The Federal Trade Commission (FTC) has filed an action against nine auto dealerships and their individual owners in a California federal court that the FTC described as its "first action against an auto dealer for 'yo-yo' financing tactics."

The FTC's complaint alleged that the dealerships were commonly owned and operated as a "common enterprise." According to the complaint, the defendants allegedly engaged in the following practices that were deceptive or unfair in violation of Section 5 of the FTC Act:

  • After entering into a retail installment sale contract (RISC) with a consumer to finance the purchase of a car and allowing the consumer to drive the car off the dealer’s lot, the dealer would ask the consumer to return with the car because it was unable to assign the RISC to a third party. In what the FTC characterized as a "yo-yo financing" scenario, the dealer would make various false representations to the consumer, such as that the consumer was required to sign a new contract with a higher finance charge or other less favorable terms than the original RISC or that the dealer was not required to return a down payment or other consideration given by the consumer.

  • The dealers included charges for ancillary products in sales and financing forms that were not authorized by the consumers or falsely represented that consumers would not be charged for ancillary products, could cancel an ancillary product within a specified time for a refund, or that the purchase of an ancillary product was a condition of the financing.

  • The dealers' advertisements represented that consumers could finance or lease cars on certain prominently advertised terms, such as a low down payment or monthly payment amount, but the advertisements omitted or concealed other material terms, such as with "fine print" disclaimers. The dealers also falsely represented in advertisements that consumers could finance car purchases at the prominently advertised terms when such terms were components of lease offers rather than credit sale offers. In addition, prominent terms advertised by the dealers were "not generally available to consumers" because those terms were subject to various qualifications and restrictions (such as that the consumer had to be a college graduate, have a certain credit score, or a five-year credit history).

  • The dealers and their employees posted favorable reviews of themselves on third-party online review and social media websites that falsely purported to be objective or independent reviews.

The complaint also alleged that the dealers violated Regulations Z and M by including certain "trigger" terms in advertisements for credit or lease offers without providing the additional information that must be disclosed when such "trigger" terms appear in an advertisement.

As noted, the FTC's allegation that certain of the dealers' advertisements were deceptive because prominently advertised terms were subject to various qualifications and restrictions was not based on a claim that the dealers failed to include those qualifications and restrictions in their advertisements. Rather, the deception allegation was based on the assertion that the prominently advertised terms were "not generally available to consumers" because of the qualifications and restrictions on their availability. This suggests that the FTC's rationale for alleging that the qualifications caused the advertisements to be deceptive is that the dealers did not affirmatively disclose that the qualifications would limit the number of consumers who could qualify for the offer.

The FTC used such a theory of deception in connection with a recent consent order in which two Ohio auto dealers settled allegations that the dealers' lease advertisements, which included a minimum credit score qualification, created a deceptive impression that a typical consumer could qualify for the advertised lease terms. With respect to advertisements of payment terms that are subject to a credit score qualification, the consent order required that "if a majority of consumers likely will not be able to meet a stated credit score qualification or restriction, the advertisement must clearly and conspicuously disclose that fact." We observed that the consent order could be seen as introducing a new standard, namely, that a majority of consumers must be able to meet any credit score restriction or qualification. If they could not, the offer will be considered deceptive unless it includes an appropriate disclosure.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.


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