Lawyers weigh $1B cost of CARS Rule as oral arguments begin

Lawyers expect wide-ranging implications from the National Automobile Dealers Association ’s legal challenge to the Federal Trade Commission's Combating Auto Retail Scams (CARS) Rule. During oral arguments, NADA attorney Jeffrey Harris said that returning the CARS Rule to a lower court for review while maintaining the current decision could be a “middle ground” solution, according to a recording of the Oct. 9 proceeding provided by the U.S. Court of Appeals for the Fifth Circuit . The CARS Rule targets dealer bait-and-switch tactics and hidden junk fees , allegedly costing consumers nationwide “more than $3.4 billion and an estimated 72 million hours each year shopping for vehicles,” according to a December 2023 FTC release. Proposed in June 2022 and finalized in December 2023, the rule was to take effect on July 30 but was delayed due to the legal challenge. During the hearing, NADA argued that the FTC had bypassed the required “advance notice of proposed rulemaking,” which allows public feedback, instead presenting draft regulations and cost-benefit analyses, which NADA claims were inappropriate. FTC attorney Benjamin Aiken defended the agency’s approach, stating that the CARS Rule is governed by the Dodd-Frank Act , which does not mandate advance notice. He noted that NADA had multiple chances to engage in the regulatory process, including submitting comments. While NADA and the Texas Automobile Dealers Association say the rule would lead to excessive compliance costs , and paperwork, FTC’s Aiken argued that the benefits of the rule made the costs worthwhile. “We don't deny that there are compliance costs here,” Aiken said during the oral arguments. “The commission found that there would be $1.1 billion in compliance costs to motor vehicle dealers. And , again, we stress-tested that. There’s a sensitivity analysis that asked, ‘Well, what happened if we underestimated those costs? What happens if we overestimate the costs?’ The commission still concluded that the benefits of the rule outweighed the costs.” "The commission found that there would be $1.1 billion in compliance costs to motor vehicle dealers." -- Benjamin Aiken, FTC Experts weigh in The Dodd-Frank Act gave the FTC the authority to determine what is unfair and deceptive in dealer sales practices, Michael Benoit, partner at law firm Hudson Cook , said during a panel discussion on Oct. 8 at Auto Finance Summit 2024 . The FTC “could easily” write a rule that says it is unfair and deceptive to negotiate pricing for products, he said. “I think the FTC would like to change the way that dealers do business and get rid of negotiated pricing entirely,” said Benoit, who specializes in automotive finance. “So that there is a price for a vehicle and a price for every single ancillary product , none of it negotiable. They would love to see dealer participation go away. If not go away, then they would like to see everybody paying the same across the board. That would eliminate a lot of the fair lending concerns.” “I think the FTC would like to change the way that dealers do business and get rid of negotiated pricing entirely." -- Michael Benoit, Hudson Cook Some dealerships use deceptive practices, intentionally or not, Benoit said. Dealership staff turns over quickly, so it's hard to keep up with training , and the CARS Rule will make life harder for dealerships, he said. “It is frightening the amount of training that [dealerships are] going to have to engage in with their employees, if [the CARS Rule] survives a challenge,” Benoit said. “What I see from the FTC and from the CFPB [Consumer Financial Protection Bureau] is that they don't care for how the car business works. They don't like it.” Potential outcomes There are a few potential outcomes, Ken Rojc , managing partner of law firm Nisen & Elliot ’s automotive finance group, said during the summit panel discussion. If the ruling is favorable to dealers, the FTC may tone down its regulatory enforcement, Rojc said. However, a favorable ruling for the FTC likely will light a fire in the agency’s regulatory approach, he said, noting that the only other outcome would be a compromise. “It is worth noting when the [CARS Rule] first came out, they had these draconian disclosure measures regarding cost comparisons. When they revised the rule based on hundreds of comments from the industry, they toned it down a little bit,” Rojc said. “It's possible there could be some type of compromise decision.” No date is set for the final decision from the court. Follow all the latest news from last week’s Auto Finance Summit here.

Lawyers weigh $1B cost of CARS Rule as oral arguments begin

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