On December 12, 2024, the Federal Trade Commission (“FTC”) announced its Combating Auto Retail Scams Rule, otherwise known as the “CARS Rule,” setting new requirements on the sale, financing, and leasing of vehicles by motor vehicle dealers. The final rule, which is effective on July 30, 2024, prohibits certain misrepresentations in the financing process, sets disclosure requirements on dealers’ advertising and sales communications, mandates that dealers obtain consumers’ express, informed consent for charges, and prohibits the sale of add-on products or services if there is no benefit to the consumer.
The CARS Rule was promulgated by the FTC pursuant to Section 1029 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which authorizes the FTC to prescribe rules with respect to unfair or deceptive acts or practices by motor vehicle dealers. When the FTC issued the Notice of Proposed Rulemaking in June 2022, it said the impetus for the rule was surging auto prices and high levels of consumer complaints related to motor vehicles in spite of vigorous enforcement efforts in recent years. In announcing the proposed rule, the FTC stated that it was intended to address deceptive and unfair practices in the motor vehicle marketplace, including bait-and-switch tactics and unlawful practices related to add-on products or services and hidden charges. We have been tracking the rule since it was proposed and have previously blogged about it here, here, and here. We also hosted two Consumer Finance Monitor podcast episodes on the proposed rule. The first podcast featured Sanya Shahrasbi and Daniel Dwyer, Staff Attorneys at the FTC’s Bureau of Consumer Protection, Division of Financial Practice, who discussed the proposed rule (available here), and the second one featured Paul Metrey, Senior Vice President for Regulatory Affairs, National Automobile Dealers Association (“NADA”), and Richard Hackett, Regulatory Compliance Consultant and former Assistant Director, Consumer Financial Protection Bureau , who provided an industry perspective on the proposed rule (available here).
Requirements under the new CARS Rule include:
- Prohibited Misrepresentations: It is a violation of the rule and an unfair or deceptive act or practice under Section 5 of the FTC Act to make any misrepresentation, expressly or by implication, regarding material information related to 16 categories of a motor vehicle transaction. “Material” is defined to mean “likely to affect a person’s choice of, or conduct regarding, goods or services,” so it appears to broadly apply throughout the sales process. These categories include:
- The costs or terms of purchasing, financing or leasing a vehicle.
- Any costs limitation, benefit or other aspect of an add-on product or service.
- Whether the terms are, or transaction is, for financing or a lease.
- The availability of any rebates or discounts that are factored into the advertised price but not available to all consumers.
- The availability of vehicles at an advertised price.
- Whether any consumer has been or will be preapproved or guaranteed for any product, service, or term.
- Any information on or about a consumer’s application for financing.
- When the transaction is final or binding on all parties.
- Keeping cash down payments or trade-in vehicles, charging fees, or initiating legal process or any action if a transaction is not finalized or if the consumer does not wish to engage in a transaction.
- Whether or when a dealer will pay off some or all of the financing or lease on a consumer’s trade-in vehicle.
- Whether consumer reviews or ratings are unbiased, independent, or ordinary consumer reviews or ratings of the dealer or the dealer’s products or services.
- Whether the dealer or any of the dealer’s personnel or products or services is or was affiliated with, endorsed or approved by, or otherwise associated with the United States government or any Federal, State, or local government agency, unit, or department, including the United States Department of Defense or its Military Departments.
- Whether consumers have won a prize or sweepstakes.
- Whether, or under what circumstances, a vehicle may be moved, including across State lines or out of the country.
- Whether, or under what circumstances, a vehicle may be repossessed.
- Any of the required disclosures under the CARS Rule.
- Offering Price, Total Payment, and Optionality of Add-Ons: Dealers have to provide the offering price—the actual price any consumer can pay for the vehicle; tell consumers that optional add-ons (like extended warranties) are not required; and give information about the total payment when discussing monthly payments. If the communication of these representations are in writing, then the disclosures must also be in writing.
- Prohibited Add-Ons: The rule prohibits dealers from charging for any add-on that does not provide a benefit to consumers. Examples of such add-ons include: warranty programs that duplicate a manufacturer’s warranty, service contracts for oil changes on an electric vehicle, Guaranteed Asset Protection (“GAP”) agreements that do not actually cover the car or neighborhood in which it is housed, or other parts of the deal, and software or audio subscription services on a vehicle that cannot support the software or subscription.
- Consumer Consent: The rule requires dealers to get consumers’ express, informed consent for any charges that they pay as part of a vehicle purchase.
In support of the new rule, the FTC has also issued a consumer alert and a Dealers Guide explaining what the CARS Rule means for dealerships. The Dealers Guide includes additional information about the specific prohibitions and an FAQ section.
The CARS Rule also includes new recordkeeping requirements, which the FTC estimates will create new compliance requirements on approximately 47,271 franchise, new motor vehicle dealer, and independent/used motor vehicle dealers. Waiver of rights under the CARS Rule by a consumer is not permitted. State laws or regulations that that are inconsistent with the CARS Rule are preempted, but state provisions that provide greater protection are allowed. We would also note that while the CARS Rule references the motor vehicle purchaser or lessor as the “consumer,” there is no express exclusion of business purpose vehicle financing; rather, the requirements apply broadly to covered dealers. The FTC has exercised its authority in the past under Section 5 of the FTC Act in matters involving small businesses (see, e.g., a 2022 FTC settlement with First American Payment Systems LP), so we expect the requirements to apply in B2B contexts.
While there is no private right of action under the CARS Rule or the FTC Act, the FTC is authorized to seek injunctive relief, equitable relief (including restitution), and civil money penalties under Section 5 of the FTC Act. Additionally, violations of the CARS Rule may present an exposure to both private litigation and state attorney general enforcement actions under many state UDAP laws. (We would note that a well-drafted arbitration provision with a class-action waiver helps mitigate the risk of private litigation. See. e.g., AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) (holding that the Federal Arbitration Act preempts state laws that invalidate class action waivers in consumer arbitration agreements.); Henry v. Vantage Credit Union, 2021 U.S. Dist. LEXIS 101571 (E.D. Mo. May 28, 2021) (granting a motion to compel arbitration where a class action plaintiff had agreed to individual arbitration of claims in her agreement with an auto dealership.)) Sales finance companies and depository institutions subject to CFPB enforcement jurisdiction may also be vulnerable to a CFPB enforcement action based on the UDAAP provision in the Consumer Financial Protection Act. Entities that are subject to the enforcement jurisdiction of one of the federal banking agencies might also be vulnerable to an enforcement action based on the UDAP provision of Section 5 of the Federal Trade Commission Act.
Industry groups expressed concerns during the public comment period, and, according to the FTC, more than 27,000 comments were received from stakeholders voicing a variety of opinions about the proposed rule. Key amongst these concerns was the potential impact beyond motor vehicle dealers and the potential liability under the rule for auto finance companies. In response to this concern, the FTC has clarified that the scope of the final rule is limited to “Covered Motor Vehicle Dealers.” That term is defined to include “any individual or entity, or resident in the United States, or any territory of the United States, that (1) Is licensed by a State, a territory of the United States, or the District of Columbia to engage in the sale of Covered Motor Vehicles; (2) Takes title to, holds an ownership interest in, or takes physical custody of Covered Motor Vehicles; and (3) Is predominantly engaged in the sale and servicing of Covered Motor Vehicles, the leasing and servicing of Covered Motor Vehicles, or both.” 16 C.F.R. § 463.2(f). While the FTC failed to add language stating that entities that do not meet the definition are not covered, it stated in the supplementary information to the final rule that an entity needs to meet all three parts of this definition to be covered; an entity is not covered if it does not meet these three parts. Notably, the FTC also noted that “Nowhere does the definition limit coverage of dealers based on CFPB jurisdictional considerations,” so “Buy-Here-Pay-Here” dealers would appear to be covered by the CARS Rule if they meet the three parts of the definition.
The FTC also failed to add the safe harbor from Holder Rule liability requested by industry associations which would have limited the liability of an assignee of a sales finance contract only to violations of the CARS Rule which are apparent on the face of the documents provided to the sales finance company. Under the FTC’s Holder Rule, a consumer can assert the same legal claims and defenses against anyone who purchases a credit contract as they would have against the seller who originally extended the credit. While the CARS Rule purportedly only applies to covered motor vehicle dealers, finance companies (including depository institutions) that purchase a retail installment sales contract or lease from a motor vehicle dealer have exposure under the new rule for violations because there is no safe harbor. The FTC declined to add a safe harbor because it felt that the CARS Rule would not create any liability for auto finance companies that would not otherwise exist. Accordingly, there will be significant impact on auto finance companies (including depository institutions that purchase sales finance contracts) despite the limitation in the definition of “Covered Motor Vehicle Dealer.”
The impact of the CARS Rule on add-on products is also significant. According to the FTC, approximately 94% of new vehicles sales and 86% of used vehicle sales include optional add-on products. (See NPRM, p. 42032, fn., 162.) While the FTC has long viewed the sale of add-on products or services that have no benefit to a consumer and the failure to disclose the optionality of add-ons as an unfair and deceptive practice, the CARS Rule codifies those practices as violations and we can expect an uptick in enforcement actions focused on add-on products.
In a statement released by the National Automobile Dealers Association (“NADA”), NADA CEO and President Mike Stanton said, “This regulation is 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. The FTC made up data to support its claims, then rejected calls to slow down the process and test the effectiveness of its proposal with real consumers. We are exploring all options on how to keep this ill-conceived rule from taking effect.”
Like NADA, the American Financial Services Association (“AFSA”) also hinted at litigation and commented that it is “likely that the rule will be challenged”, stating that the FTC did not comply with the Administrative Procedures Act (“APA”) because there was a lack of support for the cost/benefit analysis and a lack of consideration for the impact of the rule on small businesses. Before the rule was finalized, AFSA asked the House Appropriations Committee to intervene in the issuance of the final rule, and we would not be surprised to see similar requests or a resolution introduced in Congress under the Congressional Review Act seeking to override the rule.
Motor vehicle dealers and industry trade associations contemplating litigation should be aware of some potential collateral effects. To the extent an injunction were to result from any such litigation, it is conceivable that the FTC’s proposed Rule on Unfair or Deceptive Fees (the “Junk Fees Rule”) could be finalized and effective before the CARS Rule. We note this possibility because, under the proposal, motor vehicle dealers required to comply with the CARS Rule are exempt from the Junk Fees Rule. If the proposed exemption is unchanged, and it later turns out that the Junk Fees Rule is in effect while the CARS Rule is not, motor vehicle dealers would then be subject to the Junk Fees Rule.
We will continue to monitor developments and work with clients to understand the prohibitions, disclosure and recordkeeping requirements, and the impact of the CARS Rule in advance of the July 20, 2024 effective date.