By Thomas B. Hudson and Nicole Frush Munro
Hello again! This month, we feature developments from the Consumer Financial Protection Bureau and the Federal Trade Commission we thought might interest 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 industry.
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
Do your deal jackets look like rats’ nests? Believe it or not, imposing order on the contents of your deal jackets will improve your compliance and reduce risks. If you have a checklist for each document you require for a deal jacket and every deal jacket has a specific place for each required document, you will be more likely to have complete files. Also, if there is no specific place for a document that someone’s trying to put into a deal jacket, that will raise the issue of whether the document is one that actually needs to be retained in the jacket. The result will be tighter compliance all the way around.
CFPB Makes “Stealth” Change in Reg. Z Disclosure Requirements. Regulation Z Section 1026.18(k), requiring disclosure of prepayment penalties in closed-end transactions, was revised effective October 3, 2015. The section now states that in an obligation with a finance charge computed from time to time by applying a rate to the unpaid principal balance (e.g., a so-called “simple interest” retail installment sales contract), the prepayment penalty disclosure should indicate whether or not a charge may be imposed for partial or full prepayment (rather than just full, as previously required). This change was hidden in the new TILA/RESPA Integrated Disclosure Rule for mortgage loans. The change may require updates to the prepayment disclosure in the federal box on installment sales and loan forms entered into by covered persons. The CFPB has not revised the prepayment language for this disclosure in the model forms it publishes, and creditors will need to address the effect of this change on the TILA safe harbor provisions. Also, the Bureau’s change from the term “obligation” to “loan” calls into question the effect of the change with respect to credit sale transactions. In another odd twist, because the Federal Reserve has not yet changed its version of Regulation Z, this revision does not apply to dealers exempt from CFPB authority.
CFPB Targets Auto Finance Companies’ Collection Practices. On October 1, the CFPB announced a consent order with Westlake Services, LLC, an indirect auto finance company, and Wilshire Consumer Credit, LLC, a wholly-owned subsidiary of Westlake that offers and services auto title loans. The CFPB alleged that the companies used illegal debt collection tactics, changed due dates or extended the terms of title loans without the customers’ consent while misrepresenting to customers that the changes would be beneficial, and failed to clearly disclose the APRs of title loans in their advertisements. The CFPB also claimed that the companies provided false caller ID information, falsely threatened to refer customers for investigation or criminal prosecution, falsely implied that customers’ repossessed vehicles would be returned if the borrower made a partial payment, disclosed customers’ loan information to third parties, and paid a third-party repossession company to make debt collection calls to customers when the defendants allegedly had no intention to repossess the customers’ vehicles. Under the consent order, the companies must pay $44.1 million to customers and $4.25 million as a civil penalty, and must end deceptive debt collection practices, protect customers’ private information, end unlawful advertisements, and give customers truthful information about their extensions of credit.
Goodbye, Arbitration Agreements. To no one’s surprise, on October 7th, the CFPB announced that it is considering proposing rules to ban consumer financial companies from using the sorts of arbitration agreements currently employed by creditors to reduce the risk of class action lawsuits. The Dodd-Frank Act required the CFPB to study the use of arbitration clauses in consumer financial markets and gave it the power to issue regulations to protect consumers consistent with the study’s findings. The CFPB claims that its study – released in March – shows that arbitration clauses restrict consumers’ relief in disputes with financial service providers by allowing companies to block class action lawsuits and that, in the consumer finance markets studied (notably not including vehicle lease and financing), very few consumers seek individual relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through group settlements. The proposals would not ban arbitration clauses altogether, but the clauses would have to say explicitly that they do not apply to cases filed as class actions unless and until class certification is denied by the court or the class claims are dismissed in court. The proposals would also require that companies choosing to use arbitration clauses for individual disputes submit to the CFPB the claims filed and awards issued. The Bureau is considering publishing claims and awards on its website so the public can monitor them.
FTC (Again) Targets Advertising. On October 20, the FTC approved final consent orders against two Las Vegas dealers that allegedly misrepresented the cost of cars in advertising. In June, TC Leadership LP, doing business as Planet Hyundai, and JS Autoworld Inc., d/b/a Planet Nissan, agreed to settle FTC charges that their ads included heavily discounted prices not generally available to consumers. The consent orders prohibit the dealers from misrepresenting the cost of financing or leasing a vehicle, stating the amount due at signing without disclosing certain lease terms, and failing to comply with Regulation M and the Consumer Leasing Act, and Regulation Z and the Truth in Lending Act. They are also prohibited from stating the amount or percentage of any down payment without disclosing repayment terms and the annual percentage rate.
Car Buyers Who Relied on Oral Statements that Contradicted Written Documents Entitled to Proceed on Fraud Claims: Consumers buying an SUV told the salesperson they could not afford payments greater than $300 per month. The salesperson told them their payments would be about $300 per month for 36 months. The finance person also told them that their payments would be around $300 per month and then asked them to sign various documents while hiding the text of the documents except for the area requiring a signature or initial. When they got home, they reviewed the documents and noticed they were obligated to make 12 monthly payments of $882. They sued the dealership, alleging violations of the federal Truth in Lending Act and the Maryland Consumer Protection Act, fraud, and negligent misrepresentation, among other claims. The dealership moved for summary judgment, and the court granted the motion in part and denied it in part. The buyers alleged that the dealership violated TILA’s requirement to provide certain disclosures before credit is extended by preventing them from reading the documents they were asked to sign. The court granted summary judgment to the dealership on this claim with respect to statutory damages, finding that statutory damages are not available for timing violation claims, but did not grant summary judgment with respect to the claim for actual damages. The buyers also alleged that the dealership committed fraud, made negligent misrepresentations, and violated the MCPA by orally representing that their payments would be significantly less than the documents provided. The dealership claimed that the buyers could not prove they reasonably relied on oral statements that were directly contradicted by documents. The court refused to grant summary judgment to the dealership on these claims, finding that it was reasonable for relatively unsophisticated buyers allegedly prevented from reading the documents to rely on the dealership’s oral representations about the monthly payments. See Price v. Berman’s Automotive, Inc., 2015 U.S. Dist. LEXIS 129823 (D. Md. September 28, 2015).
Assignee of Retail Installment Sale Contract Not Liable under TILA for Inconsistencies Between Contract and Sales Invoice: In connection with a vehicle sale, the dealership provided the buyer with a retail installment sale contract reciting a total purchase price of $33,877.89. The RISC and related documents were assigned to a finance company. The sales invoice listed the car’s price as $25,629 and the total price as $31,038.25. With tax, the invoice listed the total price as $34,129.39. The buyer sued the dealership and the finance company for violations of the Truth in Lending Act, among other claims, for these inconsistencies. The finance company moved for summary judgment, and a magistrate judge recommended that the court grant the motion. The buyer argued that the finance company violated TILA because the RISC was “wildly inconsistent” with other transaction documents, especially with regard to the sales price. However, the judge explained that, under TILA, an assignee of a contract is liable only if the violation is apparent on the face of the disclosure statement. In this case, the judge found that there were no violations apparent on the RISC, and, therefore, the finance company could not be liable for a TILA disclosure violation. See Pierre v. Planet Automotive, Inc., 2015 U.S. Dist. LEXIS 134253 (E.D.N.Y. September 11, 2015).
Dealer Lacked Duty to Investigate Driving History or License Status of Co-Buyer: Two individuals bought a car from a dealership. One of the buyers did not have a driver’s license, but produced a state ID as a form of identification. Eight days after the sale, that buyer hit another individual with the car. The injured party sued the dealership for negligence and negligent entrustment. The dealership moved for summary judgment, arguing that it owed the injured party no duty to investigate the co-buyer’s driving record and did not know or have reason to know that the buyer was likely to use the car in a risky manner. The trial court granted summary judgment for the dealership, and the injured party appealed. The Court of Appeals of Colorado affirmed, finding that the dealership did not owe a duty to the injured party to investigate the co-buyer’s license or driving history. As a result, the injured party had no negligence claim. Next, the court decided that the dealership did not know or have reason to know that the co-buyer was likely to use the car in a way that would cause an unreasonable risk of physical harm to others simply because he did not produce a driver’s license when he bought the car. As a result, the dealership did not have a duty to prevent the sale. See Beasley v. Best Car Buys, Ltd., 2015 Colo. App. LEXIS 1535 (Colo. App. October 8, 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 the F&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. (11/15). HC# 4813-2078-0842.