As I have been doing of late, I wanted to start my article by sending well-wishes to all our KPA clients in hopes that the unofficial start to summer will bring some much-needed sunshine on what has thus far been a gloomy 2020. Despite a global pandemic, the FTC does not appear to be slowing down any, as it recently announced a $1.5 million settlement with a New York-based dealership and its general manager. This article will dive into the FTC’s allegations and discuss what dealers can learn from it going forward.
The FTC’s Allegations
The FTC’s complaint against Bronx Honda and its general manager alleges violations of the Equal Credit Opportunity Act (ECOA), the FTC Act, and the Truth in Lending Act (TILA).
As to the ECOA claim, according to the FTC, salespeople at the dealership were directed to charge higher markups and fees to African American and Hispanic customers, specifically targeting them over white customers because of their “limited education.” In fact, at one point in time, the FTC claims that African American and Hispanic finance customers were charged a markup 50% more often than white finance customers. Similarly, white customers were financed without markup, or below the lender’s buy rate, almost twice as often as their African American or Hispanic counterparts. African American customers were charged about $163 more in interest, and Hispanic customers were charged about $211 more in interest than similarly situated white customers. The FTC claims that these “markups exhibit statistically significant disparities based on race, color, or national origin that cannot be explained by non-discriminatory reasons.”
In addition to these discriminatory practices, the defendants are claimed to have committed numerous other illegal advertising and sales acts. There were alleged instances where the dealership’s advertised price was said to be an error to customers, and that the customers would have to pay more for the vehicle than what was advertised. Further, the FTC complaint states that the dealership failed to include required financial disclosures on its vehicle advertisements in violation of TILA and Reg Z, and that the dealer failed to proper label/disclose finance rates as an “annual percentage rate” or “APR.”
The complaint also cites examples where customers were informed they had to pay an additional “certification fee” in order to “certify” a vehicle that was already advertised as certified or pay an additional “dealer prep” or “reconditioning” fee to cover the dealer’s cost of repairs or cleaning for the certified vehicle. The defendants also allegedly added charges to contracts without consumers’ consent (sometimes even adding sales tax twice) and increased the sale price of vehicles mid-sale without the consumers’ knowledge.
The FTC and the defendants reached a $1.5 million financial settlement along with injunctive provisions designed to remedy the violations alleged in the complaint. The proposed settlement also requires a Fair Lending Program be instituted at the dealer.
You can read the entire FTC complaint here. The proposed settlement order may be an interesting read as well.
What We Have Learned
The FTC is Still Active on the Enforcement Front Against Dealers
The literal million-dollar (actually, million-and-a-half-dollar) question for dealers is, “what can we learn from this?” The first, and arguably the most important takeaway is that the FTC has not taken a step back during these times, and still has an ever-watchful eye on dealerships. Accordingly, now, more than ever is the time to be vigilant of our selling and advertising practices. And, perhaps these times can be a blessing in disguise in this respect. While sales and advertising may be currently experiencing a lull, now can be an excellent opportunity to audit and review current sales and advertising practices to make sure they are airtight.
Advertising is Still Highly Scrutinized and Regulated
False and deceptive advertising claims are still clearly on the FTC’s radar. Because of this current FTC action, there appears no better time than now to quickly brush up on some price advertising rules and Reg Z disclosure requirements.
Remember, a dealer in California has a duty to sell a vehicle at or below advertised price regardless of whether a specific customer has seen the advertisement. [Vehicle Code § 11713.1(e); 13 CCR § 260.04(b)]. The advertised price of the vehicle should include all pre-loaded accessories or options on the vehicle. In other words, the price should reflect the vehicle as it sits on the lot at the time of the advertisement. Once the advertised vehicle is sold (or withdrawn from sale), you must withdraw any advertisement of that vehicle within two days. [Vehicle Code § 11713(c)]. Also, always put an expiration date on your advertisements.
Regarding Reg Z, recall that if the downpayment, number of payments, amount of any payment, or the amount of any finance charge is advertised, then the advertisement must disclose all of the following: 1) the amount or percentage of the downpayment; 2) the terms of repayment (i.e., XX monthly payments of $XXXX per month per $1,000 financed); and 3) the annual percentage rate (APR). [12 CFR § 226.24(c); Vehicle Code § 11713.16(d)].
CPO Vehicles Continue to be a Hot-Button Issue
As we noted in one of our first newsletter articles of 2020, the treatment of CPO vehicles is, and has been for some time, a hot-button topic for plaintiffs’ attorneys in California, and now apparently with the FTC as well. The FTC complaint cites that extra certification charges were assessed to customers who were interested in purchasing vehicles that were advertised as “certified.” Remember that a warranty, including a CPO warranty, comes with the vehicle, and is included in the price—you cannot charge a customer extra to certify the vehicle. [See FTC’s Blog Post: Warranties and Insurance Contracts 101]. Also, if a vehicle is advertised as a certified vehicle, you cannot add extra “certification fees” or “dealer prep” fees because the vehicle must have been properly certified before advertising it as such. For more discussion on CPO vehicles, please review our article “New Year, New You (or Dealership).”
ECOA is Back in the Picture
As you know, the ECOA prohibits credit discrimination based on race, color, religion, national origin, sex, marital status, age, or because someone gets public assistance. [12 CFR § 202.4]. Generally, the ECOA has two principal theories of liability: disparate treatment and disparate impact. Many dealers may recall that years ago, much was made about the ECOA and “disparate impact,” or where facially neutral credit policies or practices had an adverse impact on a member in one of the protected classes. On the other hand, disparate treatment is where a creditor treats a credit applicant differently based on a prohibited basis.
In this instance, it seems like the FTC allegations tend to show more of overt discrimination by the dealership against African American and Hispanic customers rather than just a disparate impact. No matter how you interpret it, the moral of this story is the same: this is the time to review, and if necessary, revise your fair credit policies and to train (or retrain) staff on these policies. Now more than ever must you be hyperaware of any actions at your dealership that even give an inkling of discrimination, even if entirely innocent.
We know that these times are hard, and everyone everywhere has been affected by this global pandemic. We are all in this together, and this too shall pass. Hotline clients are invited to contact us at (800) 785-2880 (then press “4” for hotline) or [email protected]. We are here to answer any questions you may have.