By Thomas B. Hudson and Nicole Frush Munro
Happy New Year! We wish you a compliant 2015! Evidently at least some folks in Washington worked in December, because we had a number 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
Do you train your employees? If you have a repair shop, you certainly have trained mechanics, but what about your sales and F&I staff? They work in a complex and frequently-changing regulatory environment, and their legal missteps could put your dealership in a world of hurt. The CFPB says that compliance training must be a part of the compliance management system of every entity subject to the CFPB’s jurisdiction (hint – that’s you). Training of various depth and intensity is available from a number of sources, including state and national dealer associations, the Association of Finance and Insurance Professionals, the National Automotive Finance Association and others. Think about your response when you get that letter from the regulator asking about your training programs. When you have to answer, “We don’t have any,” think about the regulator’s response.
On December 12, the Federal Trade Commission announced that it filed complaints against two auto dealerships seeking civil penalties for violations of 2012 FTC administrative orders that prohibited the dealerships from deceptively advertising the costs of financing or leasing a car. The first complaint, filed against Billion Auto, a chain of dealerships operated in Iowa, Montana, and South Dakota, and against Nichols Media, Inc., an advertising company, alleged that Billion Auto and Nichols Media violated the FTC administrative order by hiding material terms in fine print, using distracting visuals, and using “rapid-fire” audio delivery in their ads. Billion Auto and Nichols Media have agreed to pay $360,000 in civil penalties to settle the FTC’s charges. In a separate action, the FTC charged Ramey Motors, Inc. and three affiliated dealerships operating in Virginia and West Virginia with violating a similar FTC administrative order. Ramey Motors’ ads allegedly misrepresented the costs of financing or leasing a vehicle by concealing important terms of the offer, such as a requirement to make a substantial down payment. The FTC also alleged that Ramey Motors failed to make credit disclosures clearly and conspicuously as required by the Truth in Lending Act. Ramey Motors and its affiliates are subject to $16,000 in civil penalties for each alleged violation of the FTC administrative order.
On December 23, the FTC announced that it reached a proposed consent order with a Texas dealership, TXVT Limited Partnership d/b/a Trophy Nissan, that allegedly used false or deceptive ads to sell or lease vehicles, in violation of the FTC Act, the Consumer Leasing Act and Regulation M, and the Truth in Lending Act and Regulation Z. Among other charges, the FTC alleged that the dealership advertised prices, lease or finance terms, and promotions and then attempted to disclaim its offers using small text in the print and television ads. The FTC also alleged that one of the dealership’s ads deceptively claimed that consumers could pay only $1 in order to get out of their current financing or lease obligation. Instead, according to the allegations, the dealership would add the balance of the financing or lease obligation to the balance of the new financing contract or lease. In another promotion, the dealership claimed that it would match consumers’ tax refunds to use for a down payment, but the small print disclosed that it would match refunds of no more than $1,000. Under the proposed consent order, the dealership is prohibited from misrepresenting that it will pay off a consumer’s trade-in, misrepresenting material terms of any promotion or other incentive, misrepresenting the cost of leasing or buying a vehicle, and failing to clearly and conspicuously disclose material terms of a promotion or other incentive.
No More Allotments. On November 21, in an effort to curb allotment system abuses, the Department of Defense announced a policy change that will prohibit servicemembers from using new allotments to buy, lease, or rent personal property, effective January 1, 2015. The allotment system allows servicemembers to make discretionary allotments from their pay and set up automatic payments to creditors for a variety of purposes. Under the new policy, personal property includes vehicles, appliances or household goods, electronics, or other tangible and movable consumer items. The policy change will not affect existing allotments and does not prohibit allotments to savings accounts or investments, to support dependents, or to pay insurance premiums, mortgages, or rents. The change applies only to active duty servicemembers, not military retirees or DoD civilians.
A Reminder on Disability Income. On November 18, the Consumer Financial Protection Bureau issued a bulletin to help lenders avoid imposing illegal burdens on consumers receiving disability income who apply for mortgages. The bulletin focused on housing credit, but auto creditors should take note of its contents, some of which apply to their activities.
Beating the Used Car Rule to Death. On November 20, the FTC issued a supplemental notice of proposed rulemaking seeking more public comment on proposed changes to the Used Car Buyers Guide required by its Used Car Rule. In December 2012, the FTC sought comments on proposed changes to the Guide as part of its systematic review of its rules and guides. In February 2013, the FTC extended the comment deadline to March 2013. The FTC now seeks comments on more potential Rule revisions that would: (1) require dealers to indicate on the Buyers Guide whether they obtained a vehicle history report and, if so, to give a copy of the report to consumers who request it; (2) revise the Buyers Guide statement describing the meaning of an “As Is” sale in which a dealer offers a vehicle for sale without a warranty; and (3) move boxes to the front of the Buyers Guide for dealers to indicate whether non-dealer warranties apply to a vehicle. The FTC also seeks comment on six questions and many subparts concerning the proposed Rule modifications. Comments are due on the new proposed amendments by January 30, 2015.
BHPH Servicing Woes. On November 19, the CFPB took its first action against a “buy-here, pay-here” car dealer. The CFPB claims that DriveTime employees harassed borrowers at work, harassed borrowers’ references, made excessive and repeated calls to wrong numbers, provided inaccurate repossession information to credit reporting agencies, failed to properly handle consumer complaints about alleged inaccurate information DriveTime furnished to credit reporting agencies, and failed to implement reasonable procedures to ensure the accuracy of consumers’ credit information. DriveTime must pay $8 million as a civil money penalty, end its allegedly unfair debt collection tactics, fix its credit reporting practices, and arrange for harmed consumers to obtain free credit reports.
Arbitration Denied where Merger Clause in RISC without Arbitration Superseded Purchase Agreement with Arbitration: Car buyers signed a retail purchase agreement containing an arbitration clause. They also signed a retail installment sale contract that did not contain an arbitration clause, but included a merger clause stating that the RISC contained the entire agreement. The buyers sued the dealership for violating Florida’s Deceptive and Unfair Trade Practices Act in connection with electronic titling/registration filing fees charged to its customers. The dealership moved to compel arbitration, and the trial court denied the motion, concluding that the RISC, with no arbitration clause, superseded the retail purchase agreement. The Court of Appeal of Florida affirmed, agreeing with the trial court that no agreement to arbitrate existed because the merger clause in the RISC rendered the retail purchase agreement’s arbitration clause nugatory. See HHH Motors, LLP v. Holt, 2014 Fla. App. LEXIS 19710 (Fla. App. December 3, 2014).
California Courts Discuss Claims Arising from Sale of “Certified” Car: Three cases we report on this month discuss claims against a dealership arising from the sale of “certified” cars. In each case, the buyers claimed that the dealership put, in the car’s glove box, a Certified Quality Inspection Certificate, which consists of a generic list of components that were inspected but not the results of the inspection. They claimed that the dealership violated California’s Consumers Legal Remedies Act, Unfair Competition Law, and Vehicle Code § 11713.18(a)(6), which prohibits a dealer from describing a car as “certified” if, “[p]rior to the sale, the dealer fails to provide the buyer with a completed inspection report indicating all of the components inspected.” In one case, the U.S. District Court for the Southern District of California denied the dealership’s motion to dismiss. The court found that the buyer had standing to bring her claims because she sufficiently alleged that she lost money or property when the dealership advertised her vehicle as “certified” without providing her, prior to the sale, a completed inspection report as required by Section 11713.18(a)(6). See Zambrano v. CarMax Auto Superstores, LLC, 2014 U.S. Dist. LEXIS 166285 (S.D. Cal. December 1, 2014). In the second case, the U.S. District Court for the Eastern District of California dismissed the complaint, finding that the buyer lacked standing because she did not allege an injury. She did not allege that an inspection did not occur or was insufficient; she merely complained that she did not receive the proper paperwork. Moreover, she did not support her claim that she overpaid for the car merely because it was deemed “certified.” See Chulick-Perez v. CarMax Auto Superstores California, LLC, 2014 U.S. Dist. LEXIS 167000 (E.D. Cal. December 2, 2014).
The U.S. District Court for the Eastern District of California dismissed the third case. The court found that the buyer lacked standing to bring claims related to receiving a generic inspection certificate rather than the authentic record of the inspection because she did not plead injury. She did not allege that the car was not inspected but merely complained that she did not receive the inspection checklist. Although the court found that the buyer had standing to bring claims alleging that the dealership made affirmative misrepresentations and fraudulent omissions regarding the history and condition of the vehicle, the court nevertheless dismissed these claims because the allegations did not meet heightened pleading standards for fraud. See Sigala v. CarMax Auto Superstores, LLC, 2014 U.S. Dist. LEXIS 158743 (E.D. Cal. November 10, 2014).
Service Contract Properly Included in Amount Financed Where Service Contract Purchase Not Required for Financing: When a buyer bought a car from a dealership, she also bought GAP protection and a service contract. The buyer claimed that she did not want to buy the service contract but that she was told that its purchase was required in order to obtain financing. The buyer sued the dealership for violations of the Truth in Lending Act, alleging that the service contract charge should have been included in the finance charge, rather than in the amount financed disclosure, because it was payable incident to the extension of credit. The U.S. District Court for the District of Minnesota granted summary judgment for the dealership. The court found that even if the dealership stated that the service contract was a condition of financing, the documents the buyer signed in connection with the truck purchase stated otherwise. The service contract itself stated that purchase of the service contract was not required in order to buy or finance the vehicle. The Product Price and Payment Disclosure for Installment Sales also stated that finance terms and approval were not conditioned on the purchase of the service contract. See Salvate v. Automotive Restyling Concepts, Inc., 2014 U.S. Dist. LEXIS 168693 (D. Minn. December 5, 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. (1/15), HC# 4840-1005-4945.