The CARLAWYER©

By Thomas B. Hudson and Nicole Frush Munro

Happy spring! It’s about time.

We hope your baseball team won on opening day and your football team picks a winner in the draft. Take a look below at what we’ve come up with this month with our collection of selected legislative and regulatory highlights. We also 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 might be particularly important or interesting to dealers.

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 claims might soon appear in your state.

Note that this column does not offer legal advice. Always check 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

The Consumer Financial Protection Bureau is sending confidential Civil Investigative Demands to independent car dealers. If you get one of these CIDs, one of the things that the CFPB will want to see is your comprehensive written Compliance Management System. If you don’t have such a system, now’s the time to put one in place. If your general level of compliance is woefully deficient (if, for example, you don’t have a Safeguarding Policy in place or don’t send adverse action notices), now’s the time to consider selling the dealership and buying a Subway franchise.

Federal Developments

On April 9, the CFPB announced an enforcement action against Bank of America, N.A. and its subsidiary, FIA Card Services, N.A., for unfair billing practices related to their identity protection credit card add-on products, which promised to monitor customer credit and alert customers to potentially fraudulent activity, and for deceptive marketing related to two credit card payment protection products. Under the consent order obtained by the CFPB, (1) B of A will be prohibited from marketing any credit protection or credit monitoring product until it submits a compliance plan to the CFPB; (2) consumers will no longer be billed for these add-on products if they are not receiving the promised benefits; (3) the Bank must provide approximately $727 million in relief to consumers harmed by the practices related to the credit card add-on products; and (4) the Bank will pay $20 million to the CFPB’s Civil Penalty Fund. The Office of the Comptroller of the Currency has also been investigating the alleged unfair billing for identity theft protection products and separately ordered a $25 million penalty for these practices, in addition to those ordered by the CFPB. The action should be noted by dealers selling ancillary products in connection with car financing – the Bureau is especially interested in this area.

On March 31, the CFPB released its 2013 Consumer Response Annual Report. According to the report, consumer complaint volume in 2013 increased 80% from 2012 – 163,700 complaints in 2013 compared to 91,000 in 2012. Mortgage-related complaints accounted for 37% of the 2013 complaint total, almost doubling the number of complaints about the next-closest industry (debt collection at 19%). Vehicle financing and leasing complaints fall into the category of consumer loans, which accounted for 3% of all complaints.

State Enforcement

On April 23, in the first legal action brought by a state regulator to enforce violations of the Dodd-Frank Act’s consumer protection requirements, the New York Department of Financial Services obtained a temporary restraining order against Condor Capital Corporation, a subprime sales finance company, and its owner for allegedly hiding the existence of refundable positive credit balances from its customers and maintaining a policy of refusing to refund positive credit balances except when expressly requested by a customer. Among other allegations, the state regulator also contended that Condor failed to secure the personally identifiable information of its customers.

On April 1, New York Attorney General Eric T. Schneiderman shut down a dealer that allegedly failed to pay off liens on trade-in vehicles before reselling the cars. The dealership also failed to submit registration and title materials to the DMV for customers who paid it to handle this service and never bought warranty coverage for customers who wanted it and paid for it. The dealership and its owner must pay $289,000 to consumers and $50,000 in fines and other costs to the state.

In addition, on April 1, the New York Attorney General announced agreements with 10 repossession companies under which the companies will no longer repossess vehicles for title loan companies after borrowers default on their title loans. The attorney general cited “predatory” practices by title loan companies that, in an attempt to avoid state laws imposing maximum interest rates on consumer loans, market their title loans on the Internet.

On March 24, the New York Attorney General announced settlements with six dealers – and announced his intention to sue a seventh dealer on related charges – resolving allegations that the dealers’ advertising practices were deceptive and misleading because they advertised sale and lease prices that reflected discounts and/or rebates for which many consumers did not qualify. The settlements require the dealers to reform these practices, as well as other advertising problems revealed during the investigation, and pay fines of up to $15,000.

On April 2, West Virginia Attorney General Patrick Morrisey announced that his office has reached a $1.2 million settlement with two title loan companies that allegedly harassed West Virginia consumers by calling them at home or work, wrongfully disclosed their debts to people listed as references, and coerced them into relinquishing their vehicles by false threats of arrest and criminal prosecution, in violation of the West Virginia Consumer Credit and Protection Act. The companies agreed to close all accounts and zero-balance any debt owed by West Virginia consumers, return any vehicles seized from West Virginia consumers that have not yet been sold, and remove all liens on vehicle titles.

Litigation

Title Loan Transactions Covered by Military Lending Act: Active duty military servicemembers brought a class action suit against several vehicle title loan companies based on the companies’ alleged violation of the Military Lending Act. The plaintiffs moved for class certification. After determining that the pre-2013 MLA implicitly authorizes a private right of action for damages, the federal trial court concluded that the plaintiffs’ title loan transactions were covered by the MLA. The defendants argued that they were not “creditors” who extend “consumer credit” within the meaning of the MLA, but instead were pawnbrokers operating under state pawnshop statutes. The court noted that the MLA does not define “consumer credit transaction” by deferring to state law definitions of those terms. The court also noted that the MLA preempts state law inconsistent with the MLA. It does not matter that the state law would categorize the transactions as “pawns” rather than “loans.” According to the court, what matters is that each of the plaintiffs deposited a vehicle title with a defendant as security for the payment of a debt. If the debt is not paid, then the plaintiff loses the title to the car and the car. Even though these transactions may not be considered “credit” transactions under state law, the court found that they are “consumer credit” transactions within the meaning of the MLA. The court concluded that the plaintiffs could pursue their claims as a class. See Cox v. Community Loans of America, Inc., 2014 U.S. Dist. LEXIS 38089 (M.D. Ga. March 24, 2014).

Finance Company Satisfied Maryland Law’s Limitation of Liability by Notifying Customer of Interest Rate Error and Timely Adjusting Account: The assignee of a vehicle retail installment sales contract governed by the Maryland Credit Grantor Closed End Credit Provisions (“CEC”), realized, on July 27, 2010, that the interest rate charged to some of its customers exceeded the rate allowed by the CEC. It conducted an internal review and discovered, on August 10, 2010, that one customer’s interest rate exceeded the maximum rate allowed under the CEC by 3%. On September 5, 2010, the assignee began charging the customer the new interest rate and credited his account in the amount of $845. It also sent a letter to the customer explaining the interest rate change and credit and noting that he could continue to make his scheduled monthly payments, which would result in him repaying the contract earlier than expected, or he could elect to have his monthly payments lowered so that the contract would be repaid on the date originally scheduled. The customer sued for damages under the CEC. The assignee moved for summary judgment, and the federal trial court granted the motion. The assignee argued that it satisfied the CEC’s limitation of liability, which provides that a credit grantor is not liable for failure to comply with a provision of the CEC if, within 60 days after discovering an error and prior to institution of an action or the receipt of written notice from the borrower, the credit grantor notifies the borrower of the error and makes whatever adjustments are necessary to correct the error. The court agreed with the assignee that it timely corrected the error within 60 days of discovering the error and adjusted the customer’s account accordingly. See Askew v. HRFC, LLC, 2014 U.S. Dist. LEXIS 40088 (D. Md. March 25, 2014).

Dealer Liable under Ohio Consumer Sales Practices Act for Failing to Disclose Unibody Damage to Used Car Regardless of “As Is” Clause: Buyers sued the dealer who sold them a used car after they found out that the car had sustained unibody damage. The dealer bought the car at an auction and signed a sales receipt that disclosed the unibody damage, but claimed that he did not read the receipt before signing. The purchase agreement between the dealer and the buyers waived all warranties with a conspicuous “as is” clause on its face. The buyers sued for violations of Ohio’s Consumer Sales Practices Act, among other claims. The trial court found that the dealer committed a violation of the CSPA and awarded the buyers treble damages and attorneys’ fees. The appellate court affirmed, finding that the “as is” clause was only effective to waive warranty and contract claims, not statutory CSPA claims, and also finding that the dealer committed one violation of the CSPA by not disclosing the unibody damage. See Hamilton v. Ball, 2014 Ohio App. LEXIS 1054 (Ohio App. March 19, 2014).

Evidence of Oral Statements Made by Lender’s Agent Inadmissible to Support Claim for Violation of TILA Insurance Disclosure Requirements: A lender made a loan to a couple secured by a lien on their car. The note and security agreement included a charge for “Limited Physical Damage Insurance,” which the borrower must pay unless the borrower obtained insurance from a provider acceptable to the lender. The borrowers claimed that they questioned this insurance charge and showed proof of their existing insurance to the lender’s agent, but the agent told them that the insurance charge was required, so they paid the charge. When the buyers filed a Chapter 13 bankruptcy petition, the lender filed a secured claim. In response, the borrowers argued that the note and security agreement violated the Truth in Lending Act. Regulation Z requires charges for insurance against loss or damage of property to be included in the finance charge unless specifically excluded. An exclusion exists for insurance premiums if certain conditions are met, including the condition that “the insurance coverage may be obtained from a person of the consumer’s choice, and this fact is disclosed.” The borrowers alleged that the oral representations made by the lender’s agent rendered the insurance disclosure unclear. They also argued that by taking the voluntary choice from them, the lender violated Reg. Z. The U.S. District Court for the Northern District of Alabama declined to consider the oral extraneous evidence to determine whether there was an ambiguity in the insurance disclosure required under TILA. The court explained that no extraneous oral evidence can be presented by a plaintiff to prove that the defendant gave the impression that insurance was required, except in the case of illiteracy, fraud, or duress. See White v. Superior Financial Services, LLC, 2014 U.S. Dist. LEXIS 31811 (N.D. Ala. March 12, 2014).

Listing Each Payment, its Due Date, and Amount Due Satisfied Creditor’s Obligation to Disclose Number of Payments: A borrower filed an adversary proceeding in her bankruptcy case against her lender, claiming that the lender violated the Truth in Lending Act by failing to disclose the number of payments her loan required. The TILA disclosure statement set forth a payment list that identified every payment the loan required, its due date, and the amount due. Nowhere did the lender state that 24 payments were required. The bankruptcy court dismissed the complaint, and the U.S. District Court for the Northern District of Illinois affirmed. TILA requires a creditor to disclose the “number, amount, and due dates or period of payments scheduled to repay the total of payments.” The appellate court found that the Official Staff Commentary provides two methods for satisfying the number, amount, and timing requirements: (1) list each payment, when it is due, and how much each payment is for, or (2) state the payment interval or frequency, the calendar date the first payment is due, and the total number of payments. The appellate court found that listing the 24 payments satisfied the lender’s obligation to disclose the number of payments the borrower was required to make. See In re Davis (Davis v. The Payday Loan Store of Illinois, Inc.), 2014 U.S. Dist. LEXIS 45972 (N.D. Ill. April 3, 2014).

Oral Representation that Used Car is “in Good Working Order” Not Deceptive in Light of Disclosures that Car Was Used and Sale Was “As Is”: A buyer bought a used car from a dealer who told her that the vehicle “was in good working order,” but also that “there is no such thing as a perfect used car” and “used means used.” In addition, the Buyer’s Guide stated that the car was being purchased “as is – no warranty.” When the car stopped working properly eight months later, the buyer sued. The trial court found that the dealer’s statements regarding the car were not proven to be false, nor were the statements misleading as a deceptive act or practice under Hawaii law. In addition, the trial court found that the buyer failed to prove she incurred economic damage as a result of the dealer’s statements. An appellate court affirmed the trial court’s decision, explaining that undisputed evidence that the car was driven for 6,657 miles over eight months and required no service except for an oil change was sufficient for a finding that the dealer’s statement about the car being in “good working order” was not false. The appellate court also found that the statement was not deceptive because, under a “clearly erroneous” standard of review, whether the statement “was likely to mislead consumers acting reasonably under the circumstances” presents a mixed question of law and fact. In this case, the dealer explained the contract terms and made statements that a used car may have problems, making the trial court’s finding that a reasonable consumer would not be misled not clearly erroneous. In addition, the buyer did not suffer economic loss because not only did she not offer any evidence of economic damages, but the record showed that she received an insurance payment greater than the amount she paid for the car after it was stolen and damaged beyond repair. See Bailey v. Siracusa, 2014 Haw. App. LEXIS 109 (Haw. App. March 10, 2014).

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

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Tom (thudson) and Nikki (nmunro) are partners in the law firm of Hudson Cook, LLC. Tom has written 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 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. Spot Delivery, CARLAW and the books are produced by CounselorLibrary.com LLC. For information, visit www.counselorlibrary.com. Copyright CounselorLibrary.com 2014, all rights reserved. Single publication rights only, to the Association. (5/14) HC# 4851-4735-0043.

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