By Thomas B. Hudson and Nicole F. Munro
Here’s our monthly article on legal developments in the auto sales, finance and lease world. This month, the action involves the Bureau, the Office of the Comptroller of the Currency (OCC), the Federal Trade Commission (FTC), the U.S. Senate and the New York Office of the Attorney General. As usual, this month’s article features our “Case of the Month.”
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.
This Month’s CARLAWYER© Compliance Tip
If you offer a warranty with the cars you sell, pay close attention to the FTC warning on warranties described immediately below. If your warranty contains provisions like the ones the FTC objects to, it’s time to sit down with your lawyer for a rewrite.
Warning to Warrantors. On April 10, the FTC announced that its staff sent warning letters to six major companies that market and sell cars, cellular devices, and video gaming systems in the United States. The letters reportedly warn that FTC staff has concerns about the companies’ statements requiring consumers to use specified parts or service providers to keep their warranties intact. Unless warrantors provide the parts or services for free or receive a waiver from the FTC, such statements are generally prohibited by the Magnuson-Moss Warranty Act. Similarly, those statements may be deceptive under the FTC Act. Here are some examples of provisions the FTC staff questioned: (1) The use of [company name] parts is required to keep your … manufacturer’s warranties and any extended warranties intact; (2) This warranty shall not apply if this product … is used with products not sold or licensed by [company name]; and (3) This warranty does not apply if this product … has had the warranty seal on the [product] altered, defaced, or removed. The FTC staff requested that each company review promotional and warranty materials to ensure the materials do not state or imply that warranty coverage is conditioned on the use of specific parts or services. In addition, the FTC staff requested each company to revise its practices to comply with the law. The letters state that FTC staff will review the companies’ websites after 30 days and that failure to correct any potential violations may result in law enforcement action. The press release about the action can be found at https://www.ftc.gov/news-events/press-releases/2018/04/ftc-staff-warns-companies-it-illegal-condition-warranty-coverage.
Senate Rejects “Guidance.” On April 18, the U.S. Senate passed a joint resolution using its powers under the Congressional Review Act to vacate the Bureau’s March 2013 guidance for indirect auto lenders on compliance with the Equal Credit Opportunity Act and Regulation B. The joint resolution passed with a 51-47 vote. In December 2017, the Government Accountability Office concluded that the CFPB’s guidance was, at the time of its issuance, a rule subject to the Congressional Review Act. The joint resolution now heads to the House for a vote, where it is expected to pass. The president is also expected to sign the joint resolution.
Did You Say a Billion Dollar Fine? On April 20, the Bureau announced a settlement with Wells Fargo, N.A. in a coordinated action with the OCC. The Bureau alleged that Wells Fargo’s policies and practices regarding force-placed collateral protection insurance on vehicles that are collateral for loans (probably retail installment contracts) it originated or acquired were unfair under the Consumer Financial Protection Act (CFPA). In addition, the Bureau alleged that certain fees Wells Fargo charged mortgage loan borrowers for extensions on interest rate locks were unfair under the CFPA. Specifically, Wells Fargo allegedly force-placed collateral protection insurance on consumers’ vehicles that were already covered by insurance policies voluntarily obtained by the consumers. In instances where the company appropriately force-placed insurance on consumers’ vehicles, the company improperly maintained the force-placed insurance policies on the consumers’ accounts even after the consumers had obtained adequate insurance on their vehicles and provided proof of insurance. Wells Fargo also allegedly failed to provide sufficient refunds of fees associated with the improper forced-placement of collateral protection insurance. The consent order requires the company to undertake certain activities related to its risk and compliance management, and the company has begun voluntarily providing remediation to consumers to address deficiencies cited in the consent order. The Bureau assessed a $1 billion penalty against Wells Fargo and credited the $500 million penalty collected by the OCC toward the satisfaction of its fine. Information about the action can be found at https://www.consumerfinance.gov/policy-compliance/enforcement/actions/wells-fargo-bank-na-2018/.
So, there’s this month’s report. See you next month!
Case of the Month
Dealership’s Fraudulent Misrepresentations Regarding Condition of Used Vehicle Invalidated Implied Warranty Disclaimer: During a test drive of a truck with a salvage title, the potential buyer noticed that the check-engine light was on and the truck smoked. The salesperson explained that the truck smoked because it was a diesel and that the check-engine light was due to a faulty oxygen sensor that would be easy to fix.
The buyer bought the truck “as is” and received a third-party vehicle protection plan at no cost. Within days of purchase, the truck lacked power and continued to smoke. The dealership refused to diagnose or repair the truck. The buyer had the truck inspected and was advised that the engine needed replacing.
The buyer sued the dealership, alleging fraud and breach of the implied warranty of merchantability and seeking attorneys’ fees under the Magnuson-Moss Warranty Act. The trial court granted judgment for the buyer, awarding her $14,366 in damages based on the price she paid for the truck and the cost of the inspection, plus attorneys’ fees and costs. The dealership appealed.
The appellate court affirmed, as did the Supreme Court of Minnesota in this decision. The dealership argued that the “as is” disclaimer barred the buyer’s claim. The state high court disagreed, finding that, under Minnesota law, a warranty disclaimer is effective “unless the circumstances indicate otherwise.” The high court concluded “that [the dealership’s] fraudulent statements about the fitness of the truck for the purpose for which a truck is purchased are a circumstance that make the ‘as is’ disclaimers of implied warranties in the purchase documents ineffective.” See Sorchaga v. Ride Auto, LLC, 2018 Minn. LEXIS 111 (Minn. March 21, 2018).
So, there’s this month’s roundup! Stay legal, and we’ll see you next month.
Tom (firstname.lastname@example.org) is Of Counsel and Nikki (email@example.com) is a Partner 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 the CEO of CounselorLibrary.com, LLC and the Senior Editor of CounselorLibrary.com’s CARLAW®, a monthly report of legal developments for the auto finance and leasing industry. Nikki is Editor in Chief of CARLAW®, a contributing author to the F&I Legal Desk Book and frequently writes for Spot Delivery®. For information, visit www.counselorlibrary.com. © CounselorLibrary.com 2018, all rights reserved. Single publication rights only, to the Association. (5/18). HC/4822-8265-6869v1.