By Erin Witte (Consumer Federation of America) and Christine Hines (NACA)
For the first time in over a decade, the Federal Trade Commission (FTC) has proposed a rule directly addressing deceptive financing practices by auto dealers. The proposal contains a host of prohibited misrepresentations, required disclosures, and specific requirements pertaining to the sale of add-ons. The FTC explains at length the problems that consumers face when purchasing a vehicle and how, despite its history of enforcement action against car dealers, consumer problems persist. There are numerous facets to the rule, and advocates are encouraged to see the FTC taking a broad approach. This blog series is intended to highlight and explain certain components of the rule and the practices by dealers that it attempts to address.
Add-On Products and Services
The FTC places particular emphasis throughout the proposed rule on the deceptive conduct surrounding the sale of certain add-on products, such as extended warranties, service plans, GAP insurance, VIN etching, and undercoating. These products typically cost several hundred dollars each and are tacked on to the sale of a vehicle, increasing the overall cost sometimes by thousands of dollars. Consumers frequently pay for these products without knowing or expressly agreeing to them.
The car purchase process is lengthy and complicated, and dealers may wait until the end of an hours-long negotiation before they include charges for the add-ons in the dense paperwork, hoping that the consumer will not review it carefully. Dealers have also lied to consumers, telling them the add-ons were a condition of the purchase, and they have lied about the benefits (and hidden the limitations) of certain add-on products. Dealers benefit tremendously from the sale of these products, prompting aggressive finance representatives to engage in deceptive conduct and pressure consumers into purchasing them.
The FTC’s Proposed Approach to Deceptive Add-On Practices
The FTC notes that despite numerous enforcement actions to address this exact conduct, problems persist with deceptive add-on practices. As such, it has published this proposed rule as a necessary tool to effectively curb this fraudulent conduct.
The proposed rule would:
1. Prohibit dealers from misrepresenting any “cost, limitation, benefit or any other material aspect of an add-on product or service.” § 462.3(b)
The FTC defines an “add-on product or service” as “any product(s) or service(s) not provided to the consumer or installed on the vehicle by the motor vehicle manufacturer and for which the Motor Vehicle Dealer, directly or indirectly, charges a consumer in connection with a vehicle sale, lease, or financing transaction.”
2. Require dealers to disclose, clearly and conspicuously, an “Add-on List” if they charge consumers for add-on products. § 463.4(b)
The “Add-On List” is “an itemized list of all optional Add-on Products or Services for which the Motor Vehicle Dealer, directly or indirectly, charges consumers. The Add-on List must Clearly and Conspicuously disclose each such optional Add-on and the price of each such Add-on. If the Add-on price varies, the disclosure must include the price range the typical consumer will pay instead of the price.” (§ 463.2(b)).
Dealers would be required to disclose this list on each website, online service or mobile application operated by the dealer, and at the dealership, and, if a vehicle is advertised in a manner other than on the dealer’s website, etc. (such as in a radio or television ad), then the dealer must provide the website where the List can be viewed.
3. Require dealers to accurately disclose whether the purchase of the add-on is a condition of the purchase of the vehicle. § 463.4
Dealers have a history of pressuring consumers to purchase add-ons by falsely telling them that the add-on is required to purchase the car. Under this proposed rule, dealers would be required to tell consumers that purchase of the add-on product is not a condition of the sale, if this is in fact true. This disclosure is required “when making any representation” about the add-on product or service, and it need only be in writing if the representation is in writing.
4. Prohibit dealers from charging for worthless add-ons. § 463.5 (a)
Dealers have deceptively charged hundreds of dollars for add-on products that provide no value, including “rustproofing,” that does not actually prevent rust, theft prevention services without evidence of efficacy, and “nitrogen filled tires” that have no more nitrogen than normal air. The FTC also explicitly states that this would prohibit dealers from selling GAP coverage to a consumer whose loan balance was low enough that GAP is unnecessary, or where hidden restrictions would exclude the car from the GAP coverage altogether.
5. Prohibit dealers from charging for any add-on product without a clear declination from the consumer to buy the car without them. § 463.5 (b)
The proposal would require dealers to give consumers a clear opportunity to purchase the vehicle without optional add-ons before referencing any aspect of financing. This provision is an attempt to prevent the practice of “sneaking in” add-ons and taking measures to preclude consumers from carefully reviewing their contract with these added expenses.
This proposal requires the dealer to:
(1) Tell the consumer the price of the vehicle without the add-ons;
(2) Tell the consumer that they can purchase the vehicle without optional add-ons;
(3) Obtain a separate written form, signed by the consumer, that includes the price without add-ons, and a declination from the consumer to purchase the vehicle without the add-ons.
What Should the FTC Do in its Proposed Rule to Address Deceptive Add-On Practices?
1. Prevent dealers from making all add-ons required instead of optional.
Notably, the FTC’s definition of “add-on products and services” does not include the word “optional.” Indeed, Section 463.5(b), which requires dealers to disclose that optional add-ons are not a condition of the sale only requires that disclosure “if true.” This means that it would still be possible for dealers to require certain add-ons as a condition of the sale of a vehicle. The FTC is also well aware that dealers have misled their customers into believing that an add-on is required, when it was not. Consumers must be able to reasonably choose whether to accept add-on products with their cars. The FTC should take steps to ensure that dealers do not simply require add-ons to evade these provisions.
2. Ensure that all add-on products are capable of being canceled or removed by communicating with the dealer, the add-on product supplier, or the finance company.
Even with the safeguards that the FTC proposes to enact to ensure that consumers make an informed decision about add-ons, consumers may still feel pressured to purchase add-ons and make a decision that they later regret. The FTC should take steps to ensure that any add-on is capable of being canceled or removed within a reasonable time after date of the sale.
Comments on the FTC’s proposed rule on auto dealer practices are due September 12.