The FTC’s New Rules: Examining the CARS Rule
Combating Auto Retail Scams Rule (CARS Rule)
Last year, the Federal Trade Commission (FTC) announced the Combating Auto Retail Scams Rule, also known as the CARS Rule. The goal? To stop auto dealers from using any hidden fees or so-called "bait-and-switch" pricing tactics. The CARS Rule will change the way a lot of dealers do business by setting forth consumer guardrails on advertising, marketing, and selling vehicles to drivers. The rule was set to go into effect July 30, 2024, however, the Fifth Circuit Court of Appeals has set oral arguments for October 7, 2024 in the challenge of this rule. The petition, filed by the National Automobile Dealers Association and Texas Automobile Dealers Association asks the court to vacate or modify the rule and stay its enforcement pending resolution of the petition.
What Is The CARS Rule?
A set of regulations span about 12 pages…with about 360 pages of comments.
Translation: Things are complicated.
But the main focus is to take on two things:
Bait-and-switch tactics
What the FTC considers "junk fees."
Give Me A Brake: A Summary Of The CARS Rule
1. Prohibits misrepresentations about material information that would affect a consumer's buying or leasing choices (like pricing, financing, or add-ons).
2. Requires dealers to clearly disclose the offering price (aka the actual price anyone can pay to get the car, excluding only required government charges). This means giving buyers the effective drive-off-the-lot price upfront.
3. Makes it illegal for dealers to charge consumers for add-ons that don't provide a clear benefit—things like duplicative warranties, software subscriptions for cars that can't support them, or service contracts for oil changes on electric vehicles, for example.
4. Requires dealers to get consumers' "express, informed consent" before charging them for anything. Dealers will have to be clear in stating that additional items (like extended warranties) aren't mandatory.
Who Does The CARS Rule Protect?
The CARS Rule also takes special care to prohibit dealers from trying to "trick:"
1. The elderly and
2. Members of the military
These are the two groups bad-actor dealers have often targeted. The FTC cites reasons like by the age of 24, around 20% of young service members have at least $20,000 in auto debt.
Disclosure Requirements: The Devil Is In The Details
Offering Price:
Whenever you advertise a specific vehicle or finance special for a group of vehicles, you will have to identify the vehicle's "offering price."
This offering price includes everything except any required government charges (all fees or charges imposed by Federal, State, or local government agencies, including taxes, license and registration costs, inspection or certification costs, and any other such fees or charges).
Long gone are the days of "MSRP Only" pricing or "Click Here for Details" links, and you can no longer state "Plus" document processing charges, mandatory add-ons, or filing charges in a disclaimer. They must be included in the offering price.
Rebates, Discounts, and "Pre-Approved" Loans
The FTC prohibits you from factoring them into the advertised price but further clarifies that this prohibited activity involves rebates and discounts that are limited to only a few consumers (i.e. those rebates that are only available for the most expensive trim of a particular model or only to consumers with high credit scores).
Any rebates or discounts, and their limitations, must be clearly and conspicuously identified in the advertisement.
Add-Ons that are Not Required; Add-Ons that Provide No Benefit
Specifically, the FTC requires you to disclose in writing that the purchase of optional add-ons is not required for vehicle purchase or lease.
The FTC assures says this was prescribed to prevent unfair or deceptive acts or practices.
Add-ons that Provide No Benefit:
You cannot charge a consumer for an add-on that provides no benefit to the consumer. The FTC provides some examples here:
1. Nitrogen-filled tire-related products or services that contain no more nitrogen than naturally exists in the air;
2. Sale of service contracts that are duplicative of manufacturer warranties;
3. Supposed rust-proofing add-ons that do not actually prevent rust;
4. Add-ons that the vehicle itself cannot support (like engine oil-change services on an electric vehicle);
5. Software or audio subscription services that the vehicle cannot support or use; and
6. GAP agreements on vehicles with a low LTV.
Charging a Consumer without Consent
You cannot charge a consumer for any item unless you obtain the consumer's "express, informed consent" to be charged for that item. The FTC defines "express, informed consent" as "an affirmative act [that communicates] unambiguous assent to be charged, made after receiving and in close proximity to a Clear and Conspicuous disclosure, in writing…of the following:
What the charge is for; and
The amount of the charge, including, if the charge is for a product or service, all fees and costs to be charged to the consumer over the period of repayment with and without the product or service.
Furthermore, the FTC identifies the following as not being "express, informed consent:"
A signed or initialed document, by itself;
Pre-checked boxes; or
An agreement obtained through any practice designed or manipulated with the substantial effect of subverting or impairing user autonomy, decision-making, or choice.
Record Keeping
For 24 months, dealers must create and retain copies of the following:
Copies of all materially different advertisements, sales scripts, training materials, and marketing materials regarding the price, financing, or lease of a vehicle;
Copies of all purchase orders, financing, and lease documents signed by the consumer (whether you sold a vehicle or not);
All written communications relating to sales, financing, or lease between you and any consumer in which you sold or leased a vehicle.
Why Now?
The practices the FTC is targeting aren't new by any means, but they became more widespread during the pandemic when we were deep in a "seller's market."
Dealer groups have pointed out since the FTC announced the CARS Rules, these new regulations might not just rein in dealers engaging in shady sales practices - they might also cripple the entire industry.
The Pushback
The National Automobile Dealers Association (NADA) and Texas Automobile Dealers Association are going to court in an attempt to block the new rules that they say are "arbitrary, capricious, and an abuse of discretion."
Before the FTC passed the CARS Rule, NADA said the then-proposed regulations would "upend the sales process for tens of millions of consumers annually and thousands of small businesses."
Some have suggested the CARS Rule lacks clarity. NADA President and CEO Mike Stanton called the rule "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."
Plus…
The CARS Rule could impact classified marketplaces significantly. They'll likely have to:
React to the ways pricing communication changes to stay compliant with the new rules.
Help dealers disclose the offering price, MSRP, discounts or markups, etc., in addition to abiding by manufacturers' rules.
For example: The rules prohibit misrepresentation of "the availability of any rebates or discounts by factoring into the advertised price those that are not widely available to all consumers" and "the availability of vehicles at an advertised price."
The question for marketplaces is, how can they stay compliant? Rebates and incentives (and their applicability rules) are complicated. Vehicle availability can change in a heartbeat, and there's virtually no way to have real-time inventory information.
At face value, it seems like things will change (for better or worse) but as we all know, the devil's in the details... And the details surrounding execution are still unclear.
Image from https://consumer.ftc.gov.