Paternalistic FTC Rule Would Stifle Consumer Choice in Auto Market

As if American drivers didn’t face enough headwinds with high gas prices, supply chain constraints, and state rules that may force them out of their gasoline-powered cars entirely, the Federal Trade Commission (FTC) is now throwing a proverbial monkey wrench into the car-buying process.

In its press release announcing its proposed “Motor Vehicle Trade Regulation Rule,” the FTC claims that the proposed rule would “protect consumers’ pocketbooks” by “making the car-buying process more clear and competitive.” In reality, the rule would not only hit consumers’ pocketbooks through costly compliance measures that would be passed on to them, it would paternalistically “protect” them from making their own choices to purchase automotive features that the FTC deems non-beneficial for them. Here are some of the points that CEI will make in our upcoming comments on the rule to the FTC.

Rule Goes Beyond Fighting Fraud and Paternalistically Restricts Consumer Choices

The first sign that the rule exceeds the FTC’s traditional practice and congressional mandate of improving disclosure and fighting fraud stems from its use of the term “junk fees.” The phrases “junk fees” and “junk charges” appear eight times in the FTC’s one-page press release on the rule. The term “junk fees” has also been utilized recently in rulemakings and communications by the Consumer Financial Protection Bureau, which is now headed by Rohit Chopra, a former FTC commissioner.

My recent critiques of the CFPB’s crusade against “junk fees” apply to this FTC effort as well. As I write in comments to the CFPB (and a related blog post), “’junk fees’ is a subjective and paternalistic term” that is used  to describe services and products an agency’s leadership simply doesn’t like, rather than deceptive practices it has authority to police.

The FTC makes clear in its rule that it is limiting consumer choices when it demands that auto dealers not just refrain from engaging in deceptive practices—which are already banned by federal law and which the FTC already polices through enforcement actions—but stop selling consumers products that the FTC deems to have “no benefit.” On the first page of the rule’s text, the FTC states that the rule would “prohibit the sale” from auto dealers “of any add-on product or service that confers no benefit to the consumer.” Later on, in Section 463.5 of the rule, the FTC dictates that “a dealer may not charge for an add-on product or service if the consumer would not benefit.”

Yet the FTC does not say how it will determine whether a consumer would “benefit” from an add-on product or service. And based on the aspersions cast in the rule and press release on two popular consumer options in their auto purchases, it doesn’t seem likely that the current FTC leadership will give much weight to American consumers’ views of what actually benefits them.

FTC Restricts Nitrogen-Filled Tires Despite Documented Performance Improvements

In the rule and accompanying press release, nitrogen-filled tires seem to be a particular bête noire of the FTC. The press release targets dealer charges for certain types of these tires as “fraudulent junk fees.” The rule also prohibits sale of certain types of these tires. (It’s unclear exactly what types are targeted, as explained below).

There is indeed a debate among automotive experts of exactly how beneficial nitrogen-filled tires are to ordinary drivers, but virtually no knowledgeable observer maintains they have zero benefit. For decades, race-car drivers and owners of high-performance vehicles have filled their tires with pure nitrogen, rather than ambient air that is a mixture of about 78 percent nitrogen, 21 percent oxygen, and 1 percent other gases and water vapor. Drivers of these vehicles have found that purging oxygen and water vapor in favor of a pure concentration of nitrogen results in better tire performance and endurance. 

In recent years, both auto dealers and service shops, including Costco automotive departments—have begun offering this service to those with ordinary cars. While the average driver may not face the high speeds and stressful scenarios of a NASCAR or Formula 1 contestant, many experts believe they could still benefit significantly from nitrogen-filled tires.

An article in Popular Mechanics states that “there are several compelling reasons to use pure nitrogen in tires,” including tire pressures that “remain more constant, saving you a small amount in fuel and tire-maintenance costs” and less corrosion that is frequently caused by the oxygen and water vapor in ordinary air.

The Carolinas chapter of the auto club AAA,  AAA Carolinas, gave the practice similar kudos in an article in its member magazine, citing a Clemson University study that found that tires filled with pure nitrogen maintained tire pressure that was 74 percent better than in tires inflated with regular air. The article argued that the tire preservation enabled by pure nitrogen also translates into environmental benefits such as better fuel economy and less tire waste.

In its review of nitrogen-filled tires, Consumer Reports differed with Popular Mechanics and AAA Carolinas on whether nitrogen-filled tires were a good deal for consumers, concluding that “consumers would be better served—and would save their money—by just using air in their tires and checking them monthly.” But the review nevertheless acknowledged that using pure nitrogen in tires reduced oxygen damage to tires and had other benefits. The review concluded that “there is nothing wrong with using nitrogen in passenger cars and trucks” as long as consumers were aware of the costs involved.

Given the documented benefits to nitrogen-filled tires, acknowledged even by their critics, it seems very odd that they would become the FTC’s poster boy for allegedly shady auto dealer practices. Even more bizarre is the proposed rule’s ambiguously worded restriction on dealers selling them to consumers.

The rule would prohibit dealers from charging consumers for “nitrogen-filled tire related-products or services that contain no more nitrogen than naturally exists in the air.” The phrasing—whether sloppy or deliberately restrictive—appears to create a standard for which it may be impossible to comply. “Air,” as defined by Merriam-Webster’s Dictionary, is “the mixture of invisible odorless tasteless gases (such as nitrogen and oxygen) that surrounds the earth.” Thus, no individual set of tires could have a higher total quantity of nitrogen than that in “the air” that stretches around the planet.

Perhaps the FTC did not mean to draft a prohibition this broad and simply meant to go after deceptive practices such as filling tires with regular air when the consumer had ordered nitrogen. Yet the FTC already has authority to go after clear deception, and the rule never alleges the existence of widespread deception or fraud in the sale of nitrogen-filled tires. Whatever the rationale, the prohibition as written would keep consumers from choosing a product that many automotive experts recommend as a tool to manage both costs and overall safety issues involved with a car. 

FTC Rule Severely Restricts Important GAP Risk-Management Product

Another product for which the FTC seeks to substitute its judgment in place of the consumer’s—rather than improve transparency and disclosure to help consumers—is in the area of guaranteed asset protection (GAP) policies. GAP products cover the difference, or “gap,” between the amount the consumer owes on a vehicle’s financing and the amount received from the main auto insurer in a total-loss event such as an accident, theft, or natural disaster.

These policies can help consumers ensure that they don’t get stuck with potentially thousands of dollars remaining on a car loan after they no longer have the vehicle, and can help in their obtaining a new vehicle. A 2020 poll conducted by the University of Michigan’s Survey Research Center—cited in a study by prominent economists Thomas Durkin, Gregory Elliehausen, and Tom Miller—found that 88 percent of consumers who bought GAP policies were satisfied and would buy it again on future vehicles. Only 1 percent of GAP policy purchasers were dissatisfied with the product.

Yet the rule would block this type of coverage even if the consumer wants it for his or her well-being. The rule prohibits dealers from selling consumers a GAP policy if “the loan-to-value ratio would result in the consumer not benefiting financially from the product or service.” As with the nitrogen-filled tires and other products and services the rule may target, the FTC does not specify how it will determine whether a consumer will “not benefit.”

This rule’s overall vagueness and paternalistic approach could create a climate of uncertainty for the auto and auto financing market. The FTC should withdraw this potential hazard for American drivers and focus on its core mission of going after fraud and deception in consumer markets.