The FTC recently announced a settlement of its lawsuit filed in a New York federal district court against a New York City car dealership and its individual general manager in which the FTC alleged that the defendants discriminated against African-American and Hispanic car buyers and engaged in other illegal business practices. The settlement provides for entry of two Stipulated Orders for Permanent Injunction and Other Equitable Relief (one as to the dealership and the other as to the general manager) that require the defendants to pay $1.5 million to be used for consumer redress (with the general manager responsible for any portion of the $1.5 million not paid by the dealership).
In its complaint, the FTC alleged that the defendants’ discretionary pricing policy violated the ECOA. According to the complaint, the policy allowed employees to “mark up” buy rates on customers’ retail installment sales contracts, “limited only by any markup cap imposed by the relevant financing entity, and fees,” and sales personnel were instructed to charge African-American and Hispanic consumers higher markups and additional fees. The FTC alleged that the defendants charged the average African-American customer approximately 19 basis percentage points (approximately $163) and the average Hispanic customer approximately 24 basis percentage points (approximately $211) more in interest than similarly situated non-Hispanic white consumers. The FTC also alleged that the defendants’ discretionary pricing policy was not justified by a business necessity that could be addressed through a less discriminatory alternative..
In addition to the alleged discriminatory pricing practices, the complaint alleged that the defendants engaged in unfair and deceptive advertising and sales practices in violation of the Truth in Lending Act and the FTC Act. According to the complaint, these practices included the following:
- Failing to disclose an annual percentage rate or other payment terms in advertisements
- Failing to honor advertised sale prices
- Inflating sales prices by double-charging consumers for sales tax and certain fees without the consumers’ knowledge
- Adding “air money” by increasing the sales price without informing consumers when completing the retail installment sales contract (thereby allowing the defendants “to pocket the difference between what the financing company would have accepted as a monthly payment and the higher monthly payment Defendants direct the consumer to pay.”)
In addition to the $1.5 million payment, the settlement requires the defendants to establish a fair lending program that includes a limit on dealer participation. For all retail installment contracts, the defendants may (1) charge an interest rate not greater than the buy rate, (2) charge the same number of basis points above the buy rate, or (3) charge a pre-set standard number of basis points above the buy rate (Standard), not to exceed 185 basis points, with deviations below the Standard permitted only in accordance with the terms of the Stipulated Order. These deviations are similar to those in several CFPB/DOJ consent orders with auto finance companies (allowing deviations in the case of competitive offers, to meet a customer’s monthly payment need, or to allow the consumer to participate in a subvention program). Notably, however, the settlement requires the defendants to keep records of each exception to the pricing policy, sworn under penalty of perjury and, in some cases, also certified by the entity’s fair lending officer. Thus, invoking these deviations from a standard dealer participation rate is significantly more difficult than envisioned in the previous CFPB/DOJ consent orders.
Also highly notable is a provision in the Stipulated Orders that provide that in any instance in which the defendants add a dealer participation to an assignee’s buy rate, they are required to provide a disclosure to the consumer “that the consumer may negotiate the APR and other consumers have received a lower rate.”