Aggressive Advertising can Generate Unforeseen Liability Along With Increased Sales

By: Keith E. Whann

As the economy and the creditworthiness of the average consumer have slowly declined, dealers have begun to use more aggressive advertising to generate dealership traffic. One example of an aggressive strategy that has become popular in the motor vehicle industry is to utilize the "Everybody Drives" theme. We have all seen this type of advertisement: “No Credit, Slow Credit, Bad Credit, Repossession, Bankruptcy...No Problem.” While those of us in the industry know that there are obvious exclusions and/or limitations that apply to an advertisement such as this, you can imagine the reaction of the average credit impaired consumer as they read the advertisement. A literal reading of the advertisement would say: “If you go to the dealership, you will leave with a car.”

The goal of any advertisement is to create traffic at the dealership, but not necessarily at the cost of subjecting the dealership to significant legal exposure. It is important to remember that there are numerous federal and state laws that regulate advertising. Naturally, any advertisement that deals with the extension of credit must comply with the Federal “Consumer Credit Protection Act” and “Consumer Leasing Act” and their implementing Regulations Z and M, more commonly known as the Truth in Lending and Leasing Acts. The Acts are similar in nature to the extent that they list certain “triggering terms” which, when used in an advertisement, create an obligation on the advertiser to make specific disclosures in the advertisement.

Regulation Z governs advertisements promoting a closed-end credit transaction (i.e. installment loans). The triggering terms include:

The amount of the down payment;
The amount of any payment;
The number of payments;
The period of repayment; and
The amount of any finance charge.

If any of the above-listed triggering terms are used in a closed-end credit advertisement, then the following three disclosures must also be included in that advertisement:

The total down payment as a dollar amount or percentage;
The terms of repayment/payment schedule; and
The “annual percentage rate,” using that term spelled out in full. If the annual percentage rate may be increased after consummation of the credit transaction, then that fact must also be disclosed.

The triggering terms defined in Regulation M apply if an advertisement offers a product through a leasing arrangement. The triggering terms are:

The amount of any payment;
The number of required payments; and
A statement of any capitalized cost reduction or other payment due (or that no down payment is required) at the beginning of the lease.

If any of the above-listed triggering terms are used in a consumer lease advertisement, then the following five disclosures must also be included in that advertisement:

A statement that the transaction advertised is a lease;
The total amount of any payment (such as security deposit or capitalized cost reduction) required at the beginning of the lease or a statement that no such payment is required;
The number, amounts, due dates, or periods of scheduled payments, and the total of such payments under the lease;
A statement of whether the consumer has the option to purchase the leased property and at what time and price (the method of determining the price may be substituted for disclosure of the specific price); and
A statement of the amount (or method of determining the amount) of any liabilities the lease imposes upon the customer at the end of the term; and, if the customer has such liability, a statement that the customer shall be liable for any difference between the estimated value of the leased property and its realized value at the end of the lease term.

The triggering terms most often utilized by the motor vehicle industry include payment information and the amount of the down payment or capitalized cost reduction. The disclosures required whenever a dealership includes a triggering term in its advertisement of a motor vehicle are designed to insure that consumers are provided with sufficient information to make an informed decision when weighing the options of obtaining an item by cash, credit or through a leasing arrangement. A fact often overlooked by many dealers is that the Acts apply equally to all forms of advertising, regardless of whether the advertisements appear in the newspaper or on the television, on the dealerships’ store windows, on the windshields of cars parked on its lot, or on its Web site.

In addition to the Federal Consumer Protection Credit and Consumer Leasing Acts, State Unfair and Deceptive Acts and Practices (UDAP) Statutes Rules promulgated thereunder also regulate the content of advertisements and provide that any material reservation, limitation or exclusion to an advertisement must be stated in the offer in a clear and conspicuous fashion. Furthermore, the material reservation, limitation and/or exclusion typically must be stated in close proximity to the words stating the offer. Remember, placing an asterisk next to an offer to refer to a footnote generally does not satisfy the close proximity requirement. Additionally, all disclosures should be set forth in such a fashion that they are easily legible, sufficiently specific, and leave no reasonable probability of being misunderstood. Advertisements that fail to disclose all material limitations or exclusions are inherently flawed and can result in a transaction being rescindable at the consumer's option.

Motor vehicle dealers should also be able to substantiate claims set forth in their advertisements and should be prepared to present a regulatory agency with evidence that substantiates its advertising claims. Remember, any representations that are made in an advertisement will be judged and interpreted using a reasonable consumer standard. When creating an advertisement, the use of any type, style, size, layout or illustration that may obscure any fact or cause an erroneous impression should be avoided. Dealers should also be careful not to create, in the reasonable consumer’s mind, a false impression about the quality, usability, or prior use of the vehicle. Finally, remember that most state UDAP Statutes and Advertising Rules require that any material statements made to a consumer concerning an advertisement be integrated into the Retail Buyers Order/Retail Lease Order for the transaction.