A New Deal for Dealerships: How a New FTC Rule Could Change the Way Americans Purchase Vehicles

Blog Post | 113 KY. L. J. ONLINE | December 6, 2024

A New Deal for Dealerships: How a New FTC Rule Could Change the Way Americans Purchase Vehicles

By: Joshua Wetzel, Staff Editor, Vol. 113 

For many Americans owning a personal vehicle is essential to their daily lives. Whether for important necessities like work, school or medical visits or for more leisurely daily tasks, Americans rely heavily on their vehicles. Yet the process of buying a vehicle has never been more expensive for the average American.[1] Average monthly car payments have reached record highs of $741 for new cars and $533 for used.[2] Rates for auto loans are also at peak highs for this century, with the national average hovering at 7.9%.[3] Purchasing a vehicle, new or used, has become one of Americans’ largest expenses and is on par with other essential costs like housing, childcare, and food costs.[4]

These high costs lead consumers to rely on financing, and specifically to rely on dealers to assist in procuring the funds needed to make their purchase. With 70% of new car buyers using dealer financing, consumers see dealer financing as a convenient and appealing option; while dealers see it as an opportunity to mark up loans, sell add on products, and make serious profits. While dealers maintain the position that dealer financing saves consumers time and money,[5] the Federal Trade Commission has spent significant resources over the last 2 years fighting what it calls “deceptive and unfair practices” in the automotive market.[6] Having received over 100,000 complaints each year for the past four years related to motor vehicle sales, the FTC has taken great notice of the types of deceptive practices dealers use.[7] Specifically the FTC has looked into practices of misleading advertising and hidden junk fees that FTC chair Lina M. Khan claims dealers extract “just because they can.”[8]

In 2022, the FTC announced the new Combating Auto Retail Scams rule (CARS) in an effort to crack down on illegal practices by dealers and save consumers from overpaying for vehicles.[9] The new rule targets deceptive tactics like bait-and-switch advertising and bogus add on packages like “nitrogen tires” and duplicate overlapping warranties.[10] More importantly the rule would require dealers to be more transparent about vehicle pricing by disclosing the full amount of the vehicle up front, and showing how adjusting monthly payments will impact that total price of the vehicle.[11] Furthermore, the rule requires dealers to disclose all additional charges and obtain consent for every charge the dealer is including in the total sale price.[12] The FTC claims the new rule will make it easier for consumers to compare their options now that they have the final price of the vehicle up front, and projects the new rule will save car buyers 13.4 billion dollars over the next ten years.[13]

The FTC issued a Notice of Proposed Rulemaking in June of 2022, and after receiving and reviewing tens of thousands of comments, issued the final rule on January 4, 2024.[14] While the rule was set to take effect on July 30, 2024, a pending case filed by the National Automotive Dealers Association (NADA) has led the FTC to stay the rule pending the resolution of the case.[15] The case is currently pending decision in the Fifth Circuit Court of Appeals where the court recently heard oral arguments.[16] The NADA argued the CARS rule was “arbitrary and capricious” with vague terms and definitions that would lead to more confusion in the industry.[17] Weighing a cost benefit analysis, the NADA claimed the rule would impose large compliance costs on dealers across the nation.[18] Lastly the NADA claimed the FTC’s finding of “widespread misconduct” was based on outdated research and unverified anecdotes and lacked any reliable evidence of an industry wide problem.[19] The FTC countered by stating they were not obligated to prove widespread misconduct, instead they only had to show the persistence of deceptive practices despite federal laws and other preventative efforts.[20] Furthermore the FTC defended their cost benefit analysis by demonstrating the rule imposes only a minimal burden on dealers as they could use existing record keeping practices to stay in compliance with the new rule.[21] The FTC also claimed the projected 13.4 billion dollars car buyers will save over the next ten years outweighs any incidental burden the rule may impose on dealers.[22]

While the Fifth Circuit Court of Appeals may take months to rule on the issue, experts have already weighed in and shown support for both sides. Some say that the FTC has a strong case and that dealers should start preparing for compliance immediately as the CARS rule is based on common consumer complaints and most of the rule is already codified in other federal laws.[23] Others note that the NADA could prevail on a procedural technicality regarding advanced notice, but still believe the NADA and dealers nationwide should review and adjust their financing and marketing practices and allocate more resources to ongoing training of dealership staff.[24]

Whichever way the Fifth Circuit comes down, an interesting point is that both parties claim to have the best interest of the American car buyer in mind. While the NADA claims dealerships save consumers both time and money, the 100,000 deceptive or unfair act complaints the FTC receives every year seem to say otherwise.[25] In any case the NADA takes on a tough position by arguing that more transparency in the negotiating process and the restriction of deceptive and unfair practices would result in less, not more, protection and benefit for the average American car buyer.

[1] Lydia DePillis, How the Costs of Car Ownership Add Up, N.Y Times (Oct. 6, 2023), https://www.nytimes.com/interactive/2023/10/07/business/car-ownership-costs.html.

[2] Combating Auto Retail Scams Trade Regulation Rule, 89 FR § 590-01.

[3] Fernando de Querol Cumbrera, Interest rates on 60-month new car loans in the United States from February 2014 to August 2024, Statista (Sept. 4, 2024), https://www.statista.com/statistics/290673/auto-loan-rates-usa/.

[4] Combating Auto Retail Scams Trade Regulation Rule, 89 FR § 590-01.

[5] Dealerships Save Consumers Time and Money, NADA, https://www.nada.org/nada/dealerships-save-consumers-money#:~:text=Every%20day%2C%20consumers%20save%20money%20on%20new-vehicle%20purchases,rates%20than%20consumers%20can%20find%20on%20their%20own. (last visited Nov. 21, 2024).

[6] FTC Announces CARS Rule to Fight Scams in Vehicle Shopping, Fed. Trade Comm’n (Dec. 12, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/12/ftc-announces-cars-rule-fight-scams-vehicle-shopping; Combating Auto Retail Scams Trade Regulation Rule, 89 FR § 590-01.

[7] Combating Auto Retail Scams Trade Regulation Rule, 89 FR § 590-01.

[8] Fed. Trade Comm’n, supra note 6.

[9] Alvaro Puig, The New CARS Rule: What You Need to Know, Fed. Trade Comm’n (Dec. 12, 2023), https://consumer.ftc.gov/consumer-alerts/2023/12/new-cars-rule-what-you-need-know.

[10] Id.

[11] Id.

[12] Id.

[13] Brief of the Fed. Trade Comm’n at 57, Nat’l Auto. Dealers Ass’n & Tex. Auto. Dealers Ass’n v. FTC, No. 24-60013, 5th Cir. (Jan. 5, 2024).

[14] Fed. Trade Comm’n, supra note 6; Order Postponing Effective Date of Final Rule Pending Judicial Review, In the Matter of: Combating Auto Retail Scams Trade Regulation Rule, Matter No. P204800 (Jan. 18, 2024).

[15] Fed. Trade Comm’n, supra note 6; Order Postponing Effective Date of Final Rule Pending Judicial Review, In the Matter of: Combating Auto Retail Scams Trade Regulation Rule, Matter No. P204800 (Jan. 18, 2024).

[16] CARS Rule Showdown: Key Insights from the Fifth Circuit Oral Arguments and What Dealers Need to Prepare for Now, ComplyAuto, https://complyauto.com/2024/10/10/cars-rule-showdown-key-insights-from-the-fifth-circuit-oral-arguments-and-what-dealers-need-to-prepare-for-now/ (last visited Nov. 21, 2024).

[17] Petitioners’ Reply Brief at 20, Nat’l Auto. Dealers Ass’n & Tex. Auto. Dealers Ass’n v. FTC, No. 24-60013, 5th Cir. (Jan. 5, 2024).

[18] Id. at 23.

[19] Id. at 13.

[20] Brief of the Fed. Trade Comm’n at 22, Nat’l Auto. Dealers Ass’n & Tex. Auto. Dealers Ass’n v. FTC, No. 24-60013, 5th Cir. (Jan. 5, 2024).

[21] Id. at 17.

[22] Id. at 57.

[23] Sean Tucker, Lawsuit Could Change What Car Dealerships Charge, Kelly Blue Book (July 25, 2024, 11:17AM), https://www.kbb.com (scroll to “The Latest from Our Experts” section; click “More Articles”; search “Lawsuit Could Change”; then click “search”; then choose the first and only result)

[24] ComplyAuto, supra note 16.

[25] NADA, supra note 5; Combating Auto Retail Scams Trade Regulation Rule, 89 FR § 590-01.