The FTC has announced the settlement of a lawsuit filed jointly with the Illinois Attorney General against a group of auto dealerships that alleged the dealerships violated federal and state law by engaging in deceptive practices in connection with add-on charges and by discriminating against Black consumers in connection with the financing of vehicle purchases. The stipulated order requires the dealerships to pay $9,950,000 to the FTC to provide monetary relief to consumers, and $50,000 to the Illinois Attorney General Court Ordered and Voluntary Compliance Payment Projects Fund. In its press release, the FTC calls the settlement “a record-setting monetary judgment for an FTC auto lending case.”
In their complaint, the FTC and Illinois AG alleged that eight dealerships and the general manager of two dealerships violated the FTC Act and the Illinois Consumer Fraud Act through conduct that included charging consumers for “add-on” products without their consent and falsely representing that the purchase of such products was mandatory.
The complaint also alleged that the dealerships’ discretionary pricing policy violated the Equal Credit Opportunity Act. According to the complaint, the policy allowed employees to “mark up” buy rates on customers’ retail installment sales contracts and to charge for unwanted add-on products. The FTC alleged that the defendants charged Black borrowers more often for add-on products and that Black borrowers paid, on average, approximately (1) $190 (approximately 18.4 basis percentage points) more in interest than similarly situated non-Latino White consumers, and (2) $99 more for similar add-on packages than similarly situated non-Latino White consumers. The FTC also alleged that the defendants’ discretionary pricing policy was not justified by a business necessity that could not be addressed through a less discriminatory alternative.
The settlement also requires the dealerships to establish a fair lending program that includes limits on the interest markup they can charge consumers. On all retail installment sales contracts, the dealerships can charge (1) an interest rate not greater than the buy rate, (2) the same number of basis points above the buy rate, or (3) a pre-set standard number of basis points above the buy rate (Standard) not to exceed 185 basis points, with deviations below the Standard allowed under specified circumstances.
FTC Chair Lina Khan and Commissioner Rebecca Slaughter issued a statement about the settlement in which they discussed the application of unfairness principles to discriminatory practices. They first observe that the conduct alleged in the ECOA count of the FTC’s complaint “presents clear disparate harms to consumers who are not in a position to avoid (or even notice) it. In light of this, we would have also supported a count alleging a violation of the FTC Act’s prohibition on unfair acts or practices.” Ms. Kahn and Ms. Slaughter then use the statement “as an opportunity to offer how the Commission should evaluate under its unfairness authority any discrimination that is found based on disparate treatment or have a disparate impact.”
They propose the following analysis:
- Discrimination based on protected status is a substantial injury to consumers. Based on the allegations in the complaint, Black consumers suffered monetary harms due to disproportionately higher interest rate markups and unwanted charges.
- Injuries stemming from disparate treatment or impact are unavoidable because affected consumers cannot change their status or otherwise influence the unfair practices. The complaint alleges that Black consumers were charged, on average, more for markups and add-ons than similarly situated non-Latino White consumers.
- Injuries stemming from disparate treatment or impact are not outweighed by countervailing benefits to consumers or competition. The complaint alleged that the defendants’ discriminatory practices resulted in high and unfair charges for Black consumers. Any potential price reductions produced by the discrimination and enjoyed by other auto purchasers should not constitute a “countervailing benefit” under the FTC Act. More generally, any purported benefit that can be achieved without engaging in the conduct causing substantial injury is not countervailing, and does not overcome the costs associated with the discrimination.
The statement by Ms. Kahn and Ms. Slaughter advocating the use of the FTC’s unfairness authority to challenge discriminatory practices follows the CFPB’s recent announcement that it is directing its examiners to apply the Consumer Financial Protection Act’s unfairness standard to conduct considered to be discriminatory whether or not it is covered by the ECOA.
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