FTC Steers Arizona Auto Dealers Into Court

Financial Services Law

In a new complaint filed in Arizona federal court, the Federal Trade Commission (FTC) charged a group of four auto dealers with a host of illegal activities ranging from misrepresenting and omitting key financial terms in advertisements to falsifying information on vehicle financing applications.

The alleged violations of the FTC Act, Truth in Lending Act (TILA) and Consumer Leasing Act primarily targeted the nearby Navajo Nation, the agency noted.

What happened

A group of four auto dealerships and their individual owners allegedly engaged in “numerous instances” of unlawful practices related to the sale, lease and financing of vehicles dating back to 2014 in an attempt to increase their sales, the FTC said. The auto dealerships are located in areas bordering the Navajo Nation, and a large percentage of the dealerships’ consumers are members of the Navajo Nation.

As part of the effort to obtain financing for customers who wish to purchase a vehicle, the defendants generally submit a completed financing application and contract to the financing company. But in many instances the defendants falsified the consumers’ monthly income and down payments on such documents, according to the complaint.

The defendants “engage[] in a variety of practices that prevent consumers from reviewing the income and down payment information,” the FTC alleged. Dealership employees “have often rushed consumers through the process of reviewing and signing these forms, preventing consumers from noticing inaccuracies,” or “do not give consumers the income and down payment portion of the contract to review before signing. In numerous other instances, [dealership] employees have altered documents after they have been signed. As a result of these practices, in many instances consumers have been unaware that their incomes or down payments were recorded incorrectly on financing applications and contracts.”

For example, one consumer allegedly told the defendants she had a fixed monthly income of about $1,200; without her knowledge, a dealership employee inflated her monthly income to $5,200 on the financing documents, according to the complaint.

The FTC alleges that in addition to exposing consumers to the risk of liability for submitting false information to financing companies by making it appear as though they provided it, the defendants’ actions resulted in financing companies accepting assignment to consumers of credit for which they did not qualify and on which they defaulted at a higher rate than did properly qualified consumers.

The Navajo Nation Human Rights Commission reported that it received more complaints about the defendants than about any other dealership, and a fraud review of the dealerships in December 2015 found that inflated income appeared on 17.9 percent to 44.83 percent of applications at the four dealerships.

The FTC asserted that in addition to the allegations of deception and unfairness in the financing process, the defendants used deceptive advertisements that misrepresented the nature of the offer or terms of financing or leasing. The dealership routinely touted low payment amounts, the agency said, while failing to clearly and conspicuously disclose the full terms. In one video advertisement, one of the dealerships offered a particular vehicle for $169 per month with a bonus of a new iPhone 6. But the ad failed to clearly or conspicuously disclose that consumers had to pay thousands of dollars in upfront payments to obtain the advertised monthly amount, that 24 monthly payments were required and that the deal applied only to leases as opposed to sales. Other ads featured hidden limitations on discounts and undisclosed financing terms, the FTC alleged.

The agency asked the court for preliminary and permanent injunctive relief as well as disgorgement and other relief to redress the injuries to consumers (such as rescission or reformation of contracts, restitution or refunds).

To read the FTC’s complaint, click here.

Why it matters

This is the FTC’s first action alleging income falsification by auto dealers and is one of the first enforcement actions initiated by the newly filled Commission. The case provides a reminder about the agency’s oversight of the industry, as auto dealers were carved out of the Dodd-Frank Wall Street Reform and Consumer Protection Act, keeping them off the Bureau of Consumer Financial Protection’s radar, but leaving them subject to the jurisdiction of the FTC. “Buying a car is one of the biggest purchases consumers make,” Andrew Smith, director of the FTC’s Bureau of Consumer Protection, said in a statement about the case. “When consumers tell an auto dealer how much they make and how much they can pay upfront, the dealer can’t turn those facts into fiction. The FTC expects auto dealers to be honest with consumers from the first advertisement to the final purchase.”