FTC, states ratchet up auto retail regulation

With leadership changes in the White House and at the Consumer Financial Protection Bureau, some dealers may have assumed that auto retail and finance regulation would scale back. It hasn't, lawyers and compliance experts warn.

In fact, some experts say the Federal Trade Commission and state attorneys general have stepped up regulatory activity focusing on auto retail in the past two years, and dealers should stress adhering to compliance standards.

State-led consumer protection efforts were reinvigorated in late 2017 with the appointment of longtime CFPB critic Mick Mulvaney as the bureau's acting director. In response, 17 attorneys general wrote a letter to President Donald Trump supporting the bureau's mission and criticizing Mulvaney's appointment.

"If incoming CFPB leadership prevents the agency's professional staff from aggressively pursuing consumer abuse and financial misconduct, we will redouble our efforts at the state level to root out such misconduct and hold those responsible to account," the attorneys general wrote.

Since then, several state attorneys general have developed consumer protection divisions. Former New York Attorney General Eric Schneiderman was active in regulating auto retailing, and this year attorneys general in Delaware, New Jersey, Pennsylvania, Massachusetts and other states have taken actions against dealers, accusing them of unfair and deceptive business practices.

Relaxing compliance standards because of political shifts at the federal level is a mistake most dealers can't afford to make, said Randy Henrick, compliance counsel at Mosaic Compliance Services.

State and federal agencies remain active in the auto retail sector, he said, investigating dealers for alleged violations such as deceptive advertising, income inflation and payment packing — inflating a monthly vehicle payment to offset the cost of an aftermarket product — in the finance and insurance office.

Regulatory activity aimed at dealers, rather than diminishing under Trump's administration, has migrated to state attorneys general, said lawyer Eric Johnson, a partner at Hudson Cook.

"It's almost like you went from one entity to be concerned about with the bureau — now you've got however many. You may have up to 50, or 51 if you include D.C.," he said.

Allen Denson, another partner at Hudson Cook, agreed. "We've seen more investigations and lawsuits with the attorneys general over the last two years than we had seen in the preceding years," Denson said.

The top compliance problem? Failing to address consumer complaints, Denson said.

"Complaints that don't get resolved at the dealer level tend to get sent on to the CFPB or the Federal Trade Commission or to state attorneys general," he said.

The FTC brought more than 40 cases against dealerships nationwide in the past five years. And, automotive-related issues were among the top 10 complaints consumers reported to the FTC in 2018, according to a February report. The commission reported 104,604 auto-related complaints in 2018, accounting for 3.5 percent of total.

Tom Widor, a lawyer in the FTC's Bureau of Consumer Protection, told Automotive News in March that the political climate does not affect the bureau's enforcement priorities in the auto industry.

"We continue to monitor and take actions to make sure that companies are deterred from violating the law," he said.

The FTC is the primary regulator for dealers, said Paul Metrey, vice president of regulatory affairs at the National Automobile Dealers Association. Because the FTC is bipartisan, he does not imagine a significant difference in activity based on which party controls the White House.

"They have three members from the president's party, two from the opposition party, and a lot of times they speak in unison," Metrey said.

The proposed Safeguards Rule, for example, was supported by a Republican chairman and two Democrats, he said.

The FTC is also more sensitive to regulation by enforcement, the notion of creating marketplace standards through punitive means such as a lawsuit, Metrey said.

"They're very concerned about if you're going to set a market standard that everybody is expected to abide by, there is a process for that," Metrey said. "I think they've done a very good job of trying to make sure that happens."

Even as the onus of auto retail and finance regulation shifts away from the CFPB, "in terms of the need to comply and do other things, there are still a number of pressure points and a lot of reasons to do everything that's been done for years," Metrey said.

The FTC relies on many of its field agents to investigate dealers, Henrick said. Last summer the agency conducted field operations to enforce changes to the Used Car Buyers Guide.

Under the agency-enforced Used Car Rule, used vehicles must have warranty information on a sticker on each used vehicle a dealership offers for sale. The Used Car Buyers Guide also details major defects that can occur in used vehicles, and instructions on how to get a vehicle history report and check for open safety recalls.

Last summer, in a compliance sweep of 20 cities, working jointly with 12 partner agencies in California, Ohio, Florida, Illinois, New York, Texas and Washington, the agency audited 94 dealers. Of those, only 14 had revised Buyers Guides on all of their used vehicles, and 33 dealers had them on at least half.

The low number of compliant auto dealers the FTC found could be a bellwether for compliance industrywide, Henrick said.

Regulatory activity in auto retail isn't limited to franchised dealers. When investigating bad behavior, state attorneys general and the FTC add those stores' vendors to their watch lists.

In April, Indiana Attorney General Curtis Hill sued a Texas-based promotions company for allegedly sending deceptive advertising to 2.1 million Indiana residents as part of 56 promotions for car dealerships in the state between March 2016 and March 2018.

Last October, a group of Washington, D.C., area dealers and their California-based marketing company settled with the FTC for allegedly mailing more than 21,000 bogus recall notices to customers in 2015 and 2017 to lure them into the dealerships.

To remain compliant, dealerships need to evaluate their partners effectively and consistently before signing up for their services, said Linda Robertson, executive director of the Association of Dealership Compliance Officers.

"To evaluate the effectiveness of training and vendors in the dealership, the compliance officer [and management] should compare the needs of the dealership and the expectations of federal regulations," Robertson said. "The next question should be, is the vendor or trainer meeting those needs or expectations?"

Hannah Lutz contributed to this report.