Recent String of Dealer Law Enforcement Activity:A New Era of Scrutiny? Jonathan Morrison Auto Advisory Services
Recent String of Government Enforcement Activity • Where Are We Today? • How Did We Get Here? • Where Are Going?
Where are We today? Federal enforcement Activity
Where are We Today? • FTC Civil Investigative Demands: • Spot Delivery • Safeguards Rule • Privacy Rule • FTC Operation Steer Clear • FTC Used Car Rule Enforcement
FTC Civil Investigative Demands • The FTC is authorized by law to issue Civil Investigative Demands (CIDs)—effectively enhanced administrative subpoena-issuing power. • In addition to document production and oral testimony, CIDs may also require a business to conduct economic or other studies (one-time or annual) or answer questions that would otherwise be outside the scope of subpoena authority. • Recently, dealers and auto lenders have received CIDs involving the following areas: • Spot Delivery; • Privacy Rule; • Information Safeguards; and • GPS Tracking/Remote Immobilization.
Operation Steer Clear/Don’t Be Taken for a Ride • Press Conference held jointly with County of Los Angeles Department of Consumer Affairs (CLADCA), at CLADCA Headquarters, on January 9th. • Announced the launch of a long-term enforcement campaign against new and used car dealers for deceptive advertising. • First volley included announcement of complaints filed against ten dealerships, nine of which were settled prior to the press conference; the last complaint was settled late last month. • Settlements involved no monetary fines, but included 20 year consent decrees under which the dealers agreed not to violate laws cited in the complaint, a mandate to submit compliance plans to the FTC, and a requirement to retain all advertisements for inspection by the FTC for a five year period.
FTC Enforcement Authority exercised • The Federal Trade Commission Act states that “[u]nfair methods of competition . . . and unfair or deceptive acts or practices . . . are herby declared unlawful.” • The “deceptive” element was defined in a1983 policy statement to Congress as requiring the following: • THERE MUST BE A REPRESENTATION, OMISSION, OR PRACTICE THAT IS LIKELY TO MISLEAD THE CONSUMER. • The FTC examines the entirety of the advertisement, and considers express or implied claims made. • The FTC generally will not need extrinsic evidence in determining whether an advertisement is deceptive, and no consumer will need to have actually been misled. • THE ACT OR PRACTICE MUST BE CONSIDERED FROM THE PERSPECTIVE OF THE REASONABLE CONSUMER. • Advertisements targeted to the general public will be interpreted from the position of a reasonable member of the general public; ads targeted to a specific group (e.g., children) will be interpreted from the position of a reasonable member of that group. • Ambiguous claims will not be interpreted in favor of the advertiser. • THE REPRESENTATION, OMISSION OR PRACTICE MUST BE MATERIAL. • Material claims are those likely to affect a consumer's choice of or conduct regarding a product. • Express claims and facts or information pertaining to central characteristics of the product or service are presumed material.
Truth In Lending Act & Consumer Leasing Act Enforcement • The FTC is also the designated dealer enforcement agency for violations of the federal Truth in Lending and Consumer Leasing Acts.
Consumer Leasing Act Advertising Trigger Terms • Consumer Lease Advertisements with certain “Trigger Terms” must clearly and conspicuously include required information: • Trigger Terms: • Statement of required capitalized cost reduction or other payment required prior to lease signing (or delivery, if occurring post-consummation); or • Amount of any lease payment. • Required Disclosures: • The Fact that the advertisement is for a lease; • The total amount due before or at consummation (or delivery, if occurring post-consummation); • The number, amounts, and due dates or periods of scheduled payments; • Whether a security deposit is required; and • The fact that an extra charge may be imposed at the end of the lease term (if liability is based on difference between residual and actual value at end of lease term)
Truth In Lending Act Advertising Trigger Terms • Closed End Credit Advertisements with certain “Trigger Terms” must clearly and conspicuously include required information: • Trigger Terms: • Amount or percentage of any downpayment; • Amount of any finance charge; • Amount of any payment; or • Number of payments or length of credit. • Required Disclosures: • Amount or percentage of downpayment; • Full terms of repayment; • Annual Percentage Rate or APR
Complaint #1 *Prices after $5,000 down + tax + lic + doc. fees on approved credit. . . . Plus government fees and taxes, any finance charges, any dealer document preparation charge and any emission testing charge.
Complaint #1 • Alleged FTC Act Violation: • Misrepresentation Regarding Purchase Price of Vehicle. • Misleading Representation, Omission, or Practice? • Likely to Mislead a Reasonable Consumer? • Materiality?
Complaint #2 $4,999 Consumer Down Payment, First Payment, Acquisition Fee, Taxes, Title & License Due at Signing.
Complaint #2 • FTC Act Violation: • Misrepresentation of Amount Due at Lease Inception • Misleading Representation, Omission, or Practice? • Likely to Mislead a Reasonable Consumer? • Materiality? • Consumer Leasing Act Violation: • Failure to fulfill Trigger Term Obligations • “Trigger Term”: Advertising a lease payment. • Disclosure Violation: Failure to clearly or conspicuously disclose the amount due at lease signing.
Complaint #3 • FTC Act Violation: • Misrepresentation Regarding Monthly Payment Amount • Misleading Representation, Omission, or Practice? • Likely to Mislead a Reasonable Consumer? • Materiality? • Truth-In-Lending Act Violation: • Failure to fulfill Trigger Term disclosure requirements. • “Trigger Terms”: Advertising downpayment and monthly payments. • Disclosure Violation: Failure to disclose the terms of repayment.
Moral of the Operation Steer Clear Story • What the Advertisement Giveth, the Disclaimer Cannot Taketh Away.
FTC Used Car Rule Enforcement:“Keeping Up With the jonesboros” • FTC Used Car Rule: • Requires dealers to conspicuously display the FTC Buyers Guide on all used vehicles to disclose the terms of any warranty offered by the dealer for the vehicle. • Enforcement Activity: • November 2012: FTC performs inspection sweep of 21 dealers in Jonesboro, Arkansas to determine whether used vehicles displayed for sale were properly displaying Buyers Guides. • January 2013: FTC warns 11 of the dealers of the failure to properly display Buyers Guides. • May 2013: All warned dealers were revisited. 10 of those dealers complied with the Used Car Rule. • March 2014: The FTC filed a complaint against the one non-compliant dealer under the FTC Act and Magnusson Moss Warranty Act, alleging that 71 of the 78 used vehicles displayed failed to properly display Buyers Guides. • The requested punishment? A permanent injunction from future violations, and potential civil penalties of $1,136,000.
How did we get here? New car sales and industry portrayals
June 22, 2007 Senate Adopts Energy Bill Raising Mileage for Cars (1,455,698 new vehicles sold; 15.86 Million SAAR) 2007: 16,154,064 New Vehicle Sales January 31, 2007 Big Investors Breathing New Life Into Gasping Auto Parts Suppliers (1,091,410 new vehicles sold; 16.47 Million SAAR) August 26, 2007 Their Titles Laundered, the Cars Are Still Lemons (1,478,650 new vehicles sold; 16.11 Million SAAR)
2008: 13,247,431 New vehicle Sales September18, 2008 Federal Aid to Detroit Seems Likely (965,160 new vehicles sold; 12.73 Million SAAR) February 12, 2008 $722 Million Quarterly Loss at G.M. (1,176,254 new vehicles sold; 15.22 Million SAAR) October 28, 2008 G.M. Speeds Hat in Hand to Treasury (838,592 new vehicles sold; 10.73 Million SAAR) November 19, 2008 By Mitt Romney Let Detroit Go Bankrupt (747,544 new vehicles sold; 10.32 Million SAAR)
2009: 10,431,509 new vehicle sales July 31, 2009 ‘Cash for Clunkers’ Car-Rebate Plan Sells Out in Days (998,062 new vehicles sold; 11.40 Million SAAR) June 19, 2009 Cash-for-clunkers bill passes, offers up to $4,500 for a new car (860,101 new vehicles sold; 9.97 Million SAAR) May 15, 2009 GM Tells 1,100 Dealers They Will Be Shut Down: Bad news arrives one day after Chrysler targeted 789 franchisees (926,130 new vehicles sold; 9.99 Million SAAR) February 8, 2009 The Sky Is Falling for Carmakers, Again (689,794 new vehicles sold; 9.05 Million SAAR) August 31, 2009 Auto Sales Up in August Thanks to Cash for Clunkers (1,262,189 new vehicles sold; 14.59 Million SAAR) August 5, 2009 More Cash for Clunkers: The Senate Should Approve an Additional $2 Billion for the Program, Which is Driving Economic Activity at a Crucial Time (1,262,189 new vehicles sold; 14.59 Million SAAR) April 30, 2009 Bankruptcy Plan for Chrysler (819,817 new vehicles sold; 9.20 Million SAAR) August 7, 2009 Senate OKs More Cash for ‘Clunkers’ (1,262,189 new vehicles sold; 14.59 Million SAAR)
2010: 11,589,844 new vehicle sales June 22, 2010 Auto Dealers Win Battle in Financial Reform Bill (983,781 new vehicles sold; 11.40 Million SAAR) June 22, 2010 New Regulator Might Not Oversee Auto Dealers Auto dealers argued that they already were subject to various federal regulations, mostly enforced by the Federal Trade Commission. “[Frank] was particularly contemptuous of objections from the regulators themselves: ‘ I do not think there is a group with less credibility in this field. . . . They are defending their reputations and their turf, to neither one of which they are entitled.’” (983,781 new vehicles sold; 11.40 Million SAAR) March 6, 2010 Consumer Groups Urge Regulation of Nonbank Financial Institutions (1,066,298 new vehicles sold; 11.57 Million SAAR) January 20, 2010 Obama Pressing for Protections Against Lenders (698,983 new vehicles sold; 10.70 Million SAAR) July 22, 2010 Car Dealers Mostly Escape CFPB, but May Face Scrutiny Elsewhere “’I think the auto dealers are going to rue what they wished for. The FTC can now just focus on auto dealers,’ said Lauren Saunders, managing attorney of the NCLC” (1,050,140 new vehicles sold; 11.75 Million SAAR) April 22, 2010 New Front in Battle over Financial Rules: Lobbyists for Military Personnel Fight Auto Dealers' Bid for Exemption From New Regulations (982,263 new vehicles sold;11.25 Million SAAR) February 27, 2010 Dodd Proposes Financial Protection Agency (780,422 new vehicles sold; 10.13 Million SAAR)
Dodd-Frank & The FTC • The FTC previously had consumer protection jurisdiction over almost every business in the country, with the primary exceptions of FDIC-regulated financial institutions, insurance companies and telecommunications companies. • Dodd-Frank additionally excluded FTC rulemaking and enforcement authority over the non-bank sector for most consumer finance practices. This authority was transferred to the newly-minted CFPB—with one major exception: • Except as permitted in subsection (b) [primarily BHPH activity], the Bureau may not exercise any rulemaking, supervisory, enforcement or any other authority . . . over a motor vehicle dealer that is predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both.
2011: 12,778,885 new vehicle sales November 1, 2011 Investors Place Big Bets on BHPH Used-Car Dealers (1,157,928 new vehicles sold; 13.42 Million SAAR) December 30, 2011 A Year of Solid Gains, and an Outlook for More Ahead (1,243,784 new vehicles sold; 13.54 Million SAAR) October 30, 2011 A Vicious Cycle in the Used Car Business: Sign, Drive, Default, Repossess and Resell – That’s the Game at BHPH Dealerships (1,021,185 new vehicles sold; 13.34 Million SAAR) February 1, 2011 Automakers’ Sales Gains Continue in New Year (819,938 new vehicles sold; 12.84 Million SAAR) November 3, 2011 A Hard Road for the Poor In Need of Cars (1,157,928 new vehicles sold; 13.42 Million SAAR) April 12, 2011 FTC hosts first dealer roundtable in Detroit, focusing on spot delivery, optional goods and services, dealer bankruptcies, and dealer reserve. (1,157,928 new vehicles sold; 13.09 Million SAAR) August 2-3, 2011 FTC hosts second dealer roundtable in San Antonia, focusing on military-related issues, financial literacy, and fair lending (1,072,379 new vehicles sold; 12.44 Million SAAR) November 17, 2011 FTC hosts third dealer roundtable in Washington D.C., focusing on issues relating to vehicle leasing, and whether future FTC action is necessary. (1,157,928 new vehicles sold; 13.42 Million SAAR)
2012: 14,439,092 new vehicle sales January 3, 2013 Automakers End 2012 with Sales at 5-Year High (1,356,132 new vehicles sold; 15.27 Million SAAR) April 18, 2012 Consumer Advocates Seek Halt to ‘Yo-Yo’ Financing (1,184,641 new vehicles sold; 14.32 Million SAAR) February 19, 2012 ‘Yo-Yo’ Terms on Car Loans (1,149,547 new vehicles sold;14.47 Million SAAR) September 4, 2012 August 2012 Car Sales Still in the Fast Lane (1,285,347 new vehicles sold; 14.78 Million SAAR) March 17, 2012 FTC Going After Car Dealers: Trading in a Car? Don’t get Taken for a Ride (1,404,699 new vehicles sold; 14.20 Million SAAR) February 27, 2012 Feds Want Dealers’ Spot Delivery Data (1,149,547 new vehicles sold; 14.47 Million SAAR)
2013: 15,582,136 new vehicle sales November 22, 2013 Dealer Fees for Arranging Car Loans are Drawing Scrutiny from U.S. “The issue of whether [dealer participation] violate[s] fair-lending rules has now been taken up by the Justice Department.” (1,243,852 new vehicles sold; 16.41 Million SAAR) March 21, 2013 Consumer Agency Warns Lenders on Bias in Auto Loans (1,453,038 new vehicles sold; 15.29 Million SAAR) March 29, 2013 Analysts Say More Cars Sold In March Than Any Month Since August 2007 (1,453,038 new vehicles sold; 15.29 Million SAAR) December 31, 2013 Three-Way Fight Over Discrimination Charges, Among Feds, Auto Lenders and Dealers (1,358,734 new vehicles sold; 15.40 Million SAAR) January 3, 2013 Auto Sales Soar Even as the Rest of the Economy Struggles (1,011,187 new vehicles sold; 15.22 Million SAAR) September 12, 2013 Auto Dealers’ Deceptive Ads: Say it Ain’t So. (1,501,294 new vehicles sold; 15.26 Million SAAR)
Where are We Going? A need to redouble compliance efforts
Recent FTC Guidance • This is not a short-term enforcement campaign. • Dealers need to regularly review their compliance procedures as an ongoing process; • Dealers need to provide employees with training “early and often”; • Multi-point groups need to ensure that the compliance review process takes place at each location; • Dealers need to be constantly aware of where their ads are running and displayed; • When “updating” a previous advertising campaign with new offers, the entire ad must be reviewed; and • Advertising medium counts.
AAS Guidance • Don’t rely on advertisements of competitors when creating your own advertising campaigns; • Don’t rely upon your advertising agencies to create compliant advertisements; • Don’t rely upon your automaker or a finance company to develop a compliant advertising campaign; and • Unless treated separately by law, don’t assume that advertisements in different media will be treated differently. • Lastly, ensure that all advertisements are reviewed by a qualified ad review service or competent law firm prior to publication
Thank You! Jonathan Morrison President Auto Advisory Services, Inc. firstname.lastname@example.org (800) 785-2880