Teach how deceptive practices led in a Honda Automobile Dealer Fraud case.
My name is Steve Hart, and I am a contributing journalist for Compliance Mitigation. I am a Partner at Conformity 360, a compliance consulting firm, serving as the resident subject matter-expert in buy-side Compliance. Prior to joining Conformity360, I was Chief Compliance Officer (“CCO”) for the prestigious firm Allen & Company, and prior to that, served as the Global Chief Administrative Officer for Compliance at BlackRock, the world’s largest asset management company. I hold an Investment Adviser Core Certification, an M.S. in Banking and Financial Services from Boston University and a B.A. in Political Science from the University of Pennsylvania.
Having worked as the CCO for Registered Investment Advisers (“RIAs”) with the Securities and Exchange Commission (“SEC”), I have been through numerous regulatory audits and examinations. Experience gives me insight into how the regulatory bodies conduct investigations and attempts to obtain enforcement actions, often including jail and prison sentences.
After completing this case study, the participants will be able to:
- Define automobile dealer fraud.
- Identify instances when automobile dealer fraud might be alleged.
- Understand how consumer protection laws protect consumers against types of fraud that include false advertising.
- Define the “Used Car Rule” enforced by the Federal Trade Commission (“FTC”).
- Understand anti-discrimination rules protecting consumers.
Automobile Dealer Fraud, Consumer Rights Law, Federal Trade Commission Act, Bureau of Consumer Protection, “Used Car Rule”
Buying or leasing a car is the biggest financial transactions for many consumers aside from owning a home, and having access to a vehicle also is essential for many Americans to carry on their daily lives. The FTC plays several important roles in making sure consumers get a fair deal in the auto marketplace.
The FTC brings auto-related enforcement actions, including against companies falsely promising to reduce auto loan payments, car dealers and others making deceptive advertising claims, telemarketers pitching bogus auto “warranties” that are actually extended service contracts, and companies promoting illegal pyramid operations through leasing offers.
The FTC also enforces the “Used Car Rule,” which requires the familiar windshield stickers that appear on used cars at dealers throughout the country and give consumers critical information about who pays for repairs if something goes wrong with the car they buy. The FTC regularly uses this rule, among numerous others, in enforcement actions.
The Dodd – Frank Act gives the FTC new and expanded authority regarding motor vehicle dealers. The “Used Car Rule,” is a powerful new tool requiring used car dealers to disclose certain information to consumers. The rule also generally prohibits false statements, material misrepresentations, and other unfair or deceptive practices in connection with the sale of used vehicles.
More specifically, the rule prescribes a specific type of notice to be posted conspicuously in the window of any used vehicle offered for sale. The notice must:
- Provide the dealer’s name and contact information, along with the make, model, year, and vehicle identification number (VIN) of the vehicle.
- Briefly describe the terms of any express warranties on the vehicle, including the extent and duration of coverage, or state that no express warranties are offered.
- Indicate whether a manufacturer’s warranty remains in effect and for how long.
- Indicate whether the dealer disclaims any implied warranties or offers the vehicle for sale “as is.”
- Identify any service contracts that are available for the vehicle.
The government is importantly dedicating more enforcement resources than ever towards consumer protection. Utilizing the Dodd-Frank Act, we can anticipate a greater emphasis on consumer fraud cases for actions committed by businesses whether unintentionally or on purpose.
Many auto dealerships offer to assist consumers with financing a vehicle purchase through an in-house finance and insurance (“F&I”) department. These departments must abide by consumer privacy rules that protect credit scores and other personal financial information. An auto-dealer located in Bronx, New York engages in discriminatory practices with respect to F&I and finds itself under investigation by the Consumer Finance Protection Bureau.
Bronx Honda, Inc., a family-owned business originally founded in the 1930s, serves the New York City community as an active dealership with a complementary service department. It records sales in the low tens-of-millions-of-dollars annually. F&I serves as a regular and very profitable department of the company’s business, helping customers to purchase new and used vehicles.
Bronx Honda management, however, charges different amounts of financing mark-ups and fees based on the color of a customers’ skin. While it may have seemed like a good way to gin up profits, it clearly fell afoul of anti-discriminatory laws created to ensure equal treatment to all. Bronx Honda management tells employees that black and Latino customers should be targeted due to their limited education, and not to attempt the same practices with non-Latino white consumers. As a result, African American and Latino customers regularly paid more for financing than similarly situated non-Latino white consumers.
This practice remains in place for years, perhaps longer, when the FTC gets wind of the scheme.
The FTC brings an action in May of 2020 alleging that Bronx Honda charged African American consumers $163 more in interest, on average than similarly situated non-Latino white consumers, while Latino consumers are charged about $211 more in interest.
In addition to alleged racial discrimination, the FTC further charges the company with numerous illegal practices in the advertising and sales process that cause consumers to pay substantially more than they expect. The complaint states that the defendants violated the FTC Act, the Truth in Lending Act (“TILA”), and the Equal Credit Opportunity Act (“ECOA”) when they:
- 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.
Under a settlement, Bronx Honda and its general manager, Carlo Fittanto, agreed to pay $1.5 million toward compensating consumers. The settlement further prohibited Bronx Honda and Fittanto from misrepresenting costs in the future, ensuring a much harsher penalty should they again find themselves in trouble with the law. They must also establish a fair lending program that, among other components, caps the amount of additional interest markup they can charge consumers.
Bronx Honda subsequently made two critical changes on the heels of the deal with the FTC. It named Izzy Wahba, a person of color and long-time salesperson at the company, to the position of General Sales Manager. They also appointed Marcie Jacob, a former vice president of Employment Law at the large publicly traded firm Time Warner, to the position of Chief Compliance Officer, demonstrating a clear commitment toward compliance going forward.
The United States’ large and complex economy offers perhaps the broadest potential for products and services in history, but with such opportunities come the risk of scams, fraud, and outright theft. The principle of caveat emptor or “buyer beware” used to be the basic tenet of commerce, obligating people to basically look out for themselves. The growing nanny state, advancing each year with more protective laws and greater enforcement courtesy of invasive technology, gradually supplants the old principles based upon “every man for himself.” In fact, the pendulum has swung considerably in the other direction, placing a greater onus on businesses to police themselves or suffer the consequences.
Bronx Honda committed an egregious act of discrimination. There can be no legitimate excuse to justify the practice. It stemmed from the policies of a rogue general manager and sales staff who followed loyally, without question, prioritizing profits over doing what’s right. As demonstrated by the company’s immediate change of direction in Sales Management and appointment of a Chief Compliance Officer, we see what should have been in place to begin with. All companies would do well to follow suit before problems occur and they get hit with a massive fine relative to the amount of business conducted by the company.