“We will pay off your balance no matter how much you owe” is a slogan that was used by a car dealership for years until the Federal Trade Commission, last week, reached settlement agreements with five car dealerships prohibiting this type of advertising regarding paying off loans on consumers’ trade-in cars and other advertising related to financing terms. The FTC alleged that the advertising was false and misleading, in violation of the FTC Act, the Truth in Lending Act, Regulation Z, and the Consumer Leasing Act and Regulation M by implying that when the consumer trades in a used car to purchase another car, the consumer will have no remaining obligation for any amount on the used car. However, according to the FTC, when a used car had a loan balance that exceeded the car’s value, called negative equity, the car dealerships involved in the settlement did not pay off the balance of the loan but rather included the amount of the negative equity in the loan for the new vehicle. For example, according to the FTC’s Consumer Alert Publication on this topic, consumers who had a loan payoff of $18,000 on a car worth $15,000 would then have the negative equity amount of $3,000 added to the loan for the new car by the car dealerships, thus increasing the amount of monthly payments for the new car or down payments.
The five dealerships, from various cities in the U.S., have entered into proposed consent agreements with the FTC (here, here, here, and here). The consent agreements prohibit them from advertising that they will pay the remaining balance on a trade-in if the consumer is still responsible for the negative equity value and from misrepresenting other facts related to leasing or financing a vehicle. These consent agreements reflect a broader FTC initiative to identify and address consumer fraud and deceptive practices targeting people who are financially distressed, which included a series of roundtable events last year soliciting information on potential consumer protection actions concerning the sale, financing, or lease of motor vehicles. As the FTC’s website states, “Having access to a motor vehicle is essential for many consumers to fulfill their daily obligations. It imposes a substantial expense, however, and accordingly most consumers seek to lease or finance the purchase of a new or used car. As the nation's consumer protection agency, the Commission is committed to protecting consumers in connection with these financial transactions.” As we have written in the past, it is important that advertising is clear and gives full information to consumers, otherwise -- as these five recent consent agreements show -- the FTC may well act fast and furiously.