Now that the comment period is closed for the proposed changes to the Federal Trade Commission regulations, the retail automotive industry is waiting to see just which rules will be enforced. Given the direction of the media coverage the FTC recently completed, the agency seems poised to make the entire 37-page document law, addressing the following key areas:
■ Full up-front pricing, costs and finance disclosures
■ Sales process disclosures
■ Add-on product benefits
■ Bait & switch
■ Surprise junk fees
■ Record retention
The agency says it is responding to an increase in consumer complaints since the pandemic, but let’s dig into the numbers. The FTC states that they received more than 100,000 consumer complaints each year for the past three years. They also assert that 17 million new vehicles were sold each year. Considering that the majority of vehicle purchases were pre-owned during that time, it’s very interesting that they chose a 17 million transaction number (circa 2006) rather than more current vehicle annual transactions.
Even with the smaller 17 million new vehicle transactions data point, the 100,000-plus consumer complaints assertion represents less than one percent of the total new vehicle buyer population.
According to the FTC, the proposed rules would protect consumers and honest dealers by making the car-buying process clearer and more competitive. More importantly, it would also allow the Commission to recover money when consumers are misled or charged without their consent. These fines would go to the FTC not the end consumer who suffered the potential disservice.
NADA challenged the proposed rules in July, stating that the agency’s justification for the rule changes is “woefully inadequate”, based on sloppy, inconsistent and unsupported data. Regardless of the pushback received, the FTC seems to be moving forward with these rules. So what can you do now?
Three Actions for Dealers to Take Now
Get familiar with the proposal
This is not a situation where ‘ignorance is bliss.’ The FTC report clearly spells out the requested changes. Read the details and take a side-by-side review of the changes versus practices at your dealership.
Follow the law
Follow already established laws, such as:
• appointing a compliance officer;
• documenting your compliance processes;
• provide your sales and finance employees with compliance training;
• document that sales and finance compliance training occurred, and
leverage already-outlined compliance processes, like rate deviation and declination forms.
Regardless of whether you agree with the changes or not, if approved, the regulations may become law. Review your current processes now; start to consider what changes may need to be implemented in the near future.
Get assistance from experts
You are not alone and there are resources available to help. Get assistance from your training provider, agency support or F&I administrator to keep your dealership two steps ahead.
Implications for Auto Lenders
While the bulk of the proposed revisions are directed toward auto dealers, there are potential implications for auto lenders as well. The effects are subtler and may take longer to be felt—but could be as significant.
Follow-on CFPB and state scrutiny of automotive lenders
While many sub-and non-prime lenders fall outside the FTC’s jurisdiction, these FTC regulations will shine a spotlight on the overall auto lending industry. Lenders should expect added scrutiny, specifically on retail installment contracts (RICs) that comply with the proposed rule, with a specific focus on financed optional products that generate additional interest revenue to the lender.
Holder Rule risks to assignees
While the rule specifically does not contain a private right of action, many states’ unfair or deceptive acts or practices (UDAP) laws do include this component. Many treat the FTC’s determination by rule that a practice is unfair or deceptive as legally conclusive. Some believe that consumers and their lawyers may be more willing to consider bringing suits against dealers and indirect auto lenders. The potential risk of litigation begs the need for greater due diligence by assignees, establishment of standards for assignment of loans, and indemnification provisions related to noncompliance.
Reduced optional products revenue
The FTC expressly intends the rule to impact dealers’ sales of optional products. In response, dealers may increase vehicle sales prices to replace lost revenue or seek higher dealer reserves in financing transactions. Coupled with continued inflation and rising interest rate pressures, indirect lenders should be prepared to respond to potential market changes.
Additional and More Complex Recordkeeping and Compliance Requirements
Overall, the regulatory changes will create added financial costs for dealers as well as the automotive lenders.
Whether you are a dealer or a lender, the FTC revisions will have some impact on your standard operating procedures. Start identifying the areas of impact now, work with your business partners, training providers and F&I administrators, and inform your staff. Savvy entities who stay ahead of the regulations will win the day.