Why is the FTC Messing With Dealers?

Since the news broke earlier this week about the FTC citing 5 auto dealers for deceptive advertising, I’ve been asked a number of questions by folks in the industry. Here’s my take on the situation:

What’s the big deal about advertising that the dealership will pay off a trade-in no matter what the customer owes? It’s a true statement.

The problem is not so much what the ads say, but what they don’t say. As far as regulators are concerned, if an ad doesn’t explicitly state that any negative equity will be added to the loan balance, it’s deceptive. While it may seem obvious to us that the customer is responsible for negative equity, some consumers (and lawmakers) apparently think that these advertisements imply that the dealer will buy the trade for the amount the customer owes, regardless of its real value.

Some basic principles that regulatory agencies consider are 1) advertising is considered deceptive if the advertisement has a “tendency or capacity to mislead the public”; 2) if an ad is deemed deceptive, an advertiser has liability regardless of whether there was intent to deceive and; 3) statements susceptible to both a misleading and a truthful interpretation will likely be construed to be deceptive.

We always fully disclose negative equity on our contracts and leases, why isn’t that good enough?

If regulators feel that the first contact with a consumer is secured by deception, a violation may occur even though the true facts are made known to the buyer before he or she enters into a purchase or lease. Since statements and representations in advertisements are evaluated based on their tendency to deceive, no actual harm to consumers need occur for there to be a violation.

Dealers have been using this type of advertising for years – did the FTC recently change the rules?

No, these types of incomplete statements about paying off trade-ins have been considered deceptive for a long time by both federal and state regulators, so this is nothing new. Bear in mind that the fact that others were, or are, engaged in like practices is not considered a defense.

As to why the Feds decided to take action against dealers now - your guess is as good as mine. The FTC has been threatening to step up enforcement against dealers for the last year or so, but to be honest; I’ve been a bit skeptical. The Feds have traditionally gone after bigger fish and left car dealers to state regulators. So, while this action may just be a flash in the pan, it can also be a major game changer.

How do we avoid this happening to us? I mean, if the regulators decide to go on a witch hunt, they’re going to get you one way or another.

I disagree. Again, the violations the FTC cited are not new or surprising to anyone who understands advertising regulations. If you have ever read or listened to my ramblings in the past you know that I have a tendency to harp on two issues - Education and Due Diligence. Please forgive me for once again repeating myself, but this is important:

Protect yourself by doing the following:

Ensure that any member of your staff involved with advertising is properly trained in all applicable regulations.
Never assume that your ad agencies or vendors know, or are following, the rules. If you write the check, you’re responsible.
If you’re not sure, don’t guess! Have your advertisements reviewed, and edited if necessary, by someone knowledge before publication (this should done for all of your advertising including websites, YouTube, social media, etc.). It may cost a few bucks, but it’s a small price to pay.

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Comment by Jim Radogna on March 21, 2012 at 11:35pm: Thanks Charles! As far as I know, this is the first FTC enforcement action regarding dealer YouTube ads (there may have been others that I've missed). I do know that there have been an increasing number of internet cases against businesses lately - false advertising, fake online reviews, privacy issues, social media cases, etc.

I think you hit the nail on the head. Federal and state regulators are clearly jumping on the digital bandwagon and dealers need to pay close attention. I'm not sure if you caught this article about Compliance in the Digital Age: http://www.autodealermonthly.com/79/4435/ARTICLE/Compliance-in-the-...

Thanks for your feedback!

Comment by Charles Gallaer on March 21, 2012 at 7:35pm: Jim, thank you for another great, timely post. Question, is this the first time that the FTC has targeted advertisements dealers posted on YouTube? I think this decision has two equally big game changers; the inclusion of an offer to payoff a customer's loan without disclosure as a "unfair and deceptive trade practice" and that the 'advertisements' now clearly include messages spread through social media.

As you have succinctly shown, the FTC has effectively stated that a dealer who doesn't diligently monitor messages on social media outlets as they would advertisements promulgated through 'traditional' media will be a target for an enforcement action.

What makes matters worse is that many state AG and other regulatory agencies take their direction regarding defining deceptive and unfair trade practices from the FTC. The game's changed for sure.

Comment by Jim Radogna on March 20, 2012 at 12:37am: You're too kind Nancy. Thank you!

Comment by NANCY SIMMONS on March 20, 2012 at 12:29am: Thanks for always enlightening dealers Jim...You give so much of yourself! I just cannot imagine a dealer, in today's day of compliance and strictly enforced regulations, not hiring YOU to consult and ensure they have policies in place! Give Jim Radogna a call...He is the best!!!

Comment by Jim Radogna on March 19, 2012 at 3:12pm: Thanks Leonard, appreciate your support!

Comment by Leonard Buchholz on March 19, 2012 at 10:39am: Jim, whenever I read a post from you I learn something new.

Comment by Jim Radogna on March 18, 2012 at 1:00pm: Thanks Bobby!

Randy Hendrick, DealerTrack's Regulatory and Compliance Counsel, was kind enough to leave a comment on our blog which gives great insight as to the direction the FTC is taking:

"I think this is a "game changer" as the FTC's three roundtable meetings on auto finance last year were likely intended for two purposes. First, to facilitate the goal of transparency in consumer finance and to perhaps expand its interpretation of "unfair and deceptive" in anticipation of the Consumer Financial Protection Bureau issuing regulations prohibiting "abusive" practices which will focus on transparency and a consumer's knowledge relative to the product. Second, the FTC has new streamlined authority to issue new unfair and deceptive acts and practices regulations against auto dealers under the Dodd-Frank Act and beginning with a series of enforcement proceedings may be a prelude to their doing so. I have seen many dealer ads that don't include the triggering terms required by Truth in Lending or the Consumer Leasing Act (this was also a part of the consent decrees last week) and a reasonable consumer being lured into a dealership on an unqualified promise that a dealer will pay off its trade is deceptive. I think it is critical that dealers pay close attention to their advertising and other aspects of compliance as 2012 is shaping up to be the year of enforcement and the CFPB has not even weighed in yet".