CARS: Combating Auto Retail Scams

Federal Trade Commission Chair Lina M. Khan: “When Americans set out to buy a car, they’re routinely hit with unexpected and unnecessary fees that dealers extract just because they can. The C.A.R.S. rule will prohibit exploitative junk fees in the car-buying process, saving people time and money and protecting honest dealers.”

This new FTC rule of law also prohibits dealers from using bait-and-switch claims to lure vehicle buyers to the lot, including claims about the cost of a car or the terms of financing, the availability of any discounts or rebates, and the actual availability of the vehicles being advertised. It also attacks hidden junk fees, which are charges buried in lengthy contracts that consumers never agreed to pay. In most cases, these fees are for services or products that provide no benefit to consumers.

This new FTC law goes into effect on July 30, 2024. If you’re not in dire need to buy a new or used car immediately, you’ll be far less likely to be cheated by a car dealer if you can wait until this date.

The main concern I have with all laws, rules, and regulations is “lack of enforcement.” The Federal Trade Commission has nowhere near the resources to police thousands of car dealers. It’s up to car buyers to notify the FTC when a car dealer violates their rules, but even then, they can be overwhelmed by complaints.

The good news is that the FTC CARS rule falls under the Unfair and Deceptive Trade Practices Acts (UDTPA), which all fifty states have versions of. The benefit to the consumer of a UDTPA is that the defendant (car dealer) in the lawsuit must pay the attorney’s fees of the plaintiff (car-buyer) when they win the lawsuit. This incentivizes lawyers to take on cases of lower economic recovery potential. For example, if a car dealer refused to reimburse a customer for the car that they were tricked into buying at a cost of $20,000, it could cost him close to $100,000 in attorney’s fees to reimburse your attorney, plus the $20,000 he owes you, the scammed car buyer.

If you must buy a car sooner than July 30, 2024, go to the FTC website, www.Consumer.FTC.gov, and read "The new CARS Rule: What You Need to Know Before You Sign Anything with a Car Dealer." All car dealers are very much aware of this new law, and you should make it clear to the dealer that you expect your car purchase to comply fully, even though the law isn’t in effect until July 30, 2024. Demand that the dealership sign a written guarantee to this effect. You still won’t have the protection of the FTC CARS rule, but you would have the right to a civil action for violation of a contract.

Buyer Beware Warranties for Sale!

If you own or lease a vehicle, someone has probably tried to sell you a warranty, maybe several people or companies. You may have already bought one, but you probably haven’t had to use it, or maybe you didn’t even realize you were sold one. If you have tried to use a warranty you purchased, it probably didn’t cover the repair your car needed.


Over the past decade, the quality and reliability of most vehicles have improved more than at any time in automotive history. If you did your homework and bought a quality car, you simply don’t need to buy another warranty, aka extended service contract.


I understand that some people buy extended warranties on their vehicles because it gives them “peace of mind.” If you’re one of them, I urge you to carefully study the warranty being offered for what it does and does not cover. The warranty companies, as you would expect, are very well versed in what repairs are more or less likely for every make, model, and year vehicle for which they sell an extended warranty. They write the warranties to cover those items that are least likely to fail and less expensive to repair if they do. They exclude items that fail more frequently and are costly to fix. For example, a powertrain warranty is often offered for free by car dealers but is also often sold.


The powertrain consists of all the parts that are lubricated by oil or grease on a vehicle. The condition in a powertrain warranty (and all warranties) is that your vehicle must have all the manufacturer’s recommended maintenance performed, which means all oil changes (typically once every year or 10,000 miles for most vehicles). Historically, to the best of my knowledge, no vehicle has ever required a repair that had all its oil changes as recommended by the manufacturer.


The huge increase in the reliability of vehicles in the past decade is largely due to the commensurate increase in technology and engineering, particularly in software and computers. Today’s automobile is more a computer on wheels than the mechanical device that evolved from Henry Ford’s Model A. Most extended warranties sold today cover mostly mechanical parts like the engine, transmission, and axles, but cover very little of the computer modules and software. These computer components are extremely expensive. The irony is that the mechanical parts fail very seldom now because of the computerized parts.


The reason extended warranties are pushed on you today is simply because they’re extremely profitable for the sellers. Almost all large car dealers design and sell their own extended warranties. They decide what the warranty covers and does not. They also decide the price. The profit margin on these homemade warranties is HUGE, some approaching 100% or higher. This is partly because tax laws favor insurance companies. Warren Buffett, close to the richest person on Earth, made most of his money owning insurance companies. Insurance companies don’t have to pay income tax on the premiums they collect from you until they “earn out”. If you buy an auto, extended 5-year warranty for $2,000, the company pays no income tax in the first year and just 20% of the tax per year after. This is called “the float” and is why warranty companies make more money than any other. They take all the money that you pay them in untaxed premiums and invest it, which increases their profits by their investment return.


**Earl Stewart**