FTC: Update on Financial Practices and Consumer Credit

Overview of the
Division of Financial Practice’s
Auto Program
September 2013
Division of Financial Practices
Bureau of Consumer Protection
Teresa Chen Kosmidis
Staff Attorney
The FTC’s Role
• The FTC enforces various consumer protection
laws, including the FTC Act, which prohibits
unfair and deceptive trade practices
• The FTC has jurisdiction over most non-bank
FTC Act Fundamentals
• Section 5 of the FTC Act broadly prohibits “unfair and
deceptive acts or practices in or affecting commerce.”
– Deception: a material representation or omission that is
likely to mislead consumers acting reasonably under the
– Unfairness: practices that cause or are likely to cause
substantial injury to consumers that are not outweighed by
countervailing benefits to consumers or competition and
are not reasonably avoidable by consumers
• Flexible law that can applied to many different
situations, entities and technologies
FTC Act Fundamentals
• Examples of Other Laws/Regulations/Rules that
Impact Auto:
– Truth-in-Lending Act (“TILA”) and “Regulation Z”
– Fair Credit Reporting Act (“FCRA”), as amended by
Fair and Accurate Credit Transactions Act (“FACTA”)
– Fair Debt Collections Practices Act (“FDCPA”)
– Consumer Leasing Act (“CLA”) and Regulation M
– Holder in Due Course Rule
– Used Car Rule
FTC and DFP Auto Overview
• Auto dealers are an increasingly important area
for the FTC and for consumers
– Second biggest financial transaction some
consumers will make
• Dodd-Frank (July 2011) made the FTC the
primary federal enforcement agency for auto
dealers and gave the agency new authority to
issue rules in this area
• In response, DFP launched a new auto program
FTC v. CFPB Jurisdiction
• The FTC has broad jurisdiction over “persons,”
“partnerships,” or “corporations” acting in interstate
commerce, except for banks and certain other entities (15
USC § 45(a)(2))
• Per the Dodd-Frank Act, the FTC has:
– Exclusive jurisdiction over many dealers
(“predominantly engaged” in sales or leases and
servicing, “routinely” assigns financing to third parties)
– Concurrent jurisdiction with CFPB over (non-bank)
lenders and “buy here, pay here” dealers
– APA rulemaking authority in auto finance area
Law Enforcement – Negative Equity Cases
• Negative Equity Cases
– “We’ll pay off your trade no matter what you owe.”
• Dealer websites and youtube.com
– In fact, dealers included the amount of the negative
equity in the loan package for the new vehicle.
– Administrative complaints filed against five
dealerships April – May 2012
Law Enforcement – Negative Equity Cases
– Section 5 Deception Allegations:
• “we’ll pay off your trade, no matter what you owe” is false
and misleading
– Alleged TILA (three cases):
• Used “trigger terms” (specific payment, rate)
• No disclosure of APR, balloon payments, etc.
– Alleged CLA (two cases)
• Failure to disclose certain lease related terms
Law Enforcement – Negative Equity Cases
– Consent Orders
• Cease the representations and comply with TILA and CLA
• Maintain and produce records upon request (5 years)
• Initial compliance report and follow-up reports upon
• Notify the FTC about changes in business (dissolution, sale,
merger, etc.)
• Order effective for 20 years
Law Enforcement – Auto Loan Mod Cases
• Hope for Car Owners and NAFSO VLM (Auto Debt
• Charged hundreds of dollars in up-front fees
• Based on bogus promises to help consumers reduce monthly loan
payments and avoid repossessions
• Once up-front fees were collected, did nothing to obtain
promised loan modifications
• Denied refunds
• Judgments entered against companies and individual
• Ban defendants from marketing auto loan modifications and
other debt relief services
• Prohibit misreps about other products or services
Law Enforcement – Auto Loan Mod Cases
• Hope for Car Owners
• Stipulated judgment against individual defendant
• Default judgment entered against corporate defendant
• Monetary relief: $362,388 (suspended as to the individual)
• NAFSO VLM (Auto Debt Consulting):
• Stipulated order with two corporate and two individual
• Monetary relief: $279,728 (suspended as to the individual)
Law Enforcement – Deceptive Auto Ad Cases
• Two car dealers from Maryland and Ohio
• Agreed to settle charges that they falsely advertised the cost or
available discounts for their vehicles
• Don White’s Timonium Chrysler:
• Charged with advertising dealer discounts that were not available
to the typical consumer
• Consumers actually needed to qualify for rebates to get price
Ganley Ford:
Charged with misrepresenting vehicles were available at
In fact, discounts applied only to specific, and the more
expensive models
Law Enforcement – Deceptive Auto Ad Cases
Don White’s Timonium Example:
2013 Chrysler 200 Limited Sedan was advertised as:
Dealer Discount - $7,499
Internet Price
$19, 821
But the “Dealer Discount” depended on qualifications
and restrictions not adequately disclosed
Law Enforcement – Deceptive Auto Ad Cases
Ganley Ford Example:
NEW 2013 FORD F-150
But deal only available for 2013 Ford F-150 (MSRP
$47,000); not for less expensive, like base model F-150
(MSRP $23,670)
Law Enforcement – Deceptive Auto Ad Cases
• Complaints Alleged:
• Don White’s Timonium – violated Section 5 by
misrepresenting that a specific discount and price are
generally available to consumers
• Ganley Ford – violated Section 5 by representing that
vehicles are available at a specific dealer discount, but
failing to disclose that this discount is only available for
some but not all of the vehicles advertised.
Law Enforcement – Deceptive Auto Ad Cases
• Orders prohibit:
• Advertising discounts unless they are accompanied by clear
and conspicuous disclosures of any material qualifications or
• Misrepresenting:
• Existence or amount of any discount, rebate, bonus, incentive or
• Existence, price, value, coverage or features of any product or
service associated with the motor vehicle purchase
• Number of vehicles available at particular price
• Any other material fact about the price, sale, financing or leasing of
motor vehicles
Law Enforcement – P2P Network Access Case
• FTC v. Franklin’s Budget Car Sales:
• Peer-to-Peer (P2P) network accesses dealer’s computer
network, publishes info (name, DOB, SSN, etc.) for approx.
95,000 customers
• Administrative Complaint alleged:
• Sec 5 misrep that dealer took reasonable and appropriate measure
to protect data
• Failure to take steps required by Safeguards Rule to protect data
• Failure to provide annual privacy notices and an “opt-out” provision
on sharing info with third parties (Privacy Rule)
• Consent Order: cease alleged misreps and implement
comprehensive security program per Safeguards Rule
Holder Rule
• Holder Rule (FTC Trade Reg. Rule):
– “Holder Rule” (16 CFR § 433): subsequent holder of
consumer debt contract is subject to consumer’s claims
and defenses against original seller
– Some courts held that consumer can only get affirmative
recovery (get money back, not just defend against action)
from holder if the seller’s breach warranted rescission, or
goods were worthless
– Advisory Opinion (May 2012): plain language of rule
means consumer can get affirmative recovery even if
complete rescission not warranted
Used Car Rule
• Used Car Rule
– Issued in 1984
– Intended to prevent oral misreps and omissions by used
car dealers concerning warranty coverage
– Requires various disclosures through a window sticker,
called the “Buyers ‘Guide” and in sales contracts
– Recently amended to make technical changes and edits to
the Spanish version of the Buyers ‘Guide
– Recent proposed changes to encourage consumers to seek
information about vehicle history (period for comments
closed and currently under review)
Used Car Rule
• Used Car Rule
– After conducting inspections, the FTC sent warning
letters to 11 used car dealerships in Arkansas
– Warning the dealers to display the Buyers’ Guides in a
clear and conspicuous location on all used cars
– The FTC has brought more than 80 actions since the
Rule took effect, with civil penalties exceeding $1
Auto Roundtables
• Purpose was to gather information on auto
finance and leasing issues and consider possible
initiatives, such as areas for enforcement,
business and consumer education, or other
appropriate measures
• Roundtables held in Detroit (April 2011), San
Antonio (August 2011), and D.C. (November
Auto Roundtables
• Examples of Attendees at Roundtables
– Consumer protection agencies (FTC, CFPB, state consumer
protection offices)
– Consumer advocacy groups (CRL, NCLC)
– Industry groups (NADA, NIADA, NAFA)
– Lending companies
– Dealers
– Private law firms (business and consumer)
– Auto finance news
– Other interested groups
Auto Roundtables
• Several areas of concern emerged:
– Basic misrepresentations by some dealers
– Product add-ons that are not disclosed
– Dealer “markups” in which the dealer marks up the
buy rate from the lender before offering the rate to
– “yo-yo” financing, in which a consumer buys a car with
one rate but is later told the rate went up
• Recent Press:
– Brian Ross – yo-yo financing segment
More info – ftc.gov
Additional Info about Roundtables
• Other issues raised at roundtables
– Interest rate markups
– Yo-yo financing
– Misrepresentations
• Interest rates
• No down payment
– Product add-ons
FTC resources
for car buyers
FTC resources
for auto dealers
Using FTC resources
1. Order free materials from bulkorder.ftc.gov
2. Visit ftc.gov/subscribe to sign up for
Consumer and Business Blog updates.
3. Visit consumer.ftc.gov
and business.ftc.gov and
bookmark auto resource
4. Link, post, tweet, blog,
adapt. All FTC materials
are in the public domain.
Overview of the
Division of Financial Practice’s
Auto Program
September 2013
Division of Financial Practices
Bureau of Consumer Protection
Teresa Chen Kosmidis
Staff Attorney
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