By Thomas B. Hudson and Nicole F. Munro
Here’s our monthly article on legal developments in the auto sales, finance and lease world. This month, we’re covering actions of the Consumer Financial Protection Bureau, the Federal Trade Commission, the Justice Department, the Senate, and the President. As usual, this month’s article features our “Case of the Month.”
Why do we include items from other states? We want to show you legal developments and trends. Also, another state’s laws might be a lot like your state’s laws. If attorneys general or plaintiffs’ lawyers are pursuing particular types of claims in other states, those claims might soon appear in your state.
Note that this column does not offer legal advice. Always check with your lawyer to learn how what we report might apply to you, or if you have questions.
This Month’s CARLAWYER© Compliance Tip
The big news this month, discussed below, is the override of the CFPB’s new arbitration rule. That’s a real win for dealers who use mandatory arbitration agreements with their car buyers to protect against class action lawsuits, as well as for those not currently doing so but considering such use in the future. The CFPB’s anti arbitration campaign has been going on for several years. During that period, many companies using arbitration agreements have been reluctant to spend legal dollars to keep their agreements on the cutting edge of the law. After all, why waste money if the CFPB is going to abolish the use of the agreements? Now that we have an industry victory for arbitration, dealers using such agreements might want to make sure their agreements reflect the latest legal developments. The “Case of the Month,” discussed below, illustrates the value of an effective arbitration agreement.
CFPB’s Arbitration Rule Goes Down in Flames. On October 23, the Treasury Department released a report examining the CFPB’s arbitration rule, which would have effectively prohibited mandatory arbitration clauses in consumer financial contracts. The report determined that:
- the CFPB’s rule would impose extraordinary costs by generating more than 3,000 additional class action lawsuits over the next five years, imposing more than $500 million in additional legal defense fees, and transferring $330 million to plaintiffs’ lawyers;
- the CFPB’s data show that the majority of consumer class actions deliver no relief to the class members, and few consumers entitled to claim settlement funds actually do;
- the CFPB failed to consider whether improved arbitration disclosures would serve consumer interests better than its ban;
- the CFPB did not adequately assess the share of class actions that are meritless; and
- the CFPB did not show that its rule will improve financial institutions’ compliance with federal consumer financial laws.
The report concluded that the arbitration rule did not satisfy the statutory prerequisites for banning the use of arbitration agreements under the Dodd-Frank Act.
Perhaps partly in response to the Treasury Department’s criticism, on October 25, the U.S. Senate passed a joint resolution to invalidate the CFPB’s rule. The late evening vote was 51-50, with the vice president breaking the tie. Despite an eleventh hour personal plea from Director Cordray to let the rule go into effect, the President signed the resolution on November 1, invalidating the rule and eliminating the CFPB’s ability to promulgate another arbitration rule without a new congressional mandate.
FTC Studying Data Security. The FTC recently announced a public workshop on December 12, 2017, in Washington, D.C., to discuss better ways to identify and measure consumer injuries that result from the misuse of consumers’ personal information. The FTC is seeking comment on issues including:
- What are the qualitatively different types of consumer injuries from privacy and data security incidents?
- What frameworks might we use to assess these different injuries, and how do we quantify injuries?
- How do businesses evaluate the benefits, costs, and risks of collecting and using consumer information in light of potential injuries? and
- How do consumers evaluate the benefits, costs, and risks of sharing information in light of potential injuries?
Justice Reports to Congress. On September 28, the Justice Department released its annual report to Congress listing its 2016 enforcement activities involving the Equal Credit Opportunity Act, the Fair Housing Act, and the Servicemembers Civil Relief Act. By the end of 2016, the DOJ had 33 open fair lending investigations related to discrimination in mortgage lending, the sale of manufactured homes, and auto financing. The report details the DOJ’s Servicemembers and Veterans Initiative, a pilot program through which the DOJ funds Assistant U.S. Attorney and Division trial attorney positions and designates military judge advocates to serve as Special Assistant U.S. Attorneys to support the DOJ in its SCRA enforcement efforts. The pilot program will be funded through the end of FY 2018. In addition, the report discusses settlements with several lenders for alleged violations of the SCRA, including alleged unlawful foreclosures and auto repossessions. Dealers with significant business with servicemembers should take note of this beefed-up enforcement capability.
Case of the Month
Brittany White and Steven Hefter bought a new car from Charlie, Inc., d/b/a Serra Hyundai. They signed a retail buyers order, a retail installment contract, and a delivery receipt. The buyers order included an arbitration provision and a spot delivery disclosure. The RIC stated that any dispute resolution agreement the buyers signed along with the RIC also applied to the RIC. The delivery receipt included a spot delivery disclosure and stated that it was a part of the buyers order and the RIC.
Serra Hyundai could not sell the contract and asked the buyers to return the car. The buyers sued Serra Hyundai for violating the Truth in Lending Act and the Equal Credit Opportunity Act, and asserted several state law claims. The buyers asked the court to rule that the contract between the buyers and Serra Hyundai entitled the buyers to keep the car.
Serra Hyundai moved to compel arbitration. The court granted Serra Hyundai’s motion, concluding that the arbitration provision was valid and enforceable. The buyers argued that financing approval was a condition precedent to the existence of a binding contract. The buyers claimed that because Serra Hyundai did not sell the RIC, the agreement between the buyers and Serra Hyundai, including the arbitration provision, was void.
The court disagreed for two reasons. First, the court explained that, under the Federal Arbitration Act, an arbitration agreement is severable from the rest of a contract. As a result, even if the rest of the contract was void, the arbitration provision would be enforceable because the buyers did not challenge it. Second, the court noted that the arbitration provision was part of the buyers order. By its terms, the buyers order and the arbitration provision took effect when Serra Hyundai delivered the car to the buyers along with the TILA disclosures. Because the RIC and the delivery receipt incorporated the arbitration provision, the arbitration agreement applied to all the buyers’ claims.
Hefter v. Charlie, Inc., 2017 U.S. Dist. LEXIS 151764 (N.D. Ala. September 19, 2017)
So, there’s this month’s roundup! Stay legal, and we’ll see you next month.
Tom (email@example.com) is Of Counsel and Nikki (firstname.lastname@example.org) is a Partner in the law firm of Hudson Cook, LLP. Tom has written several books and is the publisher of Spot Delivery®, a monthly legal newsletter for auto dealers. He is the CEO of CounselorLibrary.com, LLC and the Editor in Chief of CARLAW®, a monthly report of legal developments for the auto finance and leasing industry. Nikki is a contributing author to the F&I Legal Desk Book and frequently writes for Spot Delivery. For information, visit www.counselorlibrary.com. © CounselorLibrary.com 2017, all rights reserved. Single publication rights only, to the Association. (11/17). HC/4815-6992-3155