July CarLawyer

By Thomas B. Hudson and Nicole Frush Munro

Here’s our monthly collection of selected legislative and regulatory highlights, and a recap of some of the many auto sale and financing lawsuits we follow each month. Remember – what we report here does not capture every recent development. We select those we think should be important or interesting to car dealers. Note that this column does not offer legal advice.

We include items from other states. Why? We want you to be able to see new 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 laws and claims might soon appear in your state.

 As always, though, there is no substitute for checking with your own lawyer to learn how what we report might apply to you, or if you have any questions.

 This Month’s CARLAWYER© Compliance Tip

 Do you know what your state’s Attorney General is up to?  What actions is the AG pursuing against dealers that you need to know about?  An easy (and free) way to find out is to create a monthly reminder in your Outlook program to “Check AG.”  Then, each month when that reminder pops up, go to the AG’s web site and review recent enforcement actions and press releases.  If the AG has just hammered a dealer for using an ad just like one you were planning to use, you might just want to know about it, right?

Federal Law

Bureau Moves to Protect Servicemembers.  The Consumer Financial Protection Bureau announced that it has obtained an order against U.S. Bank and its nonbank partner, Dealers’ Financial Services, resolving allegations that the companies failed to properly disclose allotment fees charged to participants in the Military Installment Loan and Education Services (MILES) program, as well as the timing of the allotment payments.  The companies also allegedly misrepresented to servicemembers the cost and material terms of add-on products financed along with vehicle purchases.  Under the order, U.S. Bank and DFS have agreed to: stop deceptive practices in connection with the MILES program or similar programs; pay about $6.5 million in restitution to servicemembers; provide refunds or credits to affected servicemembers without any further action on their part; modify the MILES program so that servicemembers are not required to use allotments in order to participate; improve disclosures regarding add-on products; and submit a redress plan that must be approved by the Bureau and provide reports to the Bureau to demonstrate compliance with the order.

Stalking “Nonbanks.”  The CFPB has issued a final rule establishing procedures to bring under its supervisory authority certain “nonbanks” when the CFPB has reasonable cause to determine that a nonbank is engaging, or has engaged, in conduct that poses risks to consumers with respect to the offering or provision of consumer financial products or services.  Nonbanks subject to the rule are entities that offer or provide consumer financial protection products or services but do not have a bank, thrift, or credit union charter.  According to the CFPB’s release, it must base such reasonable cause on complaints it collected or on information from other sources, such as judicial opinions and administrative decisions.

Are You Behaving Nicely?  The Bureau has issued a bulletin informing entities subject to its enforcement authority about the types of activities that constitute “responsible conduct” in enforcement investigations.  The CFPB noted that it considers many factors when exercising its enforcement discretion, and this bulletin provides guidance about the activities businesses can engage in that the CFPB may favorably consider in exercising such discretion.  Specifically, the CFPB noted that “a party may proactively self-police for potential violations, promptly self-report to the Bureau when it identifies potential violations, quickly and completely remediate the harm resulting from violations, and affirmatively cooperate with any Bureau investigation above and beyond what is required.”  If the party engages in this type of “responsible conduct,” the CFPB will take that activity into account when conducting its enforcement investigation.

Beginning to Define “Abusive.”  On May 30, the CFPB filed its first action enforcing the Dodd-Frank Act’s prohibition on abusive acts or practices in connection with the provision of consumer financial products or services.  The CFPB filed a complaint against a Florida-based company, American Debt Settlement Solutions, Inc., alleging that the company violated the FTC’s Telemarketing Sales Rule and the Dodd-Frank Act by charging illegal up-front fees and making misrepresentations to consumers about its debt relief services.  Specifically, the complaint alleged that the debt relief company: misled consumers by falsely promising them it would begin to settle their debts within three to six months when, in reality, services rarely materialized; enrolled consumers despite knowing that their income level made it highly unlikely that they could complete the debt relief programs; collected up-front enrollment fees from consumers who the company knew could not afford the monthly payments required by the debt relief programs; and failed to settle the consumers’ debts within the promised time frame.

Waving the Flag, Again.  On June 12, the Federal Trade Commission issued revised guidance on its Red Flags Rule, which requires financial institutions and certain other businesses to have a written identity theft prevention program.  The guidance outlines which businesses are covered by the rule, provides frequently asked questions, and includes a detailed 4-step process on how to comply with the rule.


Arbitration Provision Not Signed by Dealer Is Enforceable: Individuals entered into a contract to buy a 2008 GMC from a dealership via the Internet. The contract provided that the buyers bought the GMC “as is,” along with the rest of the limited factory warranty, and that the contract was not binding unless signed by the seller’s officer or manager. The buyers signed the contract, but the seller did not. The contract contained an arbitration agreement. The buyers had significant problems with the vehicle and were unsuccessful in getting it repaired. They sued, and the defendants moved to compel arbitration. The buyers argued, among other things, that the arbitration agreement was not enforceable because the contract had not been signed by the seller’s officer or manager. The trial court denied the request for arbitration on the grounds that the contract lacked mutuality because the dealership failed to sign it. The defendants appealed. The Court of Appeals of Arkansas reversed, finding that the seller’s signature was not needed to establish mutuality since assent was otherwise established by the buyers’ acceptance of benefits under the contract and partial performance of the contract. See Asbury Automotive Group, Inc. v. Floyd, 2013 Ark. App. LEXIS 359 (Ark. App. May 22, 2013).

Creditor Not Required to Release Lien on Vehicle After Debtor Completed Plan and Received Discharge Where Co-Debtor Was Responsible for Balance: When a debtor filed her Chapter 13 bankruptcy plan, she proposed to pay the lienholder on her 2002 Chevrolet Trailblazer its secured claim in full, with interest, and to treat the remaining amount owed as unsecured. After the debtor completed her plan payments and received a discharge, she requested that the creditor release its lien on her vehicle in accordance with the terms of her plan, which provided that creditors would retain their liens upon their collateral until they had been paid the value of the collateral. The creditor refused, claiming that it should not be required to release its lien until the remaining amount of its unsecured claim, plus interest, is paid by the co-debtor on the account. The debtor sued, claiming that the creditor’s refusal to release its lien violated the discharge injunction. The U.S. Bankruptcy Court for the Central District of Illinois entered judgment for the creditor. It found that, despite the plan’s lien release provision, the discharge of a debtor’s debt does not affect the liability of any other entity for the debt. Therefore, the lien can remain in place after the debtor received her discharge and can be enforced against the co-debtor and the co-debtor’s interest in the vehicle until the creditor receives payment in full of its claim at the contract rate. See In re Faulkner, 2013 Bankr. LEXIS 2018 (Bankr. C.D. Ill. May 17, 2013).

RISC Enforceable Against Debtors who Ratified Contract by Conduct after Sale: Individuals bought a 2004 Chrysler Pacifica from a dealership. The retail installment contract documenting the transaction was purchased by a credit union. When the individuals stopped making payments on the contract, the vehicle was repossessed. The individuals sued, alleging that the dealership had sent documents to the credit union without permission and without their valid signature. The trial court found for the dealership, and the Court of Appeals of North Carolina affirmed. The appellate court held that even if the individuals had not signed the appropriate document, their conduct ratified its contents. They had accepted and retained the benefits of the contract by accepting the financing, making payments, and putting approximately 20,500 miles on the car prior to its repossession. See Huff v. CBS Quality Cars, Inc., 2013 N.C. App. LEXIS 557 (N.C. App. June 4, 2013).

Creditor Required to Send Notice of Disposition but Need Not Prove Notice Was Received: A finance company sued car buyers for a deficiency judgment on amounts due under a retail installment contract. The trial court entered judgment for the buyers, finding that a deficiency judgment was not warranted because the buyers claimed they did not receive a notice of disposition of collateral by certified mail and the finance company did not prove receipt through a copy of a return receipt card signed by the buyers. The Court of Appeals of Ohio reversed. It found that Section 1317.16(B) of the Ohio Retail Installment Sales Act requires that the creditor send the debtor a notice of disposition by certified mail, return receipt requested, but does not require the creditor to prove that the notice of disposition was actually received. See SAC Finance, Inc. v. Deaton, 2013 Ohio App. LEXIS 2025 (Ohio App. May 24, 2013).

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

Tom (thudson@hudco.com) and Nikki (nmunro@hudco.com) are partners in the law firm of Hudson Cook, LLC. Tom is the author of several books, available at www.counselorlibrary.com. Tom is also the publisher of Spot Delivery®, a monthly legal newsletter for auto dealers, and the Editor in Chief of CARLAW®, a monthly report of legal developments in all states for the auto finance and leasing industry. Nikki is a contributing author to the F&I Legal Desk Book and frequently writes for Spot DeliverySpot Delivery, CARLAW and the books are produced by CounselorLibrary.com LLC. For information, call 410-865-5411 or visit www.counselorlibrary.com. Copyright CounselorLibrary.com 2013, all rights reserved. Single publication rights only, to the Association. (7/8/13) HC# 4844-6791-6052.

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