By Thomas B. Hudson and Nicole Frush Munro
Here we go again. This month, we feature developments from the Consumer Financial Protection Bureau, the Federal Trade Commission, the Department of Defense and Congress 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
Are your employees who deal with car buyers doing so in compliance with all federal and state laws? How do you know whether they are or not? Consider “mystery shopping” your own dealership, with a shopper who has been briefed by your counsel on what to say and how to behave. Perhaps you’ll discover some pleasant surprises. Or not.
Protecting Our Servicemembers. On July 22, the DoD published its final Military Lending Act Rule. The rule expands MLA protections to installment loans, unsecured open-end lines of credit, deposit advance loans, and credit cards. It continues to apply to payday loans, vehicle title loans, and refund anticipation loans, and continues to exclude residential mortgages and credit extended to finance the purchase of, and secured by, personal property such as vehicles. The regulation provides several significant protections to active duty servicemembers and their families, including a 36 percent Annual Percentage Rate limit, which covers all interest and fees associated with the loan. This limit now includes charges for some ancillary “add-on” products such as credit default insurance and debt suspension plans. The MLA also prohibits creditors from, among other things, requiring servicemembers to submit to mandatory arbitration and onerous legal notice requirements, waive their rights under the Servicemembers Civil Relief Act, or provide an allotment as a condition of obtaining credit (with some exceptions). The rule, effective October 1, 2015, has staggered compliance dates. Auto finance companies and dealers should be concerned that these restrictions will be extended to cover them.
Wanna Buy Some Hot Leads? On July 22, the FTC announced a workshop on October 30, 2015 to discuss consumer protection issues arising from online lead generation in various industries, including consumer lending. The Washington, D.C. workshop is free and open to the public. The FTC is seeking research, suggested discussion topics, and panelists for the workshop.
Allotting Time for Advertisement Review. On July 20, the CFPB announced that it sent letters to several companies that sell retail goods to military servicemembers, warning them that certain ads that allow servicemembers to pay by allotment may violate federal consumer financial protection laws and that they should review their advertising and business practices related to military allotments. The allotment system lets servicemembers direct part of their paychecks to pay for certain goods. Last year, the DoD announced changes to the system that prohibit new allotments to buy, lease, or rent personal property such as vehicles, appliances, and consumer electronics. The Bureau noted that misleading servicemembers about payment options and allowing them to pay by allotment when prohibited by the DoD’s regulations could violate the Dodd-Frank Act’s prohibition against unfair, deceptive, or abusive acts or practices.
BHPH Collectors, Attention! On July 17, the FTC announced that it will host two additional “dialogues” to discuss issues related to the debt collection industry. The events are scheduled for Dallas on September 29 and Atlanta on November 18. Participants will discuss enforcement actions, consumer complaints, compliance issues, and industry best practices. The events are free and open to the public. BHPH dealers should pay attention to this topic.
Checked the CFPB’s Complaint Database Lately? On July 16, the CFPB released its first monthly complaint report, highlighting trends in the data the CFPB receives through its Consumer Complaint Database. The monthly report includes complaint data on certain companies, overall complaint volume, complaint volume by state, and other data trends. The monthly report will spotlight complaints about a particular issue and complaints from a particular geographic location. This month’s report featured debt collection complaints from Milwaukee, where the Bureau held a field hearing in May.
Curbing Dealer Finance Charge Rate Discretion. On July 14, the CFPB and the Department of Justice resolved an action with American Honda Finance Corporation that will put new measures in place to address discretionary auto financing pricing and compensation practices. The CFPB claimed that Honda’s practices resulted in African-American, Hispanic, and Asian and Pacific Islander consumers paying higher rates than white consumers for auto financing, without regard to their creditworthiness. Under the order, Honda will change its pricing and compensation system to substantially reduce dealer discretion and will pay $24 million in restitution to affected consumers.
FTC Continues to Hammer Dealer Ads. On June 29, the FTC announced a proposed consent order with two Las Vegas dealerships that allegedly used deceptive ads in connection with the sale and leasing of vehicles. Among other charges, the FTC alleged that the dealerships’ ads violated the FTC Act, the Consumer Leasing Act, and the Truth in Lending Act by misrepresenting the purchase price or leasing offer, failing to disclose required lease terms, and misrepresenting the down payment amount.
A Shot Across the CFPB’s Bow. Also on July 29, the House Financial Services Committee voted 47 to 10 to rescind the CFPB’s March 2013 fair credit guidance to indirect auto creditors require the CFPB, when proposing and issuing future guidance related to indirect auto financing, to take basic procedural steps to ensure the guidance is both transparent and informed. These steps include providing for public notice and comment, making publicly available the methodologies and other information the CFPB relied upon in developing the guidance, coordinating with the FRB, FTC, and DOJ, and studying the cost and impact of the guidance on consumers as well as small, women-owned, and minority-owned businesses.
Supreme Court’s Ruling on Disparate Impact in Fair Housing Discrimination Case May Signal How Court Might Rule on ECOA Disparate-Impact Claims against Indirect Auto Creditors: A nonprofit that assists low-income families in obtaining affordable housing sued the Texas Department of Housing and Community Affairs, alleging a disparate-impact discrimination claim under the Fair Housing Act based on the racial composition of the neighborhoods in which the department allocated tax credits. The trial court found that the nonprofit’s statistical evidence established a prima facie showing of disparate impact and that the department failed to meet its burden to show that there were no less discriminatory alternatives for allocating tax credits. The appellate court held that disparate-impact claims were cognizable but remanded, concluding that the trial court erred in requiring the department to prove less discriminatory alternatives. In a 5-4 majority, the U.S. Supreme Court upheld the appellate court ruling that disparate-impact claims are cognizable under the FHA but imposed significant practical limitations on their application. The decision has been closely watched by auto creditors as well, who are looking for signals about how the Supreme Court might rule on the disparate-impact theory under the Equal Credit Opportunity Act, as the Consumer Financial Protection Bureau and the Department of Justice are aggressively pursuing disparate-impact cases against indirect auto creditors based on finance rates set by auto dealers. Many observers have noted that the FHA language and legislative history on which the Court’s majority decision is based differ significantly from the ECOA, leaving open the question of whether the Court would reach the same conclusion under the ECOA. See Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., 2015 U.S. LEXIS 4249 (U.S. (5th Cir. (N.D. Tex.)) June 25, 2015).
Court Reads Buyer’s Order with Arbitration Agreement and RISC without Arbitration Agreement Together to Determine that Parties Intended to Arbitrate Claims: When car buyers went to a dealership to buy a car, the Buyer’s Order they signed included an agreement to arbitrate any claims arising from the transaction, while the retail installment sale contract they signed did not. However, both the Buyer’s Order and the RISC included integration provisions incorporating by reference all other documents signed by the buyers in connection with the purchase of the car. The buyers sued the dealership when they discovered the car had been involved in a collision and had also been used as a short-term rental prior to their purchase. The dealership moved to compel arbitration under the agreement to arbitrate in the Buyer’s Order. The trial court ordered the parties to arbitrate the claims. On appeal, the buyers argued that a certain provision of the Maryland regulations governing auto financing requires that all of the terms of the vehicle sale and financing be contained in a single document. In this case, the buyers argued that the controlling document was the RISC, which did not include an agreement to arbitrate. The Maryland Court of Appeals disagreed, holding that nothing in the Maryland regulations supplants the common law principle permitting the reading of multiple documents together as part of a single transaction, particularly where the documents contain integration provisions. Therefore, the appellate court affirmed the trial court’s decision to compel arbitration. See Ford v. Antwerpen Motorcars Ltd., 2015 Md. LEXIS 480 (Md. April 1, 2015).
Car Buyer Stated Sufficient Theory of Damages in Claim against Dealership under California Law for Failure to Disclose Defects: A consumer bought a used car from a dealership. The car had been used as a rental car, but no dealership representative told the buyer of this prior use, and the ads for the car did not state the prior use. However, the buyer signed a statement when buying the car that she was aware of the prior rental car use. Almost immediately, the buyer had problems with the car jerking and hesitating, which the dealership was unable to resolve. The buyer sued the dealership for, among other things, violating the Consumers Legal Remedies Act and engaging in unfair practices by failing to disclose certain defects in the car. The buyer alleged that she suffered damages because she would not have bought the car if it was defective. The dealership moved to dismiss the complaint for failure to state a claim. The court denied the motion with respect to the CLRA and unfair practices claims. The court found that the buyer stated a sufficient theory of damages. See Malone v. CarMax Auto Superstores California, LLC, 2015 U.S. Dist. LEXIS 82253 (C.D. Cal. June 23, 2015).
Buyer Stated Claim that Dealership Employees Were Aware of or Recklessly Disregarded False Information Regarding Odometer Mileage: A dealership acquired a 2007 trade-in with 3,650 miles on it. During inspection, a dealership technician told his supervisor that he suspected the odometer was inaccurate. The dealership nevertheless added the car to its sales lot. After discussing the mileage with the saleswoman, an individual bought the car “as is” and without warranty and received an Odometer Disclosure Statement indicating the car had 3,650 miles to the best of the dealership’s knowledge. A few months later, the car’s engine failed. An inspection at another dealership showed a problem with the odometer and that the car needed a replacement engine. The selling dealership refused to repair or accept return of the car. The buyer sued the dealership for, among other things, fraud and violation of the Georgia odometer statute. The trial court granted the dealership summary judgment on the fraud claim, but denied summary judgment on the odometer statute claim. The Court of Appeals of Georgia reversed the grant of summary judgment on the fraud claim, concluding that there was a question of fact as to whether the dealership issued a substantially inaccurate odometer statement because the saleswoman assured the buyer of the odometer’s accuracy, and more than one employee was aware that the odometer information was false or recklessly disregarded the possibility that it was false. The appellate court concluded that it was for a jury to determine if the dealership took any action to alter the odometer or had any knowledge that it had been altered, and therefore the Georgia odometer statute claim survived summary judgment as well. See Alvear v. Sandy Springs Toyota, Inc., 2015 Ga. App. LEXIS 392 (Ga. App. July 7, 2015).
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 and is the publisher of Spot Delivery®, a monthly legal newsletter for auto dealers. He is Editor in Chief of CARLAW®, a monthly report of legal developments for the auto finance and leasing industry. Nikki is a contributing author to theF&I Legal Desk Book and frequently writes for Spot Delivery. For information, visit www.counselorlibrary.com. Copyright CounselorLibrary.com 2015, all rights reserved. Single publication rights only, to the Association. (8/15). HC# 4816-7599-4150.