The CARLAWYER©03/18

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 reporting on activities of the Consumer Financial Protection Bureau, the Department of Justice and the courts.  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

It’s that time of year again – dealer and finance company associations are gearing up for their spring conferences.  If you plan to attend one or more of these in search of ways to improve your operations, remember as you listen to the various presenters that state laws governing what dealers can and cannot do vary.  What’s permitted in State A might be a violation of the law in State B.  To put it another way, what might win an award in a 20-group’s “Best Ideas” contest might be legal in State A but might constitute a felony in State B.  So if you pick up a great idea at a conference, make sure that your lawyer blesses it for your state before you implement it.  And don’t forget to visit us at the CounselorLibrary.com booth and listen in on a few compliance sessions.

Federal Developments

Servicemembers and Leasing.  On February 22, the Department of Justice announced that it settled a case against a captive auto finance company, resolving allegations that the company violated the Servicemembers Civil Relief Act by failing to refund certain up-front lease amounts to servicemembers who lawfully terminated their vehicle leases early.

This is the first DOJ case addressing a vehicle lessor’s SCRA obligation to refund certain types of lease payments.  The SCRA allows servicemembers to end vehicle leases early after entering military service or receiving qualifying military orders for a permanent change of station or to deploy.

When servicemembers lawfully terminate vehicle leases, the SCRA requires that they be refunded all lease amounts paid in advance.  At issue in this case is which categories of fees are paid “in advance” that must be refunded under the SCRA.

The DOJ alleged that part of the lease’s capitalized cost reduction (“CCR”) is subject to a pro rata refund.  The CCR is an amount the consumer pays to the dealer at lease signing that reduces the amount of lease payments.  The CCR could come from a consumer’s cash payment, trade-in equity, or rebate or other credit provided by the manufacturer, lessor, or a third party.

Lessors have often contended that none of the CCR is an amount paid in advance on the lease, but rather the CCR acts as a form of down payment, retained by the dealer and not paid to or received by the lease assignee.

Without admitting factual allegations or statements of law, the finance company agreed to refund over $2 million to 492 servicemembers and their co-lessees.  In addition, the company will pay $60,788 to the U.S. Treasury.

What’s the Plan?  On February 12, the CFPB released its 5-year strategic plan.  The plan sets forth the CFPB’s mission to regulate the offering and provision of consumer financial products and services under the federal consumer financial laws and to educate and empower consumers to make better-informed financial decisions.  CFPB’s strategic goals include: (1) to ensure that all consumers have access to markets for consumer financial products and services; (2) to implement and enforce the law consistently to ensure that markets for consumer financial products and services are fair, transparent, and competitive; and (3) to foster operational excellence through efficient and effective processes, governance, and security of resources and information.  Acting Director Mulvaney stated: “If there is one way to summarize the strategic changes occurring at the Bureau, it is this:  we have committed to fulfill the Bureau’s statutory responsibilities, but go no further.”

New CFPB Faces.  On February 6, Mulvaney named Kirsten Sutton Mork as the CFPB’s new chief of staff.  Mork has been staff director of the House Financial Services Committee since early 2017.  In addition, on January 30, Mulvaney advised CFPB staff that the Office of Fair Lending and Equal Opportunity will be transferred to the Director’s Office, as part of the Office of Equal Opportunity and Fairness.  The Office of Fair Lending will continue to focus on advocacy, coordination, and education, but will no longer have enforcement responsibility.

More Information, Please!  The CFPB recently issued five Requests for Information as part of Mulvaney’s call for evidence to ensure the CFPB is fulfilling its proper and appropriate functions to best protect consumers.  These RFIs invite the public to submit feedback and suggest ways to improve outcomes for both consumers and covered entities.  We reported last month on the first of these, dealing with the CFPB’s civil investigative demand process.  Here are four more CFPB RFIs.

The CFPB’s second RFI seeks public comment on whether and how the CFPB might improve its administrative adjudication processes, including its Rules of Practice for Adjudication Proceedings, which pertain to the general conduct of administrative adjudication proceedings; the initiation of such proceedings and prehearing rules; hearings; decisions and appeals; and temporary cease-and-desist proceedings.  Comments are due by April 6, 2018.

The CFPB’s third RFI seeks information to assess the overall efficiency and effectiveness of its processes related to the enforcement of federal consumer financial laws.  Comments are due by April 13, 2018.

The fourth RFI seeks information to assess the overall efficiency and effectiveness of the CFPB’s supervision program.  Comments are due by May 21, 2018.

Finally, the CFPB’s fifth RFI on external engagements seeks information on ways to engage the public and receive feedback on the agency’s work.  Comment deadlines for the fifth RFI have not yet been published.

No ACE up Their Sleeves?  On January 25, the Office of the Associate Attorney General at the U.S. Department of Justice issued a memorandum to its litigators announcing its policy regarding the use of agencies’ guidance documents in affirmative civil enforcement (“ACE”) cases.  The AAG states:  “Guidance documents cannot create binding requirements that do not already exist by statute or regulation.  Accordingly, effective immediately for ACE cases, the [DOJ] may not use its enforcement authority to effectively convert agency guidance documents into binding rules.  Likewise, [DOJ] litigators may not use noncompliance with guidance documents as a basis for proving violations of applicable law in ACE cases.  The [DOJ] may continue to use agency guidance documents for proper purposes in such cases.  For instance, some guidance documents simply explain or paraphrase legal mandates from existing statutes or regulations, and the [DOJ] may use evidence that a party read such a guidance document to help prove that the party had the requisite knowledge of the mandate.  However, the [DOJ] should not treat a party’s noncompliance with an agency guidance document as presumptively or conclusively establishing that the party violated the applicable statute or regulation.”

Case of the Month

 

Some lessons seem to require learning over and over again.  The lesson this month is:  Don’t employ multiple arbitration agreements in a single transaction.  Here’s what happened in a recent case.

Chuck Willis filed an adversary proceeding in his Chapter 7 bankruptcy case against Tower Loan of Mississippi, LLC.  Willis alleged that Tower Loan violated the Truth in Lending Act and Regulation Z by providing misleading and incorrect disclosures in his installment loan agreement with regard to, among other things, the credit insurance he bought in connection with the loan.

Tower Loan moved to compel arbitration under an arbitration clause in the loan agreement.  The agreement contained an arbitration disclaimer that said:  “By signing below and obtaining this loan, borrower agrees to the Arbitration Agreement on the additional pages of this agreement.  You should read it carefully before you sign below.  Important provisions, including our privacy policy, are contained on additional pages and incorporated herein.”  The reverse side of the loan agreement contained the Arbitration Agreement.

At the hearing on the motion, the parties presented to the court, for the first time, an Endorsement to Require Binding Arbitration, which represented the “additional pages” referenced in the arbitration disclaimer.  Willis argued that because the Arbitration Agreement and the Endorsement contained different and conflicting terms regarding the number of arbitrators, how the arbitrators will be selected, the notice required to arbitrate, the location of the arbitration, who pays the cost of arbitration, who would be entitled to attorneys’ fees and when, and when arbitration proceedings need not be initiated, there was no meeting of the minds with respect to arbitration.

The court denied Tower Loan’s motion to compel arbitration.  The court first addressed Tower Loan’s argument that the Arbitration Agreement and the Endorsement governed different issues and/or parties, and the dispute in this case was governed by the Arbitration Agreement.  The court disagreed, noting that both the Arbitration Agreement and the Endorsement governed claims against Tower Loan arising under the loan agreement, including any insurance purchased in connection with the loan.

The court went on to address the impact of the inconsistent and conflicting provisions and determined that, under Tenth Circuit precedent, the terms of the arbitration agreements were not “sufficiently definite” as required by Mississippi law, which governed the loan agreement.  Therefore, the court concluded that there was no “meeting of the minds” as to how to arbitrate claims under the arbitration agreements and, thus, no agreement to arbitrate.

Is it time to review your paperwork again?

In re Willis (Willis v. Tower Loan of Mississippi, LLC), 2017 Bankr. LEXIS 4243 (Bankr. S.D. Miss. December 12, 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 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 2018, all rights reserved. Single publication rights only, to the Association. (3/18).  HC/4843-0068-2590v1.

The CARLAWYER©02/18

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 reporting on activities of the Consumer Financial Protection Bureau and the courts. 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

Advertising and selling cars online has become commonplace. It is also common that sometimes the buyers and dealers in these online transactions are located in different states. What is less common is that a dealer, before undertaking these sales, has had the advertising and sales process reviewed by counsel. The “Case of the Month,” below, involves a Tennessee dealer who was sued in Alabama, after an Alabama buyer bought a car from the Tennessee seller. The dealer had the Alabama lawsuit dismissed, but gave the buyers permission to transfer the case to the appropriate jurisdiction. The case illustrates the perils of online transactions. Have you had your online advertising and sales processes reviewed by counsel?

Federal Developments

Struggle for Control of the CFPB. On January 10, 2018, the U.S. District Court for the District of Columbia denied CFPB Deputy Director Leandra English’s request for a preliminary injunction to block President Trump’s appointment of Mick Mulvaney as acting CFPB director. The court ruled that English is not likely to succeed on the merits of her claim that, by operation of the Dodd-Frank Act, she is the rightful acting CFPB director. English was also unable to show that a denial of the injunction would cause her or the agency to suffer irreparable harm.

As background: On November 24, 2017, Richard Cordray appointed English, his chief of staff, as deputy director and then resigned. Pursuant to a section of the Dodd-Frank Act that says the deputy director serves as the acting director when the director is unavailable, English claimed the title of acting director upon Cordray’s resignation. A few hours later, President Trump – using his authority under the Federal Vacancies Act to fill vacant positions that require Senate confirmation with another appointee who has already been confirmed by the Senate for another position – appointed Mulvaney, the director of the Office of Management and Budget, as the CFPB’s acting director until a permanent director is confirmed by the Senate, setting up a conflict with Cordray’s appointee.

English sued Mulvaney and the president, asking the court to restrain Mulvaney from heading the CFPB until a permanent director can be nominated and confirmed. In late November, the judge denied English’s initial request for a temporary restraining order.

Kiss the Payday Rule Goodbye? On January 16, 2018, the CFPB issued the following statement on its Payday, Vehicle Title, and Certain High-Cost Installment Loans final rule (“Payday Rule”): “January 16, 2018, is the effective date of the [Payday Rule]. The Bureau intends to engage in a rulemaking process so that the Bureau may reconsider the Payday Rule. Although most provisions of the Payday Rule do not require compliance until August 19, 2019, the effective date marks codification of the Payday Rule in the Code of Federal Regulations. [The] effective date also establishes April 16, 2018, as the deadline to submit an application for preliminary approval to become a registered information system (“RIS”) under the Payday Rule. However, the Bureau may waive this deadline pursuant to 12 C.F.R. 1041.11(c)(3)(iii). Recognizing that this preliminary application deadline might cause some entities to engage in work in preparing an application to become a RIS, the Bureau will entertain waiver requests from any potential applicant.”

A New Boss, With New Marching Orders. On January 23, 2018, the CFPB’s Acting Director Mulvaney wrote a memo to staff discussing how, under new leadership, the CFPB is shifting its governing philosophy in regard to carrying out its mandate under the Dodd-Frank Act. While Mulvaney affirmed the need to protect consumers and stated that the CFPB will enforce consumer financial protection laws vigorously, he noted that the CFPB will no longer “push the envelope” of the law in order to “send a message” to regulated entities. Mulvaney rejected his predecessor’s “good guy” versus “bad guy” language and promised to execute the CFPB’s mandate “with humility and prudence.”

Mulvaney indicated that the CFPB will be conducting a review of all activities in which it is engaged. More specifically, Mulvaney stated that the CFPB will be: (1) bringing enforcement actions where “quantifiable and unavoidable harm to the consumer” exists; (2) focusing on formal rulemaking instead of “regulation by enforcement;” and (3) prioritizing areas of focus based on consumer complaints (noting, specifically, that nearly a third of CY 2016 complaints related to debt collection, compared to 0.9% for prepaid cards and 2% for payday lending).

Finally, Mulvaney stated that the CFPB will engage in quantitative analysis to “consider the potential costs and benefits to consumers and covered persons” when determining whether to intervene in given situations.

Information, Please. On January 24, 2018, the CFPB issued a “Request for Information,” seeking feedback on all aspects of the CFPB’s civil investigative demand process to determine if any changes are necessary. The CFPB issues CIDs to entities and persons whom the CFPB has reason to believe have information relevant to a violation of the laws the CFPB enforces.

Recipients of a CID are required to produce the requested information to the Bureau, which uses that information to further its investigations of potential violations of federal consumer financial laws. Through the RFI, the CFPB is seeking information on how processes related to CIDs may be updated, streamlined, or revised to better achieve the CFPB’s statutory and regulatory objectives, while minimizing burdens on recipients, and how to align the CFPB’s CID processes with those of other agencies.

The CFPB believes that entities that have received one or more CID, lawyers who represent these entities, and members of the public are likely to have useful information and perspectives that will help inform the CFPB’s review of its CID processes. Comments are due by March 27, 2018.

The RFI on CIDs comes on the heels of the CFPB’s January 17, 2018, announcement that it is issuing a call for evidence to ensure the CFPB is fulfilling its proper and appropriate functions to best protect consumers. The CFPB will be publishing in the Federal Register a series of similar RFIs, seeking comment on enforcement, supervision, rulemaking, market monitoring, and education activities. These RFIs will provide an opportunity for the public to submit feedback and suggest ways to improve outcomes for both consumers and covered entities.

Case of the Month

This month’s case involves a dealer’s Internet advertising and sales activities. Here’s what happened.

Ashley and Derek Hand sued Wholesale Auto Shop, LLC, a Tennessee corporation with its principal place of business in Tennessee, for selling them a Jeep Wrangler with an odometer reading of 66,692 but with actual mileage of 252,603 miles. The Hands claimed that Wholesale Auto violated, among other laws, the Motor Vehicle Information and Cost Savings Act and the Alabama Deceptive Trade Practices Act.

After Wholesale Auto failed to answer the complaint, the Hands moved for a default judgment. The federal trial court asked the Hands to submit a supplemental brief addressing the issue of whether the court had personal jurisdiction over Wholesale Auto. After the Hands submitted the brief, the court denied the Hands’ motion for lack of personal jurisdiction, but granted them leave to move to transfer the case to an appropriate jurisdiction.

Alabama’s long-arm statute permits the exercise of personal jurisdiction if constitutionally permissible, and the U.S. Constitution requires a defendant to have sufficient minimum contacts with the forum state in order to satisfy due process. The court found that Wholesale Auto lacked sufficient minimum contacts with the state of Alabama. The Hands viewed Wholesale Auto’s advertisement for the Jeep on autotrader.com, the parties communicated by phone between Alabama and Tennessee after the Hands contacted Wholesale Auto about the Jeep, and the Hands traveled to Tennessee to buy the vehicle.

The court concluded that the fact that Wholesale Auto called the Hands twice in Alabama and allegedly made fraudulent statements during those calls was insufficient to establish personal jurisdiction over Wholesale Auto because the Hands initiated the contact, consummated the transaction in Tennessee, and were only injured in Alabama by bringing the car to that state.

Hand v. Wholesale Auto Shop, LLC, 2018 U.S. Dist. LEXIS 2138 (N.D. Ala. January 5, 2018)

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


Tom (thudson) is Of Counsel and Nikki (nmunro) 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 2018, all rights reserved. Single publication rights only, to the Association. (2/18). HC/4816-3298-5692v1.

The CARLAWYER©01/18

By Thomas B. Hudson and Nicole F. Munro

 

In November, President Trump left a brand-new pro-industry Consumer Financial Protection Bureau Director under the auto finance and lease industry’s Christmas tree.  This should make for an interesting 2018 for all of us.  This month, we also report on activities of the House and Senate, the Federal Reserve Board, the Federal Trade Commission, the Government Accountability Office, the Department of Defense and the Consumer Financial Protection Bureau.  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

 

Check out the Department of Defense item below.  If you sell and finance cars to military personnel, including military dependents, you need to get some quick schooling on what the DOD says is permitted and not permitted in connection with those transactions.  You’ll likely need your lawyer’s help on this one. Also, you should contact your consumer reporting agency about how to obtain MLA covered borrower status or get to know the Department of Defense’s website at https://mla.dmdc.osd.mil/mla/#/home.

 

Federal Developments

 

CFPB Leadership Shakeup.  On November 24, Richard Cordray resigned as CFPB Director and appointed his chief of staff, Leandra English, to become deputy director. A few hours later, President Trump appointed Mick Mulvaney, the director of the Office of Management and Budget, as acting director of the Bureau until the Senate confirms a permanent director, setting up a conflict with Cordray’s appointee. English then sued Mulvaney and the president in federal court, asking the court to restrain Mulvaney from heading the Bureau until a permanent director can be nominated and confirmed. Two days later, the judge denied English’s request for a temporary restraining order, and has not yet issued a decision on the merits of English’s claim that she has the authority to serve as acting CFPB director. Stay tuned.

 

Blocking Another CFPB Rule?  On December 1, a group of House Democrats and Republicans introduced a bill to block the CFPB’s so-called “small dollar rule” (regulating payday and title loans, among others) from going into effect. The proposed legislation exercises authority under the Congressional Review Act to prevent the rule from becoming effective on January 16. The CRA provides a procedure by which Congress can disapprove of rules issued by federal agencies within 60 legislative days of such rules being submitted to Congress for review. If both the House and the Senate vote to disapprove a rule, the agency may not issue any rule in substantially the same form in the future. Earlier this year, Congress used its CRA authority to block the CFPB’s arbitration rule. Remember the late-night tiebreaker vote by Vice President Pence?

 

CFPB Bulletin Deemed to be a “Rule,” and Invalid.  On December 5, the Government Accountability Office opined that the CFPB’s March 2013 bulletin on auto finance and compliance with the Equal Credit Opportunity Act constitutes a “rule” subject to the Congressional Review Act.  Because the CFPB did not submit the bulletin for review, the 60-day review period never began to run and the bulletin is considered not yet effective. The controversial bulletin provided detailed expectations about steps indirect auto creditors must take to monitor differences in average retail and wholesale interest rates (so-called “markups”) between protected groups and non-protected groups under the ECOA. The bulletin also detailed the Bureau’s expectations for corrective action when a creditor identifies disparities for individual dealers or within its portfolio as a whole.

 

How Can the CFPB’s Ombudsman Help You?  On December 6, the CFPB’s Ombudsman’s Office released its annual report. The report describes how the Office can assist consumers, financial institutions, and others with a question, concern, or complaint regarding a CFPB process.

 

Federal Reserve Board Does Some Rule Housekeeping.  On December 18, the FRB proposed a rule that would revise its Reg. M, issued to implement the Consumer Leasing Act. Before the enactment of the Dodd-Frank Act, the CLA was implemented solely by the Board’s Reg. M, which applied to all types of lessors. The DFA transferred rulemaking authority for the CLA to the CFPB; however, the FRB retains authority under the CLA to issue rules applicable to dealers exempt from CFPB rulemaking jurisdiction.  The FRB is proposing to revise its Reg. M and its accompanying Official Staff Commentary to reflect this change. Comments on the proposed rule are due within 60 days after publication in the Federal Register.

 

Atten-Hut!  On December 11, the Department of Defense released an interpretive rule for the Military Lending Act to provide additional guidance to industry regarding compliance with its July 2015 final rule amending the MLA’s implementing regulation. The July 2015 rule amended the regulation to extend MLA protections to a broader range of closed-end and open-end credit products. In August 2016, the DOD issued a Q&A interpretive rule to help industry comply with the July 2015 rule. The current amendments to the interpretive rule provide new Q&As in an effort to provide additional guidance concerning compliance with the July 2015 rule, but raise serious questions regarding the sale and financing of ancillary products.

 

Case of the Month

 

In what actually is not a case, but an important enforcement action, Cowboy AG, LLC, a Texas buy-here, pay-here dealer doing business as Cowboy Toyota and Cowboy Scion, recently agreed to settle FTC charges that it used deceptive ads in a regional Spanish-language newspaper. On December 8, the FTC published a description of the proposed settlement agreement in the Federal Register for public comment. The FTC will decide whether to accept the proposed agreement or take other action after it reviews the comments.

 

The FTC alleged that Cowboy’s ads buried fine print English-language disclaimers that contradicted the ads’ more prominent Spanish-language claims. As part of the proposed settlement, Cowboy has agreed that when it must make any information “clear and conspicuous” under the Truth in Lending Act and the Consumer Leasing Act, it will ensure that the information is easily noticeable and easily understandable by ordinary consumers, including a requirement that its disclosures “must appear in each language in which the representation that requires the disclosure appears.” This means that Cowboy must provide Spanish-language disclosures in its Spanish-language ads.

 

Although the FTC has consistently included this foreign language requirement in the definition of “clear and conspicuous” in Section 5(a) FTC Act settlements, this proposed settlement represents an expansion of the foreign language requirement into a settlement that includes TILA and CLA claims. Moreover, it appears that the FTC has announced this broadened “clear and conspicuous” standard through this proposed settlement, instead of through the proper course of notice and comment rulemaking. Because the FTC does not have rulemaking authority under TILA (that authority rests with the CFPB), the FTC appears to be doing by enforcement what it cannot do by rulemaking.

 

The proposed settlement is against one Texas dealer, but it could create a potentially wide-ranging TILA/CLA reinterpretation of the “clear and conspicuous” standard in ads. If you advertise credit terms in a language other than English, see your lawyer, because the Cowboy settlement reflects the FTC’s apparent position that it may be unlawful to provide related TILA-required information in English.

 

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 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 2018, all rights reserved. Single publication rights only, to the Association. (1/18).  HC/4839-3027-8746v1.

The CARLAWYER©11/17

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.

 

Federal Developments

 

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 (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 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

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