OPINION:
Last year, the Federal Trade Commission published its proposal to enact a Motor Vehicle Dealers Trade Regulation Rule, a move that would purportedly protect consumers from auto dealers making misrepresentations about voluntary protection products in the vehicle-buying process. While this proposed rule may seem well intentioned, its adoption is unnecessary and would result in far-reaching, negative implications for both the U.S. auto dealership industry and American consumers.
The spirit of the rule is to prevent bad actors from unfairly profiting from consumers in three significant ways.
First, the rule purportedly prevents dealerships from tricking consumers into buying added products and paying exorbitant “junk fees” for “dealer-provided indirect financing at the dealership.” The proposed rulemaking claims that dealers add a finance charge called a “dealer reserve” or markup to the “buy rate,” whereas “dealerships do not profit on the financing portion of the transaction when a consumer arranges financing directly.”
Second, the rule would regulate “the sale of ‘add-on’ products and services in a deceptive or unfair manner.” The proposed rule asserts that “commonly offered add-ons include extended warranties, service and maintenance plans, payment programs, guaranteed automobile or asset protection (“GAP” or “GAP insurance”), emergency road service, VIN etching and other theft protection devices, and undercoating.”
Third, the rule would purportedly protect consumers from “bait-and-switch advertising tactics.”
Unfortunately, the FTC’s rulemaking process lacked sufficient input from industry stakeholders and collaboration with other government agencies, leading them to propose a final rule that is unnecessary and poorly conceived — a solution in search of a problem. After the commission declined to extend its comment period last August, several key industry groups publicly raised significant concerns.
In a Sept. 12 letter, the National Automobile Dealers Association declared that the rule would create a mountain of unnecessary bureaucracy for auto businesses by forcing them to engage in excessive record-keeping. The letter says the new rule would require “an extensive series of oral and written disclosures governing communications with consumers related to the sales price of motor vehicles, certain credit terms, and voluntary protection products.”
In another Sept. 12 letter to then-FTC acting Secretary April Tabor, the American Financial Services Association and Consumer Bankers Association asserted that the rule would have several unintended consequences for auto finance companies, many of which could have been avoided had the commission not minimized the feedback of others throughout the process.
These factors compounded, while seemingly minor administrative burdens, have the capacity to “inject massive costs into the auto retailing process” and “greatly extend transaction times,” problems that will most likely raise industry costs.
What is most mystifying about the commission’s proposed changes is that there is a strong case they are unnecessary. For starters, the FTC could identify only three motor vehicle-related enforcement actions taken nationwide against unlawful conduct involving “add-ons” in the past 10 years. With approximately 409 million motor vehicle deliveries and 2.3 billion service transactions during this period, three unlawful actions are hardly sufficient to justify the creation of the proposed rule.
The commission’s own acknowledgment that the vast majority of dealer transactions are conducted lawfully and without problems raises troubling questions about the necessity of the proposed rule. According to NADA, in 2019, the FTC received just 3,500 auto-related complaints out of 44 million auto sales and leases, representing a minuscule 0.008% of transactions. This hardly suggests a widespread problem requiring sweeping regulatory intervention.
Still, for those consumers who do have legitimate complaints, there are already regulations and statutes in place that can be used to combat such abuse. Legally, motor vehicle dealers are already bound to comply with the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, “the Equal Credit Opportunity Act and Regulation B, the Consumer Leasing Act and Regulation M, and the Truth in Lending Act and Regulation Z, and that FTC already has broad UDAP enforcement authority pursuant to Section 5 of the FTC Act.”
Moreover, the commission has failed to implement an adequate rulemaking process. It has yet to indicate any coordination or research efforts with other federal and state agencies, such as the Consumer Financial Protection Bureau and the Federal Reserve Board, that oversee the auto marketplace, and as such, the FTC has failed to identify any harmful market conduct for which remedies are lacking to protect consumers under current federal and state law.
Current regulatory enforcement already addresses potential discriminatory lending practices and consumer protection issues in the auto industry. The commission’s adequate authority under Section 5 of the Federal Trade Commission Act to investigate marketplace misconduct and bring enforcement actions against bad actors also renders the proposed rule unnecessary.
Instead of pursuing a rushed and flawed regulatory intervention, the FTC should use existing enforcement and regulatory frameworks to protect consumers and foster a competitive free market.
• Brian Reed is the founder and CEO of Digital Auto Advisors and operating partner at Automotive Ventures.
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