FTC’s Auto Dealer Rule Promises Sweeping Industry Changes
On December 12, the FTC issued the Combating Auto Retail Scams Rule (“CARS Rule”) which will broadly regulate sales activities of motor vehicle dealers. Authorized by Congress through the Dodd-Frank Act and promulgated under the Administrative Procedure Act (as opposed to the FTC’s more cumbersome Magnusson-Moss authority), the final rule will take effect on July 30, 2024.
The rule’s reach is expansive: it establishes prohibited claims, mandates disclosures, prohibits certain categories of add-on products, requires express, informed consent for charges and prescribes how to obtain that consent, and imposes weighty recordkeeping requirements. As drafted – and barring judicial review – the rule will result in fundamental changes to the way vehicles are currently marketed and sold in the U.S.
We first highlight three key takeaways, then take a closer look at the rule’s requirements below.
- The final rule is narrower in scope than the proposed rule. Some disclosure and consumer consent requirements appearing in the FTC’s initial proposal from June 2022 are absent from the final rule. For example, the final rule does not require dealers to present consumers with “add-on lists” detailing all optional add-on products or services and their prices, or obtain signed declinations from consumers before charging for such optional add-ons. (“Add-ons” are generally defined as any products or services that consumers are charged for when buying a car and which are not installed or provided by the vehicle manufacturer.)
- The FTC will be able to seek monetary relief, including consumer redress and civil penalties, for rule violations. Section 19 of the FTC Act specifically allows the FTC to seek monetary relief in cases involving rule violations. Once the final rule goes into effect (and assuming no court interference), the FTC will be able to seek monetary relief whenever dealerships make prohibited misrepresentations to consumers or fail to follow other enumerated requirements. Section 5 of the FTC Act separately authorizes the FTC to seek civil penalties for violations of rules.
- The final rule’s recordkeeping requirements are extensive, and failure to follow them will subject dealers to monetary penalties as well. All motor vehicle dealers covered by the rule will be required to keep copies of records demonstrating compliance with the rule. This includes materially different ads, sales scripts, training and marketing materials, purchase orders, financing and lease documents, written communications with consumers about sales, consumer complaints and inquiries related to sales or add-ons, and others. Records must be kept for a period of two years from the date of creation, and failure to do so is considered a violation of the rule.
The rule prohibits motor vehicle dealers from making misrepresentations regarding “material” information relating to a number of enumerated topics. Some are obvious and expected, such as misrepresentations about:
- costs or terms of purchasing, financing, or leasing a vehicle (for example, total costs, down payments, interest rates, repayment schedules, or financing options);
- costs and other features of add-ons (for example, that an add-on is required, the add-on’s benefits, or a consumer’s right to cancel an add-on);
- availability of a specific vehicle at an advertised price;
- whether the consumer is purchasing or leasing a vehicle;
- any information on or about a consumer’s application for financing, including the consumer’s income or down payment amount; or
- conditions of repossession.
Others, however, are not as straightforward. For example, dealers may not advertise a price that accounts for rebates or discounts not available to all consumers. For example, if a rebate or discount applies only to the most expensive version of a vehicle make and model or is only available to consumers with high credit scores, it cannot be included in the advertised price. Dealers may advertise limited rebates or discounts only if they clearly and conspicuously disclose those rebates’ limitations.
Yet other categories have little to do with car-buying specifically, such as the prohibition on misrepresenting that consumer reviews or ratings of the dealer’s services are unbiased, independent, or ordinary consumer reviews or ratings. This prohibition underlines the agency’s continued focus on endorsement and review practices across industries.
The rule requires dealers to disclose three types of information in a way that is “clear and conspicuous.”
First, dealers must disclose the offering price whenever referencing a specific vehicle, whether in ads or in a consumer communication. The “offering price” is the full cash price at which a dealer is willing to sell the car; dealers are permitted to exclude only required government charges from this amount. The offering price must include any preinstalled or required add-on charges. It also cannot reflect rebates or discounts not available to typical consumers.
Second, dealers who offer optional add-ons to consumers must disclose that the add-ons are not required in order to purchase the vehicle.
Third, any claims about monthly payment amounts trigger required disclosures regarding the total amount the consumer will pay based on those monthly payments. And if consumers are presented with multiple payment options at different monthly payment amounts, dealers must also disclose if opting for a lower monthly payment will increase the total cost of the vehicle. The goal here is to avoid framing a payment option as less costly based on lower monthly payments alone, when in fact the total cost is higher or the deal reflects a balloon payment at the end.
Prohibition on Add-Ons that Provide No Consumer Benefit
Perhaps one of the most vague and open-ended mandates in the rule is the prohibition on charges for add-ons “if the consumer would not benefit from such an Add-on Product or Service.”
Staff suggests it will use objective standards to evaluate consumer benefit, such as whether the consumer is eligible to use the add-on; whether the add-on’s coverage excludes the vehicle at issue; and whether the add-on will actually work on the vehicle.
It also provides several examples of add-ons it considers of no benefit, including: nitrogen-filled tires when the tires contain no more nitrogen than exists in the air; products or services that don’t cover the vehicle or are duplicative of the vehicle’s warranty; rust-proofing products that don’t prevent rust; theft-prevention products that don’t prevent theft; engine oil-change services for electric cars; or software subscription services for vehicles that do not support that software.
While the examples are illustrative, the “no benefit” standard remains amorphous and potentially subjective. Auto dealers will need to consider the standard in light of the provided examples and be able to provide a reasoned analysis to support benefits of add-on products and services.
Express, Informed Consent for Charges
Dealers are required to get express, informed consent for all charges. Consumers must affirmatively consent to charges after receiving information about the purpose and amount of the charge. Express, informed consent can’t be obtained through signed contracts alone, or through documents with pre-checked boxes or featuring any design or template intended to manipulate users.
All auto dealers will be required to create and retain any records necessary to demonstrate compliance with the rule. Enumerated categories of information include (but are not limited to) advertisements and marketing materials; sales scripts and training materials; purchase orders; financing and leasing materials; written consumer communications relating to sales, financing, or leasing; add-on service contracts and GAP agreements; and consumer complaints related to sales, financing, leasing, or add-ons. Records must be retained for two years from the date of creation.
In justifying the rule’s recordkeeping burden, the FTC references the Telemarking Sales Rule, 16 CFR 310.5 (“TSR”), and the Business Opportunity Rule, 16 CFR 437.7 (“BOR”), noting that both require covered entities to retain certain records for a specified period of time to demonstrate compliance. While it’s true that these rules do require some record retention, the burden here is indisputably higher and seems more akin to recordkeeping mandates in FTC consent orders. Indeed, Staff references such order requirements in justifying the rule’s recordkeeping burden. The obvious logical gap is that auto dealers covered by the rule have not been accused of any wrongdoing nor placed under an FTC order. Nevertheless, if they fail to maintain all records required under this section, they will be in violation of the rule and subject to monetary penalties under Section 19.
If the rule goes into effect as drafted, auto dealers will need to overhaul recordkeeping practices significantly to ensure they can demonstrate compliance with the rule if faced with an FTC investigation.
As noted above, the rule’s effective date is in July 2024. We’ll be watching this space closely for possible court challenges and ensuing FTC enforcement activity.