Lessons From Record-Setting FTC Money Judgment Against Dealer

Paul R. Norman | 06.07.22

A record-setting money judgment from an auto lending case brought by the Federal Trade Commission (“FTC”) against the Ed Napleton Automotive Group reminds that careful sales practices related to add-on products has reputational, legal, and financial importance. The FTC complaint alleged, among other things, that Napleton participated in deceptive and unfair practices in violation of Section 5 of the FTC Act (15 U.S.C. § 45); failed to disclose required credit information in violation of the Truth in Lending Act (15 U.S.C. § 1664), and violated the Equal Credit Opportunity Act (15 U.S.C. §§ 1691 – 1691f). Napleton has agreed to pay $10 million to settle it. This article discusses each of these alleged violations and potential ways to avoid them. 

Obtain Customer Consent for Add-On Product Purchases

Section 5 of the FTC Act prohibits ​“unfair or deceptive acts or practices in or affecting commerce.” The FTC Act considers a practice to be ​“unfair” if it causes, or is likely to cause, substantial injury to a consumer that they cannot reasonably avoid and that is not outweighed by benefits of competition. With respect to Napleton, the FTC alleged that it represented to customers that they were required to buy add-on products in order to purchase, lease, or finance a vehicle. The FTC used the term ​“add-on products” to refer to voluntary protection products not provided or installed by the manufacturer, such as extended warranties, maintenance plans, Guaranteed Asset Protection (“GAP”) insurance, service contracts, tire protection, etc. The complaint further alleged that Napleton charged customers for these add-on products without obtaining their informed consent and represented that the customers had authorized such charges when they in fact did not. 

The takeaway here is that sales and finance personnel should be trained to obtain a customer’s consent to the purchase of add-on products. Programs like extended warranties and GAP insurance should be carefully explained as voluntary, separate from the motor vehicle purchase contract and retail installment contract. And in no instance should a customer’s down payment be applied toward an add-on product rather than the cost of the vehicle.

Advertisements Referencing a Down Payment Amount Must Disclose Terms of Repayment or APR

Any motor vehicle advertisement that states the amount or percentage of a down payment must also clearly and conspicuously state the terms of repayment and the annual percentage rate (“APR”). Section 144 of the Truth in Lending Act (“TILA”) requires this. In the complaint against Napleton, the FTC alleged that its advertisements promoted closed-end credit and stated the down payment amount without clearly disclosing the repayment terms or APR, making Napleton subject to civil penalties. 

Dealers should review their advertisements to ensure compliance with the TILA. If an advertisement mentions a down payment amount, the repayment terms and APR must be obvious to the consumer as well.

Dealer Finance Compensation Procedures Should Be Consistently Applied

The Equal Credit Opportunity Act (“ECOA”) prohibits discrimination against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age, and other factors. This includes both intentional discrimination and credit practices that appear neutral but nevertheless result in a negative disparate impact on customers who are members of a protected class. In its enforcement action, the FTC alleged that Napleton violated the Equal Credit Opportunity Act by imposing higher costs on Black applicants on average, compared to similarly situated non-Latino White applicants. 

To avoid a violation like this, the National Automobile Dealers Association recommends that dealers could establish a means of finance compensation where the determination of the finance income they earn does not vary on a customer-by-customer basis. For example, dealers could charge each customer a fixed percentage of the amount financed but still allow for downward adjustments if a pre-determined condition occurs – as long as the pre-determined condition is neutral, pro-competitive, and unrelated to the customer’s status as a member of a protected class (i.e. the customer has access to a more favorable offer of credit from another creditor, or a promotional offer is extended to all customers on the same terms). If well-defined adjustments to dealer finance compensation are consistently applied and documented, dealers face less risk of discrimination in violation of the ECOA.

Dealers should consult legal counsel with questions regarding compliance with the FTC Act, the TILA, and the ECOA.