Government Enforcement Activity Against Dealers: A New Era

Recent String of Dealer Law Enforcement Activity:A New Era of Scrutiny?Jonathan MorrisonAuto Advisory Services

Recent String of Government Enforcement ActivityWhere Are We Today?How Did We Get Here?Where Are Going?

Where are We today?Federal enforcement ActivityWhere are We Today?FTC Civil Investigative Demands:Spot DeliverySafeguards RulePrivacy RuleFTC Operation Steer ClearFTC Used Car Rule EnforcementFTC Civil Investigative DemandsThe FTC is authorized by law to issue Civil Investigative Demands (CIDs)effectively enhanced administrative subpoena-issuing power.In addition to document production and oral testimony, CIDs may also require a business to conduct economic or other studies (one-time or annual) or answer questions that would otherwise be outside the scope of subpoena authority. Recently, dealers and auto lenders have received CIDs involving the following areas:Spot Delivery;Privacy Rule;Information Safeguards; andGPS Tracking/Remote Immobilization.Operation Steer Clear/Dont Be Taken for a RidePress Conference held jointly with County of Los Angeles Department of Consumer Affairs (CLADCA), at CLADCA Headquarters, on January 9th.Announced the launch of a long-term enforcement campaign against new and used car dealers for deceptive advertising.First volley included announcement of complaints filed against ten dealerships, nine of which were settled prior to the press conference; the last complaint was settled late last month. Settlements involved no monetary fines, but included 20 year consent decrees under which the dealers agreed not to violate laws cited in the complaint, a mandate to submit compliance plans to the FTC, and a requirement to retain all advertisements for inspection by the FTC for a five year period. FTC Enforcement Authority exercisedThe Federal Trade Commission Act states that [u]nfair methods of competition . . . and unfair or deceptive acts or practices . . . are herby declared unlawful. The deceptive element was defined in a1983 policy statement to Congress as requiring the following:THERE MUST BE A REPRESENTATION, OMISSION, OR PRACTICE THAT IS LIKELY TO MISLEAD THE CONSUMER.The FTC examines the entirety of the advertisement, and considers express or implied claims made. The FTC generally will not need extrinsic evidence in determining whether an advertisement is deceptive, and no consumer will need to have actually been misled.THE ACT OR PRACTICE MUST BE CONSIDERED FROM THE PERSPECTIVE OF THE REASONABLE CONSUMER.Advertisements targeted to the general public will be interpreted from the position of a reasonable member of the general public; ads targeted to a specific group (e.g., children) will be interpreted from the position of a reasonable member of that group.Ambiguous claims will not be interpreted in favor of the advertiser.THE REPRESENTATION, OMISSION OR PRACTICE MUST BE MATERIAL.Material claims are those likely to affect a consumer's choice of or conduct regarding a product.Express claims and facts or information pertaining to central characteristics of the product or service are presumed material.

Truth In Lending Act & Consumer Leasing Act EnforcementThe FTC is also the designated dealer enforcement agency for violations of the federal Truth in Lending and Consumer Leasing Acts.

Consumer Leasing Act Advertising Trigger TermsConsumer Lease Advertisements with certain Trigger Terms must clearly and conspicuously include required information:Trigger Terms:Statement of required capitalized cost reduction or other payment required prior to lease signing (or delivery, if occurring post-consummation); orAmount of any lease payment.Required Disclosures:The Fact that the advertisement is for a lease;The total amount due before or at consummation (or delivery, if occurring post-consummation);The number, amounts, and due dates or periods of scheduled payments;Whether a security deposit is required; andThe fact that an extra charge may be imposed at the end of the lease term (if liability is based on difference between residual and actual value at end of lease term)Truth In Lending Act Advertising Trigger TermsClosed End Credit Advertisements with certain Trigger Terms must clearly and conspicuously include required information:Trigger Terms:Amount or percentage of any downpayment;Amount of any finance charge;Amount of any payment; orNumber of payments or length of credit.Required Disclosures:Amount or percentage of downpayment; Full terms of repayment;Annual Percentage Rate or APR

Complaint #1

*Prices after $5,000 down + tax + lic + doc. fees on approved credit. . . . Plus government fees and taxes, any finance charges, any dealer document preparation charge and any emission testing charge.Complaint #1Alleged FTC Act Violation:Misrepresentation Regarding Purchase Price of Vehicle.Misleading Representation, Omission, or Practice?Likely to Mislead a Reasonable Consumer?Materiality?

Complaint #2

$4,999 Consumer Down Payment, First Payment, Acquisition Fee, Taxes, Title & License Due at Signing.Complaint #2FTC Act Violation: Misrepresentation of Amount Due at Lease InceptionMisleading Representation, Omission, or Practice?Likely to Mislead a Reasonable Consumer?Materiality?Consumer Leasing Act Violation:Failure to fulfill Trigger Term ObligationsTrigger Term: Advertising a lease payment.Disclosure Violation: Failure to clearly or conspicuously disclose the amount due at lease signing.

Complaint #3

Complaint #3FTC Act Violation:Misrepresentation Regarding Monthly Payment AmountMisleading Representation, Omission, or Practice?Likely to Mislead a Reasonable Consumer?Materiality?Truth-In-Lending Act Violation:Failure to fulfill Trigger Term disclosure requirements.Trigger Terms: Advertising downpayment and monthly payments.Disclosure Violation: Failure to disclose the terms of repayment. Moral of the Operation Steer Clear StoryWhat the Advertisement Giveth, the Disclaimer Cannot Taketh Away.FTC Used Car Rule Enforcement:Keeping Up With the jonesborosFTC Used Car Rule:Requires dealers to conspicuously display the FTC Buyers Guide on all used vehicles to disclose the terms of any warranty offered by the dealer for the vehicle.Enforcement Activity:November 2012: FTC performs inspection sweep of 21 dealers in Jonesboro, Arkansas to determine whether used vehicles displayed for sale were properly displaying Buyers Guides.January 2013: FTC warns 11 of the dealers of the failure to properly display Buyers Guides.May 2013: All warned dealers were revisited. 10 of those dealers complied with the Used Car Rule.March 2014: The FTC filed a complaint against the one non-compliant dealer under the FTC Act and Magnusson Moss Warranty Act, alleging that 71 of the 78 used vehicles displayed failed to properly display Buyers Guides. The requested punishment? A permanent injunction from future violations, and potential civil penalties of $1,136,000.

How did we get here?New car sales and industry portrayalsAnnual New Car Sales 2007-20132007: 16,154,064 New Vehicle SalesJanuary 31, 2007Big Investors Breathing New Life Into Gasping Auto Parts Suppliers(1,091,410 new vehicles sold; 16.47 Million SAAR)June 22, 2007Senate Adopts Energy Bill Raising Mileage for Cars(1,455,698 new vehicles sold; 15.86 Million SAAR)

August 26, 2007Their Titles Laundered, the Cars Are Still Lemons(1,478,650 new vehicles sold; 16.11 Million SAAR)

2008: 13,247,431 New vehicle SalesFebruary 12, 2008$722 Million Quarterly Loss at G.M. (1,176,254 new vehicles sold; 15.22 Million SAAR)

September18, 2008Federal Aid to Detroit Seems Likely(965,160 new vehicles sold; 12.73 Million SAAR)

October 28, 2008G.M. Speeds Hat in Hand to Treasury(838,592 new vehicles sold; 10.73 Million SAAR)

November 19, 2008By Mitt RomneyLet Detroit Go Bankrupt(747,544 new vehicles sold; 10.32 Million SAAR)

2009: 10,431,509 new vehicle salesFebruary 8, 2009The Sky Is Falling for Carmakers, Again(689,794 new vehicles sold; 9.05 Million SAAR)

April 30, 2009Bankruptcy Plan for Chrysler (819,817 new vehicles sold; 9.20 Million SAAR)

May 15, 2009GM Tells 1,100 Dealers They Will Be Shut Down: Bad news arrives one day after Chrysler targeted 789 franchisees (926,130 new vehicles sold; 9.99 Million SAAR)

June 19, 2009Cash-for-clunkers bill passes, offers up to $4,500 for a new car(860,101 new vehicles sold; 9.97 Million SAAR)

July 31, 2009Cash for Clunkers Car-Rebate Plan Sells Out in Days(998,062 new vehicles sold; 11.40 Million SAAR)

August 5, 2009More Cash for Clunkers: The Senate Should Approve an Additional $2 Billion for the Program, Which is Driving Economic Activity at a Crucial Time(1,262,189 new vehicles sold; 14.59 Million SAAR)

August 7, 2009Senate OKs More Cash for Clunkers(1,262,189 new vehicles sold; 14.59 Million SAAR)

August 31, 2009Auto Sales Up in August Thanks to Cash for Clunkers(1,262,189 new vehicles sold; 14.59 Million SAAR)2010: 11,589,844 new vehicle salesFebruary 27, 2010Dodd Proposes Financial Protection Agency(780,422 new vehicles sold; 10.13 Million SAAR)

March 6, 2010Consumer Groups Urge Regulation of Nonbank Financial Institutions (1,066,298 new vehicles sold; 11.57 Million SAAR)

April 22, 2010New Front in Battle over Financial Rules: Lobbyists for Military Personnel Fight Auto Dealers' Bid for Exemption From New Regulations(982,263 new vehicles sold;11.25 Million SAAR)June 22, 2010New Regulator Might Not Oversee Auto DealersAuto dealers argued that they already were subject to various federal regulations, mostly enforced by the Federal Trade Commission. [Frank] was particularly contemptuous of objections from the regulators themselves: I do not think there is a group with less credibility in this field. . . . They are defending their reputations and their turf, to neither one of which they are entitled.(983,781 new vehicles sold; 11.40 Million SAAR)

June 22, 2010Auto Dealers Win Battle in Financial Reform Bill(983,781 new vehicles sold; 11.40 Million SAAR)

January 20, 2010Obama Pressing for Protections Against Lenders(698,983 new vehicles sold; 10.70 Million SAAR)

July 22, 2010Car Dealers Mostly Escape CFPB, but May Face Scrutiny ElsewhereI think the auto dealers are going to rue what they wished for. The FTC can now just focus on auto dealers, said Lauren Saunders, managing attorney of the NCLC(1,050,140 new vehicles sold; 11.75 Million SAAR)

Dodd-Frank & The FTCThe FTC previously had consumer protection jurisdiction over almost every business in the country, with the primary exceptions of FDIC-regulated financial institutions, insurance companies and telecommunications companies.Dodd-Frank additionally excluded FTC rulemaking and enforcement authority over the non-bank sector for most consumer finance practices. This authority was transferred to the newly-minted CFPBwith one major exception:Except as permitted in subsection (b) [primarily BHPH activity], the Bureau may not exercise any rulemaking, supervisory, enforcement or any other authority . . . over a motor vehicle dealer that is predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both.

2011: 12,778,885 new vehicle salesFebruary 1, 2011Automakers Sales Gains Continue in New Year(819,938 new vehicles sold; 12.84 Million SAAR)

April 12, 2011FTC hosts first dealer roundtable in Detroit, focusing on spot delivery, optional goods and services, dealer bankruptcies, and dealer reserve.(1,157,928 new vehicles sold; 13.09 Million SAAR)August 2-3, 2011FTC hosts second dealer roundtable in San Antonia, focusing on military-related issues, financial literacy, and fair lending(1,072,379 new vehicles sold; 12.44 Million SAAR)November 17, 2011FTC hosts third dealer roundtable in Washington D.C., focusing on issues relating to vehicle leasing, and whether future FTC action is necessary.(1,157,928 new vehicles sold; 13.42 Million SAAR)

December 30, 2011A Year of Solid Gains, and an Outlook for More Ahead(1,243,784 new vehicles sold; 13.54 Million SAAR)

October 30, 2011A Vicious Cycle in the Used Car Business: Sign, Drive, Default, Repossess and Resell Thats the Game at BHPH Dealerships(1,021,185 new vehicles sold; 13.34 Million SAAR)

November 1, 2011Investors Place Big Bets on BHPH Used-Car Dealers(1,157,928 new vehicles sold; 13.42 Million SAAR)

November 3, 2011A Hard Road for the Poor In Need of Cars(1,157,928 new vehicles sold; 13.42 Million SAAR)

2012: 14,439,092 new vehicle salesJanuary 3, 2013Automakers End 2012 with Sales at 5-Year High(1,356,132 new vehicles sold; 15.27 Million SAAR)

February 19, 2012Yo-Yo Terms on Car Loans(1,149,547 new vehicles sold;14.47 Million SAAR)

April 18, 2012Consumer Advocates Seek Halt to Yo-Yo Financing(1,184,641 new vehicles sold; 14.32 Million SAAR)

September 4, 2012August 2012 Car Sales Still in the Fast Lane(1,285,347 new vehicles sold; 14.78 Million SAAR)

March 17, 2012FTC Going After Car Dealers: Trading in a Car? Dont get Taken for a Ride(1,404,699 new vehicles sold; 14.20 Million SAAR)

February 27, 2012Feds Want Dealers Spot Delivery Data(1,149,547 new vehicles sold; 14.47 Million SAAR)

2013: 15,582,136 new vehicle salesMarch 21, 2013Consumer Agency Warns Lenders on Bias in Auto Loans(1,453,038 new vehicles sold; 15.29 Million SAAR)

November 22, 2013Dealer Fees for Arranging Car Loans are Drawing Scrutiny from U.S.The issue of whether [dealer participation] violate[s] fair-lending rules has now been taken up by the Justice Department.(1,243,852 new vehicles sold; 16.41 Million SAAR)

December 31, 2013Three-Way Fight Over Discrimination Charges, Among Feds, Auto Lenders and Dealers(1,358,734 new vehicles sold; 15.40 Million SAAR)

January 3, 2013Auto Sales Soar Even as the Rest of the Economy Struggles(1,011,187 new vehicles sold; 15.22 Million SAAR)

September 12, 2013Auto Dealers Deceptive Ads: Say it Aint So.(1,501,294 new vehicles sold; 15.26 Million SAAR)

March 29, 2013Analysts Say More Cars Sold In March Than Any Month Since August 2007(1,453,038 new vehicles sold; 15.29 Million SAAR)

Where are We Going?A need to redouble compliance effortsRecent FTC GuidanceThis is not a short-term enforcement campaign.Dealers need to regularly review their compliance procedures as an ongoing process;Dealers need to provide employees with training early and often;Multi-point groups need to ensure that the compliance review process takes place at each location;Dealers need to be constantly aware of where their ads are running and displayed;When updating a previous advertising campaign with new offers, the entire ad must be reviewed; and Advertising medium counts.AAS GuidanceDont rely on advertisements of competitors when creating your own advertising campaigns;Dont rely upon your advertising agencies to create compliant advertisements;Dont rely upon your automaker or a finance company to develop a compliant advertising campaign; andUnless treated separately by law, dont assume that advertisements in different media will be treated differently.

Lastly, ensure that all advertisements are reviewed by a qualified ad review service or competent law firm prior to publicationThank You!Jonathan MorrisonPresidentAuto Advisory Services, Inc.jmorrison@autoadvisory.com(800) 785-2880