By Christine Hines (NACA) and Erin Witte (Consumer Federation of America)
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.
Monthly payments
Cars are more expensive than ever. As a result, most car buyers finance their car purchase or lease a vehicle. This means that consumers are tied to a closed-end monthly payment until the loan is paid off. The lynchpin for profit-driven dealers is also the most vulnerable pressure point for consumers: the monthly payment amount. Consumer advocates often advise consumers not to focus on or disclose their desired monthly payment amount in the negotiations, because when the dealer has this number, it is armed with a significant leverage and the ability to manipulate components of that payment.
Take a consumer who wants a low monthly payment. A lower amount may seem attractive, but it also likely also means that the dealer has manipulated other terms, such as extending the contract period for several years, driving up the total purchase cost by thousands of dollars. Dealers may also use monthly payments to hide charges for add-on products, such as service contracts or rustproofing, because the addition of these costs may only increase the monthly payment amount by a few dollars.
Car buyers should know what to expect in a monthly payment and understand the components of that payment (price, interest rate, credit score, payment period, down payment, and trade-in).
The FTC’s Proposed Approach to Monthly Payments
The FTC’s proposed rule would require dealers to make several disclosures whenever discussing monthly payments. First, the dealer must disclose the total purchase amount if the consumer were to select that monthly payment amount. Under the proposal, if a dealer asserts anything to a consumer about a precise monthly payment, it must also disclose the total amount the consumer will pay to purchase or lease a car based on that monthly payment. In other words, dealers must disclose the full amount a car buyer will pay over time based on the amount that the car buyer would pay each month. § 463.4(d)(1).
Second, if the total amount assumes that a consumer is providing consideration (down payment or trade in), then the dealer would also be required to disclose the total amount if it includes other consumer payments such as a cash down payment or a trade-in. § 463.4(d)(2). That way, consumers can compare prices and payments considering the different monthly payments and total price of the car. The FTC would also require a dealer to disclose the fact that a comparatively lower monthly payment could increase the total purchase price. § 463.4(e).
What Should the FTC Do to Improve Its “Monthly Payments” Proposal?
The FTC should require dealers to affirmatively put the required disclosures in writing, enabling consumers to comparison shop more easily.
The FTC also should require dealers to provide a set of uniform financing disclosures before conducting a credit application. These uniform disclosures would assume a standard set of variables (interest rate, credit score, contract term, etc.) and provide a monthly payment for a particular vehicle. This would allow consumers to decide whether the car is in their price range and whether to let the dealer access their credit in order to continue financing negotiations. These uniform disclosures would help make financing determinations standard, more predictable, and anti-discriminatory.
Subsequently, at signing, after price comparisons and negotiations and after the buyer is credit-approved, the FTC should require the credit contract, which contains the agreed-upon amount due at signing, the monthly payment, and the annual interest rate, to be treated as final when the car buyer signs it.
