By Nicole F. Munro and Thomas B. Hudson
An early happy Spring to you! We hope your garden thrives and that your daffodils and tulips are popping up.
Here’s our monthly article on selected legal developments we think might interest the auto sales, finance, and leasing world. This month, the action involves the Consumer Financial Protection Bureau, the Department of Defense, and the Federal Trade Commission. As usual, our article features the “Case of the Month” and our “Compliance Tip”.
Note that this column does not offer legal advice. Always check with your lawyer to learn how what we report might apply to you, or if you have questions.
DOD Withdraws Military Lending Act’s Q&A #2. On February 28, the Department of Defense issued an amended interpretive rule for the Military Lending Act. The MLA imposes various protections on consumer credit transactions entered into with “covered borrowers” (generally speaking, active-duty servicemembers and their dependents), including a 36% “military annual percentage rate” cap, oral and written disclosure requirements, and other specified limitations and prohibitions.
In December 2017, the DOD created difficulties for creditors with an amended interpretive rule seeking to clarify which personal property and auto purchase-money credit transactions were eligible for an exclusion from the MLA’s definition of covered “consumer credit transactions.” Before the 2017 amendment, most in the auto finance industry believed that the MLA excluded purchase-money auto credit transactions. However, the DOD’s so-called “Q&A #2” instead stated that if a transaction also financed “a credit-related product or service,” it would not be eligible for the exclusion.
The DOD failed to define “credit-related product or service” but provided examples—namely GAP and credit insurance. Further complicating the issue, the MLA separately prohibits creditors from securing consumer credit transactions with covered borrowers with a motor vehicle title. As a result, dealers were in a Catch-22, in which vehicle financing transactions that financed credit-related products or services, such as GAP, were deemed covered by the MLA. But there was no way for dealers to comply with the requirements of the MLA unless the transaction was unsecured, an impractical solution at best.
The new interpretive rule resulted from formal requests to the DOD by various trade groups, including the National Automobile Dealers Association, the American Financial Services Association, the Consumer Credit Industry Association, the American Bankers Association, the Consumer Bankers Association, and the Guaranteed Asset Protection Alliance. As a result of those formal requests, the DOD became aware of, and found merit in, the concern that creditors were unable to technically comply with the MLA “if the purchase included products not expressly related to the purchase of the vehicle … because [the MLA] would prohibit creditors from taking a security interest in the vehicle in those circumstances and creditors may not extend credit if they could not take a security interest in the vehicle being purchased.”
As a result, effective February 28, the DOD withdrew Q&A #2 because of the unforeseen technical issues created. The interpretive rule indicates that the DOD is not currently taking a position on any of the arguments asserted in connection with the withdrawal. Thus, it’s unclear if further developments will be forthcoming after the DOD conducts its additional analysis.
The interpretive rule also includes a new FAQ, definitively stating that the MLA’s safe harbor for covered borrower status determinations also extends to searches of the DOD’s MLA database conducted using an Individual Taxpayer Identification Number. For purposes of the MLA, the term “social security number” is now defined to include an ITIN.
FTC Requests Comment on Endorsements and Testimonials in Advertising Guides. Do you use testimonials in your ads? On February 21, the FTC, as part of its periodic review of its rules and guides, requested public comment on its Guides Concerning the Use of Endorsements and Testimonials in Advertising. The guides are designed to assist businesses in conforming their endorsement and testimonial advertising practices to the requirements of Section 5 of the FTC Act. Comments are due by April 21.
CFPB Issues Supplemental Notice of Proposed Rulemaking on Collection of Time-Barred Debt. Collectors take note! On February 21, as a supplement to last year’s proposed rule implementing the Fair Debt Collection Practices Act, the CFPB issued a supplemental notice of proposed rulemaking focused on the collection of time-barred consumer debt (i.e., a debt on which the statute of limitations has expired). The CFPB has been hinting at this move for several months. The CFPB requests comments on the supplemental proposed rule within 60 days after its publication in the Federal Register (an expedited turnaround). The supplemental proposed rule includes a proposed effective date of one year after the final rule appears in the Federal Register.
The supplemental proposed rule is designed to address the concern, played out in numerous reported FDCPA cases, that debt collectors might be misleading unsophisticated consumers by trying to collect time-barred debt without disclosing that the debt is not legally enforceable through the courts and, when applicable, that making a payment could revive the statute of limitations.
The CFPB proposes to require a debt collector subject to the FDCPA who is collecting a debt the debt collector knows or should know is time barred to disclose to the consumer debtor: (1) that the law limits how long the consumer can be sued for a debt and that, because of the age of the debt, the debt collector will not sue the consumer to collect it; and (2) if the debt collector’s right to bring a legal action against the consumer to collect the debt can be revived under applicable law, the fact that revival can occur and the circumstances under which it can occur.
The CFPB also proposes model safe harbor forms debt collectors may use to comply with the proposed time-barred debt disclosure requirements (if the proposed rule is enacted as proposed).
Case of the Month
Court Compelled Arbitration of Claims Based on Two Separate Arbitration Agreements, Even Though They Contained Conflicting Procedural Provisions: A borrower obtained an installment loan from a lender. The installment loan agreement contained an arbitration agreement (“first arbitration agreement”).
In connection with the loan agreement, the borrower bought insurance policies issued by the lender’s subsidiaries. The insurance policies also contained an arbitration agreement (“second arbitration agreement”).
A representative of the lender allegedly handed the second arbitration agreement to the borrower, but the lender did not sign it. The two arbitration agreements were similar but not identical.
When the borrower filed a Chapter 7 bankruptcy petition, he brought an adversary proceeding against the lender, alleging that it violated the Truth in Lending Act by providing inaccurate disclosures in the loan agreement. The lender moved to dismiss the complaint or compel arbitration.
The bankruptcy court denied the motion, concluding that the arbitration agreements formed a single contract and that the conflicting provisions meant that the borrower and the lender had not formed a sufficiently definite contract to arbitrate under Mississippi law.
The district court affirmed, but the federal appellate court reversed and directed the district court to refer the case to arbitration. First, the appellate court concluded that the parties formed a valid agreement to arbitrate. The appellate court agreed with the bankruptcy court that the arbitration agreements should be construed together where they were executed at the same time, by the same parties, as part of the same transaction.
The appellate court also found that the lender was a party to the second arbitration agreement, even though the lender did not sign it, because the lender conceded that its representative handed the borrower both arbitration agreements to sign, and both arbitration agreements were closely related in that they both required the borrower to arbitrate any dispute involving the lender, both applied to all disputes that arise from the loan and the insurance policies, and the loan agreement referenced the insurance policies the borrower bought.
After determining that the arbitration agreements should be construed together, the appellate court found that the parties had a meeting of the minds regarding arbitration, despite conflicting provisions over several procedural aspects of arbitration, including the selection and number of arbitrators, time to respond, location, and fee-shifting. According to the court, “[t]he parties’ intentions were unmistakable: They wished to arbitrate any dispute that might arise between them. Not once but twice they stated that any dispute arising from the loan [the borrower] purchased should be arbitrated. Both agreements broadly cover ‘all claims and disputes between’ [the borrower] and [the lender], and both embrace any federal law claim that [the borrower] brings.” “Though the agreements differ over procedural details, they speak with one voice about whether to arbitrate.”
After concluding there was a valid agreement to arbitrate, the appellate court concluded that the delegation clauses in the arbitration agreements required an arbitrator, and not the court, to decide whether the TILA claim is arbitrable.
See In re Willis (Tower Loan of Mississippi, L.L.C. v. Willis), 2019 U.S. App. LEXIS 36738 (5th Cir. (S.D. Miss.) December 12, 2019).
This Month’s CARLAWYER© Compliance Tip
A recent Spot Delivery article warned that using multiple, and different, arbitration agreements in the same consumer transaction was not a good idea because it gave a court looking for an excuse not to enforce the arbitration agreement an invitation to invalidate the creditor’s right to compel the consumer to arbitrate. The Willis court addressed the issue, and gave the creditor a pass. We suspect that, depending on the similarities and differences in multiple arbitration agreements, other courts might well come out differently, and we still think that having your lawyer look over your forms to make sure that you aren’t taking risks that you don’t know you’re taking.
So, there’s this month’s article. See you next month!
Nikki (firstname.lastname@example.org) is a Partner in the law firm of Hudson Cook, LLP., Editor in Chief of CounselorLibrary.com’s CARLAW®, a contributing author to the F&I Legal Desk Book and a frequent writer for Spot Delivery,® a monthly legal newsletter for auto dealers Tom (email@example.com) is Of Counsel to the firm, has written several books and is a frequent writer for Spot Delivery®. He is the Senior Editor of CARLAW®. For information, visit www.counselorlibrary.com. © CounselorLibrary.com 2020, all rights reserved. Single publication rights only, to the Association. HC/4846-1385-3110.1