The FTC has been increasingly focused on dealership sales practices, likely emphasized by the record profits many dealers are realizing in the current economic environment. The agency’s most recent efforts have centered around protecting consumers against undisclosed fees and charges, embodied in a proposed rule promulgated under the Dodd-Frank act.
The rule is meant to drive truth and transparency in the car-buying process and end hidden add-on charges when consumers are shopping for a vehicle.
While on their face these requirements seem like basic standards of doing good business, requirements around implementation and proof of compliance may lead to significant changes in the sales process.
Disclosures and Consent
The proposed rule directly addresses add-on products (meaning any product or service sold to the consumer, which was not installed by the manufacturer, including F&I products) in several ways.
Before selling an add-on product, the dealer must disclose the offering price of the vehicle without the product and have the customer decline the purchase in writing, including the time, date, and customer’s signature.
- If the sale is being financed, the dealer must go through the same process again, disclosing the cash price of the vehicle and the separate finance charges excluding the add-on product.
- To sell an add-on product, the dealer must obtain the customer’s express informed consent in a written and oral disclosure.
- Finally, the dealer cannot sell an add-on product that would have no benefit to the consumer, such as a GAP contract where the consumer’s loan does not qualify for coverage.
The rule is very specific about how disclosures must be made, how written consent is obtained, and how long the dealer must retain records of compliance (24 months). A dealer that cannot prove the required disclosures were made and consents were obtained faces stiff repercussions.
The Cost of Compliance
These requirements would compel dealers to maintain several new categories of documents beyond what is typically required today. In practice, a dealer attempting to strictly comply with the rule will likely need to implement a robust software solution into the sales process to track and preserve proof of compliance that would be required.
Sourcing and implementing a solution for compliance may require a large investment for dealers, particularly having legal counsel vet the technology, subscribing to the service, issuing handheld devices to dealership staff, and paying for data storage for years.
Dealers should begin doing their diligence on these issues now in order to be ahead of the game in the likely event that the rule is enacted later in the year.
Andrew Seger is chief legal officer for Portfolio, a leading provider of reinsurance and F&I programs and products.