On April 24, the SEC released an order charging a financial institution and two senior executives for allegedly understating millions of dollars in auto loan losses during the period leading up to the financial crisis. The SEC stated that an investigation identified an alleged failure by the institution to incorporate internal loss forecasts into financial reporting, resulting in the institution understating loan loss expense. The institution did not admit the allegations, but agreed to pay $3.5 million to resolve the charges. The SEC also alleged that the two executives caused the understatements by deviating from established policies and procedures and failing to implement proper internal controls for determining its loan loss expense. The two executives did not admit the allegations, but agreed to pay a combined $135,000 to resolve the investigation, and to cease and desist from committing or causing any violations of the relevant federal securities laws.
On May 28, a group of 13 Democratic Members of the House Financial Services Committee sent a letter to CFPB Director Richard Cordray seeking “any and all background information about . . . [the CFPB’s] investigation into alleged practices within the auto lending industry.” As has been reported, earlier this year the CFPB issued guidance to bank and nonbank indirect auto lenders about compliance with federal fair lending requirements, and the CFPB has spent the past several months implementing that guidance through supervision and examination of lenders. In particular, the CFPB is focused on the practice by which auto dealers “mark up” the indirect lender’s risk-based buy rate and receive compensation based on the increased interest revenues. In their letter to Director Cordray, the Members of Congress remind the Director that vehicle ownership can be critical to a consumer’s ability to obtain and maintain employment and find affordable housing, and raise concerns about the impact of the CFPB’s auto lending enforcement activity on consumers’ access to affordable credit for vehicle purchase. The Members ask the Director to provide specific information about allegations stemming from investigations of auto lenders and the methodology the CFPB is employing to determine whether fair lending violations exists. They also seek additional information about the CFPB’s compliance expectations for indirect auto lenders with regard to dealer compensation policies. The letter asks the CFPB to respond by June 7, 2013.
Michigan Court of Appeals Holds Companies Hired by Automobile Lenders to Arrange for the Repossession of Collateral Need Not Be Licensed as Collection Agencies
On April 11, the Michigan Court of Appeals affirmed a trial court’s ruling that the Michigan Occupational Code did not require licensure of companies that contract with automobile lending institutions to handle collection services on delinquent accounts (“forwarding companies”) because the forwarding companies did not directly or indirectly engage in collections activities. Badeen v. Par, Inc., 2013 WL 1489372 (Mich. Ct. App. Apr. 11, 2013). Plaintiffs, licensed debt collectors, filed multiple amended complaints alleging that defendants, automobile lenders and forwarding companies, violated the Michigan Occupational Code by hiring unlicensed collections agencies and indirectly engaging in collections activities. The court of appeals held that plaintiffs were not entitled to relief for their claims that defendants engaged in licensable activity without a license. The court explained that because the forwarding companies hired by the automobile lenders contract out the activities of solicitation of claims and repossession of property to properly licensed collection agencies, and do not themselves “directly or indirectly” engage in the collection of debts, the forwarding agencies are not required to be licensed.
On March 27, the California Court of Appeal, First Appellate District, enforced an arbitration agreement in a retail installment sales contract. Vasquez v. Greene Motors, Inc., No. A134829, 2013 WL 1232343 (Cal. Ct. App. Mar. 27, 2013). While the court held that the agreement was “procedurally unconscionable” because the agreement “was imposed on [the Defendant] without the opportunity for negotiation, and was therefore adhesive,” it reversed the lower court’s denial of a motion to compel arbitration. In so holding, the court reasoned that the level of procedural unconscionability was “minimal” and that there was no significant substantive unconscionability. The court held “the only suggestion of substantive unconscionability . . . was the failure of the clause to permit an ‘appeal’ arbitration in the event a buyer sought and was denied injunctive relief,” but that “this asymmetry is mitigated by the provision permitting a second arbitration if a buyer is denied a monetary recovery.” Finding “minimal unconscionability,” the court reversed the trial court order denying the petition to compel arbitration and directed the trial court to order arbitration.
On March 21, the CFPB issued Bulletin 2013-02, which provides guidance to bank and nonbank indirect auto lenders about compliance with federal fair lending requirements, and specifically addresses the practice by which auto dealers “mark up” the indirect lender’s risk-based buy rate and receive compensation based on the increased interest revenues. The CFPB explains that indirect auto lenders are creditors under ECOA and Regulation B if they regularly participate in making credit decisions. Based on information the Bureau has collected to date, it believes the “standard practices” of indirect auto lenders constitute participation in a credit decision. The CFPB contends that by permitting dealer markup and compensating dealers on that basis, lenders may be liable under the legal theories of both disparate treatment and disparate impact when pricing disparities on a prohibited basis exist within their portfolios. As such, the CFPB urges indirect lenders to (i) impose controls on, or otherwise revise, dealer markup and compensation policies, and monitor the effects of those policies and address unexplained pricing disparities on prohibited bases; or (ii) eliminate dealer discretion to mark up buy rates and compensate dealers in some other way. The guidance also identifies what the CFPB considers to be core aspects of a robust fair lending compliance program, including: (i) an up-to-date fair lending policy statement; (ii) regular fair lending training for all employees involved with any aspect of the institution’s credit transactions, as well as all officers and board members; (iii) ongoing monitoring for compliance with fair lending and other policies and procedures intended to reduce fair lending risk; (iv) review of lending policies for potential fair lending violations, including potential disparate impact; (v) depending on the size and complexity of the financial institution, regular analysis of loan data in all product areas for potential disparities on a prohibited basis in pricing, underwriting, or other aspects of the credit transaction; (vi) regular assessment of the marketing of loan products; and (vii) meaningful oversight of fair lending compliance by management and, where appropriate, the institution’s board.
On March 20, 2013, Michael Bresnick, Executive Director of DOJ’s Financial Fraud Enforcement Task Force gave a speech at the Exchequer Club of Washington, DC highlighting recent accomplishments of the Task Force and outlining its priorities for the coming year. He began by discussing a number of areas of known focus for the Task Force, including RMBS fraud, fair lending enforcement, and servicemember protection. He then outlined three additional areas of focus that the Task Force has prioritized, including (i) the “government’s ability to protect its interests and ensure that it does business only with ethical and responsible parties;” (ii) discrimination in indirect auto lending; and (iii) financial institutions’ role in fraud by their customers, which include third party payment processors and payday lenders.
The third priority, which was the focus of Mr. Bresnick’s remarks, involves the Consumer Protection Working Group’s prioritization of “the role of financial institutions in mass marketing fraud schemes — including deceptive payday loans, false offers of debt relief, fraudulent health care discount cards, and phony government grants, among other things — that cause billions of dollars in consumer losses and financially destroy some of our most vulnerable citizens.” He added that the Working Group also is investigating third-party payment processors, the businesses that process payments on behalf of the fraudulent merchant. Mr. Bresnick explained that “financial institutions and payment processors . . . are the so-called bottlenecks, or choke-points, in the fraud committed by so many merchants that victimize consumers and launder their illegal proceeds.” He said that “they provide the scammers with access to the national banking system and facilitate the movement of money from the victim of the fraud to the scam artist.” He further stated that “financial institutions through which these fraudulent proceeds flow . . . are not always blind to the fraud” and that the FFETF has “observed that some financial institutions actually have been complicit in these schemes, ignoring their BSA/AML obligations, and either know about — or are willfully blind to — the fraudulent proceeds flowing through their institutions.” Mr. Bresnick explained that “[i]f we can eliminate the mass-marketing fraudsters’ access to the U.S. financial system — that is, if we can stop the scammers from accessing consumers’ bank accounts — then we can protect the consumers and starve the scammers.” Read more…
On March 5, Georgia enacted HB 266, which, among other things, eliminates a monthly sales tax on auto leases. The bill responds to a 2012 overhaul of the state’s tax code that mistakenly created a double tax on car leases, requiring payment of a Title Ad Valorem Tax of 6.5% to be paid by both lessees and purchasers of motor vehicles in the state, as well as the monthly sales and use tax to be paid by lessees. This additional tax had the effect of making motor vehicle leases less attractive than purchases, and at the same time likely would have resulted in lower overall taxes payable to the state. The bill also allows the Georgia Department of Revenue to decide whether and how to regulate “buy here, pay here” dealers. If the Department does create such rules, it has discretion to provide those dealers a larger discount from the normal title tax. The bill took effect immediately.
On March 1, the Court of Appeals of Maryland, answering a question of law certified to it by the U.S. Court of Appeals for the Fourth Circuit, held that the sale of repossessed automobiles at an auction where individuals had to pay a refundable $1,000 cash deposit was a “private sale”, and not a “public auction,” under the provisions of Maryland’s Creditor Grantor Closed End Credit Act (CLEC). Gardner v. Ally Fin. Inc., Misc. No. 10, 2013 WL 765013 (Md. Mar. 1, 2013). The court determined, based on legislative history, that one purpose of 1987 amendments to the CLEC was to protect the debtor against “favored buyer private sales that are not . . . commercially reasonable.” The court held that although the sale of the automobiles in this case was publicly advertised and open to the public for competitive bidding, the admission fee, which was charged to all participants, even those who merely wanted to observe the proceedings, “obscured transparency” and “shielded the process used to sell [the] cars from observation and, thus, could not constitute a ‘public auction’ under CLEC.” Thus, the court held that the creditors were subject to the more stringent post-sale disclosure requirements required for “private sales” under the CLEC.
California Appeals Court Holds No Actual Damages Necessary to Sustain Claims Against Dealer, Finance Company Under State Auto Finance Act
On January 15, the California Court of Appeal for the Second Appellate District held that an auto buyer need not plead actual damages to sustain a claim under the state’s auto finance act, and that there is no statutory protection from contract rescission afforded a dealer or its assignee for substantial compliance with the act. Rojas v. Platinum Auto Group, Inc. No. B235956, 2013 WL 156561 (Cal. App. Ct. Jan. 15, 2013). The plaintiff bought and financed a car with a dealer, agreeing to a deferred down payment schedule, which he claims the dealer failed to properly reflect on the retail installment sales contract. The dealer and the finance company to which it had assigned the loan, succeeded on demurrers in the trial court, obtaining dismissal of the buyer’s claims that the dealer’s mischaracterization of the down payment violated the state’s Rees-Levering Act, which requires a detailed and truthful itemization of a buyer’s down payment, and allegations that the mischaracterization violated the state Consumer Legal Remedies Act and constituted an unfair business practice. On appeal, the court held that “the purpose and history of Rees-Levering establish that [buyer] need not have suffered actual damage from [the dealer’s] violation of the statute’s disclosure requirements,” and that a common law substantial compliance rule has been statutorily removed. As such, the buyer could state a claim for relief under the act even for apparently “trivial” misstatements. The court also held that while the buyer’s allegations of injury are vague and do not support the assertions made regarding violations of the Consumer Legal Remedies Act and unfair business practices, the buyer should have the right to amend his claims. The court reversed the district court and remanded for further proceedings.
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.
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.
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 and Deceptive Acts and 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.
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.
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: Read more…