CAR: FTC auto dealer regs will cost buyers time, industry billions

The Federal Trade Commission's proposed new rules on auto dealerships would cost customers more time and dealers more money than the agency expects, a new Center for Automotive Research study concludes.

The FTC in June 2022 proposed requiring expanded disclosure and consent on finance-and-insurance products and physical accessories "not provided to the consumer or installed on the vehicle by the motor vehicle manufacturer." The agency also is considering cracking down on dealerships' statements related to the cost or financing of the vehicle itself, seeking to curtail bait-and-switch pricing and lower monthly payments that mask higher overall cost to a consumer. The agency has not taken further action on its plan following the close of a public comment period last year.

Under the FTC's plan, the average consumer would spend two more hours on a vehicle transaction, the Center for Automotive Research wrote in a May analysis based upon polling more than 60 dealerships.

The independent nonprofit research organization with ties to the auto industry had undertaken the survey at the request of the National Automobile Dealers Association,which helped identify possible survey candidates among its members.

NADA opposes the rules and has requested that the FTC withdraw them, calling the agency's plan "severely flawed both as a matter of law and public policy."

Interviews with five compliance professionals supported the estimates of an extra hour spent in each of the sales and F&I stages of a vehicle deal, the Center for Automotive Research said.

The FTC had predicted its rules would save consumers three hours of the total time spent researching, shopping and visiting dealerships to buy a vehicle.

The automotive retail industry would also incur between $18.69 billion and $22.34 billion in additional compliance expense over the course of a decade because of the FTC rules — more than 10 times the $1.36 billion to $1.57 billion predicted by the agency. An individual dealership location would spend a median $46,950 in upfront cost and $50,958 in recurring expense every year to comply with the regulation, the survey found.

"The unintended consequence of this all is that smaller dealers, such as ours, will be put at a significant competitive disadvantage versus larger dealers — particularly compared to large, publicly traded dealer groups who can spread the compliance costs over much larger sales volumes," one dealer with four rooftops told the Center for Automotive Research. "We would have to incur significant costs for hiring dedicated (new) compliance personnel and for outside consultants and attorneys. Ultimately, consumers in general will pay more and (will) spend more time at dealerships as a result."

Under the FTC's proposal, customers can't buy physical accessories or F&I products — both of which the FTC designates as "add-ons" — without first declining in writing the option to buy or finance the vehicle by itself at the corresponding amount. A manager also must sign the document.

The proposal also calls for customers to provide "express, informed consent" and receive cost information about "add-ons" before a dealership can charge them for or help them finance any of those products. Prechecked boxes or a "signed or initialed document, by itself" doesn't qualify, the agency said. Consent must be "unambiguous" and, in the case of physical transactions, oral.

“My projection of cost only includes the cost of my personnel’s time, but additional personnel will be required, which is unquantifiable at this time,” one dealer told the Center for Automotive Research. “My current system of selling will have to be changed to incorporate the changes, and the additional time required to sell vehicles will increase as a result of these changes to be included.”

The dealer said it would slow the paperwork process and "hamper the transaction process for consumers."

When the compliance cost figures were combined with the value of two more hours of customer time — priced at $22.20 per hour by the FTC — per transaction, the Center for Automotive Research put the net cost of the regulations over 10 years at between $38.06 billion and $45.87 billion. That's significantly different than the $29.72 billion to $34.77 billion in net benefit predicted by the FTC.

"Dealer respondents also indicate that any added costs incurred would be likely passed along to customers given prevailing industry competitive pressures overall," the Center for Automotive Research wrote.

"The Commission's Notice of Proposed Rulemaking lays out the harm bait and switch tactics and hidden charges cause consumers and law-abiding dealers, discusses the rule proposal and costs and benefits of the proposed rule, and invited the public to submit comments," an FTC spokesperson said in a statement provided to Automotive News in response to the findings. "We are reviewing those comments carefully as we consider next steps."

In addition to the industry hypothetically spending two more hours on each transaction to educate the customer to the FTC's specifications, 41 percent of dealers told the Center for Automotive Research they would provide more details in "pre-sale" communications with consumers when the regulations are enacted.

But 52 percent of dealers said they would share less information at this pre-sale stage. Another 7 percent told the research center they would provide the same amount of detail.

Another question found 72 percent of respondents agreeing the FTC's regulations would prompt them to require customers to contact their dealerships for pricing information "specifically in lieu of providing in advertising or consumer communications." The other 28 percent of dealers wouldn't cut the information in favor of requiring direct inquiries.

Under the FTC's proposal, dealerships would need to list an out-the-door cash price they would honor for any specific vehicle or financing term they advertise. However, the same requirement applies to the dealership's first response to a customer's inquiry about a vehicle. The regulation imposes other disclosure rules on a dealership's discussion of monthly payments as well as "add-ons."

Edgar Faler, managing director of financial analytics and industry strategy at the Center for Automotive Research, said dealers within the 72 percent group cited "additional compliance requirements and related costs" as their rationale for advertising fewer vehicles.

One dealer told the research center that his group already has incurred "considerable cost" in proofreading ads to catch misrepresentations that violate existing regulations.

"This is already challenging for us because we have four dealerships, eight different brands and, for example, can have 200 or more unique truck configurations available for sale at any given time because our customers demand customization and accessories for performance and utility," the dealer said. "Many customers also require unique financing and transaction options for legitimate business and insurance reasons as well. Some such options demanded by consumers are available factory-installed or via automakers' captive finance firms and others are not, which already poses significant disclosure challenges for us."