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Financial Services Law Insights and Observations

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  • New York extends consumer protections for vehicle leases

    State Issues

    On December 23, the New York governor signed S 3631, which amends the state’s insurance law to increase protections for New York consumers from unplanned charges at the end of a motor vehicle lease. The definition of “service contracts” is broadened to cover more comprehensive service contracts on motor vehicles leased for personal use. Service contracts covered by the law will now include agreements that apply to accidental damage and excess use and wear and tear, including missing parts of the vehicle, and items not covered by a warranty or other service agreement, as long as such services do not exceed the purchase price of the automobile. The law became effective when signed.

    State Issues Auto Finance Auto Leases State Regulation Consumer Protection Service Contracts

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  • District Court allows claims to proceed against car dealership

    Courts

    On October 17, the U.S. District Court for the District of New Jersey issued an opinion allowing consumer protection claims to proceed against a car dealership related to fees added to vehicle purchase prices, while granting two other related entities’ motions to dismiss. The plaintiff’s complaint against the dealership and related entities alleged that the dealership charged her additional mandatory fees when purchasing the vehicle, required her to spend $3,500 on a service contract in order to obtain financing, and charged interest on the contract even though, the plaintiff alleged, the contract constituted a fee related to the extension of credit and therefore was not subject to interest. These actions, the plaintiff alleged, violated TILA, the Consumer Fraud Act (CFA), the Truth-in-Consumer Contract, Warranty and Notice Act, and the Consumer Service Contract Act (CSCA). According to the plaintiff, the contracts contained cancellation provisions that guaranteed a full refund if a request was submitted within a specified period with a guaranteed 10 percent penalty for each 30-day period for which the refund was unpaid. The plaintiff executed timely refund requests but claimed that the entities failed to refund the fees within the allotted contractual period. In separate motions to dismiss, the entities argued that, while the allegations could be considered contractual breaches, they were not sufficient to constitute violations under the alleged consumer protection statutes. The court agreed and granted the entities’ motions, ruling that their contract language complied with the CSCA and that, although the entities allegedly failed to perform under their contracts, they would only have violated the CFA if they knew at the time the contract was formed that they did not intend to fulfill their contractual duties. Moreover, the court referred to a New Jersey Supreme Court holding, which said that a breach of warranty or contract, “‘is not per se unfair or unconscionable. . .and. . .alone does not violate a consumer protection statute” unless there are “substantial aggravating circumstances.” As such, the court determined, the entities’ alleged breaches of the cancellation provisions were not “‘unconscionable commercial practices’” as required under the CFA. However, the plaintiff can amend her claims.

    Moreover, the court ruled that the allegations against the dealership can proceed, and denied the dealership’s bid to send the case to arbitration. According to the court, the dealership’s argument that it never received notices that the plaintiff had initiated arbitration proceedings because of a “clerical error” or a wrong mailing address were unpersuasive, and referred to the American Arbitration Association’s decision to decline “to administer the case due to the failure of [the dealership] to pay the required arbitration fees.”

    Courts Arbitration Consumer Protection Auto Finance Fees

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  • DOJ sues Maryland car dealership for ECOA violations

    Federal Issues

    On September 30, the DOJ announced it filed a lawsuit in the U.S. District Court for the District of Maryland alleging that a Maryland used car dealership and its owner and manager violated ECOA by offering different terms of credit based on race to consumers seeking to finance cars. According to the complaint, between September 2017 and April 2018, compliance testing done by the DOJ concluded that the defendants’ “actions, policies, and practices discriminate against applicants on the basis of race with respect to credit transactions…by offering more favorable terms to white testers than to African American testers with similar credit characteristics.” Specifically, the complaint alleged that African American testers were, among other things, (i) told they needed higher down payment amounts than white testers for the same car; (ii) quoted higher bi-weekly payments for “buy here, pay here” financing than white testers for the same car; and (iii) not offered to fund down payments in two installments, as compared to white testers. The DOJ also alleges that the conduct was “intentional, willful, and taken in disregard of the rights of others” and seeks injunctive relief and monetary relief.

    Federal Issues DOJ ECOA Auto Finance Fair Lending

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  • CFPB issues summer 2019 Supervisory Highlights

    Federal Issues

    On September 13, the CFPB released its summer 2019 Supervisory Highlights, which outlines its supervisory and enforcement actions in the areas of automobile loan origination, credit card account management, debt collection, furnishing, and mortgage origination. The findings of the report cover examinations that generally were completed between December 2018 and March 2019. Highlights of the examination findings include:

    • Auto loan origination. The Bureau noted that one or more examinations found that guaranteed asset protection (GAP) products were sold to consumers with low loan-to-value (LTV) loans, resulting in those consumers purchasing a product that was not beneficial to them. The Bureau concluded these sales were an abusive practice, as “the lenders took unreasonable advantage of the consumers’ lack of understanding of the material risks, costs, or conditions of the product.”
    • Credit card account management. The Bureau found several issues with credit card account servicing, including violations of Regulation Z for failing to clearly and conspicuously provide disclosures required by triggering terms in online advertisements and for offsetting consumers’ credit card debt against funds that the consumers had on deposit with the issuers without sufficient indication that the consumer intended to grant a security interest in those funds.
    • Debt collection. The Bureau noted violations of the FDCPA’s prohibition on falsely representing the amount due when debt collectors claimed and collected interest that was not authorized by the underlying contracts between the debt collectors and the creditors.
    • Credit information furnishing. The Bureau found multiple violations of the FCRA, including furnishers failing to complete dispute investigations within the required time period and failing to promptly send corrections or updates to all applicable credit reporting agencies after a determination that the information was no longer accurate.
    • Mortgage origination. The Bureau noted that creditors had violated Regulation Z by disclosing inaccurate APRs for closed-end reverse mortgages and also by using a unit-period of one month instead of one year to calculate the total annual loan cost (TALC) rate and the future value of all advances, leading to inaccurate TALC disclosures.

    The report notes that in response to most examination findings, the companies have taken, or are taking, remedial and corrective actions, including by identifying and compensating impacted consumers and updating their policies and procedures to prevent future violations.

    Lastly, the report also highlights the Bureau’s recently issued rules and guidance.

    Federal Issues CFPB Supervision Examination Auto Finance Credit Cards Debt Collection FDCPA Regulation Z TILA FCRA Mortgages

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  • CFPB updates auto finance section of the Supervision and Examinations Manual

    Agency Rule-Making & Guidance

    On August 28, the CFPB updated its examination procedures for automobile finance in its Supervision and Examinations Manual. The procedures are comprised of seven modules and each examination will cover one or more modules. Prior to using the procedures, examiners will complete a risk assessment and examination scope memorandum, which will assist in determining which of the seven modules the exam will cover: (i) company business model; (ii) advertising and marketing; (iii) application and origination; (iv) payment processing and account maintenance; (v) collections, debt restructuring, repossession, and accounts in bankruptcy; (vi) credit reporting, information sharing, and privacy; and (vii) examiner conclusions and wrap-up.

    Agency Rule-Making & Guidance CFPB Supervision Examination Risk Management Auto Finance

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  • Florida AG settles UDAP action with auto dealership

    State Issues

    On August 5, the Florida attorney general announced a $1.2 million settlement with a Florida auto dealership and its owner (defendants) for allegedly violating the state’s Unfair and Deceptive Trade Practices Act by failing to pay off outstanding liens on vehicle trade-ins. According to a complaint filed in the Circuit Court of the 4th Judicial Circuit, the AG initiated an investigation alleging that the defendants, among other things, accumulated unpaid obligations of more than $1.2 million to lienholders on traded-in vehicles. As a result, consumers were held accountable for the debt and received invoices from the lienholders. For consumers who did not make payments on their trade-ins, the lienholders often reported the defaults to credit bureaus, with, in some instances, the adverse credit reporting affected service members’ security clearances. The AG also noted that in certain circumstances, the lienholder attempted to repossess vehicles that were no longer owned by the consumers. Additionally, the defendants also failed to process title transfers within the statutorily required time frame, which resulted in some consumers experiencing difficulty when trying to obtain financing and insurance on their other vehicles, and others being sold traded-in vehicles without having clear title. In 2018, the dealership was purchased and the outstanding liens paid by the acquiring company. Under the terms of the settlement, the defendants have agreed to pay approximately $1.2 million in equitable consumer restitution, $235,000 in civil penalties, and $15,000 for attorney’s fees and costs. The defendants are also permanently enjoined from owning, operating, or managing an auto or truck dealership in the state at any time in the future.

    State Issues State Attorney General Consumer Finance Consumer Protection Auto Finance Settlement

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  • District Court grants preliminary approval to national bank's auto lending settlement

    Courts

    On August 5, the U. S. District Court for the Central District of California granted preliminary approval and class certification to a settlement of at least $393.5 million to resolve multidistrict allegations that a national bank added force-placed auto insurance to auto loans that may have been unnecessary and without borrowers’ consent. Under the terms of the settlement, the auto insurance underwriter will pay an additional $7.5 million. The allegations stem from a 2017 lawsuit in which borrowers claimed the bank charged them for unnecessary collateral protection insurance. The settlement also requires the bank and the underwriter to pay up to $36 million in attorneys’ fees for the borrower class and up to $500,000 in litigation expenses. However, the court scheduled a settlement fairness hearing for October to examine the fees before granting final approval of the settlement. This settlement follows a 2018 settlement reached between the bank and the CFPB and the OCC concerning a similar set of allegations over the purported billing of force-placed insurance premiums that may not have been required. (See previous InfoBytes coverage here.)

    Courts Auto Finance Force-placed Insurance

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  • Hawaii amends motor vehicle service contract definition

    State Issues

    On July 2, the Hawaii governor signed HB 154, which clarifies that motor vehicle service contracts regulated by the Insurance Commissioner include contracts for certain motor vehicle repair and replacement services. The bill amends the law’s definition of “service contract” to include a specified list of repair or placement activities related to motor vehicles. The amendments are effective on July 1, 2020.

    State Issues State Legislation Auto Finance Service Contracts

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  • National bank settles alleged SCRA violations

    Courts

    Recently, the U.S. District Court for the District of Kansas granted a plaintiff’s motion for final approval of a class action settlement resolving allegations that a national bank violated the Servicemembers Civil Relief Act by incorrectly repossessing vehicles owned by certain servicemembers. The bank, which denied all claims and allegations of wrongdoing, entered into the settlement agreement to avoid further uncertainties and expenses. The approximately $5.1 million settlement fund will go to affected servicemembers who have not, as of the effective date, already accepted payments in accordance with settlement agreements reached between the bank and the DOJ and OCC in 2016. (Covered by InfoBytes here.)

    Courts Servicemembers SCRA Auto Finance

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  • FTC shares 2018 enforcement report with the CFPB

    Federal Issues

    On June 6, the FTC announced that it submitted its 2018 Annual Financial Acts Enforcement Report to the CFPB. The report—which the Bureau requested for its use in preparing its 2018 Annual Report to Congress—covers the FTC’s enforcement activities regarding Regulation Z (the Truth in Lending Act or TILA), Regulation M (the Consumer Leasing Act or CLA), and Regulation E (the Electronic Fund Transfer Act or EFTA). Highlights of the enforcement matters covered in the report include:

    • Auto Lending and Leasing. The report discusses two enforcement matters related to deceptive automobile dealer practices. The first, filed in August 2018, alleged that a group of four auto dealers, among other things, advertised misleading discounts and incentives in their vehicle advertisements, and falsely inflated consumers’ income and down payment information on financing applications. The charges brought against the defendants allege violations of the FTC Act, TILA, and the CLA. The FTC sought, among other remedies, a permanent injunction to prevent future violations, restitution, and disgorgement. (Detailed InfoBytes coverage of the filing is available here.) In the second, in December 2018, the FTC mailed over 43,000 checks, totaling over $3.5 million, to consumers allegedly harmed by nine dealerships and owners engaged in deceptive and unfair sales and financing practices, deceptive advertising, and deceptive online reviews. (Detailed InfoBytes coverage is available here.)
    • Payday Lending. The report covers two enforcement matters, including the U.S. Court of Appeals for the 9th Circuit’s December 2018 decision upholding the $1.3 billion judgment against defendants responsible for operating an allegedly deceptive payday lending program. The decision is the result of a 2012 complaint in which the FTC alleged that the defendants engaged in deceptive acts or practices in violation of Section 5(a) of the FTC Act by making false and misleading representations about costs and payment of the loans. (Detailed InfoBytes coverage is available here.) The report also indicates that, in February 2018, the FTC issued over 72,000 checks totaling more an $2.9 million to consumers stemming from a July 2015 settlement, that alleged that online payday operators used personal financial information purchased from third-party lead generators or data brokers to make unauthorized deposits into and withdrawals from consumers’ bank accounts, regardless of whether the consumer applied for a payday loan. (Detailed InfoBytes coverage is available here.)
    • Negative Option. The report covers six enforcement matters related to alleged violations of the EFTA and Regulation E for “negative option” plans, including three new filings against online marketers for allegedly advertising “free trial” offers for products that enrolled consumers in expensive, ongoing plans without their knowledge or consent. The report notes that, in 2018, the FTC reached a settlement with one entity and obtained a court judgment against another, both resulting in injunctive relief and monetary settlements (which were suspended due to the defendants’ inability to pay). The report also notes that the FTC mailed 2,116 refund checks totaling more than $355,000 to people who bought an allegedly deceptive “memory improvement” supplement.

    Additionally, the report addresses the FTC’s research and policy efforts related to truth in lending and leasing, and electronic fund transfer issues, including (i) a study of consumers’ experiences in buying and financing automobiles at dealerships; and (ii) the FTC’s Military Task Force’s work on military consumer protection issues. The report also outlines the FTC’s consumer and business education efforts, which include several blog posts warning of new scams and practices.

     

    Federal Issues FTC FTC Act TILA EFTA Enforcement CFPB Consumer Education Auto Finance Military Lending Act

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