February 2016 – The CARLAWYER©

By Thomas B. Hudson and Nicole Frush Munro

As winter gets serious, we hunker down and peruse developments in the auto sales, finance and lease world.  This month, we feature developments from the Consumer Financial Protection Bureau and the Federal Trade Commission we thought might interest folks during the winter doldrums.  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

Offering cars that are “certified pre-owned,” “inspected” or “guaranteed”?  If some of those cars you are offering are subject to open recalls, you urgently need to review your advertising in light of the recent FTC action described below.

Federal Developments

Spanish, Anyone?  On January 22, the FTC issued its newest Spanish-language fotonovela in an effort to educate Spanish-speaking consumers about the car buying process and increase awareness of possible scams.

The CFPB Rides Herd on a BHPH Dealer.  In late January, the CFPB announced a consent order with Herbies Auto Sales, a Colorado buy-here pay-here used car dealer. The CFPB alleged that Herbies engaged in abusive acts or practices through its sales process and misled consumers about the cost of credit. The CFPB charged that Herbies unlawfully advertised a misleadingly low 9.99 percent APR, without disclosing a required warranty, the cost of a required payment reminder device and other credit costs as finance charges. The CFPB claimed that the ads helped Herbies convince consumers they would get the 9.99 percent APR instead of the much higher rate actually charged.  According to the CFPB, Herbies violated the Truth in Lending Act and the Dodd-Frank Act by hiding finance charges and advertising a lower APR than consumers received and by misrepresenting finance charges and APRs in marketing materials, showroom window displays, and TILA disclosures. Hidden finance charges, according to the CFPB, included costs, only in financed transactions, for a required repair warranty and for a required GPS payment reminder device. The Bureau also alleged that Herbies hid finance charges because Herbies refused to negotiate prices with credit customers but did negotiate with cash customers, resulting in a finance charge for credit customers that should have been included in the disclosed cost of credit. Finally, the Bureau claimed that Herbies’ sales process lured consumers into the dealership with an inaccurate APR and then kept them in the dark about the true cost of financing the cars they were buying, thereby taking advantage of consumers’ inability to protect their interests in selecting or using Herbies’ financing.  Although you would never know it from the CFPB announcement, Herbies did not agree to any of the CFPB’s allegations, entering into the consent order solely for purposes of settlement. Under the order, Herbies must provide $700,000 in consumer redress. A civil penalty of $100,000 is suspended as long as the consumer redress is paid. Herbies also agreed to stop deceiving consumers during the financing process and must not misrepresent interest rates, finance charges, or amounts financed, or any other fact material to consumers concerning the financing of any vehicle. Herbies also must clearly and prominently post the purchase price on all automobiles for sale when offering financing. Finally, Herbies must give consumers certain information about the financing offer, including the actual APR, the car price, and all finance charges, and get a signed acknowledgment from buyers that they received the required information before or at the time financing is offered.

CPO, Warranted and Guaranteed Cars With Open Recalls.  On January 28, the FTC announced proposed consent orders with General Motors Company, Jim Koons Management and Lithia Motors Inc. under which the companies have agreed to settle separate FTC administrative complaint allegations that each touted how rigorously they inspect their cars, yet failed to disclose that some of the cars they were selling were subject to unrepaired safety recalls. The FTC’s complaint against GM cited the company’s representations for “Certified Pre-Owned Vehicles,” while the complaint against Koons dealt with that company’s purported “guarantee,” and the Lithia complaint involved the company’s “warranty.”  For each company, the charge was similar – in describing the program and touting the inspection of the vehicles, the companies failed to disclose that some of the vehicles were subject to open (unrepaired) recalls.  The proposed consent orders remain in effect for 20 years, and prohibit the companies from claiming their used vehicles are safe or have been subject to a rigorous inspection unless they are free of unrepaired safety recalls, or unless the companies clearly disclose the recalls in close proximity to the inspection claims. The proposed orders also would prohibit the companies from misrepresenting material facts about the safety of used cars they advertise.


GAP Insurance Provider Did Not Misrepresent that Insurance Would Fully Pay Off Debt When Payment Was Actually Limited to 25% of Vehicle Value: A consumer bought a GAP insurance policy. After she suffered a total loss of one of her covered vehicles, she sued the insurer for fraud, misrepresentation, and deceptive practices, claiming that it misrepresented that her policy would pay off her indebtedness in full in the event of a total loss, when her recovery was actually limited to 25% of the actual cash value of the vehicle. The insurer moved to dismiss the complaint, and the federal trial court granted the motion. First, the insured argued that the title of the GAP insurance option on the insurer’s website – Loan/Lease Payoff – is misleading because the insurance does not necessarily provide for a complete payoff. The court disagreed, noting that the heading, alone, is insufficient to mislead and that the website includes a full explanation of the 25% limitation language behind a link directly next to where the insured clicked to receive the insurance. Next, the insured argued that the insurer amended its rules-and-rate filing to omit the 25% limitation language, and this amendment misrepresented the benefits of the policy. The court disagreed, finding that a rules-and-rate filing is not required to contain policy language, so removal of that language could not be misleading. Moreover, the court noted that the insured did not know of the rules-and-rate filing at the time she bought her insurance, so she could not have relied on the filing in deciding to buy the insurance. Finally, the insured argued that a claims adjuster misrepresented to her when she totaled her car that the entire debt would be covered by the insurance. The court found that she could not have relied on this misrepresentation in connection with her insurance purchase because it took place after she bought the insurance. See Lacy v. Progressive Direct Insurance Co., 2016 U.S. Dist. LEXIS 24 (N.D. Ill. January 4, 2016).

Insurance Policy Covering “Wrongful Repossession” Did Not Cover Claims that Pre- and Post-Sale Notices Violated State Law: A dealership was insured under two insurance policies. One provided up to $500,000 for indemnity from and defense against suits for damages arising from the dealership’s “wrongful repossession” of an automobile and was linked to a separate $25 million umbrella policy. The other provided for up to $25,000 for costs in defending against suits arising from the sale of a car. The dealership sold a car to consumers and later repossessed and sold it for nonpayment. Prior to the sale of the car for nonpayment, the dealership sent the consumers a notice informing them that for a $25 charge, they could request an accounting. After the sale, the dealership sent them a notice charging them attorneys’ fees. The dealership sued the consumers for the deficiency balance, and they counterclaimed, alleging that the dealership’s pre- and post-sale notices violated the Uniform Commercial Code and the Missouri Motor Vehicle Time Sales Act. The dealership tendered the counterclaims to the insurer for defense and indemnity under the larger policy. The insurer refused, asserting that the claims did not constitute claims for “wrongful repossession.” The dealership sued, and the insurer moved for summary judgment. The trial court granted the motion, concluding that the larger policy only applied to repossessions that were wrongful, not to wrongful debt collection practices after repossession. The U.S. Court of Appeals for the Eighth Circuit affirmed. The appellate court found that the procedures required by statute for disposition of repossessed property are not part of the repossession process because sale of repossessed property is a separate event that takes place after repossession is complete. See Wolfe Automotive Group, LLC v. Universal Underwriters Insurance Company, 2015 U.S. App. LEXIS 21649 (8th Cir. (W.D. Mo.) December 15, 2015).

SCRA Does Not Apply to Obligations Incurred While on Active Duty, Even if Orders Changed While on Duty: A servicemember obtained a loan with a 34.37% annual percentage rate while he was on active duty in the National Guard. He asked that the lender reduce the interest rate to 6% per year pursuant to the Servicemembers Civil Relief Act. The lender notified the servicemember that he was not eligible for the interest rate reduction because the SCRA applies to obligations made before entry onto active duty, and he was on active duty when the debt was incurred. The servicemember sued, arguing that his orders were revised and that, arguably, he got the loan while he was not on active duty. The federal trial court disagreed, noting that although his orders may have changed, he was always on active duty during the relevant time frame, and granted summary judgment for the lender. See Hall v. Springleaf Financial Services Inc., 2015 U.S. Dist. LEXIS 154139 (S.D. Miss. November 13, 2015).

Dealer May be Liable for Misrepresentations about Condition of Car in “As Is” Sale: A creditor repossessed a car after it was repaired following an accident. The creditor sent the car to auction, where the auctioneer disclosed that the car had suffered damage to its frame. A dealership bought the car at the auction and offered to sell the car to a buyer “as is.” The dealership told the buyer that the car never had repairs that cost more than 25% of the value of the car. The dealership gave her a copy of a CARFAX vehicle history report that did not mention the accident or the repairs. After the buyer learned about the damage, she sued the dealership for fraud, tortious breach of contract, civil conspiracy, unfair and deceptive trade practices, and negligence. She also sued the repossessing creditor for all but the breach of contract claim. The defendants moved to dismiss, and the trial court granted both motions. The North Carolina Court of Appeals agreed with the trial court’s decision to dismiss all the claims, except for the UDAP claim against the dealership. The appellate court dismissed the fraud, negligence, and tortious breach of contract claims against the dealership, finding that the buyer could not argue that she relied on any misrepresentations the dealership might have made about the car because the sale was an “as is” sale. The appellate court refused to dismiss the claim under the state UDAP statute. It concluded that the buyer could make a UDAP claim if she could prove that the dealership’s actions or statements had the capacity or tendency to deceive her and that she suffered harm because of those statements. She did not have to show that she relied on the statements; she only had to show that she might not have bought the car if the dealership had not told her that the car had not incurred significant damage. The appellate court dismissed all the claims against the repossessing creditor. The appellate court concluded that the creditor was not liable under the state UDAP law because the buyer did not buy the car at the auction and had no knowledge of any statement or disclosure the creditor or the auctioneer made about damage to the car at the auction. The appellate court also dismissed the fraud and negligence claims because the creditor did not owe a duty to the buyer to make sure the dealership disclosed complete or accurate information to her when she bought the car from the dealership. See Sain v. Adams Auto Group, Inc., 2016 N.C. App. LEXIS 58 (N.C. App. January 5, 2016).

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 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. (2/16). HC# 4848-8454-3277.

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