efforts on the internet, and they review dealer websites. Internet advertising has the same rules that apply to other media, and those creating web content for the dealership should know the rules.
  • Additional Products. The two cases involving the payment restructuring company and the New Jersey dealers involved what the FTC calls “add-ons”. These consent orders follow up on previous FTC warnings that the additional products and services sold by dealers must provide value to consumers and their terms must be adequately disclosed. The FTC charged that the restructuring company and the dealers failed to adequately disclose the impact the fees would have on ultimate savings and those fees eliminated value for consumers. The lessons to take from this for dealers?
  • Disclosures in the sale of F&I and aftersale products and services must be candid and straightforward. Customers must understand what they are buying and what they are paying.
  • The products must provide value to consumers. What does this mean? Offering products and services for which the costs and fees exceed the savings for consumers can a problem. So can products and services whose prices are wildly inflated.

Dealers should not let the FTC’s showmanship distract from the very important lessons. The FTC is on a mission on auto sales matters. It has been given the direction, authority, and budget to be aggressive. A dealer should design its advertising and sales practices with great concern that the FTC is watching.