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On July 18, NYDFS sent a letter reminding regulated auto lenders and auto loan servicers that they are responsible for ensuring certain rebates are credited to consumers whose vehicles were repossessed or were a total loss. During its examinations, NYDFS identified instances where certain institutions that finance ancillary products, such as extended warranties, vehicle service contracts, and guaranteed asset protection insurance, failed to properly calculate, obtain, and credit rebates to consumers as required. NYDFS explained that the terms of sale for such ancillary products “provide that if the vehicle is repossessed or is a total loss prior to the product’s expiration, the consumer is entitled to a rebate for the prorated, unused value of the product (a ‘Rebate’), payable first to the [i]nstitution to cover any deficiency balance, and then to the consumer.” NYDFS found that some institutions either neglected to pursue Rebates from the issuers of the ancillary products or miscalculated the owed amounts, adding that in some instances, institutions made initial requests for Rebates but did not follow through to ensure that they were received and credited to consumers.
NYDFS explained that an institution’s failure to obtain and credit Rebates from unexpired ancillary products is considered to be unfair “because it causes or is likely to cause substantial injury to consumers who are made to pay or defend themselves against deficiency balances in excess of what the consumer legally owes.” The resulting injury caused to consumers is not outweighed by any countervailing benefits to consumers or to competition, NYDFS stressed.
Additionally, NYDFS said an institution’s statements and claims of consumers’ deficiency balances that do not include correctly calculated and applied Rebates are considered to be deceptive, as they mislead consumers about the amount they owe after considering all setoffs. NYDFS said it expects institutions to fulfill their contractual obligations by ensuring Rebates are properly accounted for, either by deducting them from deficiency balances or issuing refund checks if no deficiency balance is owed.
NYDFS further noted in its announcement that recent CFPB examinations found that certain auto loan servicers engaged in deceptive practices when they notified consumers of deficiency balances that misrepresented the inclusion of credits or rebates. The Bureau’s supervisory highlights from Winter 2019, Summer 2021, and Spring 2022 also revealed that collecting or attempting to collect miscalculated deficiency balances that failed to account for a lender’s entitled pro-rata refund constituted an unfair practice.
On May 4, the Colorado Court of Appeals held that a plaintiff had constructive notice of updated terms and conditions in her membership agreement with a defendant credit union, which included an arbitration agreement with an opt-out provision. Plaintiff entered into a finance agreement with an auto dealer, which assigned the agreement to the defendant. To complete the assignment, the plaintiff opened a savings account and signed an agreement, in which she consented to receiving and accepting statements, notices, and disclosures electronically. A few years later, the defendant updated its membership agreement’s terms to include the arbitration provision and sent notices to members with their monthly bank statements. Plaintiff received an email with information about the updates and was given an opportunity to opt-out of the arbitration provision in writing within 30 days. Records show that the plaintiff received the email but did not open it. Defendant filed a motion to dismiss plaintiff’s class action complaint and compel arbitration, but the district court concluded that the plaintiff did not have actual or constructive notice of the arbitration agreement. In reversing the district court’s ruling, the Court of Appeals wrote “we do not deem the notice as being buried or hidden in [defendant’s] email, or the surrounding information as cluttering the screen to the extent that a reasonable person would be distracted from the important notice about the ‘updated ... Membership and Account Agreement.’” The Court of Appeals also disagreed with plaintiff’s argument that her “express and affirmative consent” was required for the defendant to add the arbitration provision to the terms, stating that “[u]nder the totality of the circumstances, [plaintiff] is deemed to have assented to the addition of the arbitration agreement” as she was constructively notified of the change, did not exercise her right to opt out, and continued to use her account.
While concurring with the majority, one of the judges questioned whether the “current ‘reasonable person’ standard that courts use for constructive notice is outdated given the economic realities of the digital age.” The judge asked whether the monthly bank statement has “significantly diminished in importance” or is becoming obsolete since consumers are able to check bank account balances and transactions “at any time and from any location.”
On April 12, a split U.S. Court of Appeals for the Fourth Circuit held that loans borrowed in part to finance the purchase of a car are not governed by the Military Lending Act (MLA), even when the loan covers additional related costs. While the MLA’s requirements apply to the extension of consumer credit to covered members, loans procured “for the express purpose of financing” the purchase of a car (and are secured by the car) are excluded from many of the statute’s protections. Plaintiff purchased a car with an auto loan that included guaranteed asset protection coverage (GAP). The plaintiff then filed a putative class action against the defendant claiming the loan violated the MLA because it mandated arbitration (which is prohibited under the MLA) and failed to disclose certain information. The plaintiff argued that the loan should be protected under the MLA because part of his “bundled” loan went to GAP coverage. The district court disagreed and dismissed the case, ruling that the plaintiff’s contract was exempt from the MLA because GAP coverage and other add-on charges were “inextricably tied” to his purchase of the car.
On appeal, the majority concluded that loan, which was used for both an MLA-exempt and non-exempt purpose, can be treated together under the statute, because “[i]f a loan finances a car and related costs, then it is for the express purpose of financing the car purchase and the exception can apply.” The key issue was how to interpret the MLA exception that covers loans made for the “express purpose” of financing a car. “If that phrase, as used in the [MLA], means merely ‘for the specific purpose,’ [the defendant] wins. If it means ‘for the sole purpose,’ [plaintiff] wins,” the majority wrote. “We do not care and we do not ask” if the loan also financed GAP coverage, provided the loan was made for the specific purpose of financing a car, the court said, explaining that the loan is exempted from the MLA, “no matter what else it financed.”
The dissenting judge warned that the majority’s conclusion undermines the purpose of the MLA. “There is no reason to suspect that Congress regulated the marketing of financial products to service members, only to allow them to be smuggled in through a vehicle-loan back door,” the dissenting judge wrote, criticizing the majority’s conclusion and noting that opening up the MLA’s exception to include additional loans “permits lenders to piggyback virtually any financial product onto an exempt vehicle loan” at the expense to service members.
Notably, the CFPB, DOJ, and Department of Defense (DOD) filed an amicus brief last year on behalf of the United States in support of the plaintiff’s appeal, in which the agencies argued that the “hybrid” loan at issue must comply with the MLA. As previously covered by InfoBytes, the agencies wrote that GAP coverage “is not needed to buy a car and does not advance the purchase or use of the car.” The agencies noted that GAP coverage is identified as a “debt-related product that addresses a financial contingency arising from a total loss of the car” and that the coverage can be purchased as a standalone product. According to the brief, the plaintiff’s loan is a “hybrid loan—that is, a loan that finances a product bundle including both an exempt product (such as a car) and a distinct non-exempt product (such as optional GAP coverage),” and the district court erred in failing to interpret the MLA consistent with guidance issued in 2016 and 2017 by the DOD suggesting that such “hybrid loans” are consumer credit subject to the protections in the MLA. The 2017 guidance explained that “a credit transaction that includes financing for [GAP] insurance … would not qualify for the exception,” and the agencies argued that although the 2017 guidance was withdrawn in 2020, the “withdrawal did not offer a substantive interpretation of the statute that would alter the conclusion” that the plaintiff’s loan was not exempt from the MLA.
On March 23, the Colorado governor signed SB 23-015, which prohibits placing conditions on the terms of a vehicle sale, lease, or the extension or terms of credit, upon the purchase of a vehicle value protection agreement. In addition, the bill requires, among other things, that such agreements must outline eligibility requirements, coverage conditions or exclusions, provide certain consumer notices, and must benefit the consumer “upon the trade-in, total loss, or unrecovered theft of a covered vehicle.” Providers of such agreements must also obtain a contractual liability insurance policy that guarantees their obligations under the agreement. Finally, the act establishes that value protection agreements themselves are not insurance and are exempt from state insurance regulations.
On March 22, the Iowa governor signed HF 133 relating to refund payments made in connection with motor vehicle debt cancellation coverage. The act provides that if a creditor is a financial institution, as defined in the Iowa consumer credit code or the Gramm-Leach-Bliley Act, and purchases a retail installment contract with voluntary debt cancellation coverage, “the only obligation of the creditor upon prepayment in full shall be to notify the motor vehicle dealer within thirty days of the prepayment.” It is the motor vehicle dealer’s responsibility to promptly determine whether a consumer is eligible to receive a refund of any voluntary debt cancellation coverage. Any refunds must be issued directly to the consumer within 60 days of the dealer receiving notice of prepayment from the creditor. The act is effective July 1.
On March 24, the FTC announced that a Florida-based group of operators (defendants) faces a permanent ban from the extended automobile warranty industry and will be barred from any further involvement in outbound telemarketing. As previously covered by InfoBytes, the defendants allegedly violated the FTC Act and the Telemarketing Sales Rule by allegedly engaging in deceptive practices when marketing and selling automobile warranties. According to the FTC, the defendants, among other things, (i) misrepresented their affiliation with consumers’ car dealers or manufacturers; (ii) misrepresented warranty coverage; (iii) falsely promised consumers they could obtain a full refund if they cancelled within 30 days; (iv) used remotely created checks, which are illegal in telemarketing transactions; and (v) placed unsolicited calls to numbers on the do not call registry. The proposed stipulated order for permanent injunction, filed in the U.S. District Court for the Southern District of Florida, would require the defendants to pay a $6.6 million monetary judgment and would impose a permanent industry ban. However, the monetary judgment is largely suspended based on the defendants’ inability to pay.
On March 8, the CFPB released a special edition of its Supervisory Highlights focusing on junk fees uncovered in deposit accounts and the auto, mortgage, student, and payday loan servicing markets. The findings in the report cover examinations completed between July 1, 2022 and February 1, 2023. Highlights of the supervisory findings include:
- Deposit accounts. Examiners found occurrences where depository institutions charged unanticipated overdraft fees where, according to the Bureau, consumers could not reasonably avoid these fees, “irrespective of account-opening disclosures.” Examiners also found that while some institutions unfairly assessed multiple non-sufficient (NSF) fees for a single item, institutions have agreed to refund consumers appropriately, with many planning to stop charging NSF fees entirely.
- Auto loan servicing. Recently examiners identified illegal servicing practices centered around the charging of unfair and abusive payment fees, including out-of-bounds and fake late fees, inflated estimated repossession fees, and pay-to-pay payment fees, and kickback payments. Among other things, examiners found that some auto loan servicers charged “payment processing fees that far exceeded the servicers’ costs for processing payments” after a borrower was locked into a relationship with a servicer selected by the dealer. Third-party payment processors collected the inflated fees, the Bureau said, and servicers then profited through kickbacks.
- Mortgage loan servicing. Examiners identified occurrences where mortgage servicers overcharged late fees, as well as repeated fees for unnecessary property inspections. The Bureau claimed that some servicers also included monthly private mortgage insurance premiums in homeowners’ monthly statements, and failed to waive fees or other changes for homeowners entering into certain types of loss mitigation options.
- Payday and title lending. Examiners found that lenders, in connection with payday, installment, title, and line-of-credit loans, would split and re-present missed payments without authorization, thus causing consumers to incur multiple overdraft fees and loss of funds. Some short-term, high-cost payday and title loan lenders also charged borrowers repossession-related fees and property retrieval fees that were not authorized in a borrower’s title loan contract. The Bureau noted that in some instances, lenders failed to timely stop repossessions and charged fees and forced consumers to refinance their debts despite prior payment arrangements.
- Student loan servicing. Examiners found that servicers sometimes charged borrowers late fees and interest despite payments being made on time. According to the Bureau, if a servicer’s policy did not allow loan payments to be made by credit card and a customer representative accidentally accepted a credit card payment, the servicer, in certain instances, would manually reverse the payment, not provide the borrower another opportunity for paying, and charge late fees and additional interest.
CFPB Deputy Director Zixta Martinez recently spoke at the Consumer Law Scholars Conference, where she focused on the Bureau’s goal of reigning in junk fees. She highlighted guidance issued by the Bureau last October concerning banks’ overdraft fee practices, (covered by InfoBytes here), and commented that, in addition to enforcement actions taken against two banks related to their overdraft practices, the Bureau intends to continue to monitor how overdrafts are used and enforce against certain practices. The Bureau noted that currently 20 of the largest banks in the country no longer charge surprise overdraft fees. Martinez also discussed a notice of proposed rulemaking issued last month related to credit card late fees (covered by InfoBytes here), in which the Bureau is proposing to adjust the safe harbor dollar amount for late fees to $8 for any missed payment—issuers are currently able to charge late fees of up to $41—and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type. Martinez further described supervision and enforcement efforts to identify junk fee practices and commented that the Bureau will continue to target egregious and unlawful activities or practices.
On February 23, the CFPB sent market-monitoring orders to nine large auto lenders representing a cross-section of the auto finance market asking for information on their lending portfolios. Data collected from the responses on auto loans originated or serviced from January 1, 2018, through December 31, 2022, will be used in the Bureau’s new data set for monitoring the auto loan market. The Bureau announced its intention to create the data set last November (covered by InfoBytes here), explaining that while available data permits market participants to identify and measure certain trends, it is insufficiently granular to fully explore the causes of those trends. Since November, the Bureau has held multiple discussions with stakeholders and has gathered public input into areas in need of greater transparency, including lending channel differences; data granularity, consistency and quality; and loan performance trends. Stakeholders told the Bureau they want insights into the types of technology used during repossession, as well as “access to high-quality, consistent, and regularly published auto lending data.” The Bureau explained that the data set will provide insights into lending channels, loan performance, and inform possible future data collection efforts. The data will not include consumers’ personally identifiable information.
On February 23, the CFPB entered a consent order against a Georgia-based nonbank auto title lender (respondent) for alleged violations of the Military Lending Act (MLA), the Truth in Lending Act, and the Consumer Financial Protection Act. According to the Bureau, the respondent allegedly charged nearly three times the MLA’s 36 percent annual interest rate cap on auto title loans made to military families. The respondent also allegedly changed military borrowers’ personal information in an attempt to hide their protected status, included mandatory arbitration clauses and unreasonable notice provisions in its loans, and charged fees for an insurance product that provided no benefit to the borrower. The Bureau noted that the respondent has been under a consent order since 2016 for allegedly engaging in unfair and abusive acts related to its lending and debt collection practices (covered by InfoBytes here). While neither admitting nor denying any of the allegations, the respondent has agreed to pay $5.05 million in consumer redress and a $10 million penalty. The respondent must also implement robust measures to prevent future violations.
On February 9, the FTC announced it recently provided the CFPB with its annual summary of activities related to ECOA enforcement, focusing specifically on the Commission’s activities with respect to Regulation B. The summary discussed, among other things, the following FTC enforcement, research, and policy development initiatives:
- Last June, the FTC released a report to Congress discussing the use of artificial intelligence (AI), and warning policymakers to use caution when relying on AI to combat the spread of harmful online conduct. The report also raised concerns that AI tools can be biased, discriminatory, or inaccurate, could rely on invasive forms of surveillance, and may harm marginalized communities. (Covered by InfoBytes here.)
- The FTC continued to participate in the Interagency Task Force on Fair Lending, along with the CFPB, DOJ, HUD, and federal banking regulatory agencies. The Commission also continued its participation in the Interagency Fair Lending Methodologies Working Group to “coordinate and share information on analytical methodologies used in enforcement of and supervision for compliance with fair lending laws, including the ECOA.”
- The FTC initiated an enforcement action last April against an Illinois-based multistate auto dealer group for allegedly adding junk fees for unwanted “add-on” products to consumers’ bills and discriminating against Black consumers. In October, the FTC initiated a second action against a different auto dealer group and two of its officers for allegedly engaging in deceptive advertising and pricing practices and discriminatory and unfair financing. (Covered by InfoBytes here and here.)
- The FTC engaged in consumer and business education on fair lending issues, and reiterated that credit discrimination is illegal under federal law for banks, credit unions, mortgage companies, retailers, and companies that extend credit. The FTC also issued consumer alerts discussing enforcement actions involving racial discrimination and disparate impact, as well as agency initiatives centered around racial equity and economic equality.