By Thomas B. Hudson and Nicole Frush Munro
Here we go again. This month, we feature developments from the Consumer Financial Protection Bureau and the Federal Trade Commission we thought might interest to those in the auto sales, finance or leasing business. We also recap some of the auto sale and financing lawsuits we follow each month. Remember – we aren’t reporting every recent legal development, only 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 questions.
This Month’s CARLAWYER© Compliance Tip
Most of the companies that buy your retail installment contracts are now subject to supervision by the CFPB. Would you like to see what the CFPB expects of those companies, so you will know what the companies will be expecting from you? If so, check out the Auto Finance Examination Guidelines on the CFPB’s web site. It’s like getting a peek at the other team’s playbook!
Checked Your Pay Plan Lately? Signaling its interest in how compensation systems can harm consumers, the CFPB on June 5 ordered a California bank to pay a civil penalty of $228,000 for paying its branch managers based, in part, on the interest rates of the mortgage loans they closed. The Loan Originator Compensation Rule, which the CFPB enforces, protects consumers from being steered into costlier loans by prohibiting loan originators from receiving compensation based on the interest rates of loans they close. Even though the Rule doesn’t apply to car dealers, we believe that the CFPB might similarly challenge dealer compensation systems on other grounds.
Title Lenders Take Note. On June 10, the FTC approved final consent orders with two car title lenders that allegedly failed to disclose important conditions and financing information about their loans. The orders prohibit First American Title Lending and Fast Cash Title Pawn from failing to disclose all the qualifying terms associated with obtaining a loan at its advertised rate and what the finance charge will be after an introductory period. They are also prohibited from misrepresenting any material terms of their loan agreements. First American is also prohibited from stating the amount of any down payment, number of payments or periods of repayments, or the amount of any payment or finance charge without clearly and conspicuously stating all terms required by the Truth in Lending Act and Regulation Z. These cases were the first of their kind for the FTC, which characterized the cases as part of its ongoing effort to protect consumers in the short-term lending and auto marketplaces.
Complain, Complain, Complain. On June 25, the CFPB went live with an enhanced public-facing consumer complaint database, which includes for the first time over 7,700 consumer accounts of problems with financial companies concerning mortgages, bank accounts, credit cards, debt collection, and more. The CFPB also wants input on whether there are ways to enable the public to more easily understand and make comparisons of the complaint information. In June 2012, the CFPB launched its Consumer Complaint Database, which includes basic, anonymous, individual-level information about complaints received, including the date, zip code, company, product, the issue the consumer is complaining about, and how the company handled the complaint. In March 2015, the Bureau finalized a policy to empower consumers to publicly share their stories when they submit complaints. Since the Bureau launched this feature, more than half of complaining consumers have “opted in” to share their accounts of what happened. Now, these narratives, scrubbed of personal information, will be added to the complaint database daily. The CFPB says that the narratives provide context to complaints, are easily searchable, and help spotlight specific trends, and claims the narratives can help consumers make more informed decisions, encourage companies to improve the overall quality of their products and services and increase competition over good customer service. The narratives have been roundly criticized by industry as a one-sided mechanism that permits consumers to air unverified stories that companies cannot defend against.
U.S. Supreme Court Holds that Claims Based on Disparate Impact Theory Are Valid Under Section 804 of Fair Housing Act: In an important victory for the federal government and housing advocates, the U.S. Supreme Court held that the FHA supported claims based on race-neutral policies that have the effect of disfavoring minorities. The decision has been closely watched by auto creditors looking for signals about how the Supreme Court might rule on the disparate impact theory under the Equal Credit Opportunity Act. The CFPB and the Department of Justice are aggressively pursuing disparate impact cases against indirect auto creditors based on finance rates set by dealers. Many observers have noted that the FHA statutory language and legislative history on which the decision is based differ significantly from the ECOA, leaving open the question of whether the Court would reach the same conclusion under the ECOA. There is no case currently before the Supreme Court that presents this question under the ECOA. The decision is likely to leave the status of disparate impact claims under the ECOA uncertain. See Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc., 2015 U.S. LEXIS 4249 (U.S. (5th Cir. (N.D. Tex.)) June 25, 2015).
Vehicle-Secured Creditor Had No Right to Recover From Third Party or Third-Party’s Insurance Company for Damage Caused by Accident with Debtor: A creditor had a security interest in a car involved in an accident. The debtor did not have liability or collision insurance on the car. Louisiana’s “No Pay, No Play” law prohibited the uninsured debtor from recovering the first $25,000 of property damage from the third party involved in the accident, or from his insurance company. The creditor sued the third party and his insurance company for the amount of its lien. The trial court granted summary judgment for the creditor. The third party and his insurer appealed. The appeals court reversed the trial court’s decision. According to the appeals court, the creditor was entitled to any damages or insurance proceeds the debtor could recover from the third parties as a result of the damage to her car. But, the creditor could not recover damages from the third parties unless they owed the debtor in the first place. Because the debtor had no insurance on her vehicle at the time of the accident, the “No Pay, No Play” law barred the debtor from recovering the first $25,000 worth of property damage she suffered. As a result, the creditor could not collect from the third parties. See M&M Financial Services, Inc. v. Hayes, 2015 La. App. LEXIS 1163 (La. App. June 5, 2015).
Dealership’s Assignment of Finance Contract to Third Party Did Not Negate its Standing to Sue for Unpaid Down Payment: A dealership and a car buyer entered into a retail installment contract that disclosed, in the Itemization of Amount Financed, a down payment of $10,000. The dealership sued the buyer, claiming he never paid the down payment. The trial court agreed and entered a judgment for the dealership for $10,000, but refused to award the dealership its requested attorneys’ fees. The circuit court affirmed the judgment with regard to the down payment, but reversed as to the request for attorneys’ fees. The Court of Appeals of Michigan affirmed in part and reversed in part, finding that the dealership was entitled to judgment for the down payment but was not entitled to attorneys’ fees. The buyer argued that the dealership lacked standing to sue to recover the down payment under the RIC because it assigned its rights to a third-party finance company. The appellate court agreed with the two lower courts that the RIC related only to the payment of the amount financed and did not govern payment of the down payment, which was governed by a separate oral contract between the parties. Therefore, the dealership’s assignment of the RIC had no effect on its standing to sue to recover the down payment. Regarding the claim for attorneys’ fees, the appellate court found that, in general, litigants must pay their own attorneys’ fees. However, an exception to this rule exists where attorneys’ fees are provided by contract of the parties. The dealership argued that the RIC provision governing payment of attorneys’ fees in the event of a breach met this exception. The appellate court disagreed, noting that because the RIC did not govern the down payment, its attorneys’ fee provision did not apply in a suit to collect the down payment. See Jay Chevrolet, Inc. v. Dedvukaj, 2015 Mich. App. LEXIS 1143 (Mich. App. June 2, 2015).
So there’s this month’s roundup! Stay legal, and we’ll see you next month.