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The old maxim that “bad facts make bad law” is only a precursor to the conclusion that “bad facts and bad law make very bad results.” Bronx Honda engaged in almost inexplicably bad behavior by engaging in discriminatory and deceptive practices related to its vehicle financing practices for minority customers. In a case that has broad industry implications, the Federal Trade Commission (FTC) took note and put the pedal to the metal on stopping these practices.

On May 21, 2020, the FTC filed a complaint for injunctive and other relief against Liberty Chevrolet d/b/a Bronx Honda and its individual general manager, alleging that the dealer discriminated against African American and Hispanic customers through a variety of illegal and unethical practices in the finance and insurance functions at its dealership. (The Order can be read here.) The FTC accused Bronx Honda of:

• Indirect financing
• Excessive document fees
• Adding fees and marked-up dealer charges

Bronx Honda management allegedly instructed employees to target minority groups for such practices “due to their limited education,” while white customers were spared such tactics. As a result, the minority customers paid more for financing than white customers: the complaint pegs the discrimination delta at $163 more in interest for African-Americans than similarly situated non-Hispanic white consumers and $211 more for Hispanic consumers. With regard to other advertising, sales, and financing practices for new and used motor vehicle sales, the complaint specifically alleged violations of:

• Section 5 of the FTC Act
• 15 U.S.C. § 45
• Section 5(a) of the FTC Act
• 15 U.S.C. § 45(a)
• the Truth in Lending Act ("TILA") and its implementing Regulation Z
• 12 C.F.R. § 226
• the Equal Credit Opportunity Act ("ECOA'') and its implementing Regulation B
• 12 C.F.R. § 202

The FTC also charged Bronx Honda with other illegal practices in the advertising and sales process that caused consumers to pay substantially more than expected. The accompanying press release states that the defendants:

• • failed to honor advertised sale prices, inflating the cost through a
    variety of methods;
  • changed the sales price on paperwork in the middle of the sale
    without telling the consumer, a practice the defendants internally
    referred to as adding “air money” to the contract;
  • double-charged consumers for taxes and fees without their
    knowledge; and
  • told consumers that they had to pay thousands of dollars in unnecessary
    fees to purchase “certified pre-owned” cars that were not
    required by that program.

On May 27, Bronx Honda settled the case via a consent judgment requiring payment of $1.5 million for equitable relief to consumers and submission to prospective conduct relief. The Stipulated Order enjoins the defendants from misrepresenting the cost or terms to buy, lease, or finance a car, or whether a fee or charge is optional. Express, informed consent by each customer will be required for any charges, which must be clearly and conspicuously disclosed in understandable terms. They will also be required to establish a fair lending program that will, among other components, cap the amount of additional interest markup they can charge consumers. These requirements are bolstered by reporting and monitoring requirements.

In separate statements, FTC Commissioners Rebecca Kelly Slaughter and Rohit Chopra urged the FTC to exercise its rule-making authority to crack down on dealerships for use of discriminatory algorithms and practices. Lending algorithms can be calibrated against consumers, charging customers more based on their race or other factors. The commissioners observe that the difference between the amount lenders offer to dealerships to buy auto loan contracts and the rate negotiated between the dealer and car buyers exposes the customer to pricing disparities, which could be managed to lead to higher markups for Black or Hispanic customers. Commissioner Slaughter noted “the tricks and traps that Bronx Honda used against consumers are all too prevalent at auto dealerships across the country." Slaughter urged “far-reaching structural reform to the automobile financing and sales markets is long overdue and urgently needed.” She proposed a rulemaking process, under the Dodd-Frank Act, to regulate dealer markup.

In a recent issue of Automotive News, Dave Robertson, the Executive Director of the Association of Finance & Insurance Professionals, noted there are always three expenses associated with an auto loan: (1) loan origination expense—the cost of soliciting qualified buyers and arranging terms;
(2) loan servicing expense—the cost of collecting monthly payments and providing customer service; and (3) lending expense. When banks cover all three expenses, the customer absorbs these costs in the form of a less desirable finance rate. If the dealership arranges the financing, the dealership incurs that expense, and whoever buys the contract reimburses the dealer. Accordingly, Robertson said, "There's no logic to the argument that there's some kind of extra expense" to the dealer.

In the worst-case scenario of Bronx Honda, the discrimination based on race and ethnicity had direct, not unintentional, disparate impact. Bad facts make bad law, and both in combination generally make bad results. This has the potential to be a big problem not only for dealers but also for automotive manufacturers, whose reputations are affected by their dealers’ actions. Manufacturer-Dealer contract provisions and policy manuals on fair credit practices and compliance are, of course, important. But they are only as good as the compliance and education efforts behind them.

In a separate auto industry development, the FTC released a Business Alert on July 30, 2020, and a Staff Report titled, “Buckle Up: Navigating Auto Sales and Financing.” Based on a relatively small sample of qualitative data, the Buckle Up Report focuses on potential misleading and deceptive practices in: auto advertising, negotiating a price, negotiating financing terms, ancillary (add-on) products and services, transaction documentation review and timing, and renegotiation of financing terms (spot delivery). Generally, the Report criticizes dealer industry practices on disclosure of negotiable terms, misleading price and discount offers, and timing pressures, including electronic execution of documents without an opportunity for meaningful review. Citing the FTC’s extensive experience with automotive industry investigations and consumer workshops on auto marketplace consumer issues, the Report concludes with recommendations for further study and action in this sector.

When bad conduct draws the attention of enforcement authorities, who then propose sweeping changes, the industry better pay attention and get ahead of the problem. Enforcement actions and policy development are twin tools for imposing change. Almost inevitably, private class actions will follow. It is time to tap the brakes and keep a sharp lookout.