July 01, 2022

US FTC Proposes New Rules Governing the Car-Buying Process


The upshot, for busy people:

  • As part of its increased emphasis on rulemaking, the Federal Trade Commission (“FTC”) released on June 23, 2022, a proposed rule placing extensive restrictions on the sale, financing and leasing of motor vehicles. Dubbed the “Motor Vehicle Dealers Trade Regulation Rule,” the proposed rule covers four core areas: prohibitions of specific misrepresentations in auto sales; disclosure requirements related to vehicle cost, add-on products and services, and monthly payments; and recordkeeping.  
  • If finalized, the proposed rule would impose a number of new compliance obligations on the auto industry, which the FTC estimates will cost the industry at least $1.4 billion over the next 10 years. And violations of any provision could come with monetary penalties, including civil penalties at more than $46,000 per violation.
  • Comments are due 60 days from the day that this release is published in the Federal Register, and the FTC is seeking comment on a range of issues, not only related to the rule’s text itself, but also to the various assumptions related to compliance cost.

Authority and Background. The FTC has a long history of enforcing its laws against the auto industry, with the proposed rule’s explanatory section counting more than 50 such cases in the past decade. Most of the agency’s enforcement work was done via Section 5 of the FTC Act, which generically prohibits unfair and deceptive acts and practices. In addition to obtaining conduct relief (court injunctions or administrative cease and desist orders), the agency had for decades obtained monetary relief for first-time Section 5 violations under favorable lower-court rulings. But in April 2021, the Supreme Court overturned that practice, leaving the agency scrambling to find alternative ways to force companies to pay money in enforcement actions.

The proposed rule here is part of that process, as the FTC Act allows the FTC to obtain money penalties in connection with violations of FTC regulations, including civil penalties at more than $46,000 per violation and other consumer relief, such as rescission of contracts and refund of money paid by consumers. Although FTC rulemaking normally is a cumbersome process under Section 18 of the FTC Act—including onerous proof requirements and a contested hearing—Section 1029(d) of the Dodd-Frank Act authorized the FTC to issue regulations for auto dealers using the more familiar notice-and-comment process outlined in the Administrative Procedure Act. Dodd-Frank further cemented the FTC’s central role in regulating the auto industry by expressly prohibiting the Consumer Financial Protection Bureau from any rulemaking, supervision, or enforcement with respect to car dealerships.

The Proposed Rule. The proposed rule includes five sections. Below is a brief summary of each:
Definitions. The proposed rule includes definitions for a number of key terms, most of which are consistent with prior agency usage. But a couple of definitions are worth noting:

  • “Dealer” or “Motor Vehicle Dealer”—the class of companies subject to the proposed rule—is defined as a “person or resident” in the US that (1) is licensed to engage in the sale of cars; (2) takes title to, holds an ownership interests in, or takes physical custody of motor vehicles; and (3) is predominantly engaged in the “sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both.” On (3), the proposed rule appears not to cover companies that only “sell” or “lease” cars but do not also “service” them. This aspect of the definition also deviates from the Dodd-Frank Act’s definition of “dealer,” which includes only the “sale” of motor vehicles.
  • “Express, Informed Consent” is a common feature of FTC rules and enforcement actions requiring unambiguous assent following a clear and conspicuous disclosure of a charge and the purpose. But the definition also states that “a signed or initialed document, by itself,” or a document with “prechecked boxes” does not satisfy this standard.
  • “Add-on” is “any product(s) or service(s) not provided to the customer or installed on the vehicle by the motor vehicle manufacturer and for which the [dealer] … charges a consumer.” This is a key term in the proposed rule, as various provisions limit the type of add-on products and services that dealerships can offer and also provide procedures that dealerships must follow if they want to sell add-ons to consumers. The FTC’s auto-dealer work often involves add-on products or services, including its recent case against Napleton dealerships that we described in a prior Legal Update.

Prohibited Misrepresentations. The proposal then lists 16 prohibited misrepresentations. The precatory discussion explains that each of these categories of misrepresentations has been present in prior enforcement actions. The categories are fairly generic, prohibiting misrepresentations regarding, among other things, a vehicle’s cost, any limitations related to add-on products and services, the availability of rebates, and the availability of vehicles at an advertised price.

Disclosure Requirements. The proposed rule would require clear and conspicuous disclosures in five areas:

  • Offering price. Dealers must disclose the “offering price” in any advertisement or communication identifying a specific vehicle or in any advertisement representing the amount or financing term for a vehicle. “Offering price” is a defined term and includes all applicable charges, excluding only government fees. This definition is intended to capture all additional charges that the dealership may impose.
  • List of add-on products. If a dealer offers optional add-on products, every dealer-operated/controlled website or other online service must post a list of all add-on products offered at the dealership; advertisements not on those media must post the link to the site for this add-on product list.
  • Add-ons optional. In any representation about an add-on product or service, the dealer must disclose that the add-on is optional.
  • Total amount of payments. For a financed or leased transaction, any representation regarding a monthly payment must also disclose the total cost of the vehicle under that monthly payment and any assumptions regarding trade-in value or other up-front consideration relevant to that monthly payment figure.
  • Monthly payment comparison. In any representation comparing monthly payments including a lower monthly payment, the dealer must disclose that the lower payment will increase the total cost of the vehicle, if that is true.

Add-on Products. The proposed rule takes particular aim at add-on products and services, putting in place many requirements before a dealer can charge for an add-on.

  • Prohibition of worthless add-ons. The FTC takes issue with add-ons “if the consumer would not benefit from the add-on product or service.” The release provides two examples: “nitrogen-filled tires” that don’t provide more nitrogen than is already in the air and coverage that does not actually provide the advertised coverage, such as GAP coverage where the buyer’s circumstances would make her ineligible for protection.
  • Mandatory add-on disclosures. The proposed rule includes various rules if the dealership wants to charge for add-on products. Among other requirements, the proposed rule would require the dealership to first present the consumer with the price without add-on products and require the consumer to sign a form declining the car without the add-ons and to separately itemize all add-on products and services.

Recordkeeping. As with many FTC rules, the proposed rule includes recordkeeping requirements relating to marketing materials and documents demonstrating compliance with the substantive rules.

State Laws. The proposed rule would preempt state law only to the extent that the state law is inconsistent with the rules but expressly provides that state laws are not “inconsistent” if they provide greater protections than the proposed rule provides.

What Does This Mean? Quite a bit. The proposed rule would impose a number of new compliance requirements related to the purchase and lease of motor vehicles that would need to be implemented. In particular, the proposed rule shows that the FTC is particularly skeptical of sales practices involving add-on products.
Companies should consider how this proposed rule might affect their compliance programs. Here are just a few key areas:

  • Holder Rule. The FTC’s Rule on Preservation of Consumers’ Claims and Defenses—more commonly known as the “Holder Rule”—requires certain consumer contracts to include language that eliminates an assignee’s protection under commercial law principles from defenses and (potentially claims) the consumer could have asserted against the original seller of goods or services. Under the Holder Rule, claims related to a violation of the obligations arising under the proposed rule (to the extent that any can be asserted by the borrower, a consideration that is not discussed in the proposed rule) travel with the contract. So secondary market purchasers should consider whether any violations of the proposed rule might be chargeable against them in certain circumstances.
  • Truth in Lending Act. The proposed rule also is not clear regarding how all of these new rules might interact with the Truth in Lending Act (TILA) disclosure requirements. TILA sets out a number of specific disclosures related to financed transactions. The proposed rule includes yet another set of mandatory disclosures involving financing, including disclosures made with respect to lower monthly payments and the disclosures related to vehicle price with and without add-on products and services.
  • State laws. Similar to TILA, state laws also require certain disclosure forms that may differ from the requirements expressed in the proposed rule. The preemption provision—preempting “inconsistent” state laws but not those that provide greater protections—would require companies to determine for themselves which state laws still apply, with possible state action for getting it wrong.
  • Compliance burden. Even the FTC indicates that complying with this new law will be costly to industry—at least $1.4 billion under the FTC’s assumptions. Companies may need to review all of their advertising anew, adopt new disclosure forms using what would seem to be a new process for buying a car, and place stringent restrictions on dealers’ sale of add-on products. And that is only for the dealerships—companies that want to securitize auto loans may need to consider whether issues such as the Holder Rule could affect their products and develop additional compliance and diligence requirements.
  • Concerns for innovation. As with any mandatory disclosure regime, the FTC’s proposed rule risks impeding innovation. The proposed rule clearly contemplates a standard car-buying process involving going to a dealership, negotiating at a small table, and then signing a large stack of documents with a wet signature. But, as in other areas, fintechs may want to experiment with new disclosure and contracting methods that improve the consumer experience, which may be rendered even more difficult if the FTC layers on another disclosure regime atop those imposed by TILA and state laws.

Although the contours of any final rule is still uncertain, the auto industry should continue to monitor developments in this area and may consider submitting comments in response to the proposed rule. Of course, any final rule could be subject to legal challenges.

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