Cracks in the FTC CARS Rule Armor

There are two sides to every story, and such is the case with the Federal Trade Commission's Combating Auto Retail Scams, or CARS.

The FTC says the regulation would eliminate confusion and inconvenience in the car-buying process and won’t cost dealers a thing, but the automotive industry casts a different light on the regulation.

Despite the opposition and the fact that the FTC has stayed the rule while auto industry trade groups contest it in court, compliance experts say it’s wise that dealers don’t wait on the outcome but prepare for its enactment now.

Meanwhile, those experts are trying to prevent its enactment.

“The FTC says this will be better for the consumer,” says James Ganther, an attorney and CEO of Mosaic Compliance Services. “But in four years, there has been one complaint for every 10 million retail automobile transactions. That’s not a crisis. This regulation is a solution in desperate search for a problem.”

Tony Wanderon, CEO of APCO Holdings LLC, shares that sentiment, finding it perplexing that regulators doubt dealers' commitment to customer service. “The only way a dealer will survive is for their customers to come back to their dealership and buy a car,” he says. “It’s almost a requirement that you walk the customer through the process, provide them a great customer experience, and disclose everything properly.”

The regulation also paves the way for additional litigation, some of which may be frivolous, he says.

Flawed Pricing?

The FTC says the CARS Rule would prevent misleading ads related to significant information that could influence consumer choices. The biggest change, they say, would be in pricing.

If the rule is upheld, the FTC says the advertised price would have to reflect what consumers actually pay. Of course, the price wouldn’t include state and federally mandated taxes and fees, which are added in later, but the rule would require all other fees to be disclosed upfront.

Ganther says the rule would in fact force dealers to include all charges customers must pay. “As a practical matter,” he says. “You no longer can add documentation fees or dealer prep fees at the end. They have to be included in the advertised price, because the rule requires dealers to advertise the offering price, which is a defined term. And that definition includes everything except taxes and government fees.”

Violating those and other FTC regulations would require dealers to reimburse consumers and pay civil penalties of up to more than $50,000 per violation.

Dealers are already including the final price on the motor vehicle retail installment contract, according to Wanderon. “This document shows the interest rate, the finance charges and the total payment.”

The rule even goes beyond what consumers want, Ganther adds.

“At the end of the day, most buyers don’t care,” he says. “Most buyers are payment buyers. They want to know what their payment will be each month and if it fits their budget. Knowing the total financed price of each individual voluntary protection product doesn’t help – it just slows down and complicates the process. The only people who focus on total cash price are cash buyers.”

He adds, “This is why dealers advertise the way they advertise and negotiate the way they do. It is what customers want.”

Consistent, Transparent Communication

The rule also requires dealers to consistently and transparently disclose offering price across all communication methods.

When using email, text or other tools, the rule would mandate that dealers prominently display the offering price and avoid using confusing language. When making phone or video calls, the CARS Rule stipulates that it’s important for employees to speak in a way that ordinary consumers can easily understand.

Ganther says dealers wouldn’t be allowed to provide agreements with preselected boxes or that limit consumer autonomy, decision-making or choice.

Dealers would also need to get express informed consent before charging consumers, though it’s unclear how they should be obtained, Ganther and Wanderon say. Wanderon says the regulation leaves disclosure open to interpretation.

“Is it a signed document that’s been explained? A recorded conversation to prove that the dealer complied? Is there a script they are supposed to follow to keep them out of trouble? There is a lot of subjectivity in here. This opens up a lot of risk, even for dealers who are doing their job.”

Ganther agrees, saying dealers may be required to videotape the complete transaction and maintain the recording for two years to comply with the regulation’s express informed consent mandate.  He also points out that demonstrating express informed consent would mean a financial burden for dealers.

“How do you prove you get express informed consent during oral negotiations? The FTC doesn’t tell dealers what express informed consent is, only what it’s not. What we know is that under this ruling, signing a contract is no longer enough to show express informed consent.”

Video recording, he adds, would expose dealers to risks that extend beyond identity theft, which dealers also must protect against. “Identity theft is the least of your worries if you have a 45-minute recording of someone’s voice,” he says.

“Dealers will be tempted to record transactions and maintain recordings. That could hurt the customer. If someone hacks into this database, they can steal their voice and use it to perpetrate frauds against your friends and family. So if you record transactions, I would have a professional service do it and store the recordings safely. This is not a liability the dealer wants to keep for itself.”

The Problem with Add-Ons

The FTC says the CARS Rule would prevent dealers from trying to charge consumers for add-on products and services they don’t need and that aren’t part of the disclosed price.

It would mandate that dealers make it explicit that the add-on is voluntary, even if it's bundled in the price, Ganther says.

Examples of add-ons include prepaid maintenance packages offered by dealers, "nitrogen-filled" tires, vehicle service contracts, gap coverage agreements, and tangible items like wheels or window tinting that aren't part of the original factory build.

The FTC maintains that those add-ons are unnecessary and don’t provide value. However, that assumption eliminates consumer choice, Wanderon says.

He cites gap coverage as an example. Many consumers purchased vehicles over the last few years when automobile prices were at record highs. Now, used car prices have taken a nosedive, and those people might be in a tough spot on their loans. When consumers don't have gap coverage, their insurance coverage may be inadequate if their vehicles are deemed a total loss in an accident. And that’s just one example of gap coverage sense, he says.

The Real Cost of Compliance

The FTC says CARS would target shady dealer tactics cost-effectively.

In fact, the commission’s order states, “… the rule does not impose substantial costs, if any, on dealers that presently comply with the law, and to the extent there are costs, those are outweighed by the benefits to consumers, to law-abiding dealers, and to fair competition—as honest dealers will not be at a competitive disadvantage relative to dishonest dealers.”

However, both Wanderon and Ganther say the rule would make car-buying more time-consuming, costly, confusing and frustrating for all involved because it doesn’t account for dealership compliance costs.

“The FTC said compliance would not cost a thing,” Ganther says. “But we are in the business of creating compliance solutions. We know what the cost will be. Our best estimate is well over a billion dollars a year for car dealerships to come into compliance.”

The expenses for dealerships accumulate as they handle additional documentation, enforce compliance policies, train employees, conduct annual training sessions, and hire third-party auditors.

“When you add it all up—the education, the monitoring, the reporting and the auditing —we think it’s going to cost around $1,500 per rooftop, per month, forever,” Ganther says.  “Ultimately, these costs will be borne by the consumer. They also will slow down the transaction and make it more confusing.”

Where The Industry Heads

The national and Texas automobile dealers associations challenged the rule with an appeal filed in the Fifth Circuit of Appeals. The filing prompted the FTC to issue a stay of the rule, which had been set to take effect on July 30, as the dispute moves through the litigation process, which Ganther expects to take some months.

Amid the uncertainty, he recommends dealers evaluate their practices to ensure compliance with the FTC's guidelines.

“Look at what you are doing for clients. If you were accused of these deceptive trade practices, what could you produce in your own defense? Do you have written policies and procedures in place? Is your first line of defense consistent and demonstratable? Do you have verifiable training and third-party audits? All these should already be in place. This is how you comply with everything, not just the CARS Rule.”

Now is the moment for dealers to shore up their defenses if they discover any vulnerabilities, he says.

“The CARS Rule is a shot across the bow. Dealers need to do at least the minimum necessary to make them a hardened target.”

LEARN MORE: The New 372-Page CARS Rule: How to Avoid Being Prosecuted or Sued

Originally posted on F&I and Showroom