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California District Court Holds Assignee Indirect Auto Finance Company Not Subject to FDCPA
On January 9, the U.S. District Court for the Central District of California held that an indirect auto finance company that took assignment of a retail installment sales contract from an automobile dealer is not a debt collector subject to the FDCPA. Tu v. Camino Real Chevrolet, No. 12-9456, 2013 WL 140278 (C.D. Cal. Jan. 9, 2013). As the court explained, FDCPA Section 1692a(6) defines a “debt collector” to include any person who uses any instrumentality of interstate commerce or the mails for the principle purpose of enforcing security interests. In this case, a customer purchased and financed a car with a dealer who subsequently assigned the retail installment sales contract to an auto finance company. When the borrower fell behind on his payments and the finance company tried to collect the debt, the borrower sued the finance company, alleging violations of the FDCPA. The court held that the finance company was primarily in the business of accepting installment sales contracts with its debt collection activities ancillary to its financing activities. Therefore, the finance company is not a debt collector as defined by the FDCPA. The court dismissed the borrower’s claims.
State Law Update: Michigan Amends Rental-Purchase Agreement Act
Last month, Michigan enacted HB 5892, which makes several amendments to the state’s Rental-Purchase Agreement Act. Effective January 3, 2013, a lessor is prohibited from requiring numerous fees, including (i) any processing fee, (ii) a periodic payment or late fee for a rental period beginning after the lessee has returned or surrendered the leased property to the lessor or the lessor’s agent, and (iii) any charge or fee for reinstatement of the rental-purchase agreement in addition to or in excess of those expressly permitted by the Act. The bill also revised the conditions under which a lessee who fails to make timely periodic payments may reinstate a rental-purchase agreement without losing any rights or options. The bill included a revised sample rental-purchase agreement form to reflect the enacted changes.
Two California Appellate Courts Invalidate Auto Installment Contract Arbitration Clauses
Recently, the California Court of Appeals for the First and Second Appellate Districts affirmed lower court orders denying two automobile dealerships’ petitions to compel arbitration, holding that the arbitration clause in the vehicle retail installment sales contracts (RISC) was procedurally and substantively unconscionable. Norton v. Ford of Santa Monica, B237273, 2012 WL 6721400 (Cal. Ct. App. Dec. 28, 2012); Natalini v. Import Motors, Inc., A133236, 2013 WL 64611 (Cal. Ct. App. Jan. 7, 2013). Both trial courts rejected the dealerships’ motions to compel arbitration of complaints alleging multiple causes of action, including violations of the California Consumer Legal Remedies Act, Automobile Sales Finance Act, and Business and Unfair or Deceptive Acts or Practices Act, holding that the arbitration clauses in the RISCs were unconscionable. On appeal, the courts agreed that the arbitration provisions were substantively unconscionable because they were systematically structured to provide only the dealer a right and opportunity to appeal and, because the arbitration agreement provided no fee waiver for the consumer, the financial ramifications of the clause favored the corporate dealership over the individual consumer. Both courts also held that the arbitration clauses were procedurally unconscionable because they contained elements of surprise, with the First Appellate District also holding that the RISC contained elements of oppression since the contract was one of adhesion. Applying a “sliding scale” to the relative importance of each element, the courts found the arbitration clauses sufficiently substantively and procedurally unconscionable and upheld the trial courts’ denial of the dealerships’ petitions to compel arbitration.
Fourth Circuit Holds State Auto Debt Cancellation Requirements Not Preempted for Certain Assigned Loans
On December 26, the U.S. Court of Appeals for the Fourth Circuit held that federal law does not preempt Maryland’s debt cancellation requirements for an auto retail installment sales contract (RISC) when a national bank is the assignee, and not the originator, of the loan. Decohen v. Capital One, N.A., No. 11-2161, 2012 WL 6685767 (4th Cir. Dec. 26, 2012). In this case, a dealer sold and financed a used vehicle and subsequently assigned the loan to a national bank. The financing included a charge for a debt cancellation agreement in the RISC, which under the Maryland Credit Grantor Closed End Credit Provisions (CLEC) requires a lender to cancel any remaining loan balance when a car is totaled and insurance does not cover the full loss. After the buyer totaled his car and was left with a loan balance, he sought to enforce the debt cancellation agreement. In dismissing the case, the district court held, in relevant part, that the agreement at issue was a "debt cancellation contract" covered by the National Bank Act, and that because such contracts are governed by federal law and regulations, including regulations regarding debt cancellation agreements, state regulation of such contracts is preempted. The district court also found that the purchaser failed to state a claim for breach of contract because the bank did not agree to cancel the remaining debt. The appeals court disagreed and held that because the OCC regulations regarding debt cancellation agreements apply only to agreements entered into by national banks, “the CLEC provisions regarding debt cancellation agreements are not expressly preempted by federal law when the agreements are part of credit contracts originated by a local lender and assigned to a national bank.” The court also held that the purchaser stated a claim for breach of contract because the parties voluntarily elected to be governed by the CLEC in the RISC, which cannot be undone by assignment of the loan. The court vacated the district court’s judgment and remanded the case for further proceedings.
Federal District Court Holds Ohio Post-Repossession Notice Requirements Not Preempted
On October 17, the U.S. District Court for the Northern District of Ohio held that the post-repossession notice requirements in the Ohio Retail Installment Sales Act (RISA) and the Ohio Uniform Commercial Code (OUCC) were not preempted by the National Banking Act (NBA) and OCC regulations. White v. Wells Fargo Bank, N.A., Case No. 1:12 CV 943, 2012 WL 4958516 (N.D. Ohio Oct. 17, 2012). A group of borrowers allege on behalf of a putative class that the lender violated provisions of RISA and the OUCC when it repossessed and sold borrowers’ cars after the borrowers defaulted on their auto loans. The lender filed a motion to dismiss the action, claiming that, because it is a national bank, the NBA and applicable OCC regulations preempt borrowers’ RISA and OUCC claims. Following precedent from the Ninth and Fourth Circuits, the Ohio court held that the state laws regarding repossession notice requirements fell within the savings provision of the NBA and thus were not expressly preempted. The court also held that the federal government had not occupied the field of debt collection, and that the Ohio laws at issue do not relate to the bank’s lending operations and therefore do not significantly interfere with its ability to operate as a bank. Accordingly, the court denied the lender’s motion to dismiss on preemption grounds.
California Governor Signs Two Auto Buy-Here-Pay-Here Dealer Bills, Vetoes A Third
On September 29, California Governor Jerry Brown signed AB 1447 and AB 1534, imposing new requirements on Buy-Here-Pay-Here automobile dealers (BHPH Dealers), defined as those dealers who assign less than 90% of their sale and lease contracts to an unaffiliated third party within 45 days of entering the contract unless they meet certain other criteria. At the same time, Governor Brown vetoed a third bill, SB 956, which could have had far reaching implications for BHPH Dealers, regulators and auto finance companies who purchase loan contracts from BHPH Dealers.
Among the new requirements affecting BHPH Dealers are:
- BHPH Dealers will be required to provide buyers and lessees with a 30-day/1,000 mile warranty covering certain components of the vehicle;
- When a covered warranty claim is made, the BHPH Dealer will be required to make the repairs at no cost to the consumer or refund the full amount of the purchase or lease, minus a reasonable amount for any damage to the vehicle after the lease or sale;
- Electronic tracking of a vehicle after sale to identify the location of the vehicle, except with the consumer’s written consent and for limited purposes will be prohibited;
- Use of starter interrupt technology must be disabled except in limited circumstances;
- Disclosure of the reasonable market value of a used vehicle must be posted on the vehicle, including what information was used to determine that value, and a copy of any information obtained from a nationally recognized pricing guide must be provided to potential purchasers of the vehicle; and
- Consumers can no longer be required to make required payments in person.
In what is likely to be considered positive news for indirect auto finance companies, whose business is limited to the purchase of retail installment sales contracts from auto dealers, Governor Brown’s veto of SB 956 will allow them to continue making those purchases without the added concerns they might have otherwise had. Some of those concerns, which have become moot for the time being, included:
- Confirming whether the dealer from whom the purchase was being made was in fact a BHPH dealer and, if so, whether they were appropriately licensed;
- Ensuring that the finance company did not purchase contracts in which the interest rate charged to the borrower exceeded amount permitted under the proposed law; and
- Providing an increased grace period than is otherwise applicable before repossession.
In vetoing SB 956, Governor Brown noted that the bill required BHPH Dealers “be regulated by the Department of Corporations under the California Finance Lender’s Law. I am not yet convinced the evidence merits the regulatory oversight of this bill.” However, Governor Brown also made clear that if added protections are necessary after implementation of the two bills signed into law on September 29, his office would work with the legislature to “find appropriate, measured solutions.”
State Law Update: Illinois, Michigan, Oregon Enhance Borrower Protections
Illinois Enhances Borrower Protections. On July 25, Illinois enacted SB 1692, which enhances consumer protections related to mortgages and tax refund anticipation loans. The bill amends the state’s High Risk Home Loan Act to (i) update the definition of “high risk home loan” to be consistent with the federal standard, and prohibit prepayment penalties, balloon payments and modification fees for such loans, (ii) revise the definition of “points and fees” and clarify the prohibition on the financing of such fees in connection with high risk loans, and (iii) limit late payment fees to 4% of the amount past due. The bill also amends the state’s Tax Refund Anticipation Loan Disclosure Act to (i) revise certain definitions, (ii) limit the fees that can be charged in connection with tax refund loans and establish other prohibited activities, and (iii) amend the disclosures required for creditors making such loans. These and other changes in the bill are effective January 1, 2013.
Michigan Updates Guidance on Return Check Fees on Installment Sales Contracts. On July 19, the Michigan Office of Financial and Insurance Regulation (OFIR) published a letter to installment seller/sales finance licensees clarifying the regulator’s position on the use of return check fees in installment sales contracts. Previously, the OFIR had taken the position that inclusion of an NSF fee in a vehicle installment sales contract was not permitted because such a fee was not expressly permitted under the state’s Motor Vehicle Sales Finance Act (MVSFA). However, in its July 19 letter the OFIR clarified that the OFIR considers it a violation of state law for a licensee under the MVSFA to charge a fee for returned checks if the motor vehicle installment sales contract does not specifically provide for the assessment of such a fee. The OFIR states that the MVSFA requires a contract contain all of the terms of the agreement between a buyer and a seller, including any default charges. Although the state Credit Reform Act permits regulated lenders to charge return check fees up to a maximum of $25, because a returned check constitutes a default under the contract, a return check fee is considered a default charge and can only be assessed if disclosed in the agreement.
Oregon Adopts Rules to Implement Foreclosure Avoidance Program. Recently, the Oregon Department of Justice adopted temporary rules to implement the Foreclosure Avoidance Mediation Program established earlier this year. The rules establish (i) the accepted methods of notice required to be provided to the state Attorney General, (ii) the minimum training and qualifications for mediators, (iii) the fees and timing of fee payments, and (iv) the form of mediation notice for use in seeking nonjudicial foreclosure. The rules took effect July 11, 2012, and expire January 6, 2013.
D.C. Federal Court Holds FCRA Credit Report Notice Requirements Apply to Auto Dealers Engaging in Third Party Financing Transactions
On May 22, the U.S. District Court for the District of Columbia rejected the National Automobile Dealer's Association's (NADA) challenge to an FTC determination that an automobile dealer that executes a credit contract based on a third party financing source "uses a consumer report" under FCRA, and, thus, must provide prospective buyers with a risk-based pricing notice. National Automobile Dealers Assoc. v. Federal Trade Commission, No. 11-cv-01711, 2012 WL 1854088 (D.D.C. May 22, 2012). A risk-based pricing notice must be provided to buyers who, based upon information contained in their consumer reports, are offered credit at terms materially less favorable than the most favorable terms available to a substantial proportion of consumers. The notice is intended to alert buyers to the existence of negative information in their credit reports to enable them to correct any inaccuracies. The FTC's 2011 amendments to the Fair Credit Risk-Based Pricing Regulations clarified that even in the context of a third-party transactionwhere the auto dealer is not the ultimate source of financing and does not physically obtain a consumer's credit reportthe auto dealer must provide a risk-based pricing notification. According to NADA, the FTCs interpretation placed an unreasonable burden on auto dealers who outsource financing to banks or other entities. NADA also argued that the interpretation was arbitrary and capricious and that it was not entitled to Chevron deference. In its ruling, the court rejected these challenges, stating, among other things, that the FTC's determination was "eminently reasonable" and consistent with the overall regulatory scheme of FCRA because auto dealers are able to obtain credit report information and are best suited to convey that information to consumers. NADA intends to appeal the decision.
Spotlight on Auto Finance (Part 3 of 3): Expanded Coverage for Vehicle and Consumer Loans
Consumers have a larger platform to submit complaints against vehicle and consumer finance companies directly to regulators. The CFPB has set up an online database that allows the CFPB to receive consumers' complaints against their lenders and take action or transfer those complaints to another, appropriate regulator. "We are advising our clients to be aware of this increased focus on individual complaints," says John Redding, Counsel in BuckleySandler's Southern California office. "Because of this new database, companies need to be aware of their customer service response times and make each customer complaint a top priority." He suggests:
- Provide prompt responses to consumer complaints
- Work with consumers to resolve issues before they become complaints to the CFPB or other regulatory agencies
- Monitor social media outlets, but don't overreact to comments or complaints and use care when considering any type of response
"Companies need to recognize that consumers have been given a new outlet that they have not had before," says Redding. "Consumers now have a greater voice with the regulatory agencies and, as a result, lenders have to be aware of all issues raised by their customers." Regulators have made it clear that they are closely reviewing consumer complaints and that they are likely to have a strong impact on regulatory actions. "The CFPB is likely to focus on standards, like fairness and risk to consumers, as well as specific rules" says Redding. "The regulators are looking to address practices that may cause harm to consumers."
Spotlight on Auto Finance (Part 2 of 3): New Database to Combat Fraud Against Military and Veterans
The federal government is increasing scrutiny of financial services companies practices affecting active military members, veterans and their families. Earlier this year, the CFPB along with the FTC, the Department of Defense and the New York Attorney General announced the launch of the Repeat Offenders Against Military (ROAM) database, which will track enforcement actions against companies and individuals who repeatedly scam military personnel, veterans and their families. According to John Redding, Counsel in BuckleySandlers Southern California office, this new effort is an important development that the financial services industry needs to be aware of. He says the firm has been advising clients on how to refine their policies and procedures for doing business with servicemembers and their families. "We are suggesting they be aware of the increased focus on SCRA [Servicemembers Civil Relief Act] issues and, in part because of the new database and other efforts surrounding increased protections, need to review their practices to ensure continued compliance." According to the CFPB, law enforcement officials across the country, including state attorneys general, US attorneys, and judge advocates from all five branches of the armed forces, will be able to search the ROAM database for information about completed civil and criminal actions against businesses that have scammed military personnel, veterans, and their families.