By Thomas B. Hudson and Nicole Frush Munro
School has started, and we’re already thinking about Halloween and other scary stuff like regulators and lawsuits. We don’t have to look for ghost and goblin costumes – there are plenty of terrifying developments to tell you about. As usual, we found plenty of interesting stuff. Here’s our latest report of legal developments in the auto sales and finance world.
Take a look below at this month’s collection of selected legislative and regulatory highlights. We also recap 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 to show you 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
If your ads (including your website) contain offers in big type and have asterisks and small type that limit or condition the offers, you should drop what you are doing and call your compliance lawyer. The Federal Trade Commission has recently warned merchants about their advertising practices, and you need to be sure that what you are doing in your ads will pass muster.
Upping the Ante. On September 9, the Consumer Financial Protection Bureau and the Federal Reserve Board announced that they are increasing the dollar thresholds in Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing) for exempt consumer credit and lease transactions. The Dodd-Frank Act provides that these thresholds must be adjusted annually by the increase in the consumer price index. As adjusted, TILA and CLA protections generally will apply to consumer credit transactions and consumer leases of $54,600 or less in 2015 – an increase of $1,100 from 2014.
Supervisory Highlights – Nothing New. On September 17, the CFPB released supervisory highlights related to discrimination in auto finance. The report contained nothing new, rehashing the Bureau’s fair lending supervisory activity in the auto finance market over the past two years. CFPB examiners found that the indirect auto creditors had discretionary pricing policies resulting in discrimination against African-American, Hispanic, and Asian and Pacific Islander buyers. As a result, the Bureau states that it believes these buyers paid more for their auto financing than similarly situated non-Hispanic white buyers. The report included the much-anticipated “white paper” on the CFPB’s methodology for assigning “proxies” for sex, race, and national origin to creditors that do not collect this information directly from consumers. The white paper contains no new insight into the Bureau’s methods, stating that the proxy methodology has “evolved over time and will continue to evolve as enhancements are identified that improve accuracy and performance.”
Care to Watch a Re-run? The CFPB held a field hearing on auto finance on September 18 in Indianapolis. The hearing featured remarks from Director Cordray and testimony from consumer groups, industry representatives, and the public. A recording of the event is available on the CFPB’s website.
Identifying the Big Players. On September 17, the CFPB issued its proposed rule to allow supervision of larger participants in the auto finance business. The proposed rule would bring new oversight to larger nonbank auto finance companies not affiliated with larger depository institutions (affiliates of depository institutions with assets over $10 billion became subject to CFPB supervision in 2011). The CFPB rule would cover nonbank companies engaged in extending credit for the purpose of buying an automobile or in leasing automobiles to consumers. The proposed rule also covers companies that buy automobile finance or lease transactions and would cover both direct loans and retail installment transactions by dealers.
The proposed rule EXCLUDES auto dealers otherwise exempt from CFPB jurisdiction and excludes buy-here, pay-here dealers (i.e., dealers who fall under CFPB jurisdiction because their consumer paper “is not routinely assigned to a non-affiliated third party finance or leasing source”). For supervision purposes, the Bureau will cover the related finance companies of BHPH dealers if they meet the transaction volume criteria for larger participants.
The proposed rule appears to cover portfolio purchases not directly related to the purchase of individual vehicles, although it does exclude “investments in asset-backed securities.” The proposed rule covers refinancing of auto purchase and lease transactions and purchases of those refinance transactions. The proposed rule does not reach non-purchase transactions secured by a vehicle, such as auto title loans, unless those loans are used to refinance existing purchase-money transactions.
If a company enters into or purchases the covered transactions described above, it will be deemed a “larger participant” subject to CFPB supervision if “annual originations” exceed 10,000 transactions per year. “Annual originations” includes new transactions and purchases of existing transactions. Transactions of affiliated companies are aggregated for the transaction count. The CFPB estimates the proposed rule will cover 38 companies and roughly 91% of the transaction volume and 7% of the number of participants in the nonbank vehicle finance market.
The Dodd-Frank Act gave the CFPB authority to supervise “larger participants” in consumer financial markets as defined by rule. The CFPB can oversee larger participants’ activities to ensure compliance with federal consumer financial laws. In exercising its supervisory powers, the CFPB generally begins by asking a company to provide substantial information and documentation before a visit by examiners. The examiners then spend significant time at the company reviewing records, interviewing employees, and testing transactions. An examination can lead to various levels of confidential supervisory action, including orders to cease violation of federal consumer financial laws and provide consumer redress, and may also lead to a public enforcement action.
Comments on the proposed rule may be submitted through www.regulations.gov on or before December 8. After the comment period, the CFPB may take three to six months to respond to comments. Responses are published with the final rule. Once a rule is final, it usually takes effect a month or more after it is published, and the CFPB is usually prepared to send initial examination letters to some market participants within days or weeks of the effective date.
Claims Arising from Sale of Phony Debt Cancellation Agreement Dismissed: Car buyers bought a car from a dealership. The car price included a $750 charge for an optional debt cancellation agreement. The buyers sued a number of related dealerships for aiding and abetting one another and conspiring to sell and finance debt cancellation agreements that were not true debt cancellation agreements eligible for financing under Maryland’s Credit Grantor Closed End Credit Provisions (“CECP”). The crux of the complaint was that their debt cancellation agreement required cancellation of the difference between the remaining balance owed and the vehicle’s value, as determined by the greater of the insurer’s determination or the vehicle’s book value, rather than, as required by CECP, cancellation of the remaining balance owed. The dealerships moved to dismiss the complaint, and the federal trial court granted the motion. The court found that the buyers did not state a claim for a violation of CECP because there was no theft or total destruction of their vehicle that would have triggered the terms of the debt cancellation agreement, and “there is no civil penalty for unlawful contract terms that are not enforced.” Similarly, the court found that the buyers did not state a claim for unjust enrichment or breach of contract by violating CECP because there was no CECP violation. Jones v. Pohanka Auto North, Inc., 2014 U.S. Dist. LEXIS 123528 (D. Md. September 2, 2014).
Consumer States FCRA Claim for Reporting Adverse but not Positive Credit History: A couple obtained a bank loan secured by their home and a vacation property. They fell behind on the note, and the bank refinanced it. When they fell behind on the second note, the bank refinanced it again. The couple made payments on the third note on time. The bank furnished the adverse credit history on the first and second notes, but it did not furnish the positive credit history on the third note. The couple disputed the missing credit history with the consumer reporting agencies and the bank. When the bank refused to furnish the credit history on the third note, the couple sued the bank for violating the Fair Credit Reporting Act. The bank moved to dismiss. The federal trial court denied the motion. The court held that the bank’s failure to furnish the credit history on the third note could plausibly constitute a material misrepresentation that damaged the couple. Alley v. The Farmers Bank, 2014 U.S. Dist. LEXIS 120675 (M.D. Ga. August 29, 2014).
Buyer Not Entitled to Proceed on Certain Claims Arising from Failure to Disclose Prior Short-Term Rental Use of Vehicle: A car buyer filed a class action against the dealership where she bought her car and other related dealerships for engaging in a fraudulent scheme by failing to disclose that cars had previously been used as short-term rental vehicles. The defendants moved to dismiss the complaint, and the federal trial court granted the motions in part and denied them in part. The court allowed a Racketeer Influenced and Corrupt Organizations Act claim alleging a pattern of racketeering activity to proceed against all defendants. The court dismissed the breach of implied warranty and Magnuson-Moss Warranty Act claims because the buyer did not prove that her car suffered from any tangible defect. The court dismissed the Maryland Consumer Protection Act claim, finding that the buyer’s claim that she suffered an economic loss by overpaying for the car was insufficient to prove injury. The court dismissed the breach of contract claim, concluding that the buyer’s claim regarding a disclosure omission was insufficient to establish a breach of the parties’ contract. The court allowed the buyer to proceed with her negligent misrepresentation and deceit claims against the dealership where she bought her car even though the dealership claimed that it showed her a CARFAX report indicating the prior short-term rental use of the vehicle. In addition, the court allowed the buyer to proceed with her unjust enrichment claim against that dealership. Chambers v. King Buick GMC, LLC, 2014 U.S. Dist. LEXIS 123629 (D. Md. September 2, 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, LLP. 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. (10/14) HC# 4844-8186-3199.