The Federal Trade Commission’s Motor Vehicle Dealer Trade Regulation Rule’s comment period closed last month, after the FTC denied the many requests for an extension. The proposal, which would establish a sweeping set of prohibitions and affirmative requirements for auto dealers, including an oppressive document retention duty, carries with it the risk of civil fines of up to $46,517 per violation. Not since it adopted the Funeral Rule in 1984 has the FTC undertaken such a comprehensive regulatory scheme of a single merchant type. Auto dealers might understandably feel that, by comparison, funeral directors got off easy.

We previously discussed the proposed rule in the July and August issues of Spot Delivery. The FTC said that the proposed rule was intended to protect consumers from “junk fees and bait-and-switch advertising tactics” in the car-buying process. Now that the trade groups and even members of Congress have had a chance to weigh in, we can read some other perspectives on this poorly considered proposal.

The comment letter submitted by the National Automobile Dealers Association was a tour de force. NADA asked that the proposed rule be withdrawn, describing it as “ill-conceived, ill-supported, ill-coordinated, untested, and unlawful.” This was not simply a rhetorical flourish by a group whose members are the most threatened by this proposal. These characterizations were backed by 139 pages of keen analysis and over 200 additional pages of supporting attachments.

NADA’s comments took issue with both the proposal’s substance and its process. The prohibitions, it said, were unnecessary, already unlawful, and often poorly defined. A leading example is the FTC’s overly broad definition of a key term in the proposal—”add-on.” Although the proposal’s discussion of add-ons describes them as “ancillary products and services that are purchased and financed at the time of the transaction,” like extended service contracts and GAP, the FTC’s definition includes any product or service “not provided to the consumer or installed on the vehicle” by the manufacturer. NADA points out that there are about 600 accessories that a consumer can purchase from a dealer and have installed on a single trim line of a popular Chevrolet pickup truck. I counted about 2,700 accessories made available by Ford dealers. As the length of its comments suggests, NADA found no shortage of redundant prohibitions and poorly defined terms.

NADA had no kind words for the proposed rule’s affirmative disclosure provisions, which require dealers at the start of any conversation with a consumer about “any aspect of financing” to “undertake a complex and burdensome analysis and disclosure and obtain both a customer signature and a signature from a dealership manager.” NADA points out that these requirements can involve up to four separate signed disclosures and must be repeated for each vehicle the consumer asks about. It is no wonder that NADA contends that, far from shortening the shopping experience by three hours, the proposed rule is more likely to extend it, adding time to the transaction and costs to the dealer and ultimately to consumers.

In conclusion, NADA wrote, “The Commission has dropped onto the marketplace an unannounced NPRM that lacks any semblance of a responsible rulemaking that is the product of due diligence. It lacks critical stakeholder input, essential consumer testing, and needed coordination with other federal agencies and state governments. It asks a range of questions but then shuts off the ability of the public to answer them. It fails to support its need or properly measure its effect. It ignores requirements imposed by the Constitution, federal statutes, other federal agencies, and even the Commission’s own rules. In short, it unfortunately fails at every level.”

The damage from the proposal, if it should be adopted substantially as written, is not limited to motor vehicle dealers and their customers. As the joint comment from the American Financial Services Association and the Consumer Bankers Association points out, the proposal’s definition of “dealer” would appear to apply to finance sources that maintain licensure as dealers to facilitate sales of leased vehicles to customers who elect to purchase the vehicle at the conclusion of the lease term or to extend or transfer leases after origination.

AFSA and CBA also assert that the proposal creates “unmanageable risk for vehicle financing companies through the FTC’s Holder Rule,” which provides that any holder of a consumer credit contract is subject to all claims and defenses that the debtor could assert against the seller of the goods and services obtained under the consumer credit contract. Their comment letter points out that the proposal would penalize some conduct that is impractical or impossible for finance sources to identify or control. Like the NADA letter, AFSA and CBA express concern that the FTC’s proposal violates the Administrative Procedures Act.

On the final day of the comment period, six U.S. senators wrote FTC Chair Lina Khan to oppose the FTC’s proposal, stating that it “would fundamentally change the way that vehicles are retailed in America.” They said that it would “confuse customers, lengthen the transaction time to purchase a vehicle, limit consumer choice, increase paperwork, and mandate burdensome new recordkeeping requirements on small businesses.” They joined many other commenters in saying that the FTC’s failure to have done any consumer testing to see if its new regulatory regime would work in practice was “troubling.”

The letter next asked 11 questions, many with subparts, that the senators must have known would be difficult or embarrassing for the FTC to answer. These questions included pointed requests for explanations as to why the FTC failed to list the proposed rule in its semiannual Regulatory Agenda, whether it consulted with the Federal Reserve Board or the Consumer Financial Protection Bureau before issuing the proposal, and why it waited over a decade following its Motor Vehicle Roundtables to propose this rule, even though it relied extensively on the record from those events to justify the proposal. The letter noted that the FTC used its “over 50 motor vehicle-related” enforcement actions to justify the need for the rule, although almost one-third of these enforcement actions involved entities that do not retail vehicles. The senators asked how many of the complaints in the FTC’s consumer complaint database that the Commission relied on were verified (spoiler alert: that would be “none”).

The senators asked for a “complete” response to their questions by September 16. As of this writing, no such response seems to have been provided, and I’m not holding my breath. 

L. Jean Noonan is a partner in the Washington, D.C., office of Hudson Cook, LLP.

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