FTC Publishes Final CARS Rule Targeting Unfair and Deceptive Auto Sales Practices

On December 12, the Federal Trade Commission (FTC) issued a final rule¹ imposing a broad set of new regulatory requirements and restrictions on the sale and financing of automobiles to consumers. In brief, the final rule — or the Combating Auto Retail Scams Trade Regulation Rule (the CARS Rule) — establishes new disclosure obligations for covered automobile dealers (or auto dealers) and specifically prohibits taking certain actions and making certain representations in the course of selling, leasing, or arranging financing for automobiles or offering and selling related products and services.

The CARS Rule will take effect on July 30, 2024. This article summarizes the new requirements and prohibitions imposed by the CARS Rule and provides key takeaways for industry participants as they prepare to comply with these new federal regulatory requirements.

Background

The FTC has the authority to prescribe regulations regarding unfair or deceptive acts and practices by auto dealers,² and to take action against such entities for engaging in such practices in violation of the Federal Trade Commission Act (FTC Act).³ Concurrently, the Bureau of Consumer Financial Protection (CFPB) possesses the authority to enforce federal consumer financial laws applicable to the financing of automobile purchases by auto finance companies — including the prohibition against unfair, deceptive, or abusive acts or practices — and also has supervision and examination authority over “larger participants” in the automobile financing market.⁴ However, under the Dodd-Frank Act Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which created the CFPB, auto dealers are expressly excluded from the CFPB’s jurisdiction.⁵ Instead, the Dodd-Frank Act reserved regulatory authority over consumer protection matters related to traditional auto dealers to the FTC.

While FTC is the primary federal regulator tasked with protecting consumers from unfair or deceptive practices by auto dealers themselves, the CFPB and other federal and state agencies have for several years been active in enforcing consumer finance and trade practices laws and regulations applicable to the automobile sale and financing process and the actors operating in that market. For instance, since 2019, the CFPB has commenced enforcement proceedings involving auto finance companies and service providers based upon allegations of unfair, deceptive, or abusive acts and practices and other violations of applicable laws and regulations resulting in the payment by such companies of over US$63 million in aggregate consumer redress and US$26 million in civil money penalties. Likewise, in the past several years, the FTC and various state law enforcement agencies have brought numerous actions against auto dealers for potentially unfair and deceptive sales practices conducted by auto dealers.⁶

The adoption by the FTC of the CARS Rule therefore is consistent with the broader and ongoing efforts of federal and state governmental authorities to scrutinize automobile sales and financing practices, as well as the sale and servicing of related vehicle protection products (VPPs), or “add-on” products as they are described in the CARS Rule, by auto dealers, auto finance companies, and other market actors.

As noted in the preamble to the CARS Rule, despite years of enforcement activity at the federal and state levels as referenced above, the FTC issued a proposed rule in June 2022 to establish a host of new regulatory requirements and prohibitions specifically aimed at auto sales practices due to the agency’s perception of continued engagement by market actors in unfair and deceptive acts and practices. Industry participants and other interested parties submitted tens of thousands of comments to the FTC regarding the proposed rule, and after over a year of consideration, deliberation, and revision, the FTC finalized the regulations set forth by the CARS Rule.

Although the FTC appeared to address in the CARS Rule numerous concerns voiced by commenters during the rulemaking process, certain industry participants have expressed the view that the requirements imposed by the CARS Rule are based on flawed assumptions, insufficient data regarding the extent of alleged consumer harm, inadequate cost-benefit analysis, and a lack of input from the full spectrum of industry stakeholders, and therefore violates federal law, including the Administrative Procedure Act and the FTC’s procedures for issuing regulations under Section 5 of the FTC Act.⁷ It is therefore possible, if not probable, that certain industry participants will pursue legal challenges to prevent or delay implementation of the CARS Rule on the bases summarized above, potentially among others.

The Scope of the CARS Rule

The CARS Rule regulates the conduct of covered “motor vehicle dealers” or “dealers” in respect of the sale or financing of “covered motor vehicles,” within the meaning given to those terms under the final rule. The CARS Rule defines a covered “motor vehicle dealer” as any person, including 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.

Importantly, the definition of “covered motor vehicle” under the CARS Rule applies only to a certain subset of motor vehicles. The CARS Rule defines a “covered motor vehicle” as any self-propelled vehicle designed for transporting persons or property on a street, highway, or other road. The CARS Rule explicitly excludes motorcycles, motor homes, and boats and marine equipment from this definition. These exclusions are a departure from the proposed rule, which had specifically included each of these vehicles in the definition of covered motor vehicle.

Prohibited Conduct

The CARS Rule identifies a number of specific misrepresentations involving “material” information that violate the FTC Act’s prohibition against unfair or deceptive trade practices. Under the final rule, “material” information is defined as information which is likely to affect a person’s choice of, or conduct regarding, goods or services. Although the FTC received numerous comments addressing each of the specific misrepresentations included below, the text of the final rule is largely identical to the text of the proposed rule, with only minor changes being implemented following the public comment period.

A covered dealer is prohibited by the CARS Rule from making any misrepresentation, expressly or by implication, regarding material information about the following:

• The costs or terms of purchasing, financing, or leasing a vehicle
• Any costs, limitation, benefit, or any other aspect of a VPP or “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 products is associated with the United States government or any federal, state, or local government
• 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 disclosures required by the CARS Rule (discussed in detail below)

In addition to the prohibitions outlined above, the CARS Rule also separately prohibits (1) selling VPPs that provide no benefit to consumers or (2) charging a consumer for any item unless the dealer obtains express, informed consent by the consumer for the charge. With regard to the former prohibition, the final regulations provide illustrative examples of VPPs that the FTC deems to provide “no benefit” to consumers. Notably, these examples include products or services that do not provide coverage for the motor vehicle, the consumer, or the transaction or that are duplicative of warranty coverage, specifically including a guaranteed asset/auto protection (GAP) product if the consumer’s vehicle or neighborhood is excluded from coverage or the loan-to-value ratio would result in the consumer not benefiting financially from the product or service. The FTC rejected appeals from certain commenters to prohibit the sale of VPPs that do not provide “substantial, material” benefits or that provide only “minimal” benefits; however, the determination of whether a VPP or related service that is not expressly identified by rule may benefit a particular consumer involves a degree of inherent subjectivity. Accordingly, stakeholders may wish to monitor the implementation and enforcement of this provision of the CARS Rule to obtain further clarity regarding its scope.

New Disclosures Required by the CARS Rule

The CARS Rule also requires covered dealers to make disclosures to consumers related to the sale or financing of covered vehicles, in specific instances. Required disclosures must be made “clearly and conspicuously.” That term is given a complex definition that varies depending upon the method of communication (e.g., visual or audible); however, as a general matter, disclosures must be “difficult to miss (i.e., easily noticeable)” and “easily understandable.” An important component of compliance with this standard is providing disclosures in languages other than English when doing so is necessary for the consumer to “easily understand” the content of the disclosure. More broadly, guidance published in connection with the publication of the final rule indicates that, as a practical matter, dealers should apply the same principles that they would follow in developing their own marketing materials.⁸

These new disclosure requirements are summarized as follows:

• Offering Price. In connection with the sale or financing of a covered vehicle, a dealer must disclose the offering price in any advertisement for a specific vehicle and any communication with the consumer that discusses a specific vehicle.
• VPPs Are Not Required. When making any representation, expressly or by implication, about a VPP or “add-on” product or service, a dealer must disclose that the additional product or service is not required and that the consumer can purchase the vehicle without it. The CARS Rule defines an “add-on product” as any product or service not provided to the consumer or installed on the vehicle by the vehicle manufacturer and for which the dealer, directly or indirectly, charges a consumer in connection with a vehicle sale, lease, or financing transaction. This definition includes extended warranties, service and maintenance plans, payment programs, and GAP agreements, among other products.
• Total of Payments and Consideration for a Financed or Lease Transaction. When making any representation, expressly or by implication, about a monthly payment for any vehicle, a dealer must also disclose the total amount the consumer will pay to purchase or lease a vehicle if making all payments as scheduled.
• Monthly Payments Comparison. When making any comparison between payment options, expressly or by implication, that includes discussion of a lower monthly payment, a dealer must disclose that the lower monthly payment will increase the total amount the consumer will pay to purchase or lease the vehicle.

Penalty Provisions

Violations of the CARS Rule will be enforced in the same manner as other violations of Section 5 of the FTC Act. Specifically, violations may result in a company being required to reform its business practices, pay restitution to impacted consumers, and pay civil money penalties in amounts of up to $50,120 per violation (subject to annual adjustments for inflation).⁹

Takeaways

The FTC’s publication of the CARS Rule is the latest step in an ongoing effort by federal and state governmental authorities to enhance oversight of auto sales and financing and enforce applicable laws and regulations against market actors that may engage in unlawful business practices. As noted at the outset, the CARS Rule will take effect on July 30, 2024; until then, however, covered dealers should take the following steps to prepare for these new requirements:

• Advertising and Consumer Communications Should Be Reviewed. The CARS Rule establishes new disclosure obligations relating to advertisements and other communications with consumers. As discussed above, these requirements apply to communications involving a vehicle’s offering price, the sale of VPPs, and payment information relating to the purchase. Express or implied communications addressing covered matters may be subject to the requirements of the final rule. Additionally, dealers must adhere to the truth and transparency standards established by the final rule irrespective of the method of communication or the primary language of the consumer. These provisions of the CARS Rule may require covered dealers to reassess the content, format, and delivery mechanisms associated with relevant consumer communications and advertisements.
• Enhancement of Internal Controls and Training Will Be Required. The CARS Rule indicates that enhanced regulatory scrutiny will be applied to the specific forms of potentially unfair or deceptive conduct outlined in the final rule. Covered dealers should ensure that personnel are aware of specifically prohibited conduct and are trained to avoid engaging in unfair and deceptive trade practices as established under the final rule.
• VPP Sales Practices Are Under Scrutiny. The provisions of the CARS Rule addressing the offering and sale of VPPs and related services reflects the ongoing supervisory focus of federal and state governmental authorities on the practices of auto dealers relating to the offering and sale of VPPs, such as extended warranties, service and maintenance plans, and GAP products. Notably, in addition to restricting the sale of certain VPPs that provide consumers with “no benefits,” consumers must provide their express, informed consent before being charged for a VPP covered by the final rule. The FTC may pursue enforcement actions against dealers that engage in practices that subvert express, informed consent (e.g., providing a prechecked box or engaging in any other practice that has the effect of impairing consumers’ autonomy, decision making, or choice).¹⁰
• Supervision and Enforcement Activity Is Likely To Intensify. Regulatory oversight by federal and state governmental authorities in matters relating to auto sales and finance has been intensifying in recent years. The publication of the CARS Rule is likely to further bolster these efforts by creating a regulatory regime that can be used as a basis for supervision, investigation, and enforcement by the FTC. Industry participants should expect increased regulatory scrutiny on their businesses in the coming years, in particular where their businesses intersect with the subject matter of the CARS Rule, such as the offering and sale of VPPs and communications and advertisements provided to consumers.

Institutions interested in how the FTC’s CARS Rule may impact their businesses may contact any of the authors of this Advisory or their usual Arnold & Porter contact. The firm’s Financial Services and Consumer Protection & Advertising teams would be pleased to assist with any questions about the CARS Rule or financial regulation and consumer protection more broadly.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.