The Federal Trade Commission is broadening its enforcement of car dealerships to crack down on deception and fraud in operations that go beyond advertising.
The latest actions, announced today, also target auto-loan application fraud and deceptive practices related to add-on products and services.
Jessica Rich, director of the FTC’s Bureau of Consumer Protection, outlined the “Operation Ruse Control” initiative.
The FTC is pairing up with 32 enforcement agencies to conduct a “nationwide and cross-border crackdown on deception and fraud in the auto marketplace,” the agency said.
It included 252 actions that include charges of deceptive advertising, criminal automotive loan application fraud, odometer fraud and deceptive marketing of car title loans. There were 187 enforcement actions in the U.S. and 65 in Ontario and British Columbia, Canada, since the FTC’s last sweep in January 2014.
Jail time
While the U.S. civil charges can carry hefty fines, criminal charges carry the possi-bility of prison time. For example, a salesperson charged with conspiracy fraud could face up to 5 years in prison. A conviction against a dealer for wire fraud could carry a 20-year maximum sentence and a finance manager convicted of bank fraud could serve up to 30 years in federal prison, said Joyce White Vance, U.S. attorney for the Northern District of Alabama.
Among the six new actions announced by the FTC are its first auto enforcement cases involving add-on products or services. The six new FTC cases include more than $2.6 million in judgments.
The FTC defines add-on products as products or service a dealer or other third party adds to the vehicle lease or finance contract. A few examples Rich gave during a media conference call included undercoating, extended service contracts and road service.
Rich said, “Consumers have told us that in many cases, the prices of add-ons are not disclosed adequately or they fail to provide the promised benefits.”
She added, “To date, the FTC has also brought dozens of other auto-related cases involving subprime auto loans; deceptively marketed car title loans; dealer misrepresentations about prices, discounts, who will pay off the amount owed on a trade-in vehicle; and scams in which companies promise to reduce auto debt in exchange for a large up-front fee, but then take consumers’ money and do nothing.”
Biweekly payments
For the first time since the FTC received expanded authority over auto dealers under the Dodd-Frank Act, it took two enforcement actions involving add-ons, specifically, biweekly payment programs offered to consumers.
The FTC charged National Payment Network Inc., a San Mateo, Calif., provider of loan acceleration programs, with deceptively pitching consumers an auto payment program -- both online and through a network of authorized auto dealers -- that it claimed would save consumers money. But, Rich said, NPN did not disclose that the significant fees it charged for the service often cancelled out any real savings. Those enrollment fees averaged $775 on a standard five-year auto loan, Rich said.
In a related case, the FTC said that Matt Blatt Inc. and Glassboro Imports, which owns two dealerships in New Jersey, failed to disclose or adequately disclose the fees associated with NPN’s add-on service. The FTC said that many consumers would not actually save any money because of the fees. Matt Blatt received a commission for each of the more than 1,000 consumers they enrolled, Rich said.
Settlement terms
NPN and Matt Blatt have agreed to settle the FTC charges, Rich said. Under proposed consent orders, they are “prohibited from misrepresenting that a payment program will save consumers money, unless the amount of savings is greater than the total amount of fees and costs charged in connection with the program.” They also cannot claim that the payment programs or their associated fees will “improve, repair or otherwise affect a consumer’s credit record.”
NPN will refund more than $1.5 million to consumers, and waive another $949,000 in fees to current customers. Matt Blatt also will pay $184,000 to the FTC as part of the settlement, Rich said.
In May, the National Automobile Dealers Association had alerted its members in a memo that the FTC was cracking down on biweekly payment products arranged in the finance and insurance department and that the FTC had issued civil investigative demands to dealers in connection with such products.
NADA spokesman Jared Allen said that none of today’s FTC announcements are “indicative of any systemic problems within the auto industry -- nor, as the agencies acknowledged, are they reflective of the overwhelming number of honest businesses that make up the nation’s franchised dealer network.
“While we have no firsthand knowledge of the facts surrounding these individual cases, we share the agencies’ view that there is absolutely no place for fraud or de-ceptive practices in any part of the business community,” he added.
Within 24 hours
NPN said it has agreed to the settlement in connection with the FTC’s investigation into biweekly products sold by auto dealers.
But in an email to Automotive News, the company also said it “strongly disagrees with the FTC’s allegations and has presented considerable evidence, including consumer satisfaction surveys, training materials for dealership personnel, and other documents that support its position and demonstrate the value of biweekly payment programs, in terms of convenience, late-fee avoidance, and faster loan payoff. NPN has decided, however, that a settlement is in the best interest of its customers and auto dealer channel partners.”
It has discontinued the marketing and sale of its biweekly payment programs in 2013 and has not enrolled any new customers since that time, the email statement said. It said existing customers “may wish to remain enrolled in NPN’s biweekly payment program at reduced fees.”
‘Did not admit wrongdoing’
A spokesperson for Matt Blatt said, “We believe that we clearly explained the terms and benefits of the biweekly payment plan to our customers. As part of the settlement, the $184,000 is our portion of the settlement, we did not admit any wrongdoing and we don’t think we did anything wrong.”
Susan Buehler, spokeswoman for Matt Blatt, added that the company made the settlement because, “We felt it would be extremely difficult to defend it and pay for litigation.”
Matt Blatt has not sold or used the biweekly payment plan for a year and a half now, Buehler said. But it has set up a phone number and email contact address for customers who still have the product who might have questions or concerns about the payment plan program. “We are pledging to answer all of those phone calls and emails within 24 hours,” she said.
Deceptive advertising
Three auto dealers settled charges that they ran deceptive ads that violated the FTC Act and the Truth in Lending Act and/or Consumer Leasing Act, Rich said.
She said the ads promoted sales, leases or financing that seemed like good deals until fine-print disclaimers canceled it out. In other instances, the disclaimers did not disclose relevant terms, such as required down payments.
“What we’re most commonly seeing and keeping bring actions against are what I’m calling these bait-and-switch tactics, where the advertisement says one thing but it’s not the price you’re offered when you get to the dealership,” Rich said. “That’s not to say there aren’t many, many honest dealers in this industry, but we’re going to keep bringing charges when we see them.”
The three dealers Rich listed as having settled are Cory Fairbanks Mazda of Longwood, Fla., Jim Burke Nissan of Birmingham, Ala., and Ross Nissan of El Monte, Calif.
APR clarification
The proposed settlements in these actions prohibit the dealerships from misrepresenting the purchase cost or any other material fact about the price, sale, financing or leasing of a vehicle. Jim Burke Nissan and Cory Fairbanks Mazda are also prohibited from representing that a discount, rebate, bonus, incentive or price is available unless it is available to all consumers. They also must clearly disclose all qualifications and restrictions.
Calls to Cory Fairbank Mazda and Ross Nissan seeking comment weren’t returned.
In an emailed statement to Automotive News, a spokesperson for Jim Burke Nissan said, “The FTC’s case with Jim Burke Nissan concerned only two online advertisements and involved no other advertising medium. The advertisements did not include the required letters A.P.R. (Annual Percentage Rate) with a zero percent (0 percent) finance rate. They said, “Zero 0 percent for 72 Months” and should have said “Zero percent APR for 72 Months.”
The statement went on to say, “The FTC also claimed some of the required disclosures were incomplete or difficult to read. Jim Burke Nissan cooperated fully with the FTC, acknowledged the oversight, and immediately corrected the advertisements to comply with all the FTC’s requirements. We know of no customer complaints to the FTC involving these or any other ads or practices in our almost 30 years of serving Birmingham and the surrounding communities.”
Poor people, minorities
There is no specific demographic for the victims in these cases, Rich said. In the case of deceptive advertising, it can be far reaching given how many people read newspaper ads or go online searching for vehicle pricing, Rich said.
“The victims are nationwide and we don’t have a total count, but it’s a significant number,” Rich said.
But it is more often poor people or minorities that suffer the greatest, she said.
“In both the advertising deception and in these loan modifications, companies in general, not just auto dealers, exploit language differences to exacerbate the deception problem. We have seen ads that put the ad in Spanish, but the disclaimer in English,” Rich said.
U.S. Attorney Vance added, “We did see a lot more activity against financially depressed sectors. So all I can say is that these practices are used to hurt poor people.”
‘Most offensive’
Vance has worked closely with the FTC and has prosecuted criminal cases at dealerships. She said the Mortgage, Loan Fraud and Discrimination Working Group of the Attorney General’s Financial Fraud Enforcement Task Force is working with other law enforcement agencies “to determine what we can do now to prevent fraud during the auto lending process.”
Vance said she finds loan fraud to be most offensive.
“It’s dealerships that inflate a buyer’s income so they can buy a car they can’t afford, dealers who permit and encourage a straw purchaser to be on a loan so they can get a car they cannot afford. And, finally, putting add-ons on the car with hidden costs,” White Vance said. “These are practices dealers do to boost their bottom line without any concern for the purchasers’ income and family’s well being and I find that to be most offensive.”
FTC actions
Operation Ruse Control is the latest in a string of actions by the FTC to address practices by car dealers.
Since the FTC began Operation Steer Clear, a nationwide sweep the FTC unveiled in January 2014, the FTC has settled with 12 dealerships accused of deceptive advertising.
Under those settlements, if the dealers failed to comply at any point over the next 20 years, they could face a fine of as much as $16,000 each day a deceptive ad runs.
The settlements are part of an FTC crackdown on dealer advertising that began three years ago. In March 2012, the agency settled with five dealers that it had accused of running deceptive ads. In late 2013, the FTC settled with two more.
In January 2014, when Operation Steer Clear was announced, the agency warned that it wouldn’t let up.
It’s doing the same now.
“Protecting consumers in the auto marketplace remains a top priority for the FTC,” Rich said. “If auto dealers are not following the rules of the road, we will step in to apply the brakes.”
