The Federal Trade Commission and Wisconsin Attorney General have entered into settlements with a group of auto dealerships, their current and former corporate owners, and their general manager for allegedly engaging in unlawful discrimination in connection with financing offered to customers and for allegedly engaging in deceptive practices in connection with the sale of add-on products. The settlement with the current owners and general manager requires a payment of $1 million in consumer redress. The settlement with the former owners requires a payment of $100,000 in consumer redress and also requires the dissolution of the corporate entities.
The complaint filed jointly by the FTC and Wisconsin AG alleges that the defendants violated Section 5 of the FTC Act, the Equal Credit Opportunity Act, the Wisconsin Deceptive Trade Practices Act, and the Wisconsin Consumer Act by engaging in conduct that included the following:
- Misrepresenting that in order to purchase, lease, or finance a vehicle, consumers were required to purchase certain add-on products, such as vehicle service contracts and GAP insurance.
- Charging consumers for add-on products without their express, informed consent.
- Discriminating against American Indian customers in the cost of financing by charging larger interest rate markups than the markups charged to non-Latino white customers. Under the defendants’ policy, employees, at their discretion, could mark up the interest rate quoted by a financing company up to the maximum markup permitted by the financing company.
- Charging American Indian customers for add-on products at a higher rate than non-Latino white customers. The FTC and Wisconsin AG alleged that these additional fees, which they characterized as junk fees, can significantly drive up the amount that customers finance when they purchase their vehicles, which in turn leads to higher cost over the life of the loan. In total, American Indians allegedly paid on average approximately $1,362 more for add-ons in credit transactions than non-Latino White customers since 2016, and $1,374 more since the new ownership took over, according to the complaint.
In addition to the $1 million payment, the settlement with the current owners and general manager requires them to obtain customers’ express and informed written consent for all charges and establish and maintain a fair lending program that includes certain elements. Those elements include implementing and maintaining written guidelines specifying the reasons for assessing or not assessing any fee or other charge and each factor the defendants may consider in calculating any such charge, each of which must be objective and none of which can be discriminatory. They also require the defendants to require that for all retail installment sales contracts:
- A consumer must be offered all contracts with cash rebates and/or reduced rates for which the consumer is eligible;
- A consumer who is not eligible for a contract with cash rebates and/or reduced rates, or who rejects all such contracts, must be offered: (1) all contracts the consumer is eligible for that are financed with an assignee that does not allow an interest rate greater than the “Buy Rate,” and (2) if the consumer is eligible for any contract that is financed with an assignee whose limit on the number of basis points the defendants can charge is less than the “Standard,” each such contract with that limited number of basis points. The “Standard” is defined as “a number of basis points (not to exceed 115) above the Buy Rate, set annually.” The “Buy Rate” is defined as “the lowest interest rate at which any assignee will buy the contract.”
- A consumer who is not eligible for any contract described in the second bullet point above, or who rejects all such contracts, must be offered a contract that charges the Standard.
Another required element of the fair lending program is that the defendants must create and maintain a contemporaneous written record signed by the fair lending compliance officer that is sufficient to show (1) the offers presented to the consumer, (2) why the consumer rejected any offer, and (3) that any charge above the Buy Rate complies with the terms of the settlement agreement.
In June 2022, the FTC proposed a Motor Vehicle Dealers Trade Regulation Rule, which seeks to address unnecessary add-on fees, among other things, in the car buying process. The proposed Rule would make it an unfair or deceptive act or practice in violation of Section 5 of the FTC Act for a motor vehicle to charge for add-ons that provide no benefit, to charge for optional add-ons without certain specific disclosures, and to charge a consumer for any item unless the dealer obtains the consumer’s express, informed consent for the charge. We discussed the FTC’s proposal in an episode of our Consumer Finance Monitor Podcast for which our special guests were Sanya Shahrasbi and Daniel Dwyer, Staff Attorneys with the FTC’s Bureau Of Consumer Protection, Division Of Financial Practices.
Other recent actions alleging unfair or deceptive practices and discriminatory pricing include the Hometown Auto settlement with the Massachusetts Attorney General in January 2023 and an October 2022 FTC settlement with the Passport Automotive Group over alleged discriminatory pricing of add-on products to Black and Hispanic consumers.