Five car dealers have agreed to Federal Trade Commission settlement orders that require them to stop running ads in which they promise to pay off a consumer's trade-in no matter what the consumer owes on the vehicle. In this action, the FTC evidently used a large-bore cannon, hitting dealers in Connecticut, North Carolina, South Dakota and West Virginia.

The FTC charged that the ads, which ran on the dealers’ websites and on sites such as YouTube, deceived consumers into thinking they would no longer be responsible for paying off the balances on their trade-ins, even if a balance exceeded the trade-in’s value (i.e., the trade-in had “negative equity”). Instead, says the FTC, the dealers rolled the negative equity into the consumer's new vehicle finance contract (the FTC erroneously called these “loans”) or, in the case of one dealer, required consumers to pay it out of pocket.

The proposed settlements bar the dealers from making similar deceptive representations in the future. I could not recall an advertising complaint by the FTC against a dealer, and the FTC itself said that the cases were the first of their kind brought by the FTC. It wasn’t clear whether “their kind” referred to advertising cases, or cases dealing with negative equity.

The Commission also issued a new consumer education publication titled, “Negative Equity Ads and Auto-Trade-ins,” to help consumers understand these types of ads.

“Buying a new car or truck is a major financial commitment, and the last thing consumers need is to be tricked into thinking that a dealer will ‘pay off’ what they owe on their current vehicle, when they really won't,” said David Vladeck, director of the FTC’s Bureau of Consumer Protection. “The Federal Trade Commission is constantly on the lookout for potentially deceptive ads, and brings actions to stop them when appropriate.”

The FTC alleged that despite the dealers’ claims, consumers still end up being responsible for paying the difference between the trade-in balance and the vehicle’s value. The complaints charge that the dealers’ representations that they will “pay off” what the consumers owe are false and misleading, and violate the FTC Act. Examples of the allegedly deceptive advertisements include:

• "Credit upside down? Need a new car? Go to … We want to pay off your car."

• "… wants to pay [your trade] off in full, no matter how much you owe."

• "I want your trade no matter how much you owe or what you're driving. In fact I'll pay off your trade when you upgrade to a nicer, newer vehicle." "

• [Dealer] will pay off your trade no matter what you owe . . . even if you're upside down, [Dealer] will pay off your trade."

If those ads sound familiar, it’s because it would be hard to open a newspaper, listen to the radio or watch TV without encountering very similar wording.

What’s going on here, you ask? After all, didn’t these dealers actually pay off the balance due on the customer’s trade-in vehicle?

It appears that the dealers did, in fact, pay off those balances (at least nothing in the FTC’s release indicated to the contrary). What the FTC appears to have its shorts in a twist about is that the dealers were paying off the trade-in balances by using the consumers’ own money, in the form of financed negative equity, to do so. When a dealer does that, the FTC says that the dealer is misrepresenting the identity of the party paying off the trade-in.

The proposed orders also require each of the dealers to keep copies of relevant advertisements and materials substantiating claims made in their advertisements, and to provide copies of the order to certain employees. Finally, the dealers must file compliance reports with the FTC to show they are meeting the terms of the orders, which will expire in a mere 20 years.

That’s just ugly.

How can your dealership avoid ending up in the FTC’s crosshairs like these dealers did?

If I were you, I’d be scheduling an advertising review with your lawyer for early tomorrow morning – before breakfast. And the advertising review shouldn’t be limited to the issue of negative equity; you ought to vet every ad against every law and regulation that applies to it. The review shouldn’t be limited to print, radio and TV ads, either. Your website, any Internet sales site you are using and all that fancy new social media stuff can all be subject to the advertising laws. One outcome of the review should be advertising guidelines you can follow in the future, and a plan to update those guidelines periodically.

Or you can skip the review and fill out reports to submit to the FTC for the next 20 years.

Vol. 9, Issue 4

About the author
Tom Hudson

Tom Hudson


Thomas B. Hudson Esq. was a founding partner of Hudson Cook LLP and is now of counsel in the firm’s Maryland office. He is the CEO of LLC and a frequent speaker and writer on a variety of consumer credit topics.

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