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.
Note: The Federal Trade Commission has issued an order postponing the effective date of the CARS Rule while the NADA legal challenge against the rule is pending.
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.
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.
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.
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.
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.
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.
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:
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.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following:
[1] 16 CFR Part 463