Saturday, March 17, 2012

Why is the FTC Messing With Dealers?

Since the news broke earlier this week about the FTC citing 5 auto dealers for deceptive advertising, I’ve been asked a number of questions by folks in the industry. Here’s my take on the situation:

What’s the big deal about advertising that the dealership will pay off a trade-in no matter what the customer owes? It’s a true statement.

The problem is not so much what the ads say, but what they don’t say. As far as regulators are concerned, if an ad doesn’t explicitly state that any negative equity will be added to the loan balance, it’s deceptive. While it may seem obvious to us that the customer is responsible for negative equity, some consumers (and lawmakers) apparently think that these advertisements imply that the dealer will buy the trade for the amount the customer owes, regardless of its real value.

Some basic principles that regulatory agencies consider are 1) advertising is considered deceptive if the advertisement has a “tendency or capacity to mislead the public”; 2) if an ad is deemed deceptive, an advertiser has liability regardless of whether there was intent to deceive and; 3) statements susceptible to both a misleading and a truthful interpretation will likely be construed to be deceptive.

We always fully disclose negative equity on our contracts and leases, why isn’t that good enough?

If regulators feel that the first contact with a consumer is secured by deception, a violation may occur even though the true facts are made known to the buyer before he or she enters into a purchase or lease. Since statements and representations in advertisements are evaluated based on their tendency to deceive, no actual harm to consumers need occur for there to be a violation.

Dealers have been using this type of advertising for years – did the FTC recently change the rules?

No, these types of incomplete statements about paying off trade-ins have been considered deceptive for a long time by both federal and state regulators, so this is nothing new. Bear in mind that the fact that others were, or are, engaged in like practices is not considered a defense.

As to why the Feds decided to take action against dealers now - your guess is as good as mine. The FTC has been threatening to step up enforcement against dealers for the last year or so, but to be honest; I’ve been a bit skeptical. The Feds have traditionally gone after bigger fish and left car dealers to state regulators. So, while this action may just be a flash in the pan, it can also be a major game changer.

How do we avoid this happening to us? I mean, if the regulators decide to go on a witch hunt, they’re going to get you one way or another.

I disagree. Again, the violations the FTC cited are not new or surprising to anyone who understands advertising regulations. If you have ever read or listened to my ramblings in the past you know that I have a tendency to harp on two issues - Education and Due Diligence.  Please forgive me for once again repeating myself, but this is important:

Protect yourself by doing the following:

·         Ensure that any member of your staff involved with advertising is properly trained in all applicable regulations.
·         Never assume that your ad agencies or vendors know, or are following, the rules. If you write the check, you’re responsible.
·         If you’re not sure, don’t guess! Have your advertisements reviewed, and edited if necessary, by someone knowledge before publication (this should done for all of your advertising including websites, YouTube, social media, etc.). It may cost a few bucks, but it’s a small price to pay.


  1. If we were to say in response to the FTC’s actions that we never meant to mislead anybody or mislead any consumer, that’s not who we are….. I say, that is exactly who we are. If there was no validity to the claims of the FTC then why would we back down? In the instant case, who ultimately paid/pays off the trade? It is that simple…….. The consumer, not the dealer…..We know full well that some will assume it comes out of the dealers pocket and that is why we choose those words. That is why we found ourselves targeted by the FTC.

    Technically I suppose my girlfriend could say that she pays all my debts for me, but in doing so she would be misleading everyone she would tell that to. She does write and mail the checks every month, she hands the debit card to the wait staff after dinner. She handles nearly all financial transactions in the household……while her statement would technically be true, there is, “the rest of the story”, as Paul Harvey would say….” You can guess the rest of my story, suffice it to say, I am not a freeloader despite the FACT that my girlfriend pays all of my debts for me.

    We railed on TrueCar, a vendor, for lack of transparency. We, the dealer body, must be transparent too.

    We continue to whine how unfair it is that we can’t outrun our “old” reputations. The first step is for them to become old.

    Thomas A. Kelly

  2. Well put Tom, Thanks for your valuable feedback.

  3. I think this is a "game changer" as the FTC's three roundtable meetings on auto finance last year were likely intended for two purposes. First, to facilitate the goal of transparency in consumer finance and to perhaps expand its interpretation of "unfair and deceptive" in anticipation of the Consumer Financial Protection Bureau issuing regulations prohibiting "abusive" practices which will focus on transparency and a consumer's knowledge relative to the product. Second, the FTC has new streamlined authority to issue new unfair and deceptive acts and practices regulations against auto dealers under the Dodd-Frank Act and beginning with a series of enforcement proceedings may be a prelude to their doing so. I have seen many dealer ads that don't include the triggering terms required by Truth in Lending or the Consumer Leasing Act (this was also a part of the consent decrees last week) and a reasonable consumer being lured into a dealership on an unqualified promise that a dealer will pay off its trade is deceptive. I think it is critical that dealers pay close attention to their advertising and other aspects of compliance as 2012 is shaping up to be the year of enforcement and the CFPB has not even weighed in yet.

    1. Thanks for your feedback Randy. I remember that you were involved in the FTC's Roundtable discussions, so your insight is very valuable indeed. (Randy is DealerTrack's Regulatory and Compliance Counsel)

  4. No, I dont think its enough for the negative equity is disclosed in the contact. By the time the customer is in F&I, its too late. If you are not trying to be deceptive, simply state the facts in your ad; "We accept all/most vehicles in on trade, but please note: if you owe MORE money on your trade-in than we are going to give you for it, the "difference" in value MUST be paid for by YOU - either in cash, or it will be financed over time within your new purchase agreement."

    Dealers tend to become cynical and forgetful that, while they sell and deal with purchase agreements hundreds of times a month, the average person may see a finance agreement 5 or 10 times in a lifetime - and they've changed each time.

    Its time we think like an uninformed buyer. We need as dealers to think DISCLOSURE, DISCLOSURE, DISCLOSURE. It keeps government out of our business and helps create a happy, informed customer I'm the long run.

  5. Can't they just have that guy who speaks really really fast at the end of the commercials??

  6. It's about time. I have traveled the country and been in hundreds of stores that feel they have no rules. Shame on them