On October 18, 2022, the Federal Trade Commission (“FTC”) announced a settlement with a Washington, D.C.-area auto dealer, Passport Automotive Group (“Passport”), resolving allegations that it had deceived consumers by adding illegal “junk” fees onto car prices and charging Black and Latino consumers higher financing costs and fees. Under the terms of the settlement, Passport will pay more than $3.3 million in consumer redress.
The FTC’s complaint, filed in federal district court for the District of Maryland, alleges that Passport advertises cars as “certified,” “inspected,” or “reconditioned” at specific prices, but then adds hundreds or thousands of dollars in fees to the advertised prices. These fees either increase the price over what was advertised or negate any discounts the consumers negotiated. The FTC alleges that Passport claimed that the charges for inspection, reconditioning, or certification were required when they had already been included in the advertised price, and, in some instances, auto manufacturers specifically prohibited them from charging separate certification costs. These alleged misrepresentations are the basis for the FTC’s causes of action for deceptive practices under Section 5 of the FTC Act.
The FTC also alleges that Passport discriminated against Black and Latino consumers by charging them more in financing costs and fees than they charged to non-Latino white consumers. Passport had a standard dealer markup of 2% (beyond the underwritten financing of the installment contract), but each of its dealerships was given discretion to reduce or eliminate the markup, resulting in Black and Latino customers being charged more. While Passport had an anti-discrimination policy, the FTC alleges it was not enforced or monitored. As a result, the FTC claims Black and Latino consumers paid, on average, more than $291 and $235 in interest, respectively, and were more likely to have to pay extra fees than non-Latino white consumers. The complaint alleges that these acts constitute discriminatory finance practices under the Equal Credit Opportunity Act (“ECOA”), as well as unfair discrimination in violation of Section 5 of the FTC Act.
While the FTC’s treatment of discrimination as an unfair practice triggering FTC Act liability is novel, it is consistent with past statements by several of its Commissioners, as well as the expansive view recently taken by the CFPB of its UDAAP authority. In a March 2020 statement about the FTC’s settlement with Liberty Chevrolet, then-FTC Commissioner Rohit Chopra stated “…the alleged conduct is illegal under the [ECOA], but it also violates the FTC Act’s prohibition on unfair practices. Using disparate impact analysis and other tools, the Commission can use its unfairness authority to attack harmful discrimination in other sectors of the economy.”
More recently, in the FTC’s action against Napleton Automotive Group in March 2022, FTC Chair Lina Khan and Commissioner Rebecca Kelly Slaughter issued a statement saying they would have also supported a count alleging unfair acts and practices under the FTC Act in light of the clear disparate harm to consumers who are not in a position to avoid it. While acknowledging that the FTC’s unfairness authority to address discrimination is limited, the two Commissioners detailed a framework to be used for evaluating discrimination under its unfairness authority.
Earlier that same month, the CFPB announced it would exercise its supervisory authority under the Consumer Financial Protection Act to scrutinize discriminatory conduct as an unfair practice independent of federal fair lending laws. It accomplished this through amendments to its exam manual pertaining to UDAAP rather than through the rulemaking process. which is being challenged in court by the U.S. Chamber of Commerce and other trade groups on the grounds that it violated the Administrative Procedure Act. It is worth noting that the Chamber filed its case in a Texas federal district court, so any eventual appeal of that case would go to the Fifth Circuit, which held last week that the CFPB’s funding mechanism is unconstitutional in Community Financial Services Association of America v. Consumer Financial Protection Bureau
In addition to the monetary settlement, Passport has agreed to establish a fair lending program that will, among other things, require each of its dealerships to eliminate any dealer markups on installment loan financing or to charge the same markup rate to all consumers. Passport has also agreed not to charge fees without express, informed consent from its customers. In 2018, Passport agreed to a settlement with the FTC to resolve allegations that it had mailed more than 21,000 fake “urgent recall” notices to consumers in order to lure them into its dealerships. Passport’s President and Vice President were also parties to both settlements.
The FTC authorized the action and settlement by a 4-1 vote. Former Commissioner Noah Joshua Phillips dissented, on the grounds that the complaint included a cause of action for “Unfair Discrimination” pursuant to Section 5 of the FTC Act. While advising he would have agreed that the discrimination claims were properly brought under ECOA, Commissioner Phillips felt that the FTC was improperly attempting to turn Section 5 into “an undefined antidiscrimination statute.” As mentioned above, although this is the first time the FTC has used its UDAP authority under Section 5 of the FTC Act to address discrimination as an unfair practice, it has been foreshadowed by the statements of several Commissioners and called for by consumer advocates, including the Student Borrower Protection Center, which has advocated for this expansive interpretation. As we have discussed in the context of the CFPB, this begs the question as to why a change of this magnitude is not being made through the rulemaking process.
In conjunction with the announcement of the settlement, the FTC published a consumer alert, “Discriminatory financing and bogus fees at the car dealer? No thank you,” advising consumers to shop around for financing, carefully read the terms and agreement when shopping for a car, and to walk away if necessary. The FTC also published a blog post on its website, “$3.3 million FTC settlement with Passport drives home importance of fair lending,” which highlights four lessons learned for companies: (1) conduct an ECOA compliance check, (2) corporate officers may be on the hook for the misconduct of their company, (3) actual practices – not just policies on paper – matter, and corporate policies “won’t paper over illegal practices on the sales floor,” and (4) discriminatory conduct can be “unfair” under the FTC Act.
The action against Passport signals that the FTC is committed to expansively wielding its existing authority under the FTC Act to address unfair and deceptive practices as a tool to address discrimination. The Passport settlement also sends a clear signal that the FTC is exercising its enforcement authority against fees it considers “junk” fees and is not waiting to complete the rulemaking process it has initiated with the Motor Vehicle Dealers Trade Regulation Rule and Unfair or Deceptive Fees Trade Regulation Rule that would address, among other things, “junk” fees and bait-and-switch advertising tactics.