By Thomas B. Hudson and Nicole F. Munro
Here’s our monthly article on legal developments in the auto sales, finance and leasing world. This month, the action involves the Bureau of Consumer Financial Protection and the Federal Trade Commission. As usual, this month’s article features our “Case of the Month.”
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
In our Case of the Month, below, we describe an attempt by a dealer to “piggyback” on the arbitration agreement of a direct lender financing a sale for the dealer’s buyer. The attempt failed. What do your customer-facing documents say about arbitration? Are you certain that you can use them to compel arbitration and stay out of the crosshairs of those class action lawyers? Maybe it’s time for a legal checkup.
Debt Collectors Slammed. When the FTC goes after debt collectors, finance companies and buy-here, pay-here dealers need to take notice. On September 7, the FTC announced settlements with the operators of a Georgia-based debt collection business. The business, which allegedly used false claims and threats to get people to pay debts – including debts they allegedly did not owe or that the defendants allegedly had no authority to collect. The settlement bans the operators from the debt collection business and from buying or selling debt.
The FTC’s complaint alleged that the defendants’ business model was based on falsely claiming to consumers that they had committed a crime and would be sued, have their wages garnished, or be put in prison if they did not pay purported debts. It further alleged the defendants collected debts consumers had already paid or that the defendants otherwise had no authority to collect, illegally contacted consumers’ employers and other third parties, and failed to provide written notices and disclaimers required by law. The settlement prohibits the defendants from misrepresentations regarding any financial products and services, and from profiting from or failing to properly dispose of customers’ personal information collected as part of the challenged practices. Each order imposes a $3,462,664 judgment that will be partly suspended, due to the defendants’ inability to pay, when they have surrendered certain assets. In each case, the full judgment becomes due immediately if the defendants are found to have misrepresented their financial condition.
Credit Freeze Notice Changes. On September 12, the Bureau issued an interim final rule, effective September 21, 2018, updating the model Summary of Consumer Identity Theft Rights and model Summary of Consumer Rights provided in Appendices I and K to Regulation V, which implements the Fair Credit Reporting Act. This interim final rule is driven by the FCRA’s recent amendment by the Economic Growth, Regulatory Relief, and Consumer Protection Act. These legislative changes add a new notice requirement to any summary of rights required by section 609 of the FCRA. The notice language, provided in S. 2155, explains new consumer rights to a national credit freeze with the nationwide consumer reporting agencies and an initial fraud alert for at least one year. The Bureau’s rule begins the new notice with a header explaining that the security freeze right is available specifically through nationwide consumer reporting agencies, even though the notice must be provided by all consumer reporting agencies. The rule also updates the contact information provided in the model Summary of Consumer Rights in Appendix K. To mitigate the impact of these changes on users of the existing model forms, the interim final rule also provides that the Bureau will regard the use of the current model forms published in Appendices I and K, to constitute compliance with the FCRA provisions requiring such forms, so long as a separate page that contains the additional required information is provided in the same transmittal. Comments are due by November 19, 2018.
Credit Invisible Consumers? On September 18, the Bureau released its third “Data Point” report on consumers for whom the nationwide consumer reporting agencies have no credit file (i.e., “credit invisible”) and consumers for whom the CRAs have only limited credit histories. The first report – Credit Invisibles – estimated the number and demographic characteristics of consumers who were credit invisible or had an unscorable credit record. The second report – Becoming Credit Visible – explored the ways in which consumers establish credit records. In this new report – The Geography of Credit Invisibility – the Bureau examined geographic patterns in the incidence of credit invisibility to assess the extent to which where one resides is correlated with one’s likelihood of remaining credit invisible.
Pssst! Wanna Buy a Fake ID? On September 18, the FTC announced that the operators of websites that sold fake documents used to facilitate identity theft and other frauds have agreed to permanently shut down their businesses as part of separate settlements with the Federal Trade Commission. In separate cases filed by the FTC, the Commission alleged that individuals and their affiliated companies operated websites that sold customers a variety of fake financial and other documents – such as pay stubs, income tax forms, and medical statements – which can be used to facilitate identity theft, tax fraud, and other crimes.
Case of the Month
Alfredo Fuentes signed a purchase agreement with TMCSF, Inc., d/b/a Riverside Harley-Davidson, to buy a new motorcycle. The purchase agreement did not include an arbitration provision.
At the same time, Fuentes signed a security agreement with Eaglemark Savings Bank to finance the purchase. The security agreement included an arbitration provision that governed all claims “between [Fuentes] … and ESB and/or any of ESB’s successors, assigns, parents, subsidiaries, or affiliates and/or any employees, officers, directors, [or] agents.” “ESB” was defined as Eaglemark and its successors and assigns.
Fuentes brought a class action against TMCSF, alleging that it made various misrepresentations in connection with the advertising and sale of its motorcycles. TMCSF moved to compel arbitration pursuant to the arbitration provision in the security agreement.
The trial court denied the motion, concluding that TMCSF was not a party to the security agreement (it was solely between Fuentes and Eaglemark) and the arbitration provision did not state that it governed claims between Fuentes and TMCSF. TMCSF appealed.
The Court of Appeal of California affirmed the trial court’s decision. The appellate court held that TMCSF was not entitled to compel arbitration because: it was not a party to the security agreement containing the arbitration provision (and not a non-party expressly specified as able to invoke the arbitration provision); it was not acting in the capacity of an agent of a party to the arbitration provision; and it was not a third-party beneficiary of the arbitration provision. The appellate court also agreed with the trial court that Fuentes was not equitably estopped from denying the application of the arbitration provision to his claims.
Fuentes v. TMCSF, Inc., 2018 Cal. App. LEXIS 759 (Cal. App. August 23, 2018)
So, there’s this month’s roundup! Stay legal, and we’ll see you next month.
Tom (firstname.lastname@example.org) is Of Counsel and Nikki (email@example.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 the CEO of CounselorLibrary.com, LLC and the Senior Editor of CounselorLibrary.com’s CARLAW®, a monthly report of legal developments for the auto finance and leasing industry. Nikki is Editor in Chief of CARLAW®, a contributing author to the F&I Legal Desk Book and frequently writes for Spot Delivery®. For information, visit www.counselorlibrary.com. © CounselorLibrary.com 2018, all rights reserved. Single publication rights only, to the Association. (10/18). HC 4852-5358-1174.