The CARLAWYER© August 2017

By Thomas B. Hudson and Nicole F. Munro

Here’s our monthly article on legal developments in the auto sales, finance and lease world.  The big news this month is the release by the Consumer Financial Protection Bureau of its final rule on arbitration.  As usual, this month’s article features our “Case of the Month” as well as several CFPB actions.

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

This one’s easy.  Note the announcement of the CFPB’s new arbitration rule, discussed immediately below.  If the documents your dealership uses in its transactions with customers include arbitration provisions, those provisions are going to require a legal review in time to meet the March, 2018 deadline.  You can’t start that process too soon!

Federal Developments

Arbitration Alert!  On July 10, the CFPB issued a new rule banning companies from using mandatory arbitration clauses that prohibit consumers from seeking class relief. The rule also requires covered providers of certain consumer financial products and services that are involved in an arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB and also to submit specified court records. The Dodd-Frank Act required the CFPB to study the use of mandatory arbitration clauses in consumer financial markets and authorized the CFPB to issue regulations in the public interest, for the protection of consumers, and based on findings consistent with the CFPB’s study. The CFPB’s study, released in March 2015, showed that credit card issuers representing more than half of all credit card debt, and banks representing 44 percent of insured deposits, use mandatory arbitration clauses. Yet, three out of four consumers the CFPB surveyed did not know whether their credit card agreement had an arbitration clause. The study did not address how findings regarding credit cards applied to other financial products and services. In October 2015, the CFPB published an outline of the proposals under consideration and convened a Small Business Review Panel to gather feedback from small companies. Besides consulting with small business representatives, the CFPB sought comments from the public, consumer groups, industry, and other interested parties before continuing with the rulemaking. In May 2016, the CFPB issued a proposed rule and asked for public comment, receiving more than 110,000 comments. The final rule’s effective date is September 18, 2017. The rule requires mandatory compliance for pre-dispute arbitration agreements entered into on or after March 19, 2018.

 Rules, Rules and More Rules.  On July 20 the CFPB issued its Spring 2017 rulemaking agenda.  In addition to the arbitration rule, the agenda lists proposed activities related to payday, auto title, and similar lending products, debt collection, overdraft programs on checking accounts, larger participant and non-depository lender registration, prepaid financial products and modernizing, streamlining, and clarifying consumer financial regulations.  The Bureau will also carry out its Dodd-Frank Act mandate to assess the effectiveness of significant rules five years after they are implemented, including seeking public comment, and will begin the first in a series of reviews of existing regulations that the CFPB inherited from other agencies through the transfer of authorities under the Dodd-Frank Act. Finally, the Bureau announced that it recently formed an internal task force to coordinate and deepen its focus on concerns about regulatory burdens and projects to identify and reduce unwarranted regulatory burdens consistent with its objectives under section 1021 of the Dodd-Frank Act.

Did We Make the Top Five?  On July 6, the CFPB issued a release outlining the top five complaints it was receiving regarding financial products and services.  The top five, you ask?

  1. Debt collection: Facing a debt you don’t owe (27 % of complaints)
  2. Mortgages: Problems when you’re unable to pay (23%)
  3. Credit reporting: Incorrect information on your credit report (17%)
  4. Credit card: Billing disputes with your credit card company (10%)
  5. Bank account or service: Account management questions (10%)

If our math is correct, that’s 87% of the complaints the CFPB has fielded.  You’ll note that auto financing and leasing didn’t make top billing.

Case of the Month

 Car Buyer’s Fraud Claim Failed Absent Evidence of Buyer’s Damages: A buyer bought a used car for $21,641 and obtained a “clean” title to the car from the New York State DMV. He drove the car 43,000 miles during the two years he owned it. When he tried to renew the car’s registration, the DMV told him it could not renew the registration due to a salvage notation in the vehicle history. The DMV issued him a salvage title. The buyer told the dealership where he bought the car about the salvage title and traded in the used car for a new one. The dealership assessed the trade-in value of the used car at $14,700. The buyer sued the dealership for damages of $18,355, the amount he had paid the dealership to date, for, among other things, violations of New Jersey’s Consumer Fraud Act. The buyer claimed that the dealership hid the fact that the used car was a salvage vehicle. The trial court granted the dealership’s motion for summary judgment. The Superior Court of New Jersey, Appellate Division, affirmed. Under the CFA, a plaintiff must show he suffered either an out-of-pocket loss or a loss in value due to the defendant’s unlawful conduct. As the appellate court explained, the buyer sought a full refund of the car’s purchase price, which was not the correct measure of damages. The correct measure of damages was the difference in value between the car as represented to the buyer and the car as it was in fact. However, the buyer did not demonstrate that the car was worth less when the dealership sold it to him than the amount he paid for it. According to the appellate court, the buyer also did not demonstrate that the dealership valued the car incorrectly as a trade-in, especially because the buyer drove it 43,000 miles. Because the buyer did not demonstrate he suffered any loss either when he bought the car or when he traded it in, his CFA claim failed. See Lee v. Hudson Toyota, 2017 N.J. Super. Unpub. LEXIS 1621 (N.J. Super. App. Div. July 5, 2017).

So there’s this month’s roundup!  Stay legal, and we’ll see you next month.

________

Tom (thudson@hudco.com) is Of Counsel and Nikki (nmunro@hudco.com) 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 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. (8/17). HC# 4852-4229-5116

The CARLAWYER© July 2017

By Thomas B. Hudson and Nicole F. Munro

Here’s our monthly article on legal developments in the auto sales, finance and lease world. Last month’s report was skimpy, and this one isn’t much better.  The Consumer Financial Protection Bureau is still fairly quiet, at least on the enforcement side, but continues to be active on the supervisory side.  That makes sense, since supervision is a lower profile activity less likely to draw fire from Congressional Republicans and other CFPB critics.  In any event, this month’s article features our “Case of the Month,” activity from the CFPB and the Office of the Comptroller of the Currency.

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

 We usually don’t repeat tips from previous articles, but in light of the “Case of the Month” discussed below, here’s one we have offered before – make sure that your computers/printers are entering information on your retail installment contracts, buyers’ orders and leases in exactly the correct place.  Misalignment of data entry can create compliance violations, and these sorts of compliance violations – ones that apply to every deal you do – make for dangerous class actions.  It is often the case that “close” just won’t cut it.  If you have any question about whether your alignment is close enough, talk to your lawyer.

Federal Developments

 BHPH Dealers, Take Note.  On June 8, CFPB director Richard Cordray provided some clarity on the status of the CFPB’s debt collector rulemaking by announcing that the CFPB will carve certain “right consumer, right amount” rules out of the debt collector rulemaking and instead address such rules in a separate rulemaking for first-party creditors. In its July 2016 Outline of Proposals under Consideration for debt collectors, the CFPB included a number of proposals that would affect the information shared between creditors and debt buyers or third-party debt collectors and would impose specific, ongoing obligations on debt collectors to ensure that they are collecting the right amount from the right consumer. Director Cordray explained that the CFPB has found that these “right consumer, right amount” rules would benefit from input from all market participants (especially creditors, because they create the information about the debt upon which debt collectors rely). Therefore, Cordray said, the CFPB plans to focus its debt collector rulemaking on rules that will affect debt collection practices and require disclosures. Cordray anticipates the CFPB will be able to “move forward more quickly” on the debt collector rulemaking by carving out rules that could affect creditors and taking up “right consumer, right amount” rules in a separate rulemaking for first-party creditors.

Third Party FAQs?  On June 7, the OCC issued frequently asked questions to supplement OCC Bulletin 2013-29, “Third-Party Relationships: Risk Management Guidance,” which was originally issued October 30, 2013. OCC Bulletin 2013-29 provides guidance to national banks and federal savings associations for assessing and managing risks associated with third-party relationships. The FAQs provide further explanation of the guidance outlined in an earlier OCC Bulletin.  “Why should dealers care about these FAQs?” you ask?  The answer is that dealers sell their retail installment contracts and leases to national banks and federal savings associations, and the dealers are the sorts of third parties that the OCC is worried about.

Case of the Month

 Check Mark in General Vicinity of Vendor’s Single Interest Insurance Checkbox Not Sufficient to Disclose Premium and Exclude It from Finance Charge: After buying a car from a dealership, the buyer sued the dealership for violating the Truth in Lending Act by failing to accurately disclose the finance charge. The buyer argued that the dealership should have disclosed a premium for vendor’s single interest insurance as part of the finance charge, instead of as part of the amount financed. The trial court granted summary judgment for the buyer, and the federal appeals court affirmed. The dealership argued that it provided the buyer with sufficient notice under TILA to exclude the premium from the finance charge. The financing agreement contained a VSI provision with a checkbox, and that provision stated that VSI insurance was required, the premium amount, and that the buyer could choose her insurance company. However, the appellate court found that the dealership did not comply with the TILA notice requirement because the VSI provision was not properly checked. While there was an “XX” indicator in the general vicinity of the VSI provision, it was not close enough for a reasonable jury to conclude that the box was checked. Further, even if there was ambiguity about whether the box was checked, it could not constitute a “clear and specific” disclosure, as required by TILA. The court disregarded the dealership’s argument that the provision provided notice that VSI insurance was required, even if the box was unchecked. See Franco v. A Better Way Wholesale Autos, Inc., 2017 U.S. App. LEXIS 8689 (2d Cir. (D. Conn.) May 18, 2017).

 

So there’s this month’s roundup!  Stay legal, and we’ll see you next month.


 

Tom (thudson@hudco.com) is Of Counsel and Nikki (nmunro@hudco.com) 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 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. (7/17). HC# 4827-7675-0667

June 2017- The CARLAWYER©

By Thomas B. Hudson and Nicole Frush Munro

 

Here’s our monthly article on legal developments in the auto sales, finance and lease world. Last month’s report was skimpy, but this month’s is skimpier yet.  The Consumer Financial Protection Bureau seems to have dug a foxhole and pulled the sod in on top of itself.  That doesn’t mean that the CFPB is inactive, though.  Instead of pressing with new rules and high-profile enforcement actions, the Bureau seems to be focusing hard on supervisory activities.  That makes sense, since supervision isn’t in the public eye and is a lot less likely to draw fire from Congressional Republicans and other CFPB critics.  In any event, this month’s article features our “Case of the Month,” activity from the CFPB, the Federal Trade Commission and two state attorneys general.

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

 

For federal and state regulators, dealership ads are the lowest-hanging fruit.  A photocopy of a newspaper ad or a screen shot of a website is all the proof needed to show many violations.  Once a dealership’s obviously noncomplying ad is challenged, the only question remaining is the number of zeroes needed to complete the check the dealership writes to pay the assessed penalty.

 

Where do your ads come from?  Do you buy ad programs from a vendor, or do you craft the ads yourself?  If you use a vendor, what written assurances about compliance do you demand before you sign the vendor’s contract?  If you are doing the ads yourself, how much do you know about the federal and state laws that regulate your ad content?  If you’re just duplicating ads from another dealership that you picked up at your last 20-group meeting, you probably need to be in another business.

 

Federal Developments

 

VW Clean Diesel Claims. On May 17, the FTC announced that a federal district court judge in San Francisco signed a settlement negotiated by the FTC and private plaintiffs providing for consumer redress and starting the formal claims process for owners of Volkswagen, Audi, and Porsche 3.0 liter TDI diesel cars. The settlement deals with Volkswagen’s allegedly misleading “clean diesel” claims. The FTC will monitor VW’s compliance with the settlement’s provisions, which include special protections for those in the armed forces and rural consumers who may be far from the nearest dealer.  Under the 2.0 liter and 3.0 liter settlements, Volkswagen will offer consumers over $11 billion in compensation.  The FTC announced in February that consumers who bought 3.0 liter vehicles will receive up to $1.2 billion in compensation in addition to the more than $10 billion redress fund already created for 2.0 liter consumers. In all, consumers who bought affected “clean diesel” vehicles will receive up to $11.5 billion, and the court may hold Volkswagen in contempt if it makes deceptive environmental claims in the future.

Hold On to Your Wallet!  The FTC held a conference in Washington, D.C, on May 24 that examined the state of identity theft now and how it may evolve in the future. The “Planning for the Future” event brought together industry representatives, consumer advocates, government officials, and others.

The conference included panel discussions on how identity thieves acquire and use consumer information, how websites trade in stolen consumer information, the impact of identity theft on financial services, health care and other sectors, the challenges identity theft victims face, and resources available to them. FTC technical experts described how consumer data available online is used by malicious actors.

State Developments

The attorneys general for Massachusetts and Delaware have settled charges against a major finance company arising from the company’s subprime auto financing operations. The AGs had alleged that the company funded auto loans (both AGs used the term “loans” to refer to what were undoubtedly retail installment contracts) without having a reasonable basis to believe that the borrowers could afford them and knew that the reported incomes used to support credit applications submitted to the company by car dealers were incorrect and often inflated. The Massachusetts AG’s Office found that the company’s own internal audit concluded that the company’s oversight of auto dealer conduct when making subprime loans was inadequate. Despite identifying a group of dealers that had extremely high default and delinquency rates and other problems, the company continued to fund loans through these dealers. The company also allegedly identified a group of dealers it called the “fraud dealers,” but continued to fund loans through them.

The Delaware settlement requires business reforms by the company, including procedures to screen contracts originated by Delaware dealers to ensure that they comply with Delaware law and meet minimum documentation requirements. The company also agreed to prospectively identify and repurchase subprime loans sold to third parties that it later determines do not comply with Delaware law.

The Massachusetts settlement requires $16 million in payments to more than 2,000 consumers and a $5 million payment to the state. The Delaware settlement requires the company to pay $2.875 million into a trust to benefit hundreds of harmed Delaware consumers. The company will also pay just over $1 million to the Delaware Consumer Protection Fund.  Under the terms of the settlements, the company neither admitted nor denied either state’s allegations.

These enforcement actions are likely to have far-reaching consequences.  This finance company will be tightening its procedures to eliminate dealer fraud, but you can expect that every finance company hearing about the Delaware and Massachusetts action will be doing so, as well.

Case of the Month

 

Justin Bare bought a car with an anti-theft system manufactured by Innovative Aftermarket Systems, LP.  As part of the sale, Bare bought Innovative’s “Protection Plus” policy, which included a promise to pay Bare $2,500 in the event the anti-theft system did not deter theft and Bare’s car was not recovered.

Subsequently, Bare’s car was stolen and not recovered.  Bare made a claim under Innovative’s policy, but Innovative denied his claim as untimely.  Bare, on behalf of a similarly situated class of plaintiffs, sued Innovative, alleging various causes of action for violations of West Virginia insurance law.  Innovative moved to dismiss, arguing that the anti-theft system’s policy was not insurance.

The federal trial court granted Innovative’s motion.  Innovative argued that because the policy was not insurance, Bare’s claims that it violated West Virginia’s insurance law must fail.  West Virginia insurance law exempts warranties.  A warranty includes, “in relation to a product[,] . . . an undertaking that guarantees indemnity for defective parts … or other remedial measures … and that is made solely by the manufacturer, importer or seller of the product … without payment of additional consideration, not negotiated or separated from the sale of the product … and incidental to the sale.”

Analyzing West Virginia’s warranty exemption, the court found that (1) Innovative’s policy was simply a guarantee by the anti-theft system’s manufacturer of the system’s performance, (2) Bare did not claim that he purchased the policy separately from the anti-theft system, and (3) the monetary benefit under the policy would be paid only to Bare.  Therefore, the court concluded that the policy was a warranty and exempt from West Virginia insurance law.

Do you know the rules that apply to the sale of “ancillary” or “aftermarket” products during the F&I process?  These rules vary by state and by product, and, as this case illustrates, a consumer’s lawyer might allege that insurance laws apply to the products.  If you haven’t had each product you sell vetted for compliance under state and federal law, it’s time to get a move on.

Bare v. Innovative Aftermarket Systems, LP, 2017 U.S. Dist. LEXIS 68746 (S.D.W. Va. May 5, 2017)

 

So there’s this month’s roundup!  Stay legal, and we’ll see you next month.


 

Tom (thudson@hudco.com) is Of Counsel and Nikki (nmunro@hudco.com) 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 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. (6/17). HC# 4824-2020-4362