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FTC announces crackdown on abusive auto lending

David Shepardson
Detroit News Washington Bureau

Washington — U.S. and Canadian authorities on Thursday announced a crackdown on unfair auto lending practices, covering 252 enforcement actions.

The Federal Trade Commission and 32 law enforcement partners unveiled the results of Operation Ruse Control, which include six new FTC cases with more than $2.6 million in monetary judgments. The cases include 187 in the United States and 65 in Canada and cover both civil and criminal charges of deceptive advertising, automotive loan application fraud, odometer fraud, deceptive add-on fees, and deceptive marketing of car title loans.

“For most people, buying a car is one of the largest purchases they’ll make,” said Jessica Rich, director of the FTC’s Bureau of Consumer Protection. “Car ads must be truthful, loan terms must be clear, and dealer practices must be honest. That’s why our partners are working together to crack down on deceptive marketing about car sales, leasing and financing.”

The FTC took action against dealers and other firms adding to the vehicle sales, lease, or finance agreement charges for other products or services; those include extended warranties, payment programs, guaranteed automobile protection or GAP insurance, credit life insurance, road service, theft protection, and undercoating.

The National Automobile Dealers Association said it “strongly supports governmental efforts to address fraud and other prohibited conduct in the marketplace, and we continuously work with federal agencies to provide comprehensive compliance information to our members. It is important to recognize that the enforcement actions announced today are not indicative of any systemic problems within the auto industry — nor, as the agencies acknowledged, are they reflective of the overwhelming number of honest businesses that make up the nation's franchised dealer network,” said NADA spokesman Jared Allen.

But he said they “involve serious allegations, and while we have no first-hand knowledge of the facts surrounding these individual cases, we share the agencies’ view that there is absolutely no place for fraud or deceptive practices in any part of the business community."

The FTC charged that National Payment Network Inc, headquartered in San Mateo, Calif., allegedly deceptively pitched consumers an auto payment program — both online and through a network of authorized auto dealers — that it claimed would save consumers money. The company failed to disclose that the significant fees it charged for the service often canceled out any actual savings; those fees averaged $775 on a standard five-year auto loan.

In a related case, the FTC alleged that Matt Blatt dealerships, with locations in New Jersey, failed to disclose or adequately disclose the fees associated with NPN’s add-on service and that many consumers would not save money overall due to the program’s significant fees. The dealerships received a commission for each of the more than 1,000 consumers they enrolled.

Those firms agreed to settle the FTC charges, and are prohibited from misrepresenting that a payment program will save consumers money, unless the amount of savings is greater than the total amount of fees and costs charged in connection with the program. NPN will refund more than $1.5 million to consumers, and waive another $949,000 in fees to current customers. Matt Blatt dealerships also will pay $184,000 to the FTC as part of the settlement. Those settlements are expected to be finalized after a 30-day comment period.

The FTC also filed new cases against three auto dealers, Cory Fairbanks Mazda of Longwood, Florida, Jim Burke Nissan of Birmingham, Alabama, and Ross Nissan of El Monte, California, who agreed to settle charges that they ran deceptive ads. The FTC said the ads touted sales, lease or financing options that seemed attractive but were canceled out by fine-print disclaimers. In other instances, the disclaimers did not disclose relevant terms.

The crackdown also includes a court order that temporarily blocked a Florida firm, Regency Financial Services of Lake Worth, Fla., and its CEO Ivan Levy, who allegedly charged consumers upfront fees to negotiate an auto loan modification but then often provided nothing in return. The court also froze defendants’ asset.

This operation follows the FTC’s sweep against 10 auto dealers announced in January 2014, and is part of the agency’s ongoing effort to protect consumers purchasing and financing a new vehicle.

Auto lending has come under growing scrutiny by the Justice Department and the Consumer Financial Protection Bureau, with many auto finance companies saying they are under investigation. In September, the Obama administration proposed federal oversight of larger auto finance companies for the first time, after it uncovered discrimination against minority buyers who have taken out loans for cars at major banks.

The new rules would mean oversight for 38 large non-bank auto lenders, including captive finance arms of companies like Ford Motor Co., Toyota Motor Corp., Honda Motor Co., Volkswagen AG and Nissan Motor Co. They would cover any non-bank that made 10,000 auto loans or leases in a year. The Consumer Financial Protection Bureau declined to provide a list of the 38, but said there are as many as 530 non-bank auto lenders.

Currently, only auto finance companies that are banks or bank holding companies — like Detroit-based Ally Financial Inc. — are subject to federal oversight. They are already overseen by CFPB, the Federal Reserve Board and other regulators. The finance companies originate around 90 percent of non-bank auto loans and leases, and in 2013 provided financing to about 6.8 million buyers, the bureau said.

In December, Toyota Motor Credit Corp., the lending arm of the world's largest automaker, said it has been accused of discriminatory pricing of loans by the Justice Department and the Consumer Financial Protection Bureau.

Dealers routinely arrange financing for customers. They are often allowed by lenders to mark up the interest rate charged to consumers, allowing them to keep the difference. The CFPB contends that dealers at times charge minority buyers a higher rate than white buyers. In March 2013, the CFPB issued guidance urging banks to avoid discriminatory practices.

In December 2013, Ally agreed to pay $98 million to settle claims that the lender discriminated against more than 235,000 minority auto buyers. The Justice Department said since April 2011, about 100,000 African-American car buyers, 125,000 Hispanic borrowers and 10,000 Asian/Pacific Islander borrowers paid Ally higher interest rates than white borrowers, because of race and not on credit-worthiness.