By L. Jean Noonan, Hudson Cook, LLP partner, Washington, D.C.  Contact: (202) 327-9700 | jnoonan@hudco.com.

In my article in the last issue of Spot Delivery, I wrote about the Federal Trade Commission’s new sweeping CARS Rule, the petition for review filed by the National Automobile Dealers Association and the Texas Automobile Dealers Association, and the FTC’s decision to stay the effective date of the final rule pending review by the U.S. Court of Appeals for the Fifth Circuit.

At the end of the article, I warned dealers, who have now entered a state of limbo, against waiting to see what happens with the associations’ challenge to the rule. I suggested that dealers press forward with compliance preparation because, if the rule goes into effect, it will add a slew of new requirements that will affect every covered dealer’s operation in significant ways, and the potential fines for a violation could be ruinous.

But even if the court vacates the rule, the FTC still has plenty of enforcement tools to use against
dealers. In fact, the very day the rule was published, the FTC announced a lawsuit against a car
dealership claiming that the dealer’s practices violated existing law. The FTC claims its rule only
reflects existing law against unfair or deceptive acts or practices. The only difference, in the FTC’s
view, is that the rule allows it to seek a civil penalty of up to $51,744 for each time a dealer fails to
comply with a provision of the rule.

It is true that some provisions of the rule forbid practices that are already illegal, like selling a
worthless product or misrepresenting the benefits of any product, saying a fee is required if it is not,
or charging for a product the consumer did not agree to buy. But the most burdensome parts of
the rule add requirements that are not necessarily UDAPs, such as the extensive new recordkeeping
requirements that exist only to help the FTC prove violations.

Therefore, it may make sense for some dealers to prioritize developing compliance procedures for
requirements that are clearly—or even arguably—required under existing UDAP law. Once they feel
confident that their compliance management systems address these obligations, they can turn their
efforts to the requirements that even the FTC may need to admit are not unfair or deceptive
practices absent the requirements of the CARS Rule. If the court upholds the rule, those dealers
will need to hope that the FTC gives a new effective date that provides enough time to address the
remaining obligations under the rule.

Let’s start with the requirements that the FTC has been suing dealers for even without having a rule
in effect or that are otherwise clearly UDAPs. 

Prohibited Misrepresentations
Section 463.3 lists prohibited practices that would either certainly or likely be declared unfair or
deceptive by a court. These should be top priorities for every dealer. We’ll focus on the ones dealers
may find the most difficult.

§ 463.3(b) – Any costs, limitation, benefit, or any other aspect of an Add-on Product or Service.
This provision requires a dealer’s employees to understand very well each of the products the dealership offers. The first step is a thorough review of each voluntary protection product, which requires
reading not just the brochure provided by the vendor but also the contract and all its fine print. After
a critical review of the contract, with a special focus on limits and exclusions, consider whether the
brochure you offer customers presents a fair and balanced description of the product. Are each of
the brochure’s claims true? Or do some require qualifications? It is not good enough to have important qualifications to claims in the brochure appear only in the contract, where consumers can miss
them.

When reviewing the claimed benefits of a product, consider not only the claims as written but also
any implied claims. For example, the promotional material for a theft deterrent product might talk
about the harm a consumer experiences when a vehicle is stolen. Do these statements imply to a
reasonable consumer that buying the product will reduce the risk of theft substantially? If so, does
the vendor have written proof of this benefit? Don’t accept a vendor’s general claim that the product
is, for example, a “proven antitheft measure.” Ask for the studies, read them carefully, and consider
dropping the product from your menu if you are not satisfied. Remember that it is your duty to
ensure you can substantiate a claim you make or that is made in material you give your customers.

§ 463.3(d) – The availability of any rebates or discounts that are factored into the advertised price
but not available to all consumers.

In the past, the FTC has required rebates or discounts factored into an advertised price to be
“widely” available. The rule takes this a step further, requiring that the benefit be available to all
consumers. Also, be careful about double-counting a subvented finance charge (interest) rate or a
cash rebate when the manufacturer offers the buyer a choice. You can advertise the choice, but you
should not promote the low rate if you have included the rebate in the advertised price.

§ 463.3(k) – Whether consumer reviews or ratings are unbiased, independent, or ordinary consumer
reviews or ratings of the Dealer or the Dealer’s products or services.
Honesty may be the best policy, but honesty alone may not be good enough. Any consumer endorsement or review will be presumed to be honest and independent unless it clearly says otherwise.
A client recently asked me about its long-time policy of giving a free oil change to any customer
who submitted a five-star review. Was that a concern? Yes, I said, unless the review also prominently
disclosed the dealer’s incentive for a five-star review. The same goes for reviews submitted by friends
and family.

When I was once reviewing advertising for a bank product, I asked if the client retained the original,
unsolicited copies of glowing comments attributed to customers “John C.” and “Jessica P.” The client
responded that these “reviews” were written by the advertising department. Yikes! I suppose this is
one way to have good reviews without them coming from your brother or costing you an oil change,
but I don’t recommend it.

Dealer Charges
Section 463.5 prohibits any charges for a product that has no benefit or a charge without “express,
informed consent.”

§ 463.5(a) – Add-ons that provide no benefit.

This provision has received a lot of attention, although I don’t think it is the biggest problem
dealers face. If you research your protection products as recommended and obtain substantiation
for express and implied claims, you are not likely to have this problem. But there is a closely related
concern. What if the product might have some benefit, but perhaps not as much as the consumer
thinks? Such situations require a lot of care to avoid making a misrepresentation. Let’s say a bi-weekly
payment plan will save a consumer some interest by paying off the financing a bit early, but the fees
will exceed any interest savings unless the consumer makes all payments over a six-year term. Any
claim about savings should be carefully qualified.

§ 463.5(c) – Any item without express, informed consent.

The FTC has recently alleged that any dealer failure to get express, informed consent for a
voluntary product is an unfair practice. The cases allege that consumers were charged for items they
did not want or were falsely told that the purchase of the product was required. If true, these would
be UDAPs. But what if the deal jacket contained both clear disclosures that the products’ purchase
was voluntary and signed statements that the consumer wanted to buy them? The FTC is quick to
believe that the dealer tricked the consumer into signing the forms. Perhaps this happens in some
instances, and that would be a dishonest practice. But the FTC’s position that any charge is
unauthorized if it doesn’t meet every requirement of the express, informed consent standard seems
like overkill.

Complying with the express, informed consent requirement will be a major compliance challenge for
dealers. Dealers can probably forget about any current menu-selling procedure meeting this
requirement. To be clear and conspicuous and include all the required information, it will almost
certainly require a new, stand-alone form. The form must be signed and even read to the customer
for in-person transactions.

The charges that must receive express, informed consent are not limited to those for add-ons or
even optional products. All “items,” optional and mandatory, are subject to this heightened consent
requirement. Every charge the dealer assesses except, we assume, for the vehicle itself must be
clearly described and include the cash price and “all fees and costs to be charged to the consumer
over the period of repayment with and without the product or service.” That’s a lot more complicated
than it appears on a first reading.

Disclosure Requirements
Dealers who place a priority on avoiding compliance costs until they know the outcome of the NADA
and TADA petition for review might choose to wait on developing compliance procedures for
sections 463.4, creating new disclosures, and 463.6, requiring recordkeeping. However, we can’t
know how long the FTC will extend the effective date if the rule is upheld, so dealers who wait face
the risk that the time given will be insufficient for the tasks.

Waiting also risks an FTC decision to bring enforcement actions against dealers in the interim for not
making the disclosures in section 463.4 or keeping records as required in section 463.6. The FTC
would not be able to seek civil penalties for such conduct if a trade regulation rule is not in effect,
but even an enforcement action without penalties is an expensive and stressful experience for any
business.

§ 463.4(a) – Offering price.

The offering price is the full cash price that the dealer will charge for a vehicle, except for required
government charges. This term and its rules are intended to address complaints that consumers are
charged more than the advertised price for a car or truck once they are in the dealership. Even
dealers accustomed to strict state laws regulating auto advertising are not prepared for this
requirement.

The dealer’s first challenge is to understand what fees and charges must be included in the advertised
offering price. It must include all mandatory fees except government charges, such as “doc fees” a
dealer routinely charges and any dealer equipment or services the consumer cannot decline. Dealers
who pre-install popular equipment on cars and trucks and will not sell the vehicle without charging
for this equipment must include the cost in the advertised offering price. Of course, pre-installing
optional products will increase the offering price and may make the vehicle appear more expensive
than similar vehicles advertised by competitors without dealer-added items.

The offering price must be included in any advertisement for a specific vehicle and in any ad that
includes a monetary amount or financing term for any vehicle, which can create some interesting
inconsistencies with the Regulation Z credit advertising rules. The offering price also must be
disclosed in any communication with a consumer about a specific vehicle or any monetary amount or
financing term for any vehicle. The dealer must quote the vehicle’s offering pricing in the first
response to the consumer regarding that vehicle. This is a requirement that will necessitate
considerable training and will be a challenge for dealers to monitor. Finally, if the communication
or response is in writing, the offering price must be disclosed in writing. Therefore, if the consumer
emails or texts a dealership about a car, a dealership employee cannot call the consumer to discuss
the consumer’s needs without first providing the offering price in writing.

§ 463.4(d) – Total of payments and consideration for a financed or lease transaction.

§ 463.4(e) – Monthly payments comparison.

Two other disclosure requirements relate to quotes of monthly payments for any vehicle. These are
intended to increase transparency in pricing and respond to consumer complaints that dealers often
focus on the monthly payment without being clear about the total cost and what optional items have
been included in the payment.

If the dealer makes a representation about a car’s monthly payment, the dealer must also disclose the
total amount the consumer will pay to purchase or lease the vehicle at that monthly payment. If the
total amount disclosed assumes the consumer will make a downpayment in cash or by trade-in, the
amount must include the amount of consideration the consumer must provide. If the representation
is in writing, even informal handwritten notes, the disclosure must be in writing.

Section 463.4(e) addresses perceived unfairness and deception risks in comparing monthly payment
options. If a dealer compares payment options and discusses a lower monthly payment, the dealer
must disclose that the lower monthly payment amount will increase the total amount the consumer
will pay to purchase or lease the vehicle, if true. Written representations require written disclosures.

Recordkeeping
Section 463.6 imposes a general two-year recordkeeping requirement. This section, like the
disclosures in section 463.4, creates completely new requirements. It will require drafting and
adopting new policies and procedures, additional staff responsibilities for preserving covered records
and ensuring compliance, and some consequences that we hoped the FTC would agree were not
intended.

§ 463.6(a) – Any Covered Motor Vehicle Dealer subject to this part must create and retain, for a
period of twenty-four months from the date the record is created, all records necessary to
demonstrate compliance with this part.

This section specifies four categories of records that dealers must create and retain. The first
category covers advertisements, sales scripts, training materials, and marketing materials regarding
the price, financing, or lease of a vehicle. The second group includes deal-related records: purchase
orders, consumer-signed copies of all financing and lease documents, and all written
communications relating to sales, financing, or leasing between the dealer and any consumer who
signs a purchase order or financing or lease contract with the dealer.

The next group relates to so-called add-ons. It requires retaining records that demonstrate all
voluntary protection products sold have benefit to the consumer, copies of all service contracts
and GAP agreements, and calculations of LTV ratios in contracts including GAP agreements. The
last group requires retaining all written consumer complaints relating to sales, financing, or leasing,
as well as inquiries related to add-ons and inquiries and responses about vehicles “referenced in §
463.4.” We are not sure which vehicles are included in those referenced in § 463.4 because this
section references disclosures, not vehicles. To the extent it could mean vehicles having an
offering price, vehicles sold with an add-on, or vehicles for which a dealer quotes a monthly payment
or makes a monthly payment comparison, that seems to cover any vehicle the dealer has for sale. If
so, the dealership must retain all written consumer inquiries and responses about all of its vehicles.

Most dealers now create and maintain these records consistent with their business needs. If there is
not (or no longer) a business need to keep them, they usually aren’t kept, unless a state law requires
their retention. Under the rule, creating and maintaining records for two years will be required, and a
dealer will be subject to a fine of over $50,000 a day for noncompliance.

The scope of these requirements, which go well beyond many dealers’ existing practices, and the
steep potential fines for violations make the recordkeeping requirements a significant compliance risk
for dealers. Managing this risk is likely to require a commitment of considerable staff resources on a
daily basis. Advertising from every medium must be collected, reviewed for the need for retention,
and then stored securely. Sales scripts, training materials, and marketing materials must be created
or identified and similarly reviewed and retained. Deal-related documents must be retained. Many
dealers have different systems for “live” deals, with funding approved and assignment, and “dead”
deals, where the sale did not go through.

The rule’s recordkeeping provision for deal contracts creates a purgatory category—deals in which
the consumer signed a contract to buy/finance/lease a vehicle, but final approval was not received.
These may be in the dead file but will need to be combined with the funded files for FTC
recordkeeping.

Regarding the scope, when the FTC initially required retaining virtually all written communications
between a consumer and a dealer, we hoped it had not focused on the extent to which dealership
employees now communicate with consumers by email, text message, social media, and live chats on
dealer websites. More than one commenter raised this concern and the infeasibility of successfully
identifying and saving all electronic communications with customers, especially those that occur on
employees’ personal devices. But the FTC held firm, saying that it was up to dealers to ensure their
employees are communicating with their customers through approved channels that the dealer can
monitor and control. Dealers should not make the mistake of underestimating the considerable
compliance efforts that the recordkeeping provisions will require.

Conclusion
Even with the stay of the CARS Rule’s effective date, dealers will need every day they have to
prepare for the rule if it becomes effective. If the legal challenge succeeds and the rule bites the
dust, the FTC is likely to continue investigating and sometimes suing dealers for practices described
in the rule. We can be sure that the FTC’s commitment to contesting certain dealer practices will not
disappear.

Each dealer must make thoughtful decisions about how to use the time while we wait for the Fifth
Circuit’s decision on the petition for review. We think that most will continue working hard to ensure
their procedures and processes will be ready if the rule goes into effect. And even if the rule doesn’t
become effective, those dealers will have practices much more likely to avoid an FTC enforcement
action for UDAP violations, and, I am guessing, they will be happy they chose preparation.

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