US FTC Settlement With Auto Dealer Signals More Aggressive Fair Lending and UDAP Enforcement

The upshot, for busy people:

• On March 31, 2022, the Federal Trade Commission (“FTC”) and the Illinois Attorney General (“AG”) sued a group of auto dealers (“Napleton” or the “Companies”) for violating Section 5 of the FTC Act by charging consumers for “add-on” products that consumers allegedly did not authorize and for violating the Equal Credit Opportunity Act (“ECOA”) by marking up auto loan interest rates for Black borrowers more than for similarly situated non-Hispanic white borrowers. The Companies settled these charges by paying $10 million—a record for the FTC against an auto dealer—and agreeing to implement a fair lending program with sharp limits on interest rate markups, among other things.
• The two Democratic commissioners—Chair Lina Khan and Commissioner Rebecca Kelly Slaughter—issued a separate statement explaining that they also would have supported a count alleging that the discriminatory conduct in question constituted an “unfair” practice in violation of Section 5 of the FTC Act. The effect of adopting such a theory of liability would be to expand dramatically the FTC’s role in enforcing anti-discrimination laws—whereas ECOA applies only to credit transactions, Section 5 of the FTC Act applies broadly to “commerce.” The views from this joint statement come days after the Consumer Financial Protection Bureau (“CFPB”) similarly announced that it would interpret its own “unfairness” authority under the Dodd-Frank Act to prohibit discrimination outside of the credit context, unmoored from specific anti-discrimination statutes.
• Companies should take note of the facts here. Given the expected appointment of an additional Democratic commissioner, the FTC may push forward with an aggressive anti-discrimination agenda beyond fair lending. Companies also should review how they are disclosing fees to consumers because the FTC’s allegations that fees were not authorized came despite the fact that consumers signed documents purporting to provide that authorization.

Facts of the case: Napleton is a multistate automobile dealer that sells cars and a number of ancillary products and services in connection with vehicle sales, such as service contracts, Guaranteed Asset Protection and other insurance products, VIN etching, rustproofing, theft protection and paint protection (among others). The Companies also offered consumers the ability to finance the vehicle purchase through third-party lenders, with Napleton making additional compensation by marking up the buy rates provided by the lenders, resulting in increased financing costs for consumers.

FTC allegations: The FTC and the Illinois AG alleged that the automobile dealer engaged in UDAP violations by charging consumers for ancillary products and services without consumer authorization and, in some cases, misrepresenting to consumers that such add-ons were not optional. The complaint acknowledged that the automobile dealer did in fact disclose all of the fees for ancillary products and services in the documentation that was provided to consumers. Nevertheless, the FTC alleged that because the documentation was voluminous (sometimes in excess of 60 pages) and consumers were allegedly “rushed” through the closing process, the Companies failed to obtain consumers’ express informed consent for ancillary products and services. The FTC claimed that at least 83 percent of consumers surveyed self-reported that they were charged for add-on products without authorization or as a result of deception.

The FTC also alleged that the Companies violated ECOA by discriminating against Black borrowers through their dealer markup practices. As is common in the industry, Napleton maintained a policy permitting sales personnel to “mark-up” the third party lenders’ buy rate at the sales personnel’s discretion. The FTC alleged that the markup was not based on underwriting risk or credit characteristics and resulted in higher transaction costs for consumers. The FTC further alleged that Napleton’s markups disproportionately adversely impacted Black borrowers, who on average paid approximately 18.4 basis percentage points more in interest. According to the FTC, the Companies’ discretionary policy was not justified by a business necessity that could not be met by a less discriminatory alternative. The Complaint also alleged that Black consumers were charged for add-on products more frequently and paid approximately $99 more on average for similar packages than non-Hispanic white consumers.

The FTC and the Illinois AG also cited violations the Truth in Lending Act and of state law, including the Illinois Consumer Fraud Act for alleged misrepresentations relating to add-on products and charges, as well as the Illinois Motor Vehicle Advertising Law.

Order: The parties had pre-negotiated a consent order that included $10 million in monetary relief, the largest amount the FTC has ever obtained against an automobile dealer. The consent order also includes cease-and-desist provisions prohibiting the automobile dealer from misrepresenting whether add-ons are required and the costs for such products and services, as well as requiring the dealer to obtain borrowers’ “express informed consent” before imposing such fees.

Additionally, the Companies must implement a fair lending program, including designating a fair lending compliance officer and training employees on ECOA and fair lending obligations, as well as establishing written guidelines for assessing (or not assessing) fees. The consent order also requires Napleton to revise its dealer markup practices to set the interest rate the Companies may charge on motor vehicle installment sales contracts as one of the following: (i) the buy rate, (ii) the same number of basis points above the buy rate or (iii) a standard number of basis points above the buy rate up to a maximum of 185 basis points. The Companies are permitted to deviate from these standards to meet a competitive offer from another dealer or financing entity in certain limited circumstances if specific robust documentation is maintained.

Khan and Slaughter’s statement on discrimination under the FTC Act: The two Democratic FTC commissioners issued a separate statement indicating that while the order included an ECOA violation, they also would have supported a separate count alleging that the discriminatory conduct constituted an “unfair” practice. They issued the statement “as an opportunity to offer how the Commission should evaluate under its unfairness authority any discrimination that is found to be based on disparate treatment or have a disparate impact.” The commissioners explained how, in their view, discrimination could fit the definition of “unfairness”: (1) discrimination based on protected status inflicts substantial injury to consumers; (2) injuries from disparate treatment or disparate impact are unavoidable, as consumers cannot change their protected class or have influence over discriminatory practices; and (3) the injuries stemming from disparate treatment or impact generally are not outweighed by countervailing benefits, given that undue benefits provided to other groups in society are likely to exacerbate racial wealth inequalities. This analytical approach largely mirrors the CFPB’s recent announcement that it, too, would view discrimination as an “unfair” practice under Dodd-Frank, which was explained in a prior Mayer Brown Legal Update.

What is notable here? First, the FTC demonstrated that it will scrutinize consumer consent for ancillary products when these fees are “buried” in long standard forms if the consumer does not have time for meaningful review. The dealership’s disclosure of fees for add-on products in the voluminous documentation provided to consumers at the end of a long negotiation process was viewed as insufficient by the FTC. Second, going forward, the FTC may view discriminatory conduct as an “unfair” practice under Section 5 of the FTC Act. Although the Khan/Slaughter statement did not command a majority of the FTC, the impending arrival of a third Democratic commissioner means that the FTC may soon join the CFPB in expanding its interpretation of “unfairness” to include discriminatory conduct.

What does this mean for my business? The FTC seems to be signaling that merely including fees for ancillary products (and other fees) in lengthy standard contracts may not be sufficient to satisfy the FTC’s view of informed consent. Additionally, companies—even those that are not creditors under ECOA—should be aware that the agencies tasked with consumer protection may be trying to expand the enforcement of anti-discrimination principles outside of the traditional credit context. It’s not clear how far the agencies will take these theories. But the upshot is that any FTC investigation risks an inquiry into potentially discriminatory practices.