As we have noted often, the Federal Trade Commission is the primary federal “cop on the beat” for motor vehicle dealers. The FTC can proceed in a variety of ways if it believes that dealers are undertaking activities it sees as improper. The most common method of challenging the conduct of an individual dealer or group is through an administrative complaint. However, if the FTC considers conduct to be sufficiently serious, and it wants to immediately stop it, it can sue in federal court and seek injunctive and other equitable relief, including compensation for injured parties.
FTC Action
Recently, the Federal Trade Commission took the latter step in suing a dealer group, the individual in charge, and an individual labeled as a “relief defendant” who received financial distributions from the dealerships.
The four dealerships, two of which appear to be domestic nameplate franchised dealerships, do business in Arizona and New Mexico near the Navajo Nation Reservation. The individual defendant was identified as the secretary and treasurer of the corporate defendants who held himself out as the owner and corporate general manager. The “relief defendant” is a person who “receives funds that can be traced directly to Defendants’ unlawful acts or practices….” The complaint charges that the four dealerships allegedly:
- Misrepresented the income of applicants. The complaint alleges that instead of using customer provided information to complete the financial applications, the dealerships used inflated numbers so that all the customers would have a higher monthly income. The complaint recounts the results of a finance source audit that found one dealership had up to 45% falsified income on applications. The complaint quotes a 2014 report by the Navajo Nation Human Rights Commission that labelled the defendant dealerships as generating more complaints than any other dealerships.
- Falsified the down payments of consumers to obtain approvals that might not otherwise be issued.
- Used deceptive advertising that a vehicle could be purchased or leased at a low monthly cost when it could only be leased at that price and not purchased, and the disclosures were not clearly or conspicuously disclosed to the customer.
- Used deceptive advertising of prices not available to everyone because the disclaimers on an internet ad to achieve the price or savings could only be determined from “hidden limitations”. The limitations could only be found via a link in the advertisement not tied to the offers and then by a second click within that link.
- Violated the Truth in Lending Act and the Consumer Leasing Act by failing to disclose required terms in advertisements.
The complaint seeks preliminary and permanent injunctions to prevent the alleged practices. It seeks consumer relief including an order that the “relief defendant” must “disgorge all funds and assets, or the value of the benefit it receives from the funds and assets, which are traceable to the Defendants’ deceptive actual practices.”
The FTC touts this as the first complaint filed in a case involving falsification of “consumers’ income information on financing documents”. For some time, we have advised that, since the passage of the Dodd Frank financial reform act, the FTC has stepped up its oversight of car dealer practices. Despite the Trump administration deregulation in other areas, do not expect to see that regarding the FTC with a legislative mandate and a specific budget on auto dealer matters.
Lessons
As we have seen for many other FTC actions against motor vehicle dealers, there are lessons to take from the FTC positions revealed. Most lessons are not new. However, they bear repeating given the serious nature of these claims, the constant vigilance of the FTC, and the direction state regulators often take from FTC policies.
- As is often the case in lawsuits and administrative actions filed by the FTC, there is a claim for violation of advertising requirements of the Truth in Lending Act and the Consumer Leasing Act. We have emphasized often the need to provide required disclosures when an advertisement uses a trigger term. Failures to comply with those clear requirements of TILA and the CLA provide the FTC leverage to then demand relief on other practices that are not as clearly prohibited.
In advertising credit for a motor vehicle, any of the following is a trigger term under TILA:
- The amount of the down payment (expressed as either a percentage or dollar amount);
- The amount of any payment (expressed as either a percentage or dollar amount);
- The number of payments or the period of repayment; or
- The amount of any finance charge.
If you use a trigger term, you then must disclose:
- The amount or percentage of the down payment;
- The terms of repayment; and
- The “annual percentage rate,” using that term or the abbreviation “APR.” If the annual percentage rate may be increased after consummation of the credit transaction, that fact also must be stated.
Under the CLA, trigger terms are:
- the amount of any payment;
- the amount of any upfront payment; or
- that no down payment is required.
If any trigger term is used, that must be followed by:
- the fact that the transaction is a lease;
- the total amount due at lease signing;
- if a security deposit is required the amount of the deposit or if no security deposit is required the statement “no security deposit is required”;
- the number, amounts, due dates or periods of scheduled payment; and.
- A statement that an extra charge may be imposed at the end of the lease term where the lessee’s liability (if any) is based on the difference between the residual value of the leased property and its realized value at the end of the lease term
- The FTC has taken action in its most recent complaint consistent with other advertising cases when it felt that pricing or savings claims are not adequately disclosed to consumers. Here, the basis of the claim was the difficulty in obtaining the information to allow a consumer to determine the basis for a price through incentives or other savings because disclosures were in a link (that required a double click through) that did not appear related to the offers. The FTC’s consistent position in its advertising cases is that advertised prices or savings must be available to all or limitations must be clearly and conspicuously disclosed. The Virginia Motor Vehicle Dealer Board has similar requirements. As we have warned frequently, disclaimers such as “not all customers will qualify” do not cut it. The FTC and the MVDB expect to see full information in an advertisement that tells a customer the qualifications to get the benefit of the advertised price or savings. This case is a twist on that policy because the disclaimers could apparently be determined from the ad, but a consumer would not know about the disclaimers since the link to them was not related to the offers, and the double click through process made obtaining the information unnecessarily difficult.
- Misstatement of customers’ income is a serious problem, and dealers know the most common consequence – a demand that the dealer buy back a contract that goes bad that was originally approved based on misinformation. Here, the alleged practice led to a federal lawsuit. If the practice is intentional for credit with a federally insured bank, it can lead to a felony charge. Occasionally, dealership personnel have been criminally charged because of those practices. Here, the Federal Trade Commission has sought injunctions and relief for consumers based on the theory that consumers have been damaged because they were deceived into contracts they could not afford, with expected consequences.
- We have advised dealers for some time to be careful to document the credit information obtained from consumers. It is especially important these days when so much of the application process is electronic, and the information is input by a dealership employee. When there is no proof that the consumer has provided information to the dealership, that can lead to claims of fraud by both a consumer and the finance source. It is important that the dealership document the information about the qualifications of a consumer came from the consumer. If the consumer is at the dealership, get a credit application in the handwriting of the consumer. Make sure the customer fills in all information in the customer’s own hand and signs the application. If the customer is not at the dealership, have the customer fill in credit information at the dealer’s secure credit application portal. By whatever method you obtain the information, keep it for all customers.