Dissecting the FTC’s CARS Rule

For as long as we’ve had bad apples, they’ve been around to spoil the bunch. 

It’s an unfortunate theme in many industries, but retail auto is especially prone to negative stigmas and bad raps caused by a few rotten fruits because, the larger the price tag, the more heightened the stakes and expectations.

Marked by this lingering mistrust in the auto industry, the Federal Trade Commission has stepped in with the CARS Rule — a robust set of regulations aimed at protecting consumers in the sale, financing, and leasing of vehicles. It’s the most comprehensive and significant set of federal regulations ever introduced in the automotive dealership industry with more than 370 pages of published regulations.

‍So, what's this rule all about?

‍The primary purpose of the FTC’s CARS Rule is to ensure truth and transparency throughout the car buying and leasing process by making it clear that certain deceptive or unfair practices are illegal – for example, bait-and-switch tactics, hidden charges, and other conduct that harms consumers and honest dealers.

At the heart of the CARS Rule are provisions designed to enhance transparency and fairness in vehicle transactions. Dealers are now mandated to provide clear disclosures on pricing and obtain explicit consumer consent for charges, marking a significant departure from previous practices.

‍The Rule lays out four basic principles:

In simpler terms, here’s the gist: 

• Offering Price Rules – Requires a clearly displayed advertised price for all vehicles and finance specials.
  
  
• Salesperson Communication Rules – Sets guidelines for initial salesperson interactions, including a requirement to disclose the offering price from the jump.
  
  
• Add-on Product Regulations – Bans the sale of what FTC considers non-beneficial products/services and introduces a new form to ensure customer consent for all add-ons and other dealer charges.
  
  
• Monthly Payment Trigger Term Rules – Requires new stricter disclosures whenever a monthly payment is mentioned.
  
  
• Prohibited Advertising Practices – Enforces a strict set of rules against certain advertising methods.

That means no-no’s like this:

And this:

The rule will also impose 24-month record-keeping requirements. Under the CARS Rule, dealers must create and retain for at least two years all records necessary to demonstrate their compliance. And, they do mean all.

That means things like:

• Ads. Dealers must retain copies of all materially different ads, sales scripts, training materials, and marketing materials about the price, financing, or lease of a vehicle.

• Purchase orders and financing and leasing documents. Dealers must retain copies of all purchase orders and financing and leasing documents signed by the consumer, whether or not final approval was received for financing or leasing. This provision also covers all written communications about sales, financing, or leasing between the dealer and any consumers who sign a purchase order or financing or lease contract.

• Documents about add-ons. Dealers must retain records demonstrating that add-ons in consumer contracts meet the requirements and include copies of all service contracts, GAP Agreements, and calculations of loan-to-value ratios.

• Consumer correspondence and complaints. Dealers must retain copies of all written consumer inquiries, complaints, and responses about disclosures.

The FTC estimates its rule will shorten the car-buying process by an average of three hours, though a contrary study by the Center for Automotive Research concluded that the new regulations would actually add two hours to the car-buying process).

Overall, consumer advocates are applauding the move, seeing it as a necessary step towards protecting buyers from unfair practices, but many dealers aren’t quite seeing it the same way. 

In addition to potential fines (up to $50,120 per violation), the rule also brings with it new compliance challenges and costs. The announcement has been met with a mix of reactions from within automotive, while other organizations like NADA are voicing their clear disapproval.

In a recent statement, the CEO and President, Mike Stanton, said, “This regulation is heavy-handed bureaucratic overreach and redundancy at its worst, that will needlessly lengthen the car sales process by forcing new layers of disclosures and complexity into the transaction. The FTC made up data to support its claims, then rejected calls to slow down the process and test the effectiveness of its proposal with real consumers. We are exploring all options on how to keep this ill-conceived rule from taking effect.”

Like NADA, the American Financial Services Association also hinted at litigation and commented that it is “likely that the rule will be challenged”, stating that the FTC did not comply with the Administrative Procedures Act because there was a lack of support for the cost/benefit analysis and a lack of consideration for the impact of the rule on small businesses. Before the rule was finalized, AFSA asked the House Appropriations Committee to intervene in the issuance of the final rule, and we would not be surprised to see similar requests or a resolution introduced in Congress under the Congressional Review Act seeking to override the rule.

It’s also likely to lead to a lot of legal headaches for dealers for two reasons:

1. States vs Fed. The CARS Rule preempts any conflicting state laws unless the state laws provide greater protection. For example, California law specifically allows dealers to exclude document processing charges from the vehicle’s advertised price. The FTC CARS Rule requires such fees to be included in the advertised price. So, in this case, Federal law wins, and California dealers will now be forced to include the doc fee in the advertised price.
   
   
2. CARS vs Junk Fees. Motor vehicle dealers and industry trade associations contemplating litigation should be aware of some potential collateral effects. To the extent an injunction was to result from any such litigation, it is conceivable that the FTC’s proposed “Junk Fees Rule” could be finalized and effective before the CARS Rule. We note this possibility because, under the proposal, motor vehicle dealers required to comply with the CARS Rule are exempt from the Junk Fees Rule. If the proposed exemption is unchanged, and it later turns out that the Junk Fees Rule is in effect while the CARS Rule is not, motor vehicle dealers would then be subject to the Junk Fees Rule. 

No reason to panic. The industry is used to pivoting with panache, so we’re not worried, and neither should you be.

For one, we know our dealer community is already following along with many of these guidelines, so it’ll be more of a freshening up than a complete makeover for most.

Two, you have plenty of time. The rule doesn’t go into effect until July 30, 2024. 

And three, there are plenty of industry partners out there who can help keep you in compliance (looking at you ComplyAuto, AutoFi, Reynolds and Reynolds).

So, don’t fret. A lot can happen between now and July. But either way, you got this and keep pushing back. 👊