The CARLAWYER©

By Thomas B. Hudson and Nicole F. Munro

Happy New Year! Here’s our monthly article on legal developments in the auto sales, finance and leasing world. This month, the action involves the Consumer Financial Protection Bureau 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

Do you belong to a state dealer association? Does that dealer association have a code of conduct or code of ethics, and do you proudly display a copy of it on your dealership’s wall, out in the showroom where your customers can see it? If so, you might want to step over to the wall and read it. That statement of how your dealership does business can come back to haunt you if you are only “talking the talk,” but not “walking the walk.” Take a hard look at it and contemplate on how well your dealership is keeping its promises.

Federal Developments

A New Sheriff is in Town. On December 6, the U.S. Senate, in a 50-49 party-line vote, confirmed Kathy Kraninger as the director of the Consumer Financial Protection Bureau, replacing acting director Mick Mulvaney. Kraninger previously worked as an associate director in the Office of Management and Budget. She will serve for a 5-year term.

What’s in a Name? Mick Mulvaney, who served as acting CFPB Director before Kraninger’s nomination and confirmation, had decreed a name change for the Consumer Financial Protection Bureau – he preferred the “Bureau of Consumer Financial Protection,” the name used in the Dodd-Frank Act. One of Kraninger’s first acts at the Bureau was to drop the name change initiative, so we’re back to calling the Bureau the CFPB again.

Were You Thinking the CFPB Had Quit Enforcing the Credit Laws? Think again. On December 6, the CFPB announced a settlement with State Farm Bank, FSB, for violating the Fair Credit Reporting Act, Regulation V, and the Consumer Financial Protection Act of 2010 in connection with its credit card lending and auto refinance loans. Specifically, the CFPB alleged that State Farm obtained consumer reports without a permissible purpose, including obtaining consumer reports for the wrong consumer, not the consumer who had applied for a credit product; furnished to credit reporting agencies information about consumers’ credit that the bank knew or had reasonable cause to believe was inaccurate, including furnishing account information for the wrong consumer, reporting current accounts as delinquent, and reporting inaccurate payment histories and past-due amounts; failed to promptly update and correct information furnished to CRAs; furnished information to CRAs without providing notice that the information was disputed by the consumer; and failed to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of information provided to CRAs. The consent order requires State Farm to implement and maintain policies and procedures to address the alleged violations and to develop a compliance plan designed to ensure that its consumer credit reporting activities comply with federal law.

Wave That Red Flag! On December 4, the FTC, as part of its periodic review of current rules and guides, issued a request for comment on its Red Flags Rule, which requires financial institutions and some creditors to implement a written identity theft prevention program designed to detect the “red flags” of identity theft in their day-to-day operations, take steps to prevent identity theft, and mitigate its damage. Comments are due by February 11, 2019.

Report Card Time. On December 4, the CFPB issued its annual Fair Lending Report to Congress highlighting the CFPB’s fair lending activities in 2017. The report addresses, among other things, (1) the CFPB’s oversight and enforcement of federal laws intended to ensure the fair, equitable, and nondiscriminatory access to credit, including the Equal Credit Opportunity Act and the Home Mortgage Disclosure Act; (2) the CFPB’s coordination with other federal and state agencies to promote enforcement of federal fair lending laws; and (3) the CFPB’s fair lending education initiatives.

Case of the Month

Arbitration Agreement in Retail Installment Contract Covered Car Purchasers’ Defamation Claim Against Dealership Arising from Salesman’s Statements: After a dealership repossessed a car by mistake, the car owners sued the dealership for claims arising from the repossession and included a defamation claim based on the conduct of a dealership salesman. The car owners alleged that the salesman, who lived in the same condominium complex as the owners and many of their business customers, told other members of the condominium community that the vehicle was repossessed because the owners were in financial difficulty. The owners asserted that the dealership was vicariously liable for damages caused by the salesman’s defamatory statements. The RIC contained an arbitration clause that covered, among other things, any claim or dispute in tort that “arises out of or relates to” the credit application, purchase, or condition of the vehicle. The dealership moved to compel arbitration. The trial court ruled that the defamation claim was not covered by the arbitration clause, but the state appellate court reversed and remanded for entry of an order compelling arbitration of the defamation claim. The appellate court noted that the arbitration language expressly contemplated tort actions. The appellate court also determined that the addition of the words “relates to” broadened the scope of the arbitration provision to include all claims, including tort claims, having a “significant relationship” to the contract. The appellate court found that there was a significant relationship between the owners’ tort claim and the contract. The owners alleged that the defamation was based on statements allegedly made by the salesman within the scope of his employment. The appellate court found that those statements related to the owners’ purchase of the vehicle and their ability to afford it, which in turn related to the credit application and the RIC that controlled the purchase. See Countyline Auto Center, Inc. v. Kulinsky, 2018 Fla. App. LEXIS 16684 (Fla. App. November 21, 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 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 2019, all rights reserved. Single publication rights only, to the Association. (1/19). HC 4815-6560-3460.

Kat Messenger
Carolina Dealer Training

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NC DEALERS: NEW DMV INTERPRETATION OF THE INSPECTION LAW

DMV has recently taken a fresh look at the inspection law and how it applies to wholesale transactions. This is their current interpretation:

If a dealer buys a car from another licensed NC dealer, and that dealer has had the vehicle inspected within the past 12 months, the dealer buying it does not have to have it inspected. He or she should get a copy of the inspection receipt from the selling dealer. When that inspection is 12 months old, the buying dealer will have to have it inspected.

If the selling dealer had the vehicle inspected in a safety only county and the buying dealer is in an emissions county, the buying dealer will have to have the vehicle inspected again.

The CARLAWYER© May 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, the action involves the Bureau, the Office of the Comptroller of the Currency (OCC), the Federal Trade Commission (FTC), the U.S. Senate and the New York Office of the Attorney General. 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

If you offer a warranty with the cars you sell, pay close attention to the FTC warning on warranties described immediately below. If your warranty contains provisions like the ones the FTC objects to, it’s time to sit down with your lawyer for a rewrite.

Federal Developments

Warning to Warrantors. On April 10, the FTC announced that its staff sent warning letters to six major companies that market and sell cars, cellular devices, and video gaming systems in the United States. The letters reportedly warn that FTC staff has concerns about the companies’ statements requiring consumers to use specified parts or service providers to keep their warranties intact. Unless warrantors provide the parts or services for free or receive a waiver from the FTC, such statements are generally prohibited by the Magnuson-Moss Warranty Act. Similarly, those statements may be deceptive under the FTC Act. Here are some examples of provisions the FTC staff questioned: (1) The use of [company name] parts is required to keep your … manufacturer’s warranties and any extended warranties intact; (2) This warranty shall not apply if this product … is used with products not sold or licensed by [company name]; and (3) This warranty does not apply if this product … has had the warranty seal on the [product] altered, defaced, or removed. The FTC staff requested that each company review promotional and warranty materials to ensure the materials do not state or imply that warranty coverage is conditioned on the use of specific parts or services. In addition, the FTC staff requested each company to revise its practices to comply with the law. The letters state that FTC staff will review the companies’ websites after 30 days and that failure to correct any potential violations may result in law enforcement action. The press release about the action can be found at https://www.ftc.gov/news-events/press-releases/2018/04/ftc-staff-warns-companies-it-illegal-condition-warranty-coverage.

Senate Rejects “Guidance.” On April 18, the U.S. Senate passed a joint resolution using its powers under the Congressional Review Act to vacate the Bureau’s March 2013 guidance for indirect auto lenders on compliance with the Equal Credit Opportunity Act and Regulation B. The joint resolution passed with a 51-47 vote. In December 2017, the Government Accountability Office concluded that the CFPB’s guidance was, at the time of its issuance, a rule subject to the Congressional Review Act. The joint resolution now heads to the House for a vote, where it is expected to pass. The president is also expected to sign the joint resolution.

Did You Say a Billion Dollar Fine? On April 20, the Bureau announced a settlement with Wells Fargo, N.A. in a coordinated action with the OCC. The Bureau alleged that Wells Fargo’s policies and practices regarding force-placed collateral protection insurance on vehicles that are collateral for loans (probably retail installment contracts) it originated or acquired were unfair under the Consumer Financial Protection Act (CFPA). In addition, the Bureau alleged that certain fees Wells Fargo charged mortgage loan borrowers for extensions on interest rate locks were unfair under the CFPA. Specifically, Wells Fargo allegedly force-placed collateral protection insurance on consumers’ vehicles that were already covered by insurance policies voluntarily obtained by the consumers. In instances where the company appropriately force-placed insurance on consumers’ vehicles, the company improperly maintained the force-placed insurance policies on the consumers’ accounts even after the consumers had obtained adequate insurance on their vehicles and provided proof of insurance. Wells Fargo also allegedly failed to provide sufficient refunds of fees associated with the improper forced-placement of collateral protection insurance. The consent order requires the company to undertake certain activities related to its risk and compliance management, and the company has begun voluntarily providing remediation to consumers to address deficiencies cited in the consent order. The Bureau assessed a $1 billion penalty against Wells Fargo and credited the $500 million penalty collected by the OCC toward the satisfaction of its fine. Information about the action can be found at https://www.consumerfinance.gov/policy-compliance/enforcement/actions/wells-fargo-bank-na-2018/.
So, there’s this month’s report. See you next month!

Case of the Month

Dealership’s Fraudulent Misrepresentations Regarding Condition of Used Vehicle Invalidated Implied Warranty Disclaimer: During a test drive of a truck with a salvage title, the potential buyer noticed that the check-engine light was on and the truck smoked. The salesperson explained that the truck smoked because it was a diesel and that the check-engine light was due to a faulty oxygen sensor that would be easy to fix.

The buyer bought the truck “as is” and received a third-party vehicle protection plan at no cost. Within days of purchase, the truck lacked power and continued to smoke. The dealership refused to diagnose or repair the truck. The buyer had the truck inspected and was advised that the engine needed replacing.

The buyer sued the dealership, alleging fraud and breach of the implied warranty of merchantability and seeking attorneys’ fees under the Magnuson-Moss Warranty Act. The trial court granted judgment for the buyer, awarding her $14,366 in damages based on the price she paid for the truck and the cost of the inspection, plus attorneys’ fees and costs. The dealership appealed.

The appellate court affirmed, as did the Supreme Court of Minnesota in this decision. The dealership argued that the “as is” disclaimer barred the buyer’s claim. The state high court disagreed, finding that, under Minnesota law, a warranty disclaimer is effective “unless the circumstances indicate otherwise.” The high court concluded “that [the dealership’s] fraudulent statements about the fitness of the truck for the purpose for which a truck is purchased are a circumstance that make the ‘as is’ disclaimers of implied warranties in the purchase documents ineffective.” See Sorchaga v. Ride Auto, LLC, 2018 Minn. LEXIS 111 (Minn. March 21, 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 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. (5/18). HC/4822-8265-6869v1.

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.