By Thomas B. Hudson and Nicole Frush Munro
Happy spring (OK, nearly)! 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
This isn’t so much a compliance tip as it is a “don’t get ripped off” tip. When buyers provide you with “stip” documents, do you use phone numbers in those documents to verify employment, length of residence and other details? We’ve heard of scam providers of these documents who also provide the phone numbers for creditors to call for verification of the fakes. It would be a best practice to locate employers’ and other information providers’ phone numbers independently, and to not rely on information appearing in the stip documents themselves.
FTC Tags Title Lenders. On January 30th the FTC announced that it had brought administrative complaints against two title lenders, First American Title Lending of Georgia, LLC, and Finance Select, Inc., charging that the companies advertised 0% interest rates for a 30-day car title loan without disclosing important loan conditions or the increased finance charge imposed after the introductory period.
The FTC alleged that First American advertised a 0% offer and failed to disclose that the borrower had to satisfy specific conditions to receive that rate. The borrower had to be a new customer, repay the loan within 30 days, and pay with a money order or certified funds, not cash or a personal check. A borrower failing to satisfy those conditions would be required to pay a finance charge from the start of the loan. The ads also allegedly failed to disclose the amount of the finance charge after the introductory period ended.
The FTC alleged that Finance Select, d/b/a Fast Cash Title Pawn, failed to disclose that unless a loan was paid in full in 30 days, the 0% offer did not apply, and that a borrower would have to pay a finance charge for the initial 30 days of the loan in addition to any finance charges incurred going forward. Finance Select also allegedly failed to disclose how much the finance charge would cost a borrower after the introductory period ended.
As part of the proposed settlements, the companies are prohibited from failing to disclose all the qualifying terms associated with obtaining a loan at its advertised rate, failing to disclose what the finance charge would be after an introductory period ends, and misrepresenting any material terms of any loan agreements. In addition, First American is also prohibited from stating the amount of any down payment, number of payments or periods of repayment, or the amount of any payment or finance charge without clearly and conspicuously stating all the terms required by the Truth in Lending Act and Regulation Z.
DOJ Settles Reverse Redlining Case Against North Carolina Dealer. On February 11, the U.S. Department of Justice, the U.S. Attorney’s Office for the Western District of North Carolina and the North Carolina Department of Justice announced a settlement of the federal government’s first-ever discrimination lawsuit involving “buy here, pay here” auto financing. The settlement, subject to court approval, resolves a lawsuit by these authorities, alleging that Auto Fare Inc. and Southeastern Auto Corp., two Charlotte “buy here, pay here” dealerships, and their owner violated the federal Equal Credit Opportunity Act by engaging in a pattern or practice of “reverse redlining” by intentionally targeting African-Americans for unfair and predatory credit practices in financing used car purchases.
The lawsuit alleged that the two dealerships’ sales prices, down payments, and interest rates were disproportionately high compared to other subprime used-car dealers. Because, the government charged, the dealerships did not meaningfully assess the customers’ creditworthiness or ability to repay, their rates of default and repossession allegedly were disproportionately high. Additionally, the dealerships allegedly engaged in repossessions when customers were not in default. North Carolina also alleged that the dealerships’ actions violated the state’s Unfair and Deceptive Trade Practices Act.
The settlement requires the dealerships to implement practices to ensure that the terms of their credit sales and repossession practices are no longer unfair and predatory. The required changes include: limiting projected monthly payments to no more than 25% of a buyer’s income; requiring interest rates to be at least five percentage points below the state’s rate cap; mandating a lower interest rate for buyers with specified evidence of lower credit risk; requiring competitive sales prices; prohibiting hidden fees on top of the required down payment; prohibiting repossessions until at least two consecutive payments have been missed; providing down payment refunds to buyers who quickly go into default; requiring strict compliance with state repossession laws; providing buyers improved disclosures at sale (including disclosing the presence of any GPS or automatic shut off device); allowing buyers to obtain an independent inspection of the car before completing the purchase; and providing buyers improved notices before repossession.
The settlement also requires defendants to establish a $225,000 settlement fund to compensate victims of past discriminatory and predatory financing practices. The settlement came after the court denied the dealerships’ motion to dismiss the case and agreed that reverse redlining by an auto creditor is illegal discrimination.
Finally, Some News on Arbitration. On February 23, the CFPB announced that it will hold a field hearing on arbitration in Newark, New Jersey on March 10. The hearing will feature remarks from Director Richard Cordray, and testimony from consumer groups, industry representatives, and the public. Perhaps it will not happen at this event, but we are expecting the CFPB to ban the use of pre-dispute, mandatory arbitration agreements in finance contracts and leases.
DOJ Settles Servicemembers Repo Case. The Justice Department announced on February 25 that it reached a settlement with Santander Consumer USA to resolve allegations that Santander illegally repossessed servicemembers’ vehicles in violation of the Servicemembers Civil Relief Act. Santander has agreed to pay at least $9.35 million to resolve the lawsuit. The settlement covers the allegedly improper repossessions of 1,112 motor vehicles between January 2008 and February 2013. The lawsuit alleged that Santander conducted 760 repossessions, without court orders, of vehicles owned by SCRA-protected servicemembers. The agreement requires Santander to pay $10,000 plus compensation for any lost equity (with interest) to each of these servicemembers. The suit also alleges that Santander sought to collect fees arising from an additional 352 repossessions that unrelated vehicle creditors had conducted in violation of the SCRA before Santander acquired the accounts. Santander must pay $5,000 to each of these servicemembers, and must repair the credit of all affected servicemembers. For future repossessions, the settlement requires Santander to check the Defense Department’s automated database to see if a car’s owner is in military service prior to repossessing. Finally, the settlement requires Santander to conduct a review and provide compensation for any additional unlawful repossessions that may have occurred since February 2013.
Court in Buyer’s State Lacks Personal Jurisdiction over Nonresident Vehicle Seller: Two cases we report on this month consider whether a court in a car buyer’s state had jurisdiction over an out-of-state seller. In one case, a Washington resident bought a Jeep through eBay. The buyer flew to Philadelphia to pick up the Jeep and drove it back to Washington. He had trouble with the Jeep on the return trip. He sued in Washington state court, alleging that the seller hid the defects by manipulating the error codes and alleging additional violations of Washington trade practice law. The trial court dismissed the case for lack of jurisdiction, and the Court of Appeals of Washington affirmed, holding that a single sale through eBay, without any additional evidence, did not meet the minimum contacts requirement for personal jurisdiction over a nonresident seller under Washington’s long-arm statute. The appellate court found no additional obligations between the parties and no evidence that the seller had additional sales to Washington residents. See Cook v. Advanced Auto Brokers, LLC, 2015 Wash. App. LEXIS 59 (Wash. App. January 20, 2015).
In the other case, a Wisconsin resident saw a car ad by an Illinois dealership on cars.com. He called the dealership about the car from his home in Wisconsin and was told that the vehicle was in excellent condition with no known mechanical problems. A dealership representative also made a brief call to the Wisconsin resident at his home. The man went to the dealership in Illinois and bought the car. After the buyer had problems with the car a few months later, he sued the seller in Wisconsin state court, alleging fraud by wire and fraudulent representation. The seller moved to dismiss the complaint for lack of personal jurisdiction, and the trial court granted the motion. On appeal, the buyer argued that the trial court erred because the seller’s online ads on third-party websites and the phone conversations with him met the “minimum contacts” test required for the court to assert jurisdiction. The Wisconsin Court of Appeals affirmed. The appellate court noted that online ads are only potential contacts with the state of Wisconsin. The seller did not target Wisconsin residents and could not control who viewed or responded to the ads. In addition, the two phone calls were not significant contacts. See Carlson v. Fidelity Motor Group, LLC, 2015 Wisc. App. LEXIS 27 (Wis. App. January 14, 2015).
FTC Holder Rule Allows Buyer to Assert Affirmative Claims against Finance Contract Assignee for Substantial Breach: A couple bought a recreational vehicle from a dealership, and the finance contract was assigned to a bank. The couple alleged that the RV was defective and that the manufacturer did not perform the repairs and refused to rescind the sale. The couple sued in U.S. District Court for the Eastern District of Louisiana, alleging violations of Louisiana redhibition laws, lender liability on the part of the bank, violation of the Magnuson-Moss Warranty Act, and negligent repair. The bank moved to dismiss the claim and argued that the FTC Holder Rule does not entitle a buyer to bring affirmative claims against the assignee of a finance contract, but instead merely entitles the buyer to assert the same defenses it would have against a seller against the assignee of the contract. The court, however, ruled that the plain language and history of the Holder Rule expressly permitted affirmative claims by buyers against assignees in cases of a substantial breach warranting rescission of the sale. As such, the court denied the bank’s motion to dismiss. See Wales v. Arizona RV Centers LLC, 2015 U.S. Dist. LEXIS 2628 (E.D. La. January 9, 2015).
Court Refuses to Dismiss Claim that GAP Waiver Was Finance Charge: A woman bought a car and a Guaranteed Asset Protection waiver from a dealership. The cost for the GAP waiver was included in the Itemization of Amount Financed in her retail installment contract. Both the retail installment contract and the GAP waiver contained recitals stating that the GAP waiver was not required to obtain financing. However, the buyer claimed that, during negotiations, a salesperson told her that she had to buy the GAP waiver in order to get financing. She sued, claiming that, under the Truth in Lending Act, the GAP waiver charge should have been included in the finance charge, rather than in the amount financed, because the purchase of the GAP waiver was required as a condition of financing. The dealership moved to dismiss the complaint, and the federal trial court denied the motion. The regulations implementing TILA provide, among other things, that charges for debt cancellation coverage may be excluded from the finance charge if the coverage is not required by the creditor and that fact is disclosed in writing. The dealership argued that the contract recitals show conclusively that buying the GAP waiver was not required. The buyer argued that the recitals were not conclusive given the salesperson’s statement that the GAP waiver was required for financing. The court agreed with the buyer, noting that case law and Federal Reserve Board staff letters agree that a consumer’s signature on a document stating that insurance is not required is not conclusive evidence that insurance is not required. See Robinson v. Carport Sales and Leasing, Inc., 2015 U.S. Dist. LEXIS 5024 (M.D. Fla. January 15, 2015).
So there’s this month’s roundup! Stay legal, and we’ll see you next month.
Tom (firstname.lastname@example.org) and Nikki (email@example.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. (3/15), HC# 4831-6594-7426.