Feb 2015 -The CARLAWYER©

By Thomas B. Hudson and Nicole Frush Munro

Happy New Year, again!  This month, we feature developments from the Consumer Financial Protection Bureau, the Federal Trade Commission, the Department of Justice and the Department of Defense.  We identified several developments that we thought might be of interest to those in the auto sales, finance or leasing business.  Here’s what we found.

Take a look below at our 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

We’ve found that when it comes to dealing with regulators or creditors, neatness counts.  When your examiners or creditors come to review your operation, what do they find?  Are your deal jackets neatly organized, with a table of contents, a place for each document, each document in its place, and nothing in the jacket except for the documents that need to be there?  Or are they rats’ nests, with nothing appearing in the same place in any file, and all sorts of extraneous documents and extra copies cluttering up the file?  Spring’s coming – how about a little spring cleaning?

 Federal Developments

Credit to Servicemembers.  On December 29, the CFPB released a report addressing the marketing and extension of high-cost credit products to servicemembers and their dependents, and describing ways that such consumer credit products fall outside the scope of the Military Lending Act. As currently implemented, the MLA protections apply to three forms of credit extended to servicemembers and their dependents: closed-end payday loans with terms of 91 days or fewer and for $2,000 or less; closed-end vehicle title loans with terms of 181 days or fewer; and closed-end refund anticipation loans. The Department of Defense recently proposed regulations broadening the scope of the MLA to cover deposit advance products, payday loans of any amount and length, title loans of any length, and high-interest rate loans structured as open-end lines of credit. In the report, the CFPB contends that loopholes in the current MLA allow companies to offer high-cost loans to military families that skirt the 36 percent annual rate cap and other credit protections in the Act. The Bureau submitted its report in conjunction with a comment letter it filed supporting the DoD’s proposal to broaden the MLA’s scope.

Servicemember Debt Collection.  On December 18, the CFPB and the attorneys general of North Carolina and Virginia filed a proposed consent order in federal court against Freedom Stores, Inc. and its two affiliated companies, Freedom Acceptance Corporation and Military Credit Services LLC, for illegal debt collection practices. Freedom Stores is a Virginia-based furniture and electronics retailer that caters to servicemembers. The Bureau and attorneys general alleged that the defendants sued customers in Virginia who had not signed their financing contracts in Virginia and did not live there when the suits were filed. Many of the suits resulted in default judgments, after which the defendants garnished consumers’ wages or put liens on their bank accounts. Most of the defendants’ customers paid by military allotment, but the companies also required customers to authorize direct withdrawals from a bank account as a back-up payment method. Because reports from a payment processor were sometimes incorrect, the defendants also allegedly withdrew funds from both consumers’ paychecks and their bank accounts in the same month without the consumers’ knowledge and before the payment due dates. In addition, the defendants allegedly contacted consumers’ commanding officers about their debts. Finally, the defendants allegedly continued to debit bank or credit card accounts of a servicemember’s parent or other third party who had previously authorized a one-time payment on the servicemember’s behalf. The defendants would allegedly keep the third party’s payment information and collectors would later take funds from those accounts without authorization or notification. The proposed consent order requires the defendants to pay over $2.5 million in relief to consumers harmed by the illegal debt collection practices and to pay $100,000 to the CFPB’s Civil Penalty Fund.

Another Used Car Rule Buyers Guide Extension.  On January 22, the FTC extended the public comment period on proposed changes to its Used Car Rule from January 30, 2015 to March 17, 2015. In response to comments received on its December 2012 proposed changes to the Used Car Buyers Guide, the FTC announced in November 2014 that it was seeking public comment on additional proposed amendments to the Guide required by its Used Car Rule. The Commission seeks comments on potential additional revisions to the Rule that would: (1) require dealers to indicate on the Guide whether they obtained a vehicle history report and, if so, to provide a copy of the report to consumers who request it; (2) revise the Guide statement describing the meaning of an “As Is” sale; (3) move boxes to the front of the Guide for dealers to indicate whether non-dealer warranties apply to a vehicle; and (4) place a statement in Spanish on the front of the English-language Guide advising Spanish-speaking consumers to ask for the Guide in Spanish if they cannot read it in English. The FTC continues to consider comments submitted in response to its December proposal.

FTC Challenges Debt Collectors.  On January 21, the FTC announced it filed a complaint against Commercial Recovery Systems, Inc. and its president and former vice president, alleging that the defendants’ debt collection practices violated the FTC Act and the Fair Debt Collection Practices Act. According to the complaint, the defendants falsely threatened that, unless consumers paid the alleged debt, a debt collection lawsuit would be filed against them or Commercial Recovery would garnish their wages, levy their bank accounts, or seize their property. In addition, the complaint alleged that when Commercial Recovery called to collect on a debt, its representatives falsely claimed or implied that they were lawyers or were calling on behalf of a lawyer or that they were judicial employees. The FTC is seeking civil penalties and an injunction to stop the allegedly illegal conduct.

Do People Still Tamper With Odometers?  Evidently so.  On January 6, the Department of Justice announced indictments against two men for odometer tampering and money laundering. The indictments allege that the defendants used fictitious dealer names to buy high-mileage used vehicles from a national vehicle leasing company and altered the vehicles’ odometers to reflect lower mileages. The defendants then allegedly altered titles to reflect the false mileages and sold the vehicles at wholesale automobile auctions. The indictment alleges that, in some instances, the title indicated mileage more than 100,000 miles less than the true mileage of the vehicle, and, as a result, the defendants received inflated prices for the vehicles they sold.


Carve-Out for Small Claims Renders Arbitration Clause Unenforceable: A buyer financed her car purchase by signing a retail installment sales contract that included an arbitration clause. The arbitration clause specifically carved out an exception to mandatory arbitration for disputes or claims within the small claims court’s jurisdiction. After a finance company repossessed the car, the buyer sued, alleging New Mexico state law claims. The finance company moved to compel arbitration, and the trial court denied the motion on the grounds that the small claims carve-out was substantively unconscionable. The New Mexico Court of Appeals affirmed. The appellate court found that although the carve-out provision was bilateral, it was nonetheless unreasonably one-sided in favor of the finance company because the practical effect of the carve-out was to preserve the finance company’s most important claims – e.g., its ability to file a debt collection action in small claims court – while limiting the buyer’s access to the court to file her claims, which would likely include punitive damages, attorneys’ fees, statutory damages, and injunctions that would be outside the small claims court’s jurisdiction. Further, the appellate court found that the Federal Arbitration Act did not preempt its determination of the arbitration clause’s unconscionability.   This opinion is a particularly bone-headed one.  The American Arbitration Association rules suggest that a carve out for small claims is required.  The AAA Consumer Due Process Protocol provides:  “Principle 5. Small Claims.  Consumer ADR Agreements should make it clear that all parties retain the right to seek relief in a small claims court for disputes or claims within the scope of its jurisdiction.”  See Dalton v. Santander Consumer USA, Inc., 2014 N.M. App. LEXIS 122 (N.M. App. December 30, 2014).

Lessor’s Substantial Compliance with California’s Notice of Appraisal Statement upon Repossession Insufficient: A lessee sued her lessor for failing to comply with California’s Vehicle Leasing Act, which requires lessors to provide an appraisal statement notice containing specific statutorily provided language to lessees when a vehicle is repossessed. The lessee alleged that she received a defective notice because the lessor deleted a required phrase related to her right to obtain her own professional appraisal. The lessor moved to dismiss the complaint, arguing that it substantially complied with the notice requirements under the VLA. The trial court granted the motion, but the Court of Appeals of California reversed and remanded. Section 2987 of the VLA requires that, in addition to providing a lessee with the verbatim statement prescribed in Section 2987(d)(2)(B), a repossessing seller must also provide a number of calculations with respect to amounts owed on the lease. Under Section 2987(d)(3), a lessee has no liability to a lessor for any deficiency if the lessor has not complied with the notice requirements of Section 2987(d) except if noncompliance involves a bona fide error in the calculations required by subdivision (d)(2)(B). A deficiency is enforceable, notwithstanding an erroneous calculation, if the lessor gives the lessee notice of the erroneous calculations within 30 days after discovering the error and before an action is filed to recover the amount claimed to be owed or before written notice of the error is received by the lessor from the lessee. The appellate court concluded that the express exception to strict enforcement of one part of the statute gives rise to the inference that the legislature intended that the remaining requirements of the statute be strictly enforced. Therefore, the appellate court could infer that the notice requirements of the VLA, including the appraisal statement notice requirement, are intended to be strictly enforced. See Flannery v. VW Credit, Inc., 2014 Cal. App. LEXIS 1153 (Cal. App. December 17, 2014).

Dealership that Allegedly Threatened Buyer with Repossession for Failure to Sign New, Materially Different Financing Contract Subject to Unfair and Deceptive Trade Practices and Fraud Claims: A woman co-signed her son’s vehicle retail installment sales contract. The woman alleged that an employee of the dealership contacted her several weeks later and stated that the financing had fallen through and that she needed to sign a new RISC. The employee also allegedly stated that if she did not sign the new RISC, the car would be repossessed. A dealership employee then went to the woman’s home and presented her with the new RISC, which was backdated. The employee allegedly told her that the contract terms were the same. The woman alleged that the employee physically obscured the top half of the RISC when she signed it. The second RISC almost doubled the monthly payment that was allegedly required under the original RISC. After the mother and son defaulted, the car was repossessed. The woman sued the dealership for unfair and deceptive trade practices, fraud, and common law extortion. The trial court granted the dealership’s motion for summary judgment, and the Court of Appeals of North Carolina affirmed in part and reversed in part. The appellate court found that a material question of fact existed as to whether the dealership committed an unfair or deceptive act when it threatened to repossess the car if the woman did not sign the second RISC. If such an act took place, the resulting harm would be that the woman was subjected to a subsequent RISC on less favorable terms. The appellate court noted that questions remained regarding whether the woman reasonably relied on the dealership’s assertion that the terms of the second RISC were the same as the original contract. If she did, her alleged failure to read the second RISC would not preclude recovery. There was also a question regarding whether she signed the second RISC under duress because of the dealership’s threat to repossess the car. Next, the appellate court concluded that the claim for fraud should survive summary judgment based on the same evidence supporting the UDTP claim. The woman presented evidence that the dealership intentionally and falsely represented to her that it could repossess the car in order to induce her to sign the second RISC. With respect to the common law extortion claim, the appellate court found that extortion is not a cognizable tort under North Carolina law. See Hester v. Hubert Vester Ford, Inc., 2015 N.C. App. LEXIS 2 (N.C. App. January 6, 2015).

 So there’s this month’s roundup! Stay legal, and we’ll see you next month.

 Tom (thudson@hudco.com) and Nikki (nmunro@hudco.com) 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. (2/15),  HC# 4817-1442-6145.

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