The FTC Strikes Again – You Ain’t Seen Nothing Yet

Here we go again.

As if the CFPB/DOJ $98 million penalty against Ally Bank in December wasn’t enough, more regulators are starting off 2014 with a bang. On January 9^th, the FTC and the County of Los Angeles Department of Consumer Affairs held a press conference announcing a nationwide enforcement action targeting deceptive auto dealer advertisements. The action, dubbed "Operation Steer Clear", resulted in the voluntary settlement of complaints against nine dealerships and continuing action against another. This was the FTC’s third enforcement action against “deceptive” auto dealer advertising in the last few years. The first was in March of 2012 when they cited 5 dealers for trade payoff claims. The second was against 2 dealers in September of 2013 for rebate disclosures.

So, how significant is this? I imagine the answer depends on how well my crystal ball is functioning today, but before you blow this off as yet another “fear factor” article by a compliance guy, you might want to hear me out - if for no other reason than the future of your business may depend on it.

Still with me? Good. To start, let’s do a little math: The FTC nabbed a total of 17 dealers for alleged ad violations over the course of almost 2 years. Now, considering that there are over 60,000 new and used car dealers in America, it would seem that the chances of having the FTC show up at your door are pretty slim, right?

Before you breathe a sigh of relief and move on with business as usual, I suggest you bear with me for a few more minutes as we explore the bigger picture about what patterns are emerging with the FTC and other regulators and what it can mean to your dealership.

What Did We Learn From the “Operation Steer Clear” Press Conference?

In my humble opinion, this most recent action (and accompanying media blitz) gave a great deal of insight into what’s going on in the minds and hearts of the dealer cops. Let’s take a look at some takeaways from the January 9^th Press Conference:

There’s a New Sheriff in Town. Well, not exactly new, but it certainly seems like it. The Dodd-Frank Act passed by Congress in 2010 gave the FTC new and expanded authority regarding motor vehicle dealers. Even though we haven’t heard all that much from them up until now, it’s important to understand that while government agencies may not move very quickly, they do move – especially when they identify a target. Just because there have been relatively few FTC actions in the last three years doesn’t mean that they haven’t been working on their gameplan. In the press conference, the FTC was very forthcoming about the fact that this is just the tip of the iceberg and made it abundantly clear that their target of choice right now is auto dealerships. Jessica Rich, the FTC’s director of the Bureau of Consumer Protection, cited the passage in the Dodd-Frank Act that named the FTC as the “primary enforcers” of auto dealers. “We took that mandate very seriously, and we are going to be bringing a lot of enforcement in the auto area,” she said. “We have a lot of investigations in the pipeline.” Rich also stated “We would say that the timing of this has to do with the Dodd-Frank Act.”

They’re Extending Their Reach. Sure, there are plenty of car dealers and not very many enforcers, but don’t let that lull you into a false sense of security. The FTC indicated in no uncertain terms that they’re seeking to level the playing field by inviting their friends to the party. They’re partnering with local agencies in their investigations. Ms. Rich indicated that investigative information sharing and enforcement partnering is taking place with state agencies for state enforcement (including possible license revocation) in order to expand enforcement reach where FTC does not have jurisdiction.

Sorry to bring up a name that’s so 2013, but the FTC also entered into a “Memorandum of Understanding” with the CFPB. The two agencies have agreed to meet regularly, compare notes on investigations, and share consumer complaints. The FTC will mostly cooperate with the CFPB on auto finance matters. Yep, even though the CFPB is “exempt” from direct oversight of most dealers, the FTC sure isn’t. So don’t be surprised if they start paying attention to your financing activities along with your advertising.

The Dodd-Frank Act also gives state Attorneys General increased enforcement authority for violations of federal consumer protection law as well as state law such as Unfair and Deceptive Acts and Practices statutes. Richard Cordray, the CFPB director and a former Ohio attorney general, has made clear his desire to augment the CFPB’s power through attorneys general. So, it sounds like the CFPB, FTC, and AGs will all be working together in chasing down what they perceive as “big, bad car dealers”. Are you ready for this three-headed monster?

They’re Fishing Where the Big Fish and the Little Fish Are. The first two FTC dealer advertising actions were in relatively small markets, but this time they came to Southern California as this is considered the largest car buying market in the country in their opinion. One of the California dealers was the top-selling Honda dealer in the country in 2013. Both franchise and independent dealers were cited. In other words, it seems that ALL dealers are being targeted, so there’s nowhere to hide. These regulators apparently don’t buy into the concepts of “too big to fail” or “too small to matter”.

They’re Not Just Waiting for Something to Happen. Traditionally, dealers didn’t have to worry much about compliance issues as long as they didn’t have too many customers complaining. That’s not necessarily so anymore. According to Ms. Rich, the agency has directed their internal enforcement division to get proactive and aggressive in the automotive space. One of those directives is to proactively review advertisements to supplement the traditional reactive investigations they’ve relied on when they received consumer complaints. So it doesn’t matter if your customers object to your advertising or not, you’re still at risk. The FTC will gather violation information from not only consumer complaints, but state agencies and their own monitoring.

The Potential Downside is Huge. While the FTC stated that they generally don’t go for monetary fines on first action (although they may demand consumer refunds), they will seek injunctive relief to stop specific conduct. Consent Degrees or judgments will be put in place for a minimum of 20 Years. If there are any new violations during that time, the FTC will seek aggressive enforcement and fines. In addition, dealers under a consent decree or judgment are generally required to put training in place, file reports periodically, and maintain copies of their ads.  All dealer records, including ad records, must be kept for minimum of 5 years on a rolling basis and the agency retains the right to conduct periodic compliance reviews. How would you like having the FTC breathing down your neck for 20 years? Makes it kind of tough to advertise aggressively with that kind of pressure doesn’t it? Your competitors will no doubt be delighted.

Violations of the consent decree can result in fines up to $16,000 per occurrence. Fines are generally calculated on a per-occurrence/per-day basis. Consumer transactions in the ad period, specific vehicle sales, and advertising reach of the ad can all be factors. When asked how the fines will be calculated, Ms. Rich stated that if an unlawful advertisement goes up on Day 1 and the dealer keeps it up until Day 90, or the FTC enforcement unit catches it on Day 90, the dealer would be liable for 90 days of violations at $16,000 per day. Ouch!

And of course, this doesn’t include potential enforcement actions taken by state agencies for the same violations, including possible action against your dealer license, or the reputation damage you will suffer. So, for those of you who think that the potential downside is just a slap on the wrist or that fines are a “cost of doing business”, it may be time to think again.

What Else is Going on at the FTC?

Although it may seem that the FTC is only the “dealer advertising cop”, they are expanding their reach in several other areas. According to the FTC, since 2011 they have been gathering information on possible consumer protection issues that may arise in the sale, financing or lease of motor vehicles through a series of roundtables and by seeking public comments. Some areas they are apparently looking at include, but are not limited to, spot deliveries; payment packing; vehicle leasing; unfair, deceptive, and abusive practices; and arbitration agreements.

Recent FTC enforcement actions include Buyers Guide, Information Safeguards, and Risk Based Pricing Notice violations.

So How Do You Protect Yourself From this Onslaught?

It’s actually pretty simple, but it’s not easy…unless you get help.

·         First, make a commitment to take compliance seriously. The Ostrich Syndrome (sticking your head in the sand), just doesn’t cut it anymore. These regulators are not going away. It’s time to invest in a comprehensive compliance program.

·         Ensure that your entire staff is properly trained in all areas of compliance, including advertising. The days of having just your F&I staff compliance-trained are behind us. The FTC and other regulators are focusing on ALL aspects of vehicle sales and leasing, from “the curb to the keys”. Salespeople, sales managers, and F&I personnel all need to know the rules and be held accountable for ethical behavior.

·         If you’re not sure, don’t guess! Invest in an advertising review service and give your staff access to expert advice such as a compliance hotline. It may cost a few bucks, but it’s a small price to pay.

·         Be selective about where you get your advice. Chances are your F&I product providers are not really “experts” in compliance, nor are your advertising agencies or marketing companies, despite claims to the contrary. Automotive compliance is a very specialized area that requires full time focus by industry experts – it’s a constantly moving target.

If you really feel that your dealership has a handle on compliance, good for you. But just keep in mind that the 10 dealers that got caught up in this latest action probably thought they had it “handled” too. Better to be safe than sorry.

Dealer Compliance Trends to Watch in 2014

 

CFPB Happenings:

·         The CFPB does not have direct supervisory authority over franchised dealers but we’ve already seen how they are attempting to regulate auto dealers through the financial institutions that they assign their contracts to. The CFPB also extends their regulatory reach by partnering with and sharing complaint investigations and enforcement initiatives with other agencies, such as the FTC and state enforcement agencies that DO have direct supervisory authority over automotive dealers. Case in point…

CFPB is soliciting consumer complaints on their website: “Currently, we are handling complaints about vehicle loans and installment loans with large banks. If a complaint is against a large bank, we will handle it directly. If however a complaint involves a small bank or a nonbank, we will refer it to another federal agency with the authority to handle it. If this happens, we will immediately notify the consumer and identify which agency the complaint was referred to. Over time we will expand our complaint handling functionality to include nonbank auto lenders in order to more directly assist consumers with these complaints.”

·         The CFPB grew from about 970 employees as of the end of FY 2012 to 1,335 employees as of the end of FY 2013. Their budget grew from $162 million in 2011 to $518 million in 2013. Jeff Langer, an experienced attorney with a strong industry background, will be joining the CFPB to serve as Assistant Director, Installment and Liquidity Lending Markets and overseeing auto and student lending. 

·         The CFPB’s top priority is that every consumer transaction be transparent and properly documented.  Director Richard Corday stated “if anyone is uncertain about our resolve, let me do my best to dispel that uncertainty. We will make every effort to do the job that Congress has set out for us, which is to identify and root out unlawful, discriminatory lending practices, including practices that, in the words of the Supreme Court, are “fair in form but discriminatory in operation.” We intend to create a fair marketplace for all consumers.”

·         Through its scrutiny of auto lending, the CFPB is also examining how consumers fare with ancillary products, such as theft protection, service contracts and GAP. This will likely be more disruptive than the regulators’ interest in dealer mark-up. When selling F&I products, dealers should make sure that the consumer practices and information for these products are robust and transparent. Excessive markups on these products can lead to lawsuits by customers, scrutiny by regulators and a bad reputation in the dealership's community. Whenever the same product or service is offered to a customer at a different price than other customers are charged, a claim of discrimination becomes a possibility – especially when those sales are made to “protected classes”.

Charging "whatever the market will bear” for F&I products is increasingly dangerous. In a few states, prices are regulated by the state, but for the most part there is little regulation so far. Dealers should consider price caps or maximum markups regardless of whether they are state-regulated or not. In addition, fair and consistent pricing will likely lead to higher product penetrations and more profits.

·         Protecting service members from creditor abuse is also priority for the CFPB. Last June, the bureau ordered U.S. Bank and Dealers' Financial Services to refund a total of $6.5 million to military service members who received auto loans through the MILES program. The CFPB said the companies sometimes minimized the cost and exaggerated coverage of extended service contracts and GAP. The bureau ordered DFS to rewrite disclosures to emphasize that add-on products are optional, that they don't have to be financed along with the vehicle, and that financing the products costs more than paying cash. The charges included:

1.    Understating the costs of the vehicle service contract: DFS claimed in marketing materials that the vehicle service contract would add just “a few dollars” to the customer’s monthly payment when it actually added an average of $43 per month.

2.    Understating the costs of the insurance: Similarly, DFS told some customers that the insurance policy would cost only a few cents a day, when the true cost averaged 42 cents a day, or more than $100 a year.

3.    Misleading consumers about product benefits: The MILES marketing materials also deceptively suggested that the vehicle service contract would protect servicemembers from all expensive car repairs, when many basic parts were not covered.

The CFPB has been the “Shiny Object” but…

Other Regulators are at Work:

·         The Dodd - Frank Act passed by Congress in 2010 gave the FTC new and expanded authority regarding motor vehicle dealers.

·         Although it may seem that the FTC is only the “dealer advertising cops”, they are expanding their reach in several other areas.

·         Since 2011, the FTC has been gathering information on possible consumer protection issues that may arise in the sale, financing or lease of motor vehicles through a series of roundtables and by seeking public comments. Some areas the FTC is looking at are:

·         Dealer interest rate markups

·         Spot Delivery

·         Payment Packing

·         Vehicle Leasing

·         Unfair and Deceptive Practices

·         Jessica Rich, the FTC’s director of the Bureau of Consumer Protection, cited the passage in the Dodd-Frank Wall Street Reform and Consumer Act — the law that created the Consumer Financial Protection Bureau when it was passed in 2010 — that named the FTC as the “primary enforcers” of auto dealers. “We took that mandate very seriously, and we are going to be bringing a lot of enforcement in the auto area,” she said. “We have a lot of investigations in the pipeline.”

·         Additionally, the CFPB entered into a “Memorandum of Understanding” with the FTC.  The two agencies have agreed to meet regularly, compare notes on investigations, and share consumer complaints.

·         The Dodd-Frank Act also gives state Attorneys General (with which the CFPB also has cooperation agreements) increased enforcement authority for violations of federal consumer protection law as well as state law such as Unfair and Deceptive Acts and Practices statutes. The CFPB, FTC, and AGs will now be working together. Richard Cordray, the CFPB director and a former Ohio attorney general, has made clear his desire to augment the CFPB’s power through attorneys general.

·         The CFPB and DOJ also signed an agreement that has facilitated strong coordination between the two agencies on fair lending enforcement. Under this agreement, the CFPB will refer matters to DOJ when the CFPB has reason to believe there is a pattern or practice of lending discrimination.

·         On Monday, January 13, 2014, the US DOJ and US Attorney’s office announced a lawsuit against two Buy Here Pay Here independent used car dealerships for violating the federal Equal Credit Opportunity Act (ECOA) and violating the state’s Unfair and Deceptive Trade Practices Act. 

·         The case claims sited grounds for the actions stemmed from dealers were ““reverse redlining” by targeting African-American customers with installment sale contracts containing inflated sales prices, down payments and increased interest rates without meaningfully assessing the customers’ credit.”

Recent F&I-Related Enforcement Targets:

·         Automotive Lenders - The CFPB and DOJ ratcheted up the pressure in December with a consent order in which Ally Financial Inc. settled accusations of discrimination for $98 million. Ally also agreed to monitor auto dealers more closely and reduce what Ally calls the "perceived disparity" that minorities may face obtaining auto loans.

This could also lead to some consumers who get a refund suing the dealership that allegedly discriminated against them. Ally will implement a compliance program to prevent future discrimination. The program will include dealer education; prompt corrective action against dealers when there are dealer disparities; and portfolio-wide analysis of pricing data for disparities. Until Ally’s compliance program effectively eliminates disparities, Ally will pay harmed consumers each year under the order. In the alternative, Ally can move away from dealer markups to a non-discretionary dealer compensation structure, which would eliminate its obligation to monitor the fair lending risk of ongoing dealer markups.

·         In a direct dealer case, last September a Los Angeles dealer settled with the DOJ for $125k for alleged rate markup discrimination.

·         There has been an uptick in enforcement actions for falsification of credit applications, including:

o    A Chicago-area dealer in December

o    2 Charleston-area dealers on December

o    A Birmingham dealer in October

·         In September 2013, A Washington dealer forfeited $1.75 million for failure to report cash transactions exceeding $10,000.

·         Risk Based Pricing Notices - The Federal Trade Commission announced in December the settlement of its first enforcement action for alleged violations of the FCRA risk-based pricing rule. Under the settlement, Time Warner Cable agreed to pay a civil penalty of $1.9 million to settle charges of failing to provide the required risk-based pricing notices to consumers. In addition to imposing the $1.9 million civil penalty, the settlement enjoins TWC from failing to comply with the Rule.

Other Recent Dealer Issues:

·         On January 9, 2014— The FTC announced “Operation Steer Clear”, an aggressive action to halt false vehicle advertising; 10 motor vehicle dealers, franchised and independent were investigated and prosecuted in cooperation with state regulatory authorities. Settlements with Consent Decree terms up to 20 Years were reached in 9 of the 10 cases. 

·         In 2013, The FTC cited 11 Arkansas Dealers for not displaying Buyers Guides.

·         In June of 2012, the FTC cited a Georgia dealer for violating the Information Safeguards Rule.

·         This past December, the CFPB released preliminary research on the use of arbitration clauses in connection with consumer financial products and services. This is significant since class action complaints against auto dealers have increased since the early 2000s.

·         In November, the NY attorney general settled with a dealer for $135k.The dealer was cited with adding a bogus $499 “administrative fee”.

Politics:

·         Sen. Elizabeth Warren cited a study conducted by the Bipartisan Policy Center that calls for Congress to close the dealer loophole. “It makes no sense to me that there should be any exception here for consumers who are being tricked out of billions of dollars every year on car loans,” Warren said.

·         You never know how this will play out, but high-profile cases like Ally, MILES, and “deceptive” dealer advertising actions set the “anti-dealer” tone.