New Rules of the Road: FTC's Proposed Changes to Car, Boat, Motorcycle and RV Sales Practices

The Federal Trade Commission (FTC) has issued a new proposed rule that aims to make the "motor vehicle"-buying process more clear and competitive, and also allow the FTC to recover money when consumers are misled or charged without their consent.

Introduction: Who Is Impacted by the Proposed Rule?

On June 23, 2022, the FTC proposed the Motor Vehicle Dealers Trade Regulation Rule, which seeks to "protect consumers and honest dealers by making the car-buying process more clear and competitive." The rule would regulate dealers exempt from the Consumer Financial Protection Bureau's (CFPB) jurisdiction pursuant to the Dodd-Frank Act Section 1029(a). In addition, the expansive Rule would regulate sales practices related to various modes of transportation, as the definition of "Motor Vehicle" means 1) any self-propelled vehicle designed for transporting persons or property on a street, highway or other road; 2) recreational boats and marine equipment; 3) motorcycles; 4) motor homes, recreational vehicle trailers and slide-in campers, as those terms are defined in Sections 571.3(b) and 575.103(d) of Title 49, Code of Federal Regulations, or any successor thereto; and 5) other vehicles that are titled and sold through dealers.

The proposed rule stems from the FTC's concern that consumers never learn the true cost of the vehicle they purchase and that consumers unknowingly purchase optional add-on products and services without knowing the true costs, whether the add-ons are a condition of the sale, or that they are even purchasing add-ons for the vehicle.

If the proposed rule goes into effect, it will regulate the vast majority of dealers, as Section 1029(a) of the Dodd-Frank Act exempts most dealers from the CFPB's jurisdiction. However, many "Buy Here, Pay Here" dealers are already regulated by the CFPB because they target low-income consumers with poor credit. Thus, "Buy Here, Pay Here" dealers may be exempt from the Rule. It is also possible that the CFPB will adopt the FTC's proposed rule for the dealers that fall under its jurisdiction.

Impact of Proposed Rule

If the proposed rule takes effect, it will become an unfair or deceptive act or practice in violation of the FTC Act, Section 5 for a dealer of any "motor vehicle" as defined above to:

1. make any misrepresentation in the purchasing, financing or leasing of a vehicle
2. fail to make clear and conspicuous disclosures about the offering price, optional add-on products and services, the total number of payments and the total amount the consumer will pay
3. charge consumers for add-on products that provide no benefit, optional add-on products without presenting specific disclosures or any item without obtaining a consumer's express, informed consent for the charge

The proposed rule also prohibits dealers from attempting to solicit consumers' waiver of the proposed rule's protections and will impose specific record-keeping requirements on dealers.

However, the proposed rule may cause confusion for consumers and dealers. The disclosures relating to advertising and cost that are required under the proposed rule overlap with, and at times are inconsistent with, the requirements of the Truth in Lending Act. Additionally, while the proposed rule will not supersede consistent state law, state law already heavily regulates dealer trade practices and provides for specific disclosures. As a result, where state law is not superseded by the proposed rule, dealers must produce and consumers must read through and sign oftentimes duplicitous paperwork.

The proposed rule is also likely to pose a significant compliance burden to dealers. Although the FTC estimates that it will take dealers only 15 hours to bring their practices into compliance, this estimate is inconsistent with the time it takes to reprogram and operationalize new forms.

Proposed Rule Explained

At a glance, the proposed rule would require dealers to disclose all costs and sale conditions to the consumer upfront. It would also prohibit dealers from making deceptive advertising claims or misrepresentations relating to the cost of the vehicle, the cost of add-on products and services, and the financing terms. Dealers also would be prohibited from offering add-on products that offer no benefit to the consumer, such as "nitrogen-filled" tires.

The Proposed Rule Would Require Dealers to Obtain Consumer Consent

In general, the proposed rule would require dealers to obtain clear, written and informed consent for any and all charges, fees and conditions of sale. This notably includes the price of the vehicle without any optional add-on products or services and the amount and purpose of each charge, including any financing costs.

The proposed rule would require dealers to present consumers with a second form that lists the costs of any optional add-on products or services included in the purchase. Consumers must then provide their express, informed consent for all charges.

Further, the proposed rule does not consider a signed or initialed document, on its own, as evidence of a consumer's express, informed consent. Also, consent cannot be achieved through the use of "prechecked boxes" or a memorandum with presentation of an agreement that impairs the consumer's "autonomy, decision-making, or choice."

The Proposed Rule Would Prohibit Bait-and-Switch Claims

The FTC seeks to prohibit bait-and-switch claims to prevent dealers from luring in consumers with false advertising. Under the proposed rule, deceptive claims can include any claims relating to:

• the cost of the vehicle
• the financing terms
• the cost of add-on products or services
• the availability of any discounts or rebates
• the actual availability of the vehicle being advertised (under the proposed rule, it will be false advertising to show that a vehicle is in stock online if it is not available at the dealership)
• whether a financing deal has been finalized
• whether financing terms are for a lease

The Proposed Rule Would Prohibit Fraudulent Junk Fees

In keeping with its aim to protect consumers, the proposed rule would prohibit dealers from charging consumers "junk fees." Under the proposed rule, all add-on products and services that do not provide a benefit to the consumer are considered fraudulent junk fees. Specifically, finance and insurance coverage as well as non-beneficial physical add-ons, such as "nitrogen-filled" tires, would be prohibited. The proposed rule also would require specific disclosures and the express, informed consent of consumers for any other optional add-on products. This would require dealers to include a list of prices for all optional add-on products online.

The Proposed Rule Would Prohibit Surprise Junk Fees

The proposed rule would require dealers to inform consumers of a vehicle's price without any of the optional add-on products or services. It would likewise prohibit dealers from charging consumers for add-on products or services without their clear, written consent. In effect, dealers would have to provide consumers with specific disclosures about optional add-on products and services. Specifically, dealers would have to provide consumers with key information about the financing terms and make clear that the sale is not conditioned upon the purchase of add-ons.

The Proposed Rule Would Require the Full Upfront Disclosure of Costs and Conditions

The proposed rule would also require dealers to make disclosures relating to the overall costs and conditions of the sale. Notable costs that dealers would be required to inform consumers of include:

• the true "offering price" of the vehicle (defined as the full cost, minus only government fees and taxes)
• crucial financing terms
• the extra cost of any optional add-on fees
• the total amount of the monthly payment and total number of monthly payments
• destination freight charges
• dealer fees

The term "offering price" is one that automobile dealer trade groups have taken particular exception to, asserting that in practice dealers would only be able to advertise the "out-the-door" price that the dealership will charge to purchase the vehicle.

The Proposed Rule Would Require Dealers to Maintain Records

Finally, under the proposed rule, dealers would be required to maintain detailed records for at least two years on almost all aspects of their trade practices, including:

• advertisements
• marketing materials relating to price, financing or lease terms
• sales
• add-on products and services offered
• consumer transactions, including purchase orders, financing, and leasing agreements
• training materials
• scripts
• written consumer complaints and inquires relating to vehicles and/or products
• records that demonstrate compliance with monthly payment disclosures
• records that demonstrate compliance with add-on sales requirements
• any and all other records required to demonstrate compliance with the proposed rule

The proposed rule will soon be published in the Federal Register, at which point the public will have 60 days to comment.

If Promulgated, Compliance Is Mandatory

The proposed rule was issued by a 4-1 vote of the FTC, indicating that it is likely to take effect. However, Commissioner Christine S. Wilson, the lone dissenter, encouraged stakeholders to submit comments as to "whether it is possible to future-proof the proposed Rule" noting that complex regulatory schemes "tend to create market distortions that stifle innovation, increase costs and prices, and ultimately harm consumers."

The remaining four Commissioners support the proposed rule, noting that the amount of consumer fraud occurring in the auto sale industry. In the last 10 years, the FTC has brought more than 50 enforcement actions relating to automobiles and helped lead two nationwide enforcement sweeps that included 181 state-level enforcement actions in these areas. Similarly, consumer complaints relating to automobiles are in the top 10 types of complaints that the FTC receives each year. In the last three years, the FTC has received more than 100,000 complaints annually.

As such, the FTC has made it clear that if the proposed rule takes effect, it is prepared to enforce it and bring actions against non-compliant dealers. The FTC anticipates a net economic gain of $29 billion in the next 10 years, collected from successful enforcement actions against non-compliant dealers. It is thus important for dealers to understand the scope of the proposed rule and what changes they must implement to be in compliance with its terms.

The Takeaway

The proposed rule will present operational and compliance risks for many stakeholders in the "Motor Vehicle" sales industry. However, the proposed Rule aligns with much of the regulatory, compliance and enforcement activity of regulators at both the state and federal levels for the past few years directed at the automotive and similar industries. The proposed rule is simply confirmation that enforcement activity will remain very active for these industries in the near future.

How We Can Help

Holland & Knight's Consumer Protection Defense and Compliance Team includes a robust FTC practice, with experienced attorneys that are recognized as thought leaders in the field. The firm has represented dozens of companies and individuals in federal and state investigations concerning advertising, marketing practices, privacy and data security, consumer credit, telemarketing and debt collection, saving clients from significant financial loss, public scrutiny and having to make changes to their core business operations.

For more information or questions about the specific impact that the FTC's proposed rule can have on you or your company, contact the authors.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.