By Nicole F. Munro and Thomas B. Hudson
We hope you and your loved ones are safe and healthy and that things go well for you as we try to emerge from all of our various lockdown and shelter-in-place mandates. Business and legal developments have not entirely come to a halt while we’ve been hunkered down, though, so here’s our monthly article on selected legal developments we think might interest the auto sales, finance, and leasing world.
This month, we note developments at the Federal Trade Commission and the Consumer Financial Protection Bureau. We don’t have room in this article for all the virus-related regulatory developments, but for a list of those, you can visit Hudson Cook’s COVID-19 resources website at https://www.hudsoncook.com/covid-19/.
As usual, our article features the “Case of the Month” and our “Compliance Tip.” 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.
FTC Postpones Safeguards Workshop. In an update to an item we reported on last month, the FTC postponed its May 13 public workshop seeking input on proposed amendments to the Safeguards Rule until July 13, 2020, and will now hold the event online. The workshop seeks information on topics such as price models for specific elements of information security programs, standards for security in various industries, the availability of third-party information security services aimed at different sized institutions, information about penetration and vulnerability testing, and the costs of possible alternatives to encryption and multifactor authentication. The comment deadline on these topics is August 12, 2020.
CFPB Credit Reporting Developments. On April 1, the CFPB released a policy statement to “highlight furnishers’ responsibilities under the CARES Act and inform consumer reporting agencies and furnishers of the CFPB’s flexible supervisory and enforcement approach during this pandemic regarding compliance with the Fair Credit Reporting Act and Regulation V.”
In the statement, the CFPB reiterates its prior guidance encouraging financial institutions to work with borrowers and other customers affected by COVID-19 and encourages institutions to provide accurate information to consumer reporting agencies. The Bureau also expects furnishers to comply with the provision of the CARES Act that generally requires them to report as current certain credit obligations for which they make payment accommodations to consumers affected by COVID-19.
In addition, the Bureau’s statement encourages furnishers to voluntarily provide consumers affected by COVID-19 with payment flexibility. The Bureau “does not intend to cite in examinations or take enforcement actions against those who furnish information to consumer reporting agencies that accurately reflects the payment relief measures they are employing.” Finally, with respect to the FCRA’s requirement to investigate consumer disputes, the CFPB “will consider a consumer reporting agency’s or furnisher’s individual circumstances and does not intend to cite in an examination or bring an enforcement action against a consumer reporting agency or furnisher making good faith efforts to investigate disputes as quickly as possible, even if dispute investigations take longer than the statutory timeframe.”
Case of the Month
Car Buyer Unsuccessful on Claims Against Dealership Arising Out of Terms of Retail Installment Contract and Replacement of First Contract with Another Contract When Initial Financial Fell Through: A consumer went to a dealership to buy a car. The dealership obtained his credit report on March 20, 2017. The consumer executed a credit application, and the dealership submitted it to several financial institutions. A bank issued a conditional approval of his credit application. The dealership and the consumer entered into a retail installment contract whereby the consumer agreed to pay $683 per month for 75 months, beginning on May 4, 2017, and a $138 dealer fee, and the consumer left with the car.
When the bank found out that the consumer decided to obtain GAP coverage, a service warranty, and a tire program, it decided not to finance the purchase. Thereafter, the dealership secured financing from another bank, reduced the annual percentage rate to compensate the consumer for any trouble caused by the change in financing, and sent him a second RIC reflecting the reduced rate and a lower monthly payment.
When the consumer did not timely return the second RIC, the dealership prepared a third RIC, which provided the same financial disclosures as the second RIC but changed the first payment date to July 3, 2017. The consumer returned the third RIC, along with the bank’s loan application, to the dealership, and the bank requested the consumer’s credit report on June 26 and July 6.
Because the bank had not accepted the assignment of the third RIC as of the date the first payment was due and the consumer refused to make that payment to the dealership, the dealership covered the loss. On July 20, the bank paid the dealership for the contract.
The consumer then sued the dealership for breach of contract, breach of the implied warranty of good faith and fair dealing, and violations of the Pennsylvania Motor Vehicle Sales Finance Act, the federal Truth in Lending Act, the Pennsylvania Unfair Trade Practices and Consumer Protection Law, and the federal Fair Credit Reporting Act. The U.S. District Court for the Eastern District of Pennsylvania granted the dealership’s motion for summary judgment on all claims.
The consumer claimed that the dealership breached its contract by miscalculating the finance charge. The court concluded that the consumer did not sufficiently establish this claim; the calculations were accurate, the bank purchased the contract, the consumer has continued to pay the bank without objection, and the bank never raised any issues about the calculations with the dealership.
The consumer also claimed that the dealership breached the contract by issuing multiple RICs with different terms and without cancelling the prior RICs. The court found that the parties intended that each subsequent RIC served as a novation that cancelled the prior RIC.
The consumer claimed that the dealership violated the covenant of good faith and fair dealing by not timely paying off the debt on the car he traded in as part of his purchase. Even though the dealership’s original payoff of the debt was returned, the creditor received a second payment, and there was no evidence that the delay caused the consumer any harm, including negative credit reporting, from the alleged breach.
The consumer claimed that the dealership violated the MVSFA by miscalculating the finance charge. The court found that the MVSFA permits several different methods of calculating the finance charge so long as the method is disclosed in the RIC. The court found that the calculations were proper and the method was properly disclosed.
The consumer claimed that the dealership violated TILA because, among other things, the financing terms in the first RIC were subject to change and, therefore, illusory. The court rejected this claim, noting that the terms of the third RIC, which replaced the prior RICs, were not illusory because the consumer continued to perform on that contract.
The consumer claimed that the dealership violated the UTPCPL by, among other things, charging a dealer fee without showing that the fee bears a rational relationship to the costs associated with preparing transaction documents. The court found that Pennsylvania law sets a cap on the document preparation fee that a dealer may charge but does not require a dealership to only charge its actual cost for its document preparation services.
Finally, the consumer claimed that the dealership violated the FCRA by causing unauthorized and excessive credit inquiries. The court found that the dealership obtained the consumer’s credit report only once. As for the bank’s multiple credit inquiries, the court concluded that they were obtained with a permissible purpose and with the consumer’s consent, as set forth in his credit application in which he agreed to having his credit report obtained “in connection with the proposed transaction and any update, renewal, refinancing, modification or extension of that transaction.”
Brogan v. Fred Beans Motors of Doylestown, Inc., 2020 U.S. Dist. LEXIS 58863 (E.D. Pa. April 3, 2020).
This Month’s CARLAWYER© Compliance Tip
Take a long look at the Brogan decision described above. This attack on the dealership’s use of a series of changing contracts failed. As we read the decision, we wonder whether the dealership lucked into a process that the court approved, or whether the process was the result of a good compliance analysis followed by good implementation. We’re hoping that it was the latter, which brings us to this month’s tip. Your documents and procedures dealing with what you need to do when you replace one contract with another need to be set before the event, not afterward. Can you point to written policies and procedures at your dealership dealing with this situation? If not, maybe it’s lawyer time!
So, there’s this month’s article. See you next month!
Nikki (firstname.lastname@example.org) is a Partner in the law firm of Hudson Cook, LLP, Editor in Chief of CounselorLibrary.com’s CARLAW®, a contributing author to the F&I Legal Desk Book and a frequent writer for Spot Delivery®, a monthly legal newsletter for auto dealers. Tom (email@example.com) is Of Counsel to the firm, has written several books and is a frequent writer for Spot Delivery®. He is the Senior Editor of CARLAW®. For information, visit www.counselorlibrary.com. ©CounselorLibrary.com 2020, all rights reserved. Single publication rights only, to the Association. HC/4850-6410-1051.1