The Federal Trade Commission recently issued a final rule that is squarely aimed at changing the way dealers interact with customers in the financing process. The final rule takes effect on July 30, 2024.

While the effects on auto dealers—and the consumers that purchase vehicles from those dealers—are the most obvious, it is expected that the rule will have an ancillary and potentially material impact on banks, original equipment manufacturer (OEM) affiliated finance companies, and other non-bank auto finance companies.

The final rule, which the Federal Trade Commission (FTC) has re-styled as the CARS Rule, differs in only limited respects from its original proposal. As we noted in our prior analysis, the rule follows multiple FTC enforcement actions and consent orders over the last several years, deriving particularly from the Bronx Honda, Tate’s Auto, Napleton, and Rhinelander Auto Center cases, each involving allegations that have made their way into the final rule.

Meanwhile, since the proposed rule’s dissemination, consequences for lenders and servicers have been amplified by supervisory and enforcement actions that the Consumer Financial Protection Bureau (CFPB) announced over the past year.

KEY PROVISIONS

The CARS Rule [1] is the final rule in the FTC’s proposed Motor Vehicle Dealers Trade Regulation rulemaking issued on June 23, 2022. The final rule (1) prohibits misrepresentations about material information; (2) requires dealers to clearly disclose the offering price—“the actual price anyone can pay to get the car, excluding only required government charges”; (3) makes it unlawful for dealers to charge consumers for add-ons that “provide no benefit”; and (4) requires dealers to get consumers’ express, informed consent for certain charges.

• Bringing dealer sales practices and conduct within the FTC’s penalty offense authority. In establishing this new disclosure framework, including a new FTC dealer’s guide for compliance, [2] the CARS Rule brings certain already-prohibited deceptive dealer practices within the FTC’s civil penalty authority. The FTC has the power to seek civil penalties for deceptive trade practices proscribed by a trade regulation rule only. In defining as unlawful a specific universe of misrepresentations made in the course of selling, leasing, or arranging motor vehicle financing, the rule would subject violations of the provision to civil penalties up to approximately $50,000 per violation (an amount adjusted annually by inflation).
• Mandating specific new financing disclosures. The CARS Rule goes beyond existing disclosure requirements under Regulations M and Z by requiring “clear and conspicuous” disclosure (now explicitly defined in the rule) of additional information about the purchase price of the vehicle and prices for optional products.
• Requiring dealers to obtain consumers’ “express, informed consent” to any charges related to the sale or lease. The CARS Rule will expand the Napleton consent order’s requirement of express informed consent to vehicle sale and lease charges to the entire industry. The definition requires truthful, clear, and conspicuous disclosure, both in writing and (for in-person transactions) orally, of the reason for the charge and the amount of the charge, followed by affirmative, unambiguous assent to be charged.
• Prohibiting the sale of add-on products and services that “provide no benefit” to the consumer. The CARS Rule targets both products and services that the FTC believes provide no value to any consumer, such as nitrogen tire products that do not include more than ambient atmospheric nitrogen. It also targets those that provide no value to the specific consumer, such as duplicative warranty coverage or guaranteed asset protection (GAP) agreements when the loan-to-value (LTV) ratio is already low. The FTC has not defined the universe of products or services that fit in this category, leaving the value of some products or services open to subjective judgments and imposing the need to substantiate genuine benefits associated with ancillary products and services.
• Imposing a two-year recordkeeping requirement on dealers. Dealers will be required to create and retain records showing compliance, including advertisements, price lists, customer correspondence, financing documentation, LTV calculations for all sales of GAP coverage, and customer complaints.

Departures from June 2022 Proposed Motor Vehicle Dealers Trade Regulation

In drafting the final rule, the FTC changed some key provisions. The final rule removes the so-called “Add-on List” disclosure provision, which would have required dealers to keep and maintain a list of add-on products, including on their websites. The final rule also removed the “Cash Price without Optional Add-ons” provision, which would have required disclosures pursuant to the proposed definition and the consumers’ affirmative declination of the cash price without optional add-ons.

The final rule also changed “Motor Vehicles” to “Covered Motor Vehicle” and “Dealers” to “Covered Motor Vehicle Dealer.” These modifications clarify that Covered Motor Vehicles and Covered Motor Vehicle Dealers do not include the sale of RV, marine, motorcycles, and other recreational vehicles, including certain high-end recreational vehicles. Lastly, the final rule slightly modifies dealer recordkeeping requirements to reflect the above changes.

CONTEXT

The rule comes after years of enforcement actions against auto dealers and statements from FTC commissioners criticizing the way in which cars are sold and financed in the United States as a “broken” market in need of regulatory intervention.

In the last decade, the FTC has brought more than 50 law enforcement actions related to automobiles and helped lead two nationwide law enforcement sweeps that included 181 state-level enforcement actions in these areas. In addition, complaints from consumers related to automobile dealer conduct remain in the top 10 complaint types received by the FTC, with more than 100,000 complaints from consumers annually over the last three years.

After the FTC lost the AMG Capital Management case in the US Supreme Court—sharply curtailing the agency’s ability to pursue monetary relief where it had not first undertaken a rulemaking—the agency turned its focus in part to laying out rules that could provide such a predicate. Under the Dodd-Frank Act, the FTC was granted the authority to issue consumer protection regulations governing auto dealers using an expedited process, which made the industry a likely target for action.

With one major omission, the scope of the CARS Rule hews closely to both the fundamental allegations and the remedies adopted in recent cases, and similarly tracks factual findings from the FTC’s recent research efforts into the market. The agency’s concern about the prices of optional products—what the FTC’s official press release terms “junk fees”—also ties in with the FTC’s and CFPB’s junk fee initiative.

Conspicuously missing from both the proposed and final rule is any regulation of dealer markup, which was a significant focus of the FTC’s Bronx Honda, Napleton, and Rhinelander Auto Center cases. While a substantial part of the preamble to the CARS Rule proposal explained the role of markup in automotive finance, nothing in the rule would require additional disclosures or limits on dealer markups. The FTC and CFPB have both focused on antidiscrimination concerns associated with dealer markup for years, and at least one current FTC commissioner has explicitly called for the regulation of markups.

IMPLICATIONS FOR AUTOMOTIVE LENDERS

The potential effects on dealers themselves will undoubtedly be substantial. The effects on the automotive lending market could be more subtle—but lenders and servicers should begin assessing and planning for the potential impact now.

• Reduced optional products revenue. The FTC expressly intends the rule to reduce dealers’ sales of optional products. How dealers will react could result in pressures across the automotive lending market. Dealers may increase vehicle sale prices to replace lost revenue or seek higher dealer reserves in financing transactions. Indirect lenders should be prepared to respond to these market changes.
• Holder Rule risks to assignees. While the rule, like the FTC Act itself, does not contain a private right of action, many states’ unfair or deceptive acts or practices (UDAP) laws do—and many treat the FTC’s determination by rule that a practice is unfair or deceptive as conclusive or persuasive. While there are defenses for lenders and servicers, customers and plaintiffs’ lawyers may contemplate bringing suits for dealer conduct that they contend violates the CARS Rule. They may also attempt to construct an argument that the FTC Holder Rule can be read to allow consumers to bring those claims against assignees for indirect auto loans—particularly following April 2021 guidance rejecting the existence of a “large transaction” ceiling on that rule’s applicability. These considerations counsel in favor of greater due diligence by assignees, establishment of standards for assignment of loans, and indemnification provisions related to noncompliance as supplements to other protective and defensive measures.
• Follow-on CFPB and state scrutiny of automotive lenders. Many automotive lenders are banks or other finance companies that fall outside the FTC’s jurisdiction. But the FTC, the CFPB, and state enforcement officials such as state attorneys general and financial regulators collaborate closely, and automotive lenders should anticipate that these agencies may look carefully at whether they are purchasing retail installment contracts (RICs) that comply with the CARS Rule, with a specific focus on financed optional products that generate additional interest revenue to the lender. While the market dynamics are often different than they perceive them to be, enforcement officials have historically been reluctant to credit arguments that the dealer is solely responsible for compliance with dealer focused rules and may well expect lenders to monitor the contracts they are purchasing for facial violations and suspicious patterns. CFPB Supervision announced in its July 2023 Supervisory Highlights that it had taken action against an auto financing company on the theory that knowingly benefiting, in the form of increased interest, from an auto dealer’s inclusion of nonexistent features on a financed vehicle is an abusive practice in violation of the Dodd-Frank Act. While this is an aggressive reading of the abusiveness authority, the risk that the CFPB will take the same view of add-on products prohibited by the new CARS Rule is high.

Additional and more complex recordkeeping and compliance requirements create added financial costs for dealers as well as the automotive lenders that must police those requirements. The prospect of significant per-violation penalties means that the costs of compliance measures, although significant, are necessary.

NEXT STEPS FOR LENDERS AND SERVICERS

The final compliance deadline of July 30, 2024 will arrive quickly. Prudence dictates review of compliance processes and consideration of proactive steps to address dealer noncompliance. In doing so, lenders should consider particularly:

• What information is already available about RICs and vehicles that would help monitor for dealer violations of the rule—especially dealer violations of the rule that might be argued to benefit the lender?
• What level of testing and monitoring is appropriate to identify dealerships that create greater risk?
• What additional information would be needed from dealers to make that testing more effective?
• Which dealer marketed optional products create the greatest potential risk for the lender?
• What tools, such as reserve accounts or enhanced monitoring of higher-risk dealers, can be deployed to create dealer incentives toward compliance with the rule?
• What lines need to be drawn that strike the right balance between mitigating upstream risk to lenders and servicers, compliance program administrability, and reasonable interpretations of the more nuanced aspects of the regulation?

For lenders and servicers in particular, a key focus in regulatory interactions following and even leading up to the rule’s effective date will be to demonstrate that they understand the rule’s effect and have a deliberate compliance plan.

Automotive finance companies should address these issues with dealers early so that they can take action to confirm compliance (or implement compliance undertakings) and can make informed decisions on how to proceed in terms of accepting RIC assignments and mitigating associated risks.

[1] 16 CFR Part 463

[2] FTC CARS Rule: Combating Auto Retail Scams – A Dealers Guide

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