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On February 22, the DOJ announced a settlement agreement with a motor vehicle finance company regarding allegations that the company did not refund a portion of the capitalized cost reduction (CCR), after the motor vehicle leases were terminated early under the Servicemembers Civil Relief Act (SCRA). The DOJ took the position that the CCR was a prepayment subject to refund upon termination. Consistent with industry practice, the finance company treated the CCR as an amount comparable to a down payment in a finance agreement, not subject to refund, rather than a prepayment. Though not admitting any violation of law, the company agreed to refund certain portions of CCR pre-payments and update its policies and procedures, among other relief. Buckley Sandler attorneys John Redding and Sasha Leonhardt represented the company in this matter.
District judge rules financing contingency clause in retail installment contract does not violate TILA
On February 12, a federal judge in the U.S. District Court for the Eastern District of California held that a financing contingency clause in a retail installment contract (contract) did not violate the Truth in Lending Act (TILA). The clause provided that the dealership (defendant) could cancel the contract if it could not assign it to a financial institution on terms acceptable to the seller. According to the opinion, the plaintiff signed the contract with the defendant to purchase a car after being told she was approved for financing; however, the defendant later contacted the plaintiff and informed her that it was unable to assign her loan to a third party bank and demanded that she “return to the dealership with a co-signor or surrender the [v]ehicle.” The plaintiff asserted that “she never received a written notice explaining why [the] defendant [had] revoked its extension of credit” or why it had cancelled the contract. Among other things, the plaintiff argued that the defendant’s actions violated (i) TILA when it inserted a seller’s right to cancel provision in the contract, and (ii) a “breach of ‘good faith and fair dealing obligation.’” However, with respect to TILA, the judge found no violation, holding that while TILA requires certain disclosures for the purpose of avoiding the “uninformed use of credit,” it does not prohibit the inclusion of financing contingencies. Here, the contract included all required elements under TILA and the properly disclosed credit terms were not rendered meaningless or invalid just because the dealership reserved a unilateral right to rescind the contract. The judge further dismissed the breach of good faith claim, noting that the defendant was acting within the allowed terms of the right to cancel provision.
On February 12, following a four-day trial, the U.S. Bankruptcy Court for the Western District of Virginia entered a memorandum opinion to sanction and enjoin a national consumer bankruptcy law firm and its local partner attorneys (defendants) for “systematically engag[ing] in the unauthorized practice of law, provid[ing] inadequate representation to consumer debtor clients, and promot[ing] and participat[ing] in a scheme to convert auto lenders’ collateral and then misrepresent[ing] the nature of that scheme.” According to a DOJ press release, the combined order was entered in two actions consolidated for trial brought by the DOJ’s U.S. Trustee Program. The actions concern a Chicago-based law firm that offered legal services via its website to financially distressed consumers and allegedly had “non-attorney ‘client consultants’” engage in the unauthorized practice of law and employ “high-pressure sales tactics” when encouraging consumers to file for bankruptcy relief. Among other things, the defendants allegedly (i) refused to refund bankruptcy-related legal fees to clients for whom the firm failed to file bankruptcy cases; (ii) failed to have in place oversight and supervision procedures to prevent non-attorney salespeople from practicing law; and (iii) partnered with an Indiana-based towing company to implement a scheme that would allow clients to have their bankruptcy-related legal fees paid if they transferred vehicles “fully encumbered by auto lenders’ liens” to the towing company without lienholder consent. Under the “New Car Custody Program,” the towing company allegedly claimed rights to the vehicles, sold the vehicles at auction, paid the client’s bankruptcy fees to the defendants, and pocketed the proceeds. According to the release, this program “harmed auto lenders by converting collateral in which they had valid security interests,” and exposed clients to “undue risk by causing them to possibly violate the terms of their contracts with their auto lenders as well as state laws.”
Under the terms of the order, the court sanctioned the defendants $250,000, imposed additional sanctions totaling $60,000 against the firm’s managing partner and affiliated partner attorneys, ordered the defendants to disgorge all funds “collected from the consumer debtors in both bankruptcy cases,” and revoked the defendants’ privileges to practice in the Western District of Virginia for various specified periods of time. The court also sanctioned the towing company and “ordered the turnover of all funds it received in connection” with the program. The towing company did not respond to the filed complaints.
On February 2, the FTC released a new Staff Perspective (perspective) which highlights takeaways from a July 2017 FTC workshop focused on examining the array of financial issues that may affect military consumers (defined as servicemembers, veterans, and their families). The perspective notes, among other things, that servicemembers may struggle during auto financing transactions because of a lack of time to shop and lack of credit history, which may result in disadvantageous credit terms. Additionally, the perspective highlights that debt collection problems may result in a servicemember not qualifying for a security clearance and that debt collectors may threaten to contact servicemembers’ commanding officers. The perspective also summarized the additional legal rights that may apply to military consumers, such as the Military Lending Act (MLA) and the Servicemembers Civil Relief Act (SCRA), and emphasized the FTC’s focus on financial education for servicemembers throughout the various stages of their military career.
On January 29, the U.S. District Court for the Western District of Pennsylvania granted a motion to compel arbitration, finding that an arbitration clause set forth under extension agreements with an automobile finance company to refinance and extend the plaintiff’s loan obligation is “valid and enforceable.” Additionally, the court ruled that alternative motions to dismiss filed by other defendants were moot, and then stayed and administratively closed the matter pending the resolution of the claims subject to arbitration. The plaintiff alleged violations of her Fourth and Fourteenth Amendment rights, the Fair Debt Collections Practices Act, and several other state and federal credit statutes, when defendants—including the automobile finance company—repossessed her vehicle despite having signed extension agreements. In response to the defendants’ assertion that her claims were subject to the arbitration clause, the plaintiff argued that the extension agreements were unenforceable due to the unavailability of the “designated arbitrators,” and that defendants were barred from trying to obtain “alternative relief” by relying on additional terms outlined in a second extension agreement that released defendants from liability. However, the court ruled that the plaintiff’s failure to dispute the scope of the arbitration clause meant that the defendants were “entitled to enforcement of the arbitration clause with respect to all claims and defenses asserted,” so long as the designated arbitrators are available.
Department of Defense Updates MLA Interpretive Guidance; Addresses Timing for Safe Harbor Qualification
The Department of Defense (DoD) published a new interpretive rule (rule) under the Military Lending Act (“MLA”) on December 14. This interpretive rule takes effect immediately, and it both amends and adds to the interpretive rule issued by DoD in August 2016 (previously covered by a Buckley Sandler Special Alert). In general, the rule contains the following updated interpretations:
- Exemption of Credit Secured by a Motor Vehicle or Personal Property. The rule provides additional guidance on the exemption covering purchase money-secured motor vehicle and personal property loans. Specifically, the rule states that additional costs may be added to an extension of credit so long as these costs relate to the object securing the credit, and not the extension of credit itself. For example, the rule explains that credit used to finance “optional leather seats,” “an extended warranty,” or “negative equity” in connection with the purchase of a motor vehicle will not cause the loan to be subject to the MLA. However, the rule also states that, if credit is extended to cover “Guaranteed Auto Protection insurance or a credit insurance premium” or additional “cashout,” the loan is not eligible for the MLA exception.
- Security Interests in Covered Borrowers’ Accounts. The rule addresses the ability of a creditor to take a security interest in a covered borrower’s account. Specifically, the rule states that a covered borrower may “convey security interest for all types of consumer credit” to a creditor, so long as the creditor complies with all other laws and the MLA rule. Similarly, the rule notes that the MLA does not prohibit a creditor from exercising rights to take an otherwise-valid statutory lien on funds that have been deposited into a covered borrower’s account “at any time.” However, the rule also emphasizes methods a creditor may not use to obtain payment from a covered borrower’s account, such as a “remotely created check.”
- Timing for Safe Harbor Qualification. The rule provides additional clarity on when a creditor must check an applicant’s active duty status to obtain the MLA’s safe harbor. The rule states that an applicant’s covered borrower status should be determined when the applicant (i) initiates the transaction, (ii) submits an application to establish an account or during the processing of that application, or (iii) anytime during a 30-day period of time prior to such action. In addition, the rule states that a covered borrower check can qualify for the safe harbor if it is performed “during the course of the creditor’s processing of that application for consumer credit.”
English Litigation Continues as Mulvaney Delays CFPB Enforcement Cases and Lawmakers Begin New Payday CRA Action
On December 6, Deputy Director of the CFPB, Leandra English, filed an amended complaint for declaratory and injunctive relief and a motion for preliminary injunction with a supporting memorandum. In her amended complaint, English adds, among other things, a constitutional claim alleging that President Trump’s appointment of Mulvaney violates Article II, section 2 of the U.S. Constitution, which empowers the President to appoint “Officers of the United States,” subject to “the Advice and Consent of the Senate.” According to English, since Mulvaney was appointed without Senate approval and the Federal Vacancies Reform Act (FVRA) allegedly does not provide the President with a separate authority, President Trump does not have the constitutional authority to appoint Mulvaney in the manner he chose.
The amended complaint also alleges that the appointment of Mulvaney under the FVRA is illegal because that act cannot be used to make an appointment to an “independent multi-member board or commission without Senate approval,” and the CFPB Director is, by law, a member of the FDIC’s board. This argument mirrors the argument made in a new complaint filed on December 5 by a New York-based credit union against President Trump and Acting CFPB Director Mick Mulvaney in the U.S. District Court for the Southern District of New York to contest the legality of Mulvaney’s appointment. The defendants have yet to respond to the credit union’s complaint.
With respect to English’s litigation, the defendants are set to respond to the motion for preliminary injunction, which builds off the arguments in the amended complaint, by December 18, and a hearing on the motion is set for December 22.
Mulvaney has continued his work as Acting Director at the CFPB. On December 4, according to sources, he met with reporters to announce his decision to delay at least two active litigation cases as part of his plan to reevaluate the Bureau’s enforcement and litigation practices. The first case concerns a district court dispute between the Bureau and an immigration bond company over whether the CFPB has the authority to enforce a civil investigative demand for personal information about the company’s customers. The second case involves Mulvaney’s decision to withdraw the Bureau’s demand that a mortgage payment company post bond after being ordered to pay a $7.9 million civil money penalty (see previous InfoBytes coverage here). Mulvaney’s December 4 statements also included a freeze on the Bureau’s collection of consumers’ personally identifiable information. These actions follow directions issued by Mulvaney during his first week at the Bureau as previously covered by InfoBytes here.
Mulvaney has also suggested that he would not seek to repeal the Bureau’s final rule concerning payday loans, vehicle title loans, deposit advance products, and longer-term balloon loans but expressed his support for resolution H.J. Res. 122, which was introduced December 1 by a group of bipartisan lawmakers to override the rule under the Congressional Review Act (CRA). The final rule is set to take effect January 16, 2018, but compliance is not mandatory until August 19, 2019. A press release issued by the House Financial Services Committee in support of the resolution stated, “small-dollar loans are already regulated by all 50 states, the District of Columbia and Native American tribes. The CFPB’s rule would mark the first time the federal government has gotten involved in the regulation of these loans.”
On December 5, the Government Accountability Office (GAO) issued a letter to Senator Pat Toomey (R-Pa.) stating that CFPB Bulletin 2013-02 (Bulletin) on indirect auto lending and compliance with the Equal Credit Opportunity Act (ECOA) is a “general statement of policy and a rule” that is subject to override under the CRA. According to GAO, the CRA’s definition of a “rule” includes both traditional rules, which typically require notice to the public and an opportunity to comment, and general statements of policy, which do not. GAO concluded that the Bulletin meets this definition “since it applies to all indirect auto lenders; it has future effect; and it is designed to prescribe the Bureau’s policy in enforcing fair lending laws.” GAO’s decision may allow Congress to repeal the four year old Bulletin through a House and Senate majority vote under the CRA, followed by the President’s signature. Sen. Toomey issued a statement saying, “I intend to do everything in my power to repeal this ill-conceived rule using the [CRA].”
Additionally, and as expected, on December 5, former Director Richard Cordray officially announced his candidacy for governor of Ohio.
On December 1, the FTC announced a proposed order to settle with a Dallas, Texas auto dealership for alleged deceptive advertisements containing loan and lease terms in Spanish-language newspapers. According to the FTC, the dealership violated the FTC Act by prominently displaying advantageous loan and lease terms in Spanish and qualifying those terms in smaller-print English at the bottom of the page. The FTC alleges the dealership misrepresented (i) the total cost of purchasing or leasing; (ii) the underwriting restrictions for the advertised loan or lease; and (iii) the availability of the inventory advertised. Additionally, the FTC alleged that the dealership violated Truth in Lending Act and the Consumer Leasing Act by failing to “clearly and conspicuously” disclose credit and lease terms. The proposal requires the dealership to cease the allegedly deceptive conduct and comply with all applicable advertisement regulations in the future. The proposal is published in the Federal Register and is open for public comment until January 2, 2018.
On November 6, the Federal Reserve Board (Fed) released its October 2017 Senior Loan Officer Opinion Survey on Bank Lending Practices. Responses came from both domestic banks and U.S. branches and agencies of foreign banks, and focused on bank loans made to businesses and households over the past three months. The October survey results indicated that over the third quarter of 2017, on balance, lenders eased their standards on commercial and industrial loans with demand for such loans decreasing. However, lenders left their standards on commercial real estate (CRE) loans unchanged and reported that demand for CRE loans weakened. As to loans to households, banks reported that standards for all categories of residential real estate (RRE) lending “either eased or remained basically unchanged,” and that the demand for RRE loans also weakened.
The survey also included two sets of special questions addressing changes in household lending conditions.
The first set of these special questions asked banks to specify the reasons for changing this year their credit policies on credit card and auto loans to prime and subprime borrowers. Respondents’ most reported reasons for tightening standards or terms on these types of loans were (i) “a less favorable or more uncertain economic outlook”; (ii) “a deterioration or expected deterioration in the quality of their existing loan portfolio”; and (iii) “a reduced tolerance for risk.” Auto loan reasons also focused on “less favorable or more uncertain expectations regarding collateral values.”
The second set of these special questions asked banks for their views as to why they have experienced stronger or weaker demand for credit card and auto loans over this year. Respondents’ reported that a strengthening of demand for credit card and auto loans from prime borrowers could be attributed to customers’ confidence as well as their improved ability to manage debt service burdens. The most reported reasons for weakened demand for credit card and auto loans from prime borrowers were an increase in interest rates and a shift in customers’ borrowing “from their bank to other bank or nonbank sources.”
For additional details see:
- Table 1 – Opinion Survey on Bank Lending Practices at Selected Large Banks in the U.S.
- Table 2 – Opinion Survey on Bank Lending Practices at Selected Branches & Agencies of Foreign Banks
- Charts – Measures of Supply and Demand for Commercial & Industrial Loans
On November 6, the FTC announced a settlement of $1.4 million with a Southern California auto dealership for violating a 2014 administrative order (Order). The Order prohibited the dealership from misrepresenting the cost to finance or lease a vehicle. In issuing the Order, the FTC alleged that the dealership had violated the FTC Act by using advertisements that deceptively stated a $0 up-front lease option while excluding other fees and costs, and also that the dealership’s advertisements violated disclosure requirements of the Consumer Leasing Act (CLA) and TILA.
The new settlement resolves a complaint in which the FTC alleged the auto dealership “routinely violated” the Order requiring the dealership to, among other things, (i) accurately represent costs and terms of financing or leasing vehicles; (ii) conform its advertisements to the requirements of the CLA and TILA; and (iv) maintain necessary records and make those records available to the agency. In addition to the monetary penalty and the prohibition of similar practices, the settlement also subjects the dealership to strong compliance and reporting requirements.
- Buckley Webcast: The next consumer litigation frontier? Assessing the consumer privacy litigation and enforcement landscape in 2019 and beyond
- Buckley Webcast: The CFPB’s proposed debt collection rule
- Buckley Webcast: Trends in e-discovery technology and case law
- Brandy A. Hood to discuss "What the flood? Don’t get washed away by a flood of changes" at the American Bankers Association Regulatory Compliance Conference
- Daniel P. Stipano to discuss "Mitigating the risks of banking high risk customers" at the American Bankers Association Regulatory Compliance Conference
- Daniel P. Stipano, Kari K. Hall, Brandy A. Hood, and H Joshua Kotin to discuss "Regulations that matter in a deregulatory environment" at the American Bankers Association Regulatory Compliance Conference Power Hour
- Buckley Webcast: Data breach litigation and biometric legislation
- Hank Asbill to discuss "Pay no attention to the man behind the curtain: Addressing prosecutions driven by hidden actors" at the National Association of Criminal Defense Lawyers West Coast White Collar Conference
- Daniel P. Stipano to discuss "Keep off the grass: Mitigating the risks of banking marijuana-related businesses" at the ACAMS AML Risk Management Conference
- Daniel P. Stipano to discuss "Mid-year policy update" at the ACAMS AML Risk Management Conference
- Amanda R. Lawrence to discuss "Navigating the challenges of the latest data protection regulations and proven protocols for breach prevention and response" at the ACI National Forum on Consumer Finance Class Actions and Government Enforcement
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program
- Brandy A. Hood to discuss "RESPA Section 8/referrals: How do you stay compliant?" at the New England Mortgage Bankers Conference
- Daniel P. Stipano to discuss "Lessons learned from recent enforcement actions and CMPs" at the ACAMS AML & Financial Crime Conference
- Daniel P. Stipano to discuss "Assessing the CDD final rule: A year of transitions" at the ACAMS AML & Financial Crime Conference
- Douglas F. Gansler to discuss "Role of state AGs in consumer protection" at a George Mason University Law & Economics Center symposium