By Thomas B. Hudson and Nicole Frush Munro
It’s hard to believe that we are nearly half way through 2014. It’s also hard to believe the volume of regulation and enforcement involving auto sales, financing and leasing that is coming from Washington, D.C.
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.
Why do we include items from other states? 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
Until very recently, buy-here, pay-here dealers with related finance companies have not had many compliance training resources to assist them with their origination, servicing, collection and repossession obligations under federal law. The National Automotive Finance Association has announced such a training program, and it comes with the benefit of certification, offering those who complete the program a valuable credential. Dealers seeking more information can contact Jack Tracey, the Executive Director of NAF, at firstname.lastname@example.org.
FTC Slams Subprime Auto Finance Company. On May 29, the FTC announced that a subprime auto finance company will pay more than $5.5 million to settle charges that the company used illegal tactics to service and collect consumers’ accounts, including collecting money consumers did not owe, harassing consumers and third parties, and disclosing debts to friends, family, and employers. Consumer Portfolio Services, Inc. agreed to refund or adjust 128,000 consumers’ accounts more than $3.5 million and forebear collections on 35,000 other accounts to settle charges the company violated the FTC Act. CPS will pay another $2 million in civil penalties to settle FTC charges that it violated the Fair Debt Collection Practices Act and the Fair Credit Reporting Act’s Furnisher Rule.
The order settling the charges requires CPS to change its business practices to comply with law. CPS must establish and maintain a comprehensive data integrity program to ensure the accuracy, integrity and completeness of its loan servicing processes, and the data and other information it services, collects or sells. CPS must also provide the FTC with periodic independent assessments of its data integrity program for 10 years.
The FTC charged CPS with several violations including:
- Misrepresenting fees consumers owed in collection calls, monthly statements, pay-off notices, and bankruptcy filings;
- Making unsubstantiated claims about the amounts consumers owed;
- Improperly assessing and collecting fees or other amounts;
- Unilaterally modifying contracts by, for example, increasing principal balances;
- Failing to disclose financial effects of loan extensions;
- Misrepresenting that consumers must use particular payment methods requiring service fees; and
- Misrepresenting that the company audits verified consumer accounts balances.
The company’s violations included disclosing the existence of debts to third parties; calling consumers at work when not permitted or inconvenient; calling third parties repeatedly with intent to harass; making unauthorized debits from consumer bank accounts; falsely threatening repossessions; and deceptively manipulating Caller ID. CPS also is charged with failure to establish and implement reasonable written procedures and failure to reasonably investigate and respond timely to consumer disputes under the Furnisher Rule.
Regulation Z Made Easier. On May 12, the CFPB added Regulation Z to its eRegulations tool, a web-based service that purports to make regulations easier to find, read, and understand to promote better compliance. eRegulations displays the currently effective version of Reg. Z, previous versions beginning December 30, 2011, and planned versions not yet effective (but published in the Federal Register). A new feature allows the user to compare two versions of a regulation. The CFPB notes that eRegulations is not an official legal edition of the Code of Federal Regulations or the Federal Register, and it does not replace the official versions of those publications.
CFPB Proposes to Lighten Companies’ Privacy Compliance Burden. On May 6, the CFPB proposed a rule that would allow financial institutions (this includes car dealers who hold their own retail installment contracts), under certain circumstances, to post their annual privacy notices online instead of mailing a paper copy to each customer. The Gramm-Leach-Bliley Act generally requires the institutions to provide their customers with initial and annual privacy notices. The notices must describe whether and how the institution shares consumers’ nonpublic personal information. If institutions share this information with an unaffiliated third party, the institutions must provide notice to their customers and an opportunity to opt out of the sharing. Specifically, the proposed rule would allow institutions to use the alternative delivery method for annual privacy notices if the institutions take certain specified steps and meet certain specified conditions. If an institution uses the proposed alternative online disclosure method, it would have to inform customers that the annual privacy notice has not changed and is available online and in paper by request at a toll-free number. This could be done on another notice or disclosure the institution issues under any other provision of law, such as a monthly billing statement. The CFPB will accept comments on the proposed rule until June 12, 2014.
More Operation Steer Clear Activity. On May 6, the FTC approved final consent orders involving 10 auto dealers’ deceptive advertising charges. Under the orders, the dealerships are prohibited from misrepresenting in ads for the purchase, financing, or leasing of motor vehicles the cost of leasing a vehicle, the cost of buying a vehicle with financing, or any other material fact about the price, sale, financing, or leasing of a vehicle. When relevant, the consent orders also addressed the alleged Truth in Lending Act and Consumer Leasing Act violations by requiring the dealerships to clearly and conspicuously disclose terms required by these laws. In a case where the dealership misrepresented that consumers had won a prize, the order also prohibited misrepresenting material terms of any prize, sweepstakes, giveaway, or other incentive. The cases were part of Operation Steer Clear, a nationwide sweep focusing on misleading dealer ads.
CFPD Director Applauds “Flats.” On April 30, CFPB Director Richard Cordray issued a statement in response to news that BMO Harris Bank intends to pay dealers a flat percentage compensation fee for originating indirect vehicle financing. Cordray stated: “It is encouraging to see BMO Harris taking this proactive step to protect consumers from discrimination. When people go to buy a car, they should not have to worry whether they’ll pay more for their auto loan because of their race, gender, or ethnic background.”
Settlement Agreement Lacking Arbitration Provision Did Not Entirely Supersede RISC Containing Arbitration Provision: A car buyer signed a retail installment sale contract, which contained an arbitration provision, in connection with his vehicle purchase. The buyer sued the assignee of the RISC, and the parties entered into a settlement agreement. After the settlement, the buyer brought another action against the assignee, and the assignee moved to compel arbitration pursuant to the arbitration provision in the RISC. The buyer argued that the settlement agreement, which did not contain an arbitration provision, entirely superseded the RISC, so he could not be compelled to submit his current claims to arbitration. He relied on language in the settlement agreement stating that it “sets forth the entire agreement” and “fully supersedes any and all prior and/or contemporaneous agreements or understandings between the undersigned, which pertain to the subject matter hereof.” The assignee argued that the purpose of the “entire agreement” clause is to preclude parol evidence from disproving the terms of the settlement. The federal trial court agreed with the assignee, finding that the purpose of the “entire agreement” clause is to ensure that “preliminary negotiations, whether oral or written, are either memorialized in the final contract or are not considered part of it.” Therefore, it found that the settlement agreement did not entirely supersede the RISC and submitted the buyer’s claims to arbitration. See Pittman v. Santander Consumer USA, Inc., 2014 U.S. Dist. LEXIS 57109 (M.D. Ala. April 24, 2014).
Dealership’s Insurer Not Obligated to Defend Purchaser for Accident Occurring before Approval of Financing: A dealership sold a car to a buyer. The next day, the buyer’s car collided with another vehicle. The driver of that vehicle sued the buyer. The buyer’s insurer sued the dealership’s insurer, claiming that it owed a duty to defend the buyer because the dealership owned the car on the day of the accident. The buyer’s insurer relied on the fact that, as of the date of the accident, financing had not been approved, and the retail installment contract provided that “[u]ntil irrevocable contract acceptance by a third party or the Dealer, you shall have absolutely no right, title and interest in the vehicle.” The trial court granted summary judgment for the dealership’s insurer. Despite the language cited by the buyer’s insurer, the court relied on other language in the contract, which provided that the buyer was buying the vehicle and granting the dealership a security interest in it, that the buyer was responsible for all damages occurring to the vehicle, and that she was required to obtain physical damage insurance on it. The court also relied on the application for title and registration to conclude that the buyer was the owner, and relied on the fact that the buyer had a possessory interest as well as a financial interest in the vehicle and complete control over the vehicle. See Safeco Insurance Company of Oregon v. Federated Mutual Insurance Company, 2014 U.S. Dist. LEXIS 51828 (D. Or. April 15, 2014).
Dealer Violated State Law by Failing to Use Mandatory Contract Form, Include Official Fees, and Include Method for Calculating Unearned Finance Charge upon Prepayment: Buyers bought a used vehicle and signed a sales contract that provided for monthly payments and a “finance charge.” After the buyers allegedly defaulted, the seller repossessed the car. The buyers sued, and the trial court granted the buyers’ summary judgment motion with regard to their claims under the state retail installment sales act. The buyers alleged that the seller failed to adhere to the mandatory contract form for vehicle sales transactions under NRS §97.299. The seller argued that this requirement did not apply because the buyers made no application for credit. The court rejected this argument, finding that because the sales contract included a “finance charge,” the seller granted credit to the buyers, whether or not the buyers formally applied for credit with a credit application or whether the seller formally inquired into their credit history through a credit reporting agency. The court also found evidence that the seller did not provide the mandatory contract form for vehicle sales applying add-on interest. The buyers alleged that the seller violated NRS §97.185(1)(e) by failing to include the aggregate amount of “official fees” in the sales contract. The court rejected the seller’s argument that the sales contract’s “finance charge” included these fees, finding that “official fees” cannot be subsumed in the finance charge. The court also concluded that the seller violated NRS §97.299(2)(d) by failing to include in the sales contract a description of the method for calculating the unearned portion of the finance charge upon prepayment of the outstanding balance. See Trejo de Zamora v. Auto Gallery, Inc., 2014 U.S. Dist. LEXIS 58863 (D. Nev. April 28, 2014).
So there’s this month’s roundup! Stay legal, and we’ll see you next month.
Tom (email@example.com) and Nikki (firstname.lastname@example.org) 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. (6/14) HC# 4838-5076-3547.