By Thomas B. Hudson and Nicole Frush Munro
We’re back, passing on what we’ve recently learned about legal 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, as well as our “Case of the 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
Signed up for the CFPB’s complaint portal yet? You need to be monitoring complaints from all sources, and the CFPB offers one more source for determining whether your customers are unhappy with you. And taking care of complaints is one of the most effective ways of staying out of the regulators’ crosshairs. What, exactly, are you waiting for?
Speaking of complaints, on May 24, the CFPB released its monthly complaint report, which highlights trends in the complaint data the Bureau receives through its Consumer Complaint Database. The report includes complaint data specific to certain companies, overall complaint volume and complaint volume by state, and other trends in the data. Each month, the report spotlights complaints about a particular issue and complaints from a particular geographic location. The latest report focuses on complaints related to credit reporting and highlights complaints from consumers residing in New Mexico.
Are You Involved in Title Lending? On May 18, the CFPB released a report on the title loan business. The CFPB’s report demonstrated that 20% of borrowers who obtain a single-payment auto title loan have their car or truck seized by their lender when they default. Evidently, that means that 80% of these borrowers managed to get past their dire financial problems without having their cars seized, but that narrative doesn’t advance the CFPB’s agenda. According to the CFPB’s research, lenders renewed more than 80% of these loans on the due date because borrowers could not otherwise repay the loan. The report examined nearly 3.5 million anonymized, single-payment auto title loan records from nonbank lenders from 2010 through 2013. The CFPB concluded from its study that these auto title loans have issues similar to payday loans, including high rates of consumer reborrowing, which can trigger high costs in fees and interest.
Warranty Rule Changes on the Way. On May 18, the FTC proposed to amend the rules governing Disclosure of Written Consumer Product Warranty Terms and Conditions (“Disclosure Rule”) and Pre-Sale Availability of Written Warranty Terms (“Pre-Sale Availability Rule”) to implement the E-Warranty Act, which allows for the use of websites to disseminate warranty terms to consumers in some circumstances. The Disclosure Rule specifies the aspects of warranty coverage that must be disclosed in written warranties, as well as the exact language that must be used for certain disclosures with respect to state law regarding the duration of implied warranties and the availability of consequential or incidental damages. Under the Disclosure Rule, warranty information must be disclosed in simple, easily understandable, and concise language in a single document. The warrantor must disclose any limitations on the duration of implied warranties on the face of the warranty, as mandated by the Magnuson-Moss Warranty Act. The FTC proposes to revise the Disclosure Rule to specify that disclosures mandated to appear ‘on the face’ of a warranty posted on an Internet website or displayed electronically must be placed close to the text of the warranty terms begins. The Pre-Sale Availability Rule details the methods by which warrantors and sellers must provide warranty terms to consumers prior to sale of the warranted item. The FTC proposes to revise the Pre-Sale Availability Rule to allow warrantors to post warranty terms on websites if they also provide a non-Internet method for consumers to obtain the warranty terms and satisfy certain other conditions. Comments on the proposed rule are due by June 17.
Are You Up To Speed on Your Credit Reporting Responsibilities? On May 9, the FTC announced a $72,000 settlement with Credit Protection Association, a debt collection agency, resolving allegations that the company violated the Fair Credit Reporting Act by failing to have adequate policies and procedures in place to handle consumer disputes of information the company provided to credit reporting agencies and by failing to adequately inform consumers about the outcomes of its investigations about disputed information. In addition to the civil penalty, the company will be required to adopt new procedures that comply with the requirements of the FCRA’s Furnisher Rule. The FTC also released a blog post discussing its settlement with Credit Protection, noting that the case offers compliance guidance for other companies covered by the Furnisher Rule.
Adios, Arbitration Agreements in Credit Contracts. On May 5, the CFPB issued a proposed rule limiting mandatory arbitration clauses in a wide variety of contracts. The CFPB is seeking comment on a proposal to prohibit companies from using class action waivers in pre-dispute mandatory arbitration clauses with consumers. Companies would still be able to include arbitration clauses in their contracts, but for contracts subject to the proposal, the clauses would have to say explicitly that they cannot be used to stop consumers from being part of a class action in court. The proposal provides the specific language that companies must use. The proposal also requires companies using pre-dispute arbitration agreements to submit to the CFPB claims, awards, and certain related materials filed in arbitration cases to allow the Bureau to monitor arbitrations to ensure that the process is fair for consumers. Comments on the proposed rule are due by August 22.
Case of the Month
Dealership’s Inflation of “Cash Price” to Compensate for Trade-In Over-Allowance Did Not Violate TILA: A consumer agreed to buy a new car from a dealership for $31,322. The manufacturer’s suggested retail price for the car was $24,150. The dealership subtracted $3,500 from the $31,322 price for the car that the consumer traded in as part of a promotion in which the dealership agreed to provide a $3,500 discount for any trade-in, regardless of the trade-in’s actual value, which in the consumer’s case was close to $0. In cases where the dealership gives the $3,500 discount, the buyer agrees not to negotiate the sale price, and the dealership adds $3,500 to the sale price.
The consumer sued the dealership for violating the federal Truth in Lending Act and the Connecticut Unfair Trade Practices Act. The federal trial court granted the dealership’s motion for summary judgment. The consumer claimed that the dealership violated TILA by failing to accurately itemize the amount financed and failing to accurately disclose the finance charge in the retail installment contract she signed.
Both arguments were based on the fact that the dealership inflated the cash price of the car the consumer bought to compensate for the trade-in discount it gave her for a car with almost no value.
First, the court found that the dealership accurately disclosed the finance charge. The consumer claimed that the increase in the sale price of the car to compensate for the trade-in discount constituted an undisclosed finance charge. The court disagreed, noting that because the dealership increased the sales prices of its cars to offset the trade-in allowances in both cash and credit transactions, the increase did not amount to a finance charge.
Second, the court found that the dealership accurately itemized the amount financed. The court noted that although the consumer agreed to a bad bargain, the itemization of amount financed represented a true and accurate description of the terms to which she agreed. After the court dismissed the consumer’s federal claims, it declined to exercise jurisdiction over her state law claims.
Just because the court found for the dealer on the Truth in Lending claim doesn’t mean the dealer is home free. The court didn’t rule on the buyer’s state law unfair trade practice claims, leaving the buyer free to bring those claims in state court. Note that we have seen these “$X dollars for anything you can push, pull, drive or drag” ad campaigns successfully attacked in other cases – you should avoid these sorts of advertisements. See Morales v. Barberino Brothers, Inc., 2016 U.S. Dist. LEXIS 59726 (D. Conn. May 5, 2016).
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 2016, all rights reserved. Single publication rights only, to the Association. (6/16). HC# 4851-4777-3234.