For the first time in over a decade, the Federal Trade Commission (FTC) has proposed a rule directly addressing deceptive financing practices by auto dealers. The proposal contains a host of prohibited misrepresentations, required disclosures, and specific requirements pertaining to the sale of add-ons. The FTC explains at length the problems that consumers face when purchasing a vehicle and how, despite its history of enforcement action against car dealers, consumer problems persist. There are numerous facets to the rule, and advocates are encouraged to see the FTC taking a broad approach. This blog series is intended to highlight and explain certain components of the rule and the practices by dealers that it attempts to address.
Advertising
Consumers waste a significant amount of time at dealerships as a direct result of responding to inaccurate advertisements. Dealers lure consumers into their dealerships with promises of financing terms and attractive discounts or rebates without fully disclosing the limited eligibility for these incentives. Some dealer advertisements completely omit certain fees (“document preparation fees,” “dealer processing fees,” etc.), major MSRP markups, and required add-ons from the advertised price. The FTC itself has charged dealers with deceptive advertising practices, such as implying that a down payment was not required and offering an annual percentage of 0%, while in reality, the down payment and APR were much higher than what was advertised.
These practices cause consumers to choose that dealership based on a false and deceptive advertisement, then spend hours negotiating a sale that turns out to be much more expensive than what was advertised. Many consumers in this situation “give up” and purchase the vehicle after thousands of dollars have been tacked on and they have used up an entire day, purely to avoid the hassle of going through the process again.
Pricing
Many consumers report that by the time they have purchased a vehicle, the total sale price was significantly higher than what they expected to pay. One reason for these discrepancies is the deceptive sale of expensive add-ons. The hours-long arduous financing process involves stacks of complex paperwork that often hide the cost of add-ons. Dealers have further obfuscated meaningful review of these fees and costs through conduct such as not mentioning the fees at all, lying about the cost, rushing consumers through the signature process, using electronic pin pads for document signatures, and focusing consumers on the minimal increase to their monthly payment instead of the true cost of the product itself. The FTC’s own examination and interviews with car buyers corroborate these too-common incidents for consumers negotiating car prices.
The FTC’s Proposed Approach to Deceptive Advertising & Pricing Practices
The FTC is clear that this deceptive conduct causes considerable consumer harm and hurts competition for dealers who honestly advertise and price their vehicles. As such, the FTC has proposed to require up-front, accurate advertising and pricing of vehicles by prohibiting misrepresentations and requiring affirmative disclosures.
Prohibited Misrepresentations
The proposed rule would prohibit dealers from misrepresenting (1) the costs or sale or leasing terms, (2) whether the transaction involves financing for purchase or a lease, (3) whether rebates or discounts are available or not, (4) whether the vehicles advertised for a certain price are available, and (5) whether consumers can be preapproved or guaranteed to receive any product, service, or sale terms.
Each of these misrepresentations centers on information that is material to a consumer’s decision to purchase a vehicle. Dealers would be prohibited from being anything less than truthful about this information to ensure that consumers are not ensnared in a class bait and switch scenario.
Required Disclosures
The proposed rule would require dealers to clearly and conspicuously disclose the offering price and the cash price. The Offering Price is the full cash price where a Dealer will sell or finance the motor vehicle to any consumer, excluding only required Government Charges. § 463.2(h). The dealer must clearly and conspicuously disclose the Offering Price in any advertisement specifically about the vehicle, in advertisements that include monetary or financing terms, and in any communication with a consumer about a specific vehicle, or a monetary amount/financing term for a vehicle. § 463.2(e).
The dealer must clearly and conspicuously disclose the Cash Price without Optional Add-Ons (§ 463.2(c)) to consumers in financed and non-financed vehicle sales to ensure that consumers understand the price of the vehicle, and to avoid dealers “sneaking in” add-on fees without openly explaining them to a consumer. This is defined as “the Offering Price, plus required Government Charges, minus any discounts, rebates, or trade-in valuation amounts, and excludes optional Add-ons.”
Under the proposed rule, dealers must disclose the Cash Price before referencing any aspect of financing for a particular vehicle, or before consummating a non-financed sale, whichever is earlier. §463.5(b)(1). The dealer must also disclose the Cash Price plus the finance charge in a financed sale before charging for any optional add-ons.
What Should the FTC Do in its Proposed Rule to Address Deceptive Advertising?
The FTC should ensure that the Offering Price includes fees and that it is truly a firm and legally enforceable offer. The Offering Price should be a contractual offer to purchase, such that a consumer should be able to see the price, arrive at the dealership with a cash or check in hand at that exact price, and purchase the vehicle from the dealer. Currently, the Offering Price excludes certain government fees, such as taxes, titling and registration. The FTC should change the definition of the Offering Price to include all of these fees, based on the assumption that the purchase is in-state with no trade-in.
Comments on the FTC’s proposed rule are due September 12.