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As Dennis gets ready for his panel presentation at the Consumer Bankers Association next week, an announcement was made regarding the crackdown on ads promising to pay off the consumer's trade. The Federal Trade Commission (FTC) named some prominent dealerships in its complaint. While most consumers recognize that the amount they are upside down on their trade is going to be applied to the price of the vehicle they buy, we are entering an era of regulation and enforcement aiming to protect even the most unknowledgeable of consumers. What is clearly not going to fly are ads promising to pay off the loan balance of the customer's trade-in, even if they owe more than the value of the trade-in.
We talked to FTC officials Thursday, and confirmed that the five stores selected are being made an example of in hopes that the many other stores using the same advertising tactics will immediately abandon the practice. Clearly, the warning shot has been fired and any ambiguity about whether this practice will be tolerated has been removed.
The new Consumer Financial Protection Bureau (CFPB) regulates banks. the FTC still regulates auto dealers. But it should be no surprise that staying with the existing regulator agency is not going to be the same as freely conducting business as usual. There is no way the Consumer Protection Bureau of the FTC is going to let itself be seen as weak in its defense of consumers. We are told through outside sources that the two agencies are cooperating with each other, the FTC sharing dealer loan data with the CFPB and the CFPB sharing banking data relative to auto loans with the FTC. In the worst of all possible scenarios, the two agencies may compete for media attention to show which is doing the most for consumers. That's the cynical view.
Pragmatically, change is coming and some dealerships are going to be made examples of. At a minimum, dealerships are going to want to stay far enough within the spirit of advertising regulations to avoid becoming a juicy target. To our knowledge, there is nothing wrong with the practice of overpaying on the customer's trade to pay it off and correspondingly overcharging on the vehicle purchased. But if that is what you are offering, then that is what you will need to advertise. Most customer's buying vehicles this way understand what they are getting into. It's the service they want and in some cases need. Theoretically, the only store traffic you will lose are the ones who would have come in with the wrong impression, that you were going to pay off their trade out of the goodness of your heart. That is the horn the FTC is blowing, and dealers need to hear it.
One strategy for dealers is to publicly go to the extreme on transparency to consumers. Southwest Airlines doesn't just charge lower baggage fees, they don't charge for them at all and advertise that doing so is foul practice. TD Ameritrade has made its policy of $9.99 flat rate fees with no maintenance charges its calling card. Progressive Insurance stands by its willingness to share the rates of competitors alongside its own. These companies have identified the things consumers hate and made their opposition to those practices a competitive advantage. Is it possible to be in the business of offering creative financing solutions and advertise your policies in a way that makes transparency a competitive advantage? For some stores, it's time to give it some serious thought. For all stores, the Government's message about the renewed crackdown on deceptive advertising is loud and clear.