Industry Challenges to the CARS Rule

There are two sides to every story, and such is the case with the Federal Trade Commission's Combating Auto Retail Scams, or CARS, program, which originally would’ve taken effect on July 30.

Though the agency has stayed the rule while auto industry trade groups contest it in court, compliance experts say it’s wise that dealers don’t wait for the outcome but prepare for its enactment now.

The FTC, resolute that the rule is needed, gives the following reasons:

1. To prohibit misrepresentation about material information
2. Require dealers to clearly disclose offering price, excluding only taxes and other government fees
3. Make it illegal for dealers to charge for add-ons that don’t provide a benefit, such as selling GAP coverage on a cash deal
4. Get express consent before charging customers for anything.

The agency says the regulation would eradicate confusion and inconvenience in the car-buying process and that it wouldn’t cost dealers anything. But the automotive industry sees things differently, according to James Ganther, CEO of Mosaic Compliance Services, an attorney-led compliance company that serves the auto, RV and power-sports markets.

“The FTC says this will be better for the consumer,” he says. “News flash: All of these things were already illegal before the CARS rule went into effect. And in four years, there has been one complaint for 10 million transactions. That’s not a crisis. This regulation is a solution in desperate search for a problem.”

Ganther says the true danger lies in the mechanisms required for dealers to comply with the rule.

“The rule in its current form will make vehicle transactions take longer, cost more money, and make it more difficult to sell vehicle products that customers need and desire,” he says.

Tony Wanderon, CEO of APCO Holdings LLC, concurs and says he’s baffled by the assertion that dealers wouldn’t prioritize the customer experience. “The only way a dealer will survive is for their customers to come back and buy a car,” he says. “It’s almost a requirement that you walk the customer through the process, provide them a great customer experience, and disclose everything properly.”

Better, More Transparent Pricing

The FTC says the rule aims to combat deceptive advertisements that may sway consumer decisions by withholding crucial information.

The most substantial change would be around pricing. Under the rule, the advertised price is what consumers can expect to pay. Dealers will add in state and federally mandated taxes and fees later but must disclose all other fees from the beginning.

At issue is that the rule requires dealers to include every charge that a customer will pay upfront. “As a practical matter,” Ganther says, “you cannot add documentation fees or dealer prep fees at the end. They have to be included in your advertised price.”

Setting price would also be difficult because there are so many options and add-ons, Wanderon says. A base Ford-150 is going to have one price, but if it has after-market options galore, it’s going to cost far more.

And, if dealers miss something, they would be penalized, Ganther says.

Dealers who violate those and other FTC regulations would be required to refund consumers and pay civil penalties of up to more than $50,000 per violation, a fine that’s adjusted annually for inflation. “Every violation on its own is a fineable event, which means you can be fined over $50,000 for every vehicle on your website if they are priced incorrectly,” he says.

Echoing Ganther, Wanderon says the rule is also unnecessary. The motor vehicle retail installment contract already discloses the full price, he points out. “This document shows the interest rate, finance charges and the total monthly payment.”

The rule even goes beyond what consumers actually want, Ganther says.

“At the end of the day, most buyers don’t care. Most buyers are payment buyers. They want to know what their payment will be each month and if it fits their budget. Knowing the total financed price of each individual voluntary protection product doesn’t help – it just slows down and complicates the process. The only people who focus on total cash price are cash buyers.”

He adds, “This is why dealers advertise the way they advertise and negotiate the way they do. It is what customers want.”

Clear, Consistent Communication

The FTC rule would also require dealers to consistently and transparently disclose the offering price in all communication methods they use.

That means that when communicating by email, text or other tools, dealers must clearly state the price and avoid using complicated language or hidden text. All verbal communication over the phone or in video calls should be at a volume, speed and rhythm that is easily understandable for everyday consumers. Dealers also must avoid sales documentation with preselected boxes or agreements that limit consumer autonomy, decision-making or choice.

Plus, dealers would get express, informed consent and full disclosure throughout the transaction, according to Wanderon, who suggests that the regulation would open the door for additional—and frivolous—litigation.

“What does full disclosure really mean? They could sign a document, then come back and say, ‘I didn’t understand what you told me.’ That opens the door to legal challenges. In my opinion, simplifying things versus overcomplicating them is easier for everyone involved. Instead of legalizing every document, let’s make it simpler for consumers to understand.”

How dealers would meet full-disclosure requirements is also open for interpretation, he says.

“Is it a signed document that’s been explained? A recorded conversation to prove the dealer complied? Is there a script they are supposed to follow to keep them out of trouble? There is a lot of subjectivity in here. This opens up a lot of risk, even for dealers who are doing their job properly.”

Ganther says the rule’s reference to express informed consent is another disaster in the making. “This is where compliance gets really costly. How do you prove you get express informed consent during oral negotiations?”

Clear disclosures would be required from dealers, outlining the charge, amount and loan fees. Complying would require dealers to quote each item, be it the vehicle or a voluntary protection product, at both its agreed-upon price and the extended price after financing the transaction if it’s not a cash deal, according to Ganther.

For example, if a dealership sells a vehicle service contract at $2,400, but it’s financed at six years at 9.5%, that would have to be clearly and conspicuously disclosed. The dealer would need to share that its actual price was $2,400 but that when financed at that rate, it would be $3,158.

Proving express informed consent would also cost dealers money, Ganther adds.

“The FTC doesn’t tell dealers what express informed consent is, only what it’s not. But what we know is that under this ruling, signing a contract will no longer be enough to show express informed consent. They are throwing out 1,000 years of contract jurisprudence out the window.”

The presumption that signing a contract indicates, “I read the document, understand it, and agree to be bound by its terms” would be moot under the rule, Ganther says. The regulation states that dealers must record, then archive an entire transaction for two years.

Wanderon wonders whether, if consent requires recorded videos, consumers would have to sign a document granting permission for that.

Preserving video recordings is costly, Ganther says. Dealers have two options when it comes to video-storage solutions: maintain on-site storage, which requires purchasing and maintaining physical hardware, or using a cloud storage solution with monthly fees.

With either option, dealers also open themselves to privacy issues that go beyond identity theft, Ganther says. “To comply with this rule, I believe dealers will be tempted to record transactions and preserve the recordings for two years,” he says. “That hurts the customer. If someone hacks into this database, they can steal your voice and use it to perpetrate frauds against your friends and family. So if you record transactions, I would have a professional service do it and store the recordings safely. This is not a liability the dealer wants to keep for itself.”

The Add-On Dilemma

The FTC says the CARS Rule would prevent dealers from trying to charge consumers for add-on products and services they don’t need and that aren’t part of the disclosed price.

Dealers would have to clarify that an add-on is optional, even if it's part of the price. All add-ons are optional, unless the manufacturer or another owner installed it, Ganther says.

Examples of add-ons include service maintenance packages offered by dealers, “nitrogen-filled" tires, after-market extended warranties, gap coverage agreements, and tangible items, like wheels or window tinting that aren't part of the original factory build.

The FTC says those add-ons are unnecessary and don’t provide value, something Ganther disagrees with. “I dislike the FTC presumption that dealers are providing gap on a cash deal or suggesting that nitrogen-filled tires are not a valuable product,” he says.

Those assumptions would also eliminate consumer choice, Wanderon says. He cites gap coverage as an example. During the past few years, many consumers bought vehicles at peak prices. Used-car prices have fallen significantly, leaving some consumers with negative equity on their loans. If consumers don't have gap coverage, their insurance may not be enough to cover the total loss of their vehicles in an accident. That’s just one example of when gap coverage makes sense, he says.

Most of the time, Wanderon adds, lenders approve the sale of add-on products. “This means much of the FTC CARS Rule duplicates processes that are already being done. It is almost a requirement that you walk the customer through the process, provide them with a good customer experience and disclose everything properly.”

Compliance Cost Factor

The FTC maintains the CARS Rule will target shady dealer tactics in a cost-effective way.

In fact, the commission’s order states, “… the rule does not impose substantial costs, if any, on dealers that presently comply with the law, and to the extent there are costs, those are outweighed by the benefits to consumers, to law-abiding dealers, and to fair competition—as honest dealers will not be at a competitive disadvantage relative to dishonest dealers.”

But both Ganther and Wanderon say the rule would make car-buying more time-consuming, costly, confusing and frustrating for all involved because it wouldn’t account for practical dealership compliance costs.

“The FTC said compliance would not cost a thing. They said good dealers are doing these things already,” Ganther says. “But we are in the business of creating compliance solutions. We know what the cost will be. Our best estimate is well over a billion dollars a year for car dealerships to come into compliance.”

Costs would come from documentation, policy development, employee training and annual audits, they say.

Dealers would need to draft or customize a CARS Rule compliance policy, then train and test employees, especially salespeople and F&I staff, on the policy, training and testing that would have to be done annually due to employee turnover and ensuring it stayed top of mind for all employees.

If dealers videotape express, informed consent, someone would also have to review the 60- to 90-minute recordings for each transaction, Ganther says.

Finally, the dealership would need to annually hire a third party to audit its compliance effort, he adds.

“When you add it all up—the education, the monitoring, the reporting and the auditing — we think it’s going to cost around $1,500 per rooftop, per month, forever. Ultimately, the consumer will bear these costs. They also will slow down the transaction and make it more confusing.”

Where the Industry Heads

The national and Texas automobile dealers associations challenged the rule the day after it was issued in the Fifth Circuit of Appeals. The suit prompted the FTC to issue a stay of the rule, which had been scheduled to take effect on July 30, as the case moves through the legal process.

Mosaic spearheaded an amicus brief in support of the appeal. “We got a shallow but wide representation of the industry in this brief,” Ganther says. “We have the providers, the agents who sell the providers’ wares, and the compliance companies that offer training audits to ensure dealerships comply.”

Ganther said he expects the court process to take some time, though he expects the rule will be enacted in some form.

“Our goal is to get the CARS Rule overturned or modified.”

If the only thing left after the court ruling is that the FTC can fine dealers for deceptive trade practices, “I’d be fine with that,” he says. “But they want to broaden deceptive trade practices in their definition of offering price and in express, informed consent. It is the FTC’s convoluted, tortured definitions of offering price and express informed consent, and their record-keeping requirements that are far beyond the scope of their original stated intent.”

What Can Dealers Do

While dealers are in limbo, Ganther advises them to review their practices to ensure compliance with the substance of the CARS Rule. The key for dealers is to prevent the FTC from citing their behavior to justify the rule, he says.

“Look at what you are doing for clients. If you were accused of these deceptive trade practices, what could you produce in your own defense? Do you have written policies and procedures in place? Is your first line of defense consistent and demonstratable? Do you have verifiable training and third-party audits? All these should already be in place. This is how you comply with everything, not just the CARS Rule.”

If dealers identify gaps in their processes and policies, he says now is the time to shore up their defenses.

“The CARS Rule is a shot across the bow. Do at least the minimum necessary to make yourself a hardened target.”

Wanderon agrees, saying dealers who don't act responsibly don't last anyway. “Their retention rates are down, their CSI scores will be terrible, and the factory will come in and take away their franchise if they do not stay in compliance. Consequences for deceptive practices already exist.”

 According to Ganther, a good offense is the best defense, especially when it comes to the CARS Rule.

“Be transparent. Be fair. Treat your customers with respect. Once the litigation surrounding the CARS Rule is resolved, we’ll be back with guidance on how to comply with it.”

Ronnie Wendt is an editor at F&I and Showroom.