FTC proposed rule homes in on ‘junk fees’ in auto loan transactions

Regulators are zeroing in on fees and add-on products within auto finance transactions, potentially putting dealers and creditors on the hook for borrower claims related to unfair practices. The Federal Trade Commission last week proposed a rule to ban “junk fees and bait-and-switch advertising tactics” during the car-buying process, according to an FTC release. The proposed rule would prohibit dealers from making “deceptive” claims regarding a vehicle’s cost, terms of financing, cost of add-on products or services, availability of discounts, availability of the car being advertised and whether a finance deal is finalized. [caption id="attachment_61591" align="aligncenter" width="1024"] © Can Stock Photo / demerzel21 [/caption] The FTC also aims to prohibit dealers from charging consumers fees deemed unnecessary for add-on products and services that “provide no benefit to the consumer.” If the rule passes, dealers would be required to disclose to consumers the full price of the vehicle and optional add-on fees, and make it clear such add-ons are not required as a condition of a purchase or lease. In other words, dealers must disclose what a consumer’s monthly payment is with and without add-on products, John Redding, partner at law firm Alston & Bird , told Auto Finance News . “The fact that you can afford a $350 a month payment doesn't mean your payment has to be $350,” he noted. Regulators “want to make sure that the consumer is making an informed decision at the time they're entering the transaction with the dealer as to what the products cost on a monthly basis, and whether the consumer believes those products are worth that cost.” The onus also is on the lender Creditors must be just as vigilant as dealers in ensuring proper disclosures are given since lenders are also subject to the claims and defenses borrowers make against dealers under the FTC’s Holder Rule, Redding added. “Creditors — if this rule goes through — need to make sure they understand the processes that the dealers have and make sure that the processes follow the requirements,” he said. “It is possible that [lenders] could ultimately be on the receiving end of a claim, typically when they go to repossess, that the dealer didn't do what they were required to do.” The FTC is currently seeking public comment on the proposed rule, with comments due 60 days from the publication date of the notice. Once the FTC reviews comments, the Commission will decide whether to proceed with issuing the rule. It will likely be at least later this year before the rule is passed, Redding noted. Regulators eye add-on products There has been significant regulator focus on add-on products and voluntary protection products in auto finance, with the FTC bringing more than 50 law enforcement actions related to cars in the last 10 years, according to the release. In April, the FTC reached a $10 million Unfair or Deceptive Acts or Practices (UDAP) settlement with Illinois-based Ed Napleton Automotive Group , marking the largest-ever FTC settlement regarding auto finance. “Regulators have always questioned the value of these products, while recognizing a lot them do provide real value,” Redding said. The FTC’s proposed rule mirrors the Consumer Financial Protection Bureau ’s Jan. 26 request for public input on fees associated with bank, credit union, loan, mortgage, prepaid or credit card account or payment transfers. The CFPB termed “junk fees” as unexpected fees for a product or service, unclear fees and fees perceived as too high for the service provided. “What [regulators are] really worried about is making sure that people understand what they're buying,” Redding said, noting the FTC rule would define what a dealer must do and provide remedies if a dealer does not comply. Auto Finance Summit, the premier industry event for auto lending and leasing , returns October 26-28 at the Wynn Las Vegas. To learn more about the 2022 event and register, visit www.AutoFinanceSummit.com .

FTC proposed rule homes in on ‘junk fees’ in auto loan transactions

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