$3.3 million FTC settlement with Passport drives home importance of fair lending

When it comes to the car buying process, there a world of difference between going for a test drive and getting taken for a ride. An FTC complaint against DC-based Passport Automotive Group alleges that the company deceived customers by packing junk fees onto the cost of its vehicles. According to the complaint, Passport also discriminated against Black and Latino consumers by charging them higher financing costs and fees, in violation of the Equal Credit Opportunity Act and the FTC Act. To settle the case, the defendants will pay $3.3 million and will change their business practices in ways that should cause others in the industry to take notice.

Passport operates nine dealerships in the Washington area. (And yes, if the name sounds familiar, Passport was the subject of an FTC action in 2018, charging the company with sending phony “urgent recall” notices that were really just sales promotions.) In the just-announced case, Passport ads conveyed to consumers that they could buy certain inspected, reconditioned, or certified vehicles at specific prices. However, the complaint alleges that in many instances, when a consumer tried to buy a car for the advertised amount, Passport’s double-talk – and double pricing – kicked in. Despite the claim that the advertised price included the cost of certification, inspection, etc., the FTC says Passport packed on hefty additional (and redundant) fees for those same services. 

The complaint cites examples of just how Passport’s tactics walloped consumers in the wallet. For example, one Passport dealership advertised a certified pre-owned Nissan Rogue for $24,050. However, Passport later charged the buyer an additional $2,390 in fees, purportedly required for reconditioning and certification. The upshot: the consumer had to pay $26,440 due to the double charges. But the deception didn’t end there. In numerous instances, Passport falsely told prospective buyers that those extra reconditioning, inspection, preparation, and certification fees were mandatory, despite what Passport said in its ads – and despite the fact that many manufacturers’ policies prohibit dealers from separately charging for the cost of certification.

The FTC also alleges Passport violated the Equal Credit Opportunity Act and the FTC Act by imposing higher borrowing costs on Black and Latino consumers when compared to non-Latino White consumers. To put the discrimination allegations in context, here’s some background on the vehicle financing process. Dealerships like Passport often arrange financing for customers by reviewing their credit applications and credit reports, and then submitting the applications to one or more finance companies. Those companies get back to Passport with a specific “buy rate” – the risk-based interest rate the company will offer for that transaction.

In some instances, the finance company allows Passport to add another charge – called a markup. But unlike the buy rate, the markup isn’t based on the individual’s credit record. The complaint alleges that Passport’s policy was to charge a standard markup of 2%, but gave employees discretion to reduce or eliminate the markup for certain reasons. Passport supposedly required approvals and audits, but the FTC says Passport didn’t actually follow its policy.

According to the FTC, Passport’s discretionary use of markup rates – charging some consumers the markup, but not others – resulted in charging many Black and Latino consumers more than non-Latino White consumers. For example, among thousands of consumers who received financing through Passport between August 2017 and August 2020, when compared to non-Latino White consumers, Passport charged Black consumers, on average, about $291 more in interest, and Latino consumers, on average, about $235 more. In addition, Black consumers were charged the maximum markup approximately 47% more often and Latino consumers approximately 38% more often than non-Latino White consumers.

The complaint also alleges that Passport charged Black and Latino consumers even more in those tacked-on junk fees. The FTC say that when compared to non-Latino White consumers, Black consumers paid, on average, approximately $82 more and Latino consumers approximately $81.

In addition to the $3.3 million financial remedy, the proposed stipulated order will make sweeping changes in how Passport does business, including a broad prohibition on misrepresenting the costs or terms to buy, lease, or finance a car and a requirement that the defendants get consumers’ express, informed consent before charging them any fees. The proposed order explains the changes in detail, but one provision related to the Equal Credit Opportunity Act deserves particular attention. In addition to implementing a Fair Lending Program, the defendants have agreed that each Passport dealership will either charge no financing markup or will charge the same markup rate to all consumers. In other words, the defendants are prohibited from charging different groups different markups. That provision addresses the FTC concern that Passport was using the discretionary markup rate to discriminate against consumers on the basis of race and ethnicity. 

There’s a lot for other companies to glean from the FTC action against Passport.

Conduct an ECOA compliance check. This is the latest in a series of recent FTC actions to enforce the Equal Credit Opportunity Act. ECOA has been the law of the land for almost 50 years and businesses have no excuse for continuing pernicious practices that violate the statute.

Corporate officers: The buck stops with you. In addition to naming corporate entities, the complaint names in their individual capacities Passport’s owner Everett A. Hellmuth, III, and Jay Klein, Vice President of seven of the Passport-related companies. The complaint explains in detail their involvement in the conduct challenged as illegal and alleges that Passport didn’t take appropriate corrective measures even when possible law violations were called to their attention. For example, according to the FTC, “Despite these multiple emails and text messages informing them of Passport’s practice of charging consumers bogus fees, Hellmuth and Klein have allowed the practice to continue.” Furthermore, Passport had received letters from finance companies raising “statistically significant differences in the markup rates charged to Black borrowers at two separate Passport dealerships,” but the FTC says Passport “took no steps to modify its discretionary markup policy or practice.”

When implementing corporate policies, practices – not paper – are what matters. According to Passport’s written policy, any deviations from the standard markup had to be recorded on a certification form, signed by the sales person, and reviewed by another employee. The written policy also required random monitoring of credit offers and periodic audits of credit sales. Sounds good on paper, but the FTC says Passport didn’t walk the walk. A document that looks nice in a file folder won’t paper over illegal practices on the sales floor. 

Discriminatory conduct can be “unfair.” In addition to alleging that Passport’s discriminatory finance practices violate ECOA, the FTC alleges the practices were unfair under the FTC Act. That makes sense. Passport’s discriminatory conduct injured Black and Latino consumers’ wallets: They paid more than White consumers to finance their car. They couldn’t reasonably avoid being charged more by Passport. The FTC says Passport didn’t disclose the markups and didn’t tell the truth about the fees. And the practice of charging those consumers more doesn’t yield countervailing benefits.