A New York franchise motor vehicle dealer agreed in May to pay $1.5 million to the Federal Trade Commission to settle charges that the dealership discriminated against African-American and Hispanic consumers and engaged in other unfair and deceptive practices.
In a complaint filed in the United States District Court for the Southern District of New York, the FTC alleged that the dealership, Liberty Chevrolet, d/b/a Bronx Honda, charged minority consumers higher financing markups and fees, in violation of the Equal Credit Opportunity Act (“ECOA”) and Regulation B (“Reg B”). The agency alleged that the dealership charged African-American consumers approximately $163 more in interest than similarly situated white consumers, and charged Hispanic consumers approximately $211 more in interest. The settlement arose out of a common practice in the motor vehicle sales industry, where dealers arrange financing and charge a higher finance charge rate than the minimum required by the automobile finance company or bank. In return, the finance company or bank pays the dealer additional compensation in connection with the financing. Federal banking regulators, the FTC, and the Consumer Financial Protection Bureau have taken the position that this practice creates a risk of “disparate impact” on protected groups, as the subjective pricing decisions by dealers could lead to higher finance charges for protected groups.
The complaint against Bronx Honda further detailed allegations that the dealership engaged in illegal practices that forced consumers to pay higher prices than expected, including allegations that the dealership:
- failed to honor advertised sale prices and used a variety of methods to increase vehicle prices;
- altered the deal paperwork during the sale process to change the prices of vehicles without notifying the buyer;
- doubled up on taxes and fees without consumers’ knowledge; and
- represented that “certified pre-owned” vehicles required thousands of dollars in fees for purchase.
According to the agency, the above allegations resulted in violations of the FTC Act and the Truth-in-Lending Act, as well as the ECOA. The resulting settlement will provide redress for affected consumers and will prevent Bronx Honda from misrepresenting vehicle prices or terms in the future. The dealership also will be required to establish a fair lending program designed to cap the amount of interest markup charged to consumers.
In a statement, FTC Commissioner Rebecca Kelly Slaughter stated: “The federal government, I believe, has a moral obligation to end the discriminatory impact of permissive dealer markup. The net result of doing so will be to end an enormous wealth transfer from consumers of color to other consumers and to dealers.” To further this aim, Commissioner Slaughter suggested initiating a rulemaking process to regulate discretionary dealer markup. “The financing terms of a vehicle should depend only on one’s financial capability and not on one’s race. This desirable outcome is not the system American consumers encounter today, because of widespread discretionary dealer-markup policies countenanced by auto lenders and exploited by auto dealers.” Similarly, Commissioner Rohit Chopra haled the use of disparate impact analysis for detecting potential discrimination and called for FTC action in the auto finance space.
Troutman Sanders will continue to monitor these regulatory developments.