The CARLAWYER © 03/20

By Nicole F. Munro and Thomas B. Hudson 

An early happy Spring to you!  We hope your garden thrives and that your daffodils and tulips are popping up. 

Here’s our monthly article on selected legal developments we think might interest the auto sales, finance, and leasing world.  This month, the action involves the Consumer Financial Protection Bureau, the Department of Defense, and the Federal Trade Commission.   As usual, our article features the “Case of the Month” and our “Compliance Tip”.

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.

Federal Developments

DOD Withdraws Military Lending Act’s Q&A #2. On February 28, the Department of Defense issued an amended interpretive rule for the Military Lending Act. The MLA imposes various protections on consumer credit transactions entered into with “covered borrowers” (generally speaking, active-duty servicemembers and their dependents), including a 36% “military annual percentage rate” cap, oral and written disclosure requirements, and other specified limitations and prohibitions. 

In December 2017, the DOD created difficulties for creditors with an amended interpretive rule seeking to clarify which personal property and auto purchase-money credit transactions were eligible for an exclusion from the MLA’s definition of covered “consumer credit transactions.” Before the 2017 amendment, most in the auto finance industry believed that the MLA excluded purchase-money auto credit transactions. However, the DOD’s so-called “Q&A #2” instead stated that if a transaction also financed “a credit-related product or service,” it would not be eligible for the exclusion. 

The DOD failed to define “credit-related product or service” but provided examples—namely GAP and credit insurance. Further complicating the issue, the MLA separately prohibits creditors from securing consumer credit transactions with covered borrowers with a motor vehicle title. As a result, dealers were in a Catch-22, in which vehicle financing transactions that financed credit-related products or services, such as GAP, were deemed covered by the MLA. But there was no way for dealers to comply with the requirements of the MLA unless the transaction was unsecured, an impractical solution at best. 

The new interpretive rule resulted from formal requests to the DOD by various trade groups, including the National Automobile Dealers Association, the American Financial Services Association, the Consumer Credit Industry Association, the American Bankers Association, the Consumer Bankers Association, and the Guaranteed Asset Protection Alliance. As a result of those formal requests, the DOD became aware of, and found merit in, the concern that creditors were unable to technically comply with the MLA “if the purchase included products not expressly related to the purchase of the vehicle … because [the MLA] would prohibit creditors from taking a security interest in the vehicle in those circumstances and creditors may not extend credit if they could not take a security interest in the vehicle being purchased.” 

As a result, effective February 28, the DOD withdrew Q&A #2 because of the unforeseen technical issues created. The interpretive rule indicates that the DOD is not currently taking a position on any of the arguments asserted in connection with the withdrawal. Thus, it’s unclear if further developments will be forthcoming after the DOD conducts its additional analysis. 

The interpretive rule also includes a new FAQ, definitively stating that the MLA’s safe harbor for covered borrower status determinations also extends to searches of the DOD’s MLA database conducted using an Individual Taxpayer Identification Number. For purposes of the MLA, the term “social security number” is now defined to include an ITIN.

FTC Requests Comment on Endorsements and Testimonials in Advertising Guides. Do you use testimonials in your ads?  On February 21, the FTC, as part of its periodic review of its rules and guides, requested public comment on its Guides Concerning the Use of Endorsements and Testimonials in Advertising. The guides are designed to assist businesses in conforming their endorsement and testimonial advertising practices to the requirements of Section 5 of the FTC Act. Comments are due by April 21.

CFPB Issues Supplemental Notice of Proposed Rulemaking on Collection of Time-Barred Debt. Collectors take note!  On February 21, as a supplement to last year’s proposed rule implementing the Fair Debt Collection Practices Act, the CFPB issued a supplemental notice of proposed rulemaking focused on the collection of time-barred consumer debt (i.e., a debt on which the statute of limitations has expired). The CFPB has been hinting at this move for several months. The CFPB requests comments on the supplemental proposed rule within 60 days after its publication in the Federal Register (an expedited turnaround). The supplemental proposed rule includes a proposed effective date of one year after the final rule appears in the Federal Register

The supplemental proposed rule is designed to address the concern, played out in numerous reported FDCPA cases, that debt collectors might be misleading unsophisticated consumers by trying to collect time-barred debt without disclosing that the debt is not legally enforceable through the courts and, when applicable, that making a payment could revive the statute of limitations. 

The CFPB proposes to require a debt collector subject to the FDCPA who is collecting a debt the debt collector knows or should know is time barred to disclose to the consumer debtor: (1) that the law limits how long the consumer can be sued for a debt and that, because of the age of the debt, the debt collector will not sue the consumer to collect it; and (2) if the debt collector’s right to bring a legal action against the consumer to collect the debt can be revived under applicable law, the fact that revival can occur and the circumstances under which it can occur. 

The CFPB also proposes model safe harbor forms debt collectors may use to comply with the proposed time-barred debt disclosure requirements (if the proposed rule is enacted as proposed).

Case of the Month

Court Compelled Arbitration of Claims Based on Two Separate Arbitration Agreements, Even Though They Contained Conflicting Procedural Provisions: A borrower obtained an installment loan from a lender. The installment loan agreement contained an arbitration agreement (“first arbitration agreement”). 

In connection with the loan agreement, the borrower bought insurance policies issued by the lender’s subsidiaries. The insurance policies also contained an arbitration agreement (“second arbitration agreement”). 

A representative of the lender allegedly handed the second arbitration agreement to the borrower, but the lender did not sign it. The two arbitration agreements were similar but not identical. 

When the borrower filed a Chapter 7 bankruptcy petition, he brought an adversary proceeding against the lender, alleging that it violated the Truth in Lending Act by providing inaccurate disclosures in the loan agreement. The lender moved to dismiss the complaint or compel arbitration. 

The bankruptcy court denied the motion, concluding that the arbitration agreements formed a single contract and that the conflicting provisions meant that the borrower and the lender had not formed a sufficiently definite contract to arbitrate under Mississippi law. 

The district court affirmed, but the federal appellate court reversed and directed the district court to refer the case to arbitration. First, the appellate court concluded that the parties formed a valid agreement to arbitrate. The appellate court agreed with the bankruptcy court that the arbitration agreements should be construed together where they were executed at the same time, by the same parties, as part of the same transaction. 

The appellate court also found that the lender was a party to the second arbitration agreement, even though the lender did not sign it, because the lender conceded that its representative handed the borrower both arbitration agreements to sign, and both arbitration agreements were closely related in that they both required the borrower to arbitrate any dispute involving the lender, both applied to all disputes that arise from the loan and the insurance policies, and the loan agreement referenced the insurance policies the borrower bought. 

After determining that the arbitration agreements should be construed together, the appellate court found that the parties had a meeting of the minds regarding arbitration, despite conflicting provisions over several procedural aspects of arbitration, including the selection and number of arbitrators, time to respond, location, and fee-shifting. According to the court, “[t]he parties’ intentions were unmistakable: They wished to arbitrate any dispute that might arise between them. Not once but twice they stated that any dispute arising from the loan [the borrower] purchased should be arbitrated. Both agreements broadly cover ‘all claims and disputes between’ [the borrower] and [the lender], and both embrace any federal law claim that [the borrower] brings.” “Though the agreements differ over procedural details, they speak with one voice about whether to arbitrate.” 

After concluding there was a valid agreement to arbitrate, the appellate court concluded that the delegation clauses in the arbitration agreements required an arbitrator, and not the court, to decide whether the TILA claim is arbitrable. 

See In re Willis (Tower Loan of Mississippi, L.L.C. v. Willis), 2019 U.S. App. LEXIS 36738 (5th Cir. (S.D. Miss.) December 12, 2019). 

This Month’s CARLAWYER© Compliance Tip

A recent Spot Delivery article warned that using multiple, and different, arbitration agreements in the same consumer transaction was not a good idea because it gave a court looking for an excuse not to enforce the arbitration agreement an invitation to invalidate the creditor’s right to compel the consumer to arbitrate.  The Willis court addressed the issue, and gave the creditor a pass.  We suspect that, depending on the similarities and differences in multiple arbitration agreements, other courts might well come out differently, and we still think that having your lawyer look over your forms to make sure that you aren’t taking risks that you don’t know you’re taking.

So, there’s this month’s article. See you next month!

Nikki (nmunro@hudco.com) is a Partner in the law firm of Hudson Cook, LLP., Editor in Chief of CounselorLibrary.com’s CARLAW®, a contributing author to the F&I Legal Desk Book and a frequent writer for Spot Delivery,® a monthly legal newsletter for auto dealers  Tom (thudson@hudco.com) is Of Counsel to the firm, has written several books and is a frequent writer for Spot Delivery®.  He is the Senior Editor of CARLAW®.   For information, visit www.counselorlibrary.com. © CounselorLibrary.com 2020, all rights reserved. Single publication rights only, to the Association.  HC/4846-1385-3110.1

The CARLAWYER©Feb2020

The CARLAWYER©

By Nicole F. Munro and Thomas B. Hudson 

A late Happy Groundhog Day 2020!   Punxsutawney Phil could not find his shadow, so we’re in for an early spring. Or so the legend goes.  We’ll see.

Here’s our monthly article on selected legal developments we think might interest the auto sales, finance, and leasing world.  This month, the action involves the Consumer Financial Protection Bureau and the Federal Trade Commission. As usual, our article features the “Case of the Month” and our “Compliance Tip”.

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.

Federal Developments

What Does “Abusive” Mean, Anyway?  On January 24, the CFPB issued a policy statement to provide clarification on how it will apply the Dodd-Frank Act “abusiveness” standard in supervision and enforcement matters.  The DFA prohibits a provider of consumer financial products or services from engaging in unfair, deceptive, or abusive acts or practices.

The statement is intended to address uncertainty about the scope and meaning of the term “abusiveness” under the Act.  The CFPB will apply the following principles during supervision and enforcement matters immediately. First, the CFPB intends to focus on citing conduct as abusive in supervision or challenging conduct as abusive in enforcement if the Bureau concludes that the harms to consumers from the conduct outweigh the benefits to consumers.

Second, the CFPB will generally avoid challenging conduct as abusive that relies on all or nearly all of the same facts that the Bureau alleges are unfair or deceptive.  Where the CFPB nevertheless decides to include an alleged abusiveness violation, it intends to plead such claims in a manner designed to clearly demonstrate the nexus between the cited facts and the Bureau’s legal analysis of the claim.  In its supervision activity, the CFPB similarly intends to provide more clarity as to the specific factual basis for determining that a covered person has violated the abusiveness standard.

Third, the CFPB generally does not intend to seek certain types of monetary relief for abusiveness violations where the covered person was making a good-faith effort to comply with the abusiveness standard.

FTC Ups the Ante.  The FTC has adjusted the maximum civil penalty dollar amounts for violations of 16 provisions of federal law.  Commission Rule § 1.98 sets forth the applicable civil penalty amounts for violations of certain laws enforced by the FTC, while the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 directs agencies to implement annual inflation adjustments based on a prescribed formula.  As directed by the FCPIAA, the FTC has issued adjustments to increase certain maximum civil penalty amounts to address inflation since its prior 2019 adjustment. The FTC Act does not provide for civil penalties for unfair or deceptive acts and practices unless the defendant is already under an administrative order or has actual knowledge that the FTC has determined a specific practice to be UDAP in a prior litigated order.

The maximum civil penalty amounts for violations of the FTC Act’s sections on UDAP have increased as follows:  (1) Section 5(l) of the FTC Act, 15 U.S.C. 45(l) – violation of a cease & desist order – has increased from $42,530 to $43,280; (2) Section 5(m)(1)(A) of the FTC Act, 15 U.S.C. 45(m)(1)(A) – violation of a Trade Regulation Rule or any rule or law that can be enforced as one (such as Regulation B or the Fair Debt Collection Practices Act) – has increased from $42,530 to $43,280; (3) Section 5(m)(1)(B) of the FTC Act, 15 U.S.C. 45(m)(1)(B) – violation of UDAP where the FTC had previously determined there to be an FTC Act violation during administrative litigation, if the FTC can show the defendant had actual notice of the violation – has increased from $42,530 to $43,280.  The maximum civil penalty amount for violations of Section 621(a)(2) of the FCRA, 15 U.S.C. 1681s(a)(2) – knowing violation of the FCRA – has increased from $3,993 to $4,063.

CFPB Forms Taskforce.  On January 9, the CFPB announced four members for its new Taskforce on Federal Consumer Financial Law.  The taskforce will examine the current legal and regulatory environment facing consumers and financial services providers and report to Director Kraninger its recommendations for ways to improve and strengthen consumer financial laws and regulations.

The taskforce will “produce new research and legal analysis of consumer financial laws in the United States, focusing specifically on harmonizing, modernizing, and updating the federal consumer financial laws – and their implementing regulations – and identifying gaps in knowledge that should be addressed through research, ways to improve consumer understanding of markets and products, and potential conflicts or inconsistencies in existing regulations and guidance.”

The taskforce members are: Dr. J. Howard Beales, III, former Professor of Strategic Management and Public Policy at the George Washington University and former Director of the Bureau of Consumer Protection at the Federal Trade Commission; Dr. Thomas Durkin, Senior Economist (Retired) at the Federal Reserve Board; L. Jean Noonan, Partner at Hudson Cook, LLP, former General Counsel at the Farm Credit Administration, and former Associate Director of the Bureau of Consumer Protection’s Credit Practice at the Federal Trade Commission; and Todd J. Zywicki, Professor of Law at George Mason University Antonin Scalia Law School, Senior Fellow of the Cato Institute, and former Executive Director of the GMU Law and Economics Center.

Taking Action Against Pesky Consumers Who Post Unfavorable Online Reviews?  Read This.  On January 7, the FTC announced a $120,000 settlement with Mortgage Solutions FCS, Inc., a mortgage broker, and its owner to resolve allegations that the company publicly disclosed its customers’ personal information in response to the customers’ critical online Yelp reviews of the company’s services.  The company allegedly responded to customers who posted negative reviews by disclosing their credit histories, debt-to-income ratios, taxes, health, sources of incomes, family relationships, and other personal information, as well as first and last names.

The FTC alleged that the company used consumer reports for an impermissible purpose in violation of the Fair Credit Reporting Act, failed to develop and implement an information security program and failed to test such a program in violation of the Safeguards Rule, provided customers with inaccurate privacy notices and engaged in impermissible disclosure of nonpublic personal information in violation of Regulation P, and committed unfair and deceptive acts or practices in violation of the FTC Act.

Case of the Month

Dealer Whose Lease Agreement Included Lease Acquisition Fee Along with Vehicle’s Agreed Upon Value Did Not Raise Lease Price of Vehicle or Fail to Include Lease Acquisition Fee in Advertised Price, in Violation of Ohio Law.  A vehicle lessee sued his lessor, alleging various causes of action related to the $595 lease acquisition fee he was charged in addition to the agreed upon value of $29,300 in the lease agreement. The trial court dismissed the lessee’s complaint, and the Court of Appeals of Ohio affirmed.

The Ohio Administrative Code provides that it is a deceptive or unfair practice for a dealer to raise or attempt to raise the actual purchase price of a vehicle to a specific consumer or to advertise any price for a vehicle unless the price includes all costs to the consumer except tax, title and registration fees, and a documentary service charge. The lessee claimed that the lessor raised the vehicle’s lease price by inserting the lease acquisition fee in its preprinted form lease agreement and/or failed to include the lease acquisition fee in the advertised price included in the lease agreement.

The appellate court found that the lease agreement included the advertised price, which consisted of the agreed upon value of $29,300 and the lease acquisition fee of $595. The appellate court noted that this case is not one in which “suspect fees were surreptitiously added to the payment that [the lessee] agreed to pay” or in which “[the lessee] claims … that he was orally advised of a price other than that set forth in the Lease Agreement that did not include the lease-acquisition fee or that he saw a television commercial that advertised the lease price for an amount that did not include this fee.”

See Hatfield v. Preston Chevrolet-Cadillac, Inc., 2019 Ohio App. LEXIS 4796 (Ohio App. November 18, 2019).

This Month’s CARLAWYER© Compliance Tip

The Hatfield case decision on acquisition fees came out in favor of the dealer.  That’s always good news, but the consumer’s challenge of the fees should send up a warning flag.  The question of whether a dealer may charge such a fee in a lease or retail installment sale transaction and, if so, how it must be disclosed, is one of the thorniest legal problems facing dealers.  It’s a question that involves both federal and state law, and one that involves several issues. What’s more, the treatment of these fees may differ depending on whether the deal is a lease or a retail installment sale.  If your dealership imposes such fees and has not had a recent thoroughgoing legal review of its practices, it’s lawyer time again.

So, there’s this month’s article. See you next month!


Nikki (nmunro@hudco.com) is a Partner in the law firm of Hudson Cook, LLP., Editor in Chief of CounselorLibrary.com’s CARLAW®, a contributing author to the F&I Legal Desk Book and a frequent writer for Spot Delivery,® a monthly legal newsletter for auto dealers  Tom (thudson@hudco.com) is Of Counsel to the firm, has written several books and is a frequent writer for Spot Delivery®.  He is the Senior Editor of CARLAW®.   For information, visit www.counselorlibrary.com. © CounselorLibrary.com 2020, all rights reserved. Single publication rights only, to the Association.

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The CARLAWYER© Jan2020

The CARLAWYER©

 

By Nicole F. Munro and Thomas B. Hudson 

 

Happy new year!  We hope that you had a great holiday, and that the upcoming year is good to you.  As is the case in most years during the holidays, the federal regulators were taking time off for shopping and family, so our docket isn’t crowded this month.  

 

Here’s our monthly article on selected legal developments we think might interest the auto sales, finance, and leasing world.  This month, the action involves the Federal Reserve Board, the Consumer Financial Protection Bureau, the Federal Trade Commission, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency and the Department of Justice.   As usual, our article features the “Case of the Month” and our “Compliance Tip”.

 

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.

 

Federal Developments

 

The CFPB and the FTC have extended the deadline to submit comments on issues affecting the accuracy of traditional consumer credit reports as well as employment and tenant background screening reports. The new deadline is January 31, 2020. 

 

On December 18, the CFPB issued a report to Congress describing the Bureau’s and other agencies’ enforcement actions and required reimbursements to consumers by supervised institutions related to the Truth in Lending Act, the Electronic Fund Transfer Act, and the Credit Card Accountability Responsibility and Disclosure Act and their respective implementing regulations. The report also gives an assessment of the extent to which compliance with TILA and EFTA, and their implementing regulations, has been achieved. 

 

On December 9, the CFPB released a special edition of Supervisory Highlights focusing on its examinations of consumer reporting companies and furnishers of information to consumer reporting companies to determine compliance with the Fair Credit Reporting Act and Regulation V. Furnishers covered in the report include banks, mortgage servicers, auto financing servicers, student loan servicers, and debt collectors.

 

On December 3, the FRB, CFPB, FDIC, NCUA and the OCC issued an interagency statement on the use of alternative data in credit underwriting by banks, credit unions, and non-bank financial firms. The statement highlights potential benefits and risks of using alternative data in underwriting. For purposes of the statement, alternative data means information not typically found in consumers’ credit files with the nationwide consumer reporting agencies or customarily provided by consumers as part of credit applications. The statement explains that a well-designed compliance management program provides for a thorough analysis of relevant consumer protection laws and regulations to ensure firms understand the opportunities, risks, and compliance requirements before using alternative data.

 

On November 20, the CFPB published its Fall 2019 rulemaking agenda. The agenda lists regulatory matters the Bureau reasonably anticipates having under consideration from October 1, 2019, to September 30, 2020.

 

On October 30, the CFPB and the FRB announced that they are increasing the dollar thresholds in Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing) for exempt consumer credit and lease transactions. The Dodd-Frank Act provides that the dollar amount thresholds for TILA and the CLA must be adjusted annually by any annual percentage increase in the consumer price index. Because there was an annual percentage increase in the consumer price index as of June 1, 2019, the protections of TILA and the CLA generally will apply to consumer auto finance and lease transactions of $58,300 or less in 2020.

 

Case of the Month

This month we feature a case that illustrates a problem we’ve described in earlier articles – dueling arbitration clauses.  

A car owner traded in his old car and leased a new one from a dealership. The car owner sued the dealership, alleging various state law claims arising from an undisclosed fee he was charged in connection with paying off the lien on the car he traded in. 

The dealership moved to compel arbitration under an arbitration provision in the parties’ lease agreement. The trial court granted the motion, but the Superior Court of New Jersey, Appellate Division, reversed, finding that the arbitration provision was vague and unenforceable. 

The dealership then moved to compel arbitration under an arbitration provision in the parties’ motor vehicle retail order. The trial court denied the motion, finding that the arbitration provisions in the lease agreement and the retail order conflicted with one another and were, therefore, unenforceable. The trial court added that the dealership waived its right to arbitration under the arbitration provision in the retail order because it did not rely on that provision when it filed its first motion to compel arbitration. 

The appellate court affirmed. First, the appellate court noted that it agreed with the trial court that the dealership waived its right to assert the retail order’s arbitration provision by failing to invoke that provision in its first motion to compel arbitration and by waiting over a year to assert that provision, a delay that prejudiced the car owner. 

The appellate court also agreed with the trial court that the conflicting terms in the two arbitration provisions, including terms addressing the ability to pursue claims in court, the venue of an arbitration proceeding, the scope of the claims covered, and whether the arbitrator or the court has the power to decide the validity and scope of waiver of class action rights, rendered each arbitration provision unenforceable. 

If the forms you ask your customers to sign include multiple arbitration agreements, time for another lawyer visit.

See Trout v. Winner Ford, 2019 N.J. Super. Unpub. LEXIS 2440 (N.J. Super. App. Div. December 3, 2019).

 

This Month’s CARLAWYER© Compliance Tip

 

Okay, it’s January.  What better time to blow your whistle and run a compliance drill.  Hold a meeting of your Compliance Officer, your Red Flags Officer and your Privacy Officer and go over your dealership’s compliance program for the upcoming year.  First, you’ll determine whether the people who were appointed to those positions are still employed by the dealership, then you can discuss continuing training for each officer’s area of specialty and the budget allocation for each officer’s area of responsibility (remember – no budget allocation for compliance usually means no compliance).  Finally, each officer can be tasked with the development of a 2020 compliance plan for his or her area of responsibility. Sound like a plan?

 

So, there’s this month’s article. See you next month!

________

 

Nikki (nmunro@hudco.com) is a Partner in the law firm of Hudson Cook, LLP., Editor in Chief of CounselorLibrary.com’s CARLAW®, a contributing author to the F&I Legal Desk Book and a frequent writer for Spot Delivery,® a monthly legal newsletter for auto dealers  Tom (thudson@hudco.com) is Of Counsel to the firm, has written several books and is a frequent writer for Spot Delivery®.  He is the Senior Editor of CARLAW®.   For information, visit www.counselorlibrary.com. © CounselorLibrary.com 2020, all rights reserved. Single publication rights only, to the Association. 

 

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