Photo of Brooke Conkle

Brooke focuses her practice on complex litigation and federal consumer protection statutes, including the Fair Credit Reporting Act (FCRA) and Regulation V (Reg V), the Equal Credit Opportunity Act (ECOA) and Regulation B (Reg B), the Telephone Consumer Protection Act (TCPA), and Unfair and Deceptive Acts and Practices laws (UDAP).

BMW Financial Services N.A. has agreed to settle claims brought by the U.S. Department of Justice that the company violated federal law by failing to refund portions of up-front lease payments made by servicemembers who terminated their leases early due to military obligations.  Under the agreement, BMW will pay more than $2 million to affected servicemembers.

The Department of Justice filed a complaint in the District of New Jersey, contending that BMW’s auto finance division violated the Servicemembers Civil Relief Act (“SCRA”), which includes a number of protections to servicemembers.  Under the SCRA, servicemembers may terminate motor vehicle leases early without penalty after entering military service or receiving qualifying military orders for a permanent change of station or for deployment.  If a servicemember terminates a motor vehicle lease, the SCRA requires a refund of all lease amounts paid in advance.

The government alleged that BMW violated the SCRA by failing to refund portions of advance lease payments made in cash or vehicle trade-in credit when servicemembers had to end their leases early due to deployment or relocation.  According to the Department of Justice, servicemembers were denied refunds of their remaining capitalized cost reduction amounts, a portion of their up-front payments that was intended to reduce monthly payments over the term of a lease.

The agreement covers all leases terminated by servicemembers since August 24, 2011, and requires BMW to refund portions of the capitalized cost reduction amounts to each affected servicemember based on the number of days remaining on their leases, plus additional damages consisting of $500 or triple the refund, whichever is higher.  The agreement also requires BMW to revise its policies and procedures to ensure SCRA compliance moving forward.

The case is United States v. BMW Financial Services N.A., LLC (D.N.J.).

On February 21, the Ninth Circuit affirmed a district court’s dismissal of an action brought under the Fair and Accurate Credit Transactions Act (“FACTA”), finding that the plaintiff had not demonstrated Article III standing.  Plaintiff Steven Bassett alleged that ABM Parking Services and its affiliated businesses repeatedly printed the expiration date of his credit card on sales receipts.  Bassett argued that the failure to withhold this information from the credit card receipt could lead to identity theft, but the Western District of Washington dismissed his case for failure to plead injury.

In an opinion that included a step-by-step analysis of the Supreme Court’s reasoning in the landmark Spokeo decision, the Ninth Circuit affirmed the district court’s finding that Bassett had not alleged a concrete injury-in-fact to confer standing.  “We need not answer whether a tree falling in the forest makes a sound when no one is there to hear it,” wrote Judge M. Margaret McKeown for the panel.  “But when this receipt fell into Bassett’s hands in a parking garage and no identity thief was there to snatch it, it did not make an injury.”  Bassett’s credit card information was not disclosed to anyone but Bassett himself, the panel concluded, and his complaint failed to allege a risk of harm, “given that he could shred the offending receipt along with any remaining risk of disclosure.”

The court contrasted Bassett’s claims to those recently before the court in a Telephone Consumer Protection Act (“TCPA”) case.  In Van Patten v. Vertical Fitness Group, LLC, the Ninth Circuit held that a consumer who received unsolicited text messages in violation of the TCPA alleged an injury because “unrestricted telemarketing can be an intrusive invasion of privacy and is a nuisance.”  While a credit card receipt that has not been divulged to anyone but the credit card’s holder may not cause harm or present the material risk of harm, “unconsented text messages and consumer reports divulged to one’s employer necessarily infringe privacy interests and present harm.”

The decision unites the Ninth Circuit with the Second and Seventh circuits, which both affirmed dismissals of similar FACTA cases in Crupar-Weinmann v. Paris Baguette America, Inc. and Meyers v. Nicolet Restaurant of De Pere, LLC, which we covered here.

A state court in Arizona returned a $1.85 million verdict against two related rental car companies, resolving a consumer fraud suit raised by the Arizona Attorney General’s Office.  The A.G.’s Office originally filed suit against Phoenix Car Rental, Saban’s Rent-A-Car, and the companies’ owner, Dennis N. Saban, in 2014, alleging violation of the Arizona Consumer Fraud Act.  The A.G. contended that the rental car companies charged consumers unlawful fees during rental transactions from 2009 to 2016.

“Our priority was to get consumers their money back and the defendant continued to fight us.  We refused to back down and ended up with a great victory for consumers,” said Attorney General Mark Brnovich in a statement.  “After an intensive five-week trial, the judge’s ruling sends a message that consumer fraud won’t be tolerated in Arizona.”

An investigation of the companies revealed numerous problems with their business practices.  The A.G.’s Office alleged that an undercover agent was promised a rental vehicle for $129 per week, but the price ballooned to $250 per week after additional fees and taxes were imposed.  The agent also asked for a copy of the rental agreement but was denied and was falsely told by a sales associate that he would be arrested if he left the Phoenix area because of “specially coded license plates.”  The A.G.’s Office further contended that an employee of the companies told an agent that an additional charge was the “county tax” that actually was a surcharge imposed by the rental company.  Finally, investigators also discovered that the rental vehicle’s odometer had been tampered with, displaying a mileage that was 100,000 miles less than the actual mileage, according to the A.G.’s Office.  A number of consumers testified at the trial that their experiences with the companies mirrored those outlined in the allegations.

Of the $1.85 million verdict, $1 million will go to consumers who were charged unlawful fees.  In addition to monetary penalties, the ruling requires the companies to provide consumers with a good faith estimate of the rental charges and prohibits the defendants from inaccurately advertising the condition or rental rates of vehicles, renting any vehicle without regularly scheduled maintenance, altering the odometer, and altering or disengaging a vehicle’s warning light.

The case is State of Arizona, ex rel. Mark Brnovich v. Dennis N. Saban, et al., Case No. CV2014-005556 (Maricopa Cnty., Ariz.).

A district judge in the Southern District of Florida recently dismissed a FACTA class action on Spokeo grounds even though he had previously approved a near-$600,000 settlement in the same case.  In 2016, lead plaintiff Eric Kirchein filed suit against Pet Supermarket, Inc, contending that the retailer violated the Fair and Accurate Credit Transactions Act (“FACTA”) when it printed more than five digits of his and other consumers’ credit card numbers on sales receipts.  The parties reached a preliminary settlement agreement later that year, with Pet Supermarket agreeing to pay $580,000 to a class of almost 30,000 consumers.

The deal ran into trouble soon thereafter, as the parties had difficulty finding and locating individual class members.  Further complicating matters, the size of the class increased, as Pet Supermarket discovered the class was approximately ten percent larger than initially thought.  Plaintiffs’ counsel requested additional settlement funds to compensate for the additional class members, leading the parties to try to renegotiate the settlement.  Despite these issues, the court declined requests to vacate the settlement agreement.

Even though the parties had an agreement in principal, Pet Supermarket later challenged the court’s subject matter jurisdiction based on Spokeo grounds.  The court agreed with the retailer that Kirchein could not show he had suffered concrete harm resulting from the alleged FACTA violation.  Judge Robert N. Scola, Jr. chiefly relied on his own previous decisions in similar FACTA cases – specifically Gesten v. Burger King, which found that the plaintiff failed to allege that any disclosure of his private information actually occurred – to reach a similar conclusion regarding Kirchein’s claims.  Without any allegation that his private data had been divulged, the court found that Kirchein could not establish standing.

Though the court acknowledged that there was “substantive work that remains to be done” in the case, the absence of subject matter jurisdiction prevented further activity by the court, including a fairness hearing or issuing an order approving the proposed settlement agreement.

The case is Kirchein v. Pet Supermarket, Inc., Case No. 0:16-cv-60090.

The deadline for motor vehicle dealer compliance with the Federal Trade Commission’s revised Used Car Rule is rapidly approaching.  The January 28, 2018 compliance date imposed by the FTC requires dealers, as of that date, to use the agency’s revised window sticker, known as the “Buyers Guide,” on all used vehicles offered for public sale. 

In November 2016, the FTC announced its final amendments to the Used Car Rule, and specifically revised the federally-required form of the Buyers Guide that must be displayed on a used motor vehicle offered for sale to the public. 

As we covered here, the FTC issued additional guidance on the Used Car Rule in September 2017, in response to a number of questions raised by dealers regarding compliance.  The guidance was in the form of frequently asked questions (FAQs) and addressed topics such as:  whether and what type of changes can be made to the language; the format and font of the Buyers Guide; disclosure requirements regarding manufacturer and third-party warranties; and guidance for completing the “systems covered” portion of the revised Buyers Guide.   

The amendments to the Rule included a grace period that permitted dealers to use their remaining stock of Buyers Guides for up to one year after the January 28, 2017 effective date.  Time is running short, however, and all used vehicles must display the new Buyers Guide by January 28, 2018.

On January 16, the Consumer Financial Protection Bureau announced its intention to reconsider a controversial rule affecting the short-term (payday) and auto-title lending industries.  This reconsideration could signal that a stripped down rule that omits a number of the rule’s more controversial provisions could be in the offing.

The original rule was finalized in October 2017, when Richard Cordray was still the head of the Bureau, and required lenders to determine whether a borrower could afford his or her loan payments while still meeting basic living expenses and other financial obligations.  For short-term or auto-title loans due in a lump sum, lenders must determine whether a borrower can make a full payment of the total loan amount, plus any fees and finance charges, within two weeks or a month.  For loans with a longer term and a balloon payment, lenders must determine whether a borrower can afford the highest total payments.  The rule also includes additional requirements, including a principal-payoff option for certain short-term loans, loan options, and debit attempt cutoff.  The rule officially took effect on January 16, yet the majority of key provisions are not scheduled for implementation until August 19, 2019.

The rule has proved controversial, as consumer advocates fully supported the measure while lenders contended that the rule’s restrictions would result in a number of lenders going out of business and reduced credit options for many borrowers.  Members of Congress have introduced measures to repeal the rule under the Congressional Review Act, a tactic that proved effective with the arbitration rule.

The CFPB’s announcement did not offer any details regarding the scope of its reconsideration or any timeline for changes to the rule.

On Tuesday, December 5, 2017, the Government Accountability Office (“GAO”) levelled a heavy blow on a major regulatory initiative of the Consumer Financial Protection Bureau (“CFPB”): its highly controversial “disparate impact” discrimination theories as applied to pricing in the indirect automobile financing industry. The specific GAO ruling finds that a 2013 “Bulletin” stating the CFPB’s interpretation of the Equal Credit Opportunity Act (“ECOA”) as applied to indirect automobile lending should have been issued as a rule and hence be subject to Congressional review. Under the ruling, the CFPB should have transmitted the Bulletin to Congress for evaluation, but failed to do so.

The GAO’s conclusion that the guidance qualifies as a rule means that the Bulletin must be re-submitted to Congress for review in order for it to become effective. As a result, the Bulletin can no longer be used by government examiners. Given the shift in control of the CFPB to a Trump appointee, chances seem slim that the CFPB would reissue the guidance. Hence, by its narrow finding, the GAO appears to have dealt the Bulletin a death blow.

In March 2013, the Bureau issued CFPB Bulletin 2013-02 to target dealer markups, a practice where an automobile dealer charges a consumer a higher interest rate than the rate by which an indirect lender is willing to purchase the consumer’s retail installment sales contract. The CFPB expressed concern that dealers were being allowed by the indirect lenders to exercise too much pricing discretion, opening the door to discrimination. In the Bulletin, the CFPB contended that it was “likely” to consider an indirect auto lender a “creditor” within the meaning of ECOA, if an indirect lender purchased a contract at an interest rate lower than the rate on the consumer’s contract. The Bureau also announced that it intended to use a disparate treatment or disparate impact theory to examine an indirect auto lender’s ECOA liability for prohibited pricing differences created by the dealer’s pricing activities. Under this view, indirect lenders would have liability for disparate pricing – even though they did not set the pricing and even without evidence that either the lender or the dealer intended to discriminate against anyone. The Bureau’s guidance has had considerable implications for financial institutions, as banks and lenders have seen significant increase in the cost of compliance, not to mention numerous and expensive investigations and settlements with the CFPB, banking regulators, and the U.S. Department of Justice.

The Bulletin has long been the subject of controversy, as many indirect lenders contended that they should not be penalized for unintentional discrimination by dealers. Many also attacked the methodology used to prove disparate impact. In March 2017, Senator Pat Toomey (R-PA) asked the GAO, Congress’ investigative wing, to determine whether the financial guidance issued by the Bureau in 2013 qualified as a “rule.” The GAO concluded that the guidance did qualify as a rule, even though Bulletin 2013-02 is not legally binding. Specifically, the GAO found that:

The Bulletin provides information on the manner in which the CFPB plans to exercise its discretionary enforcement power. It expresses the agency’s views that certain indirect auto lending activities may trigger liability under ECOA. For example, it states that an indirect auto lender’s own markup and compensation policies may trigger liability under ECOA if they result in credit pricing disparities on a prohibited basis, such as race or national origin. It also informs indirect auto lenders that they may be liable under ECOA if a dealer’s practices result in unexplained pricing disparities on prohibited bases where the lender may have known or had reasonable notice of a dealer’s discriminatory conduct. In sum, the Bulletin advised the public prospectively of the manner in which the CFPB proposes to exercise its discretionary enforcement power and fits squarely within the Supreme Court’s definition of a statement of policy.

In conclusion, the GAO found that the Bulletin was subject to the requirements of the Congressional Review Act because it served as “a general statement of policy designed to assist indirect auto lenders to ensure that they are operating in compliance with ECOA and Regulation B, as applied to dealer markup and compensation policies.”

The GAO’s decision renders the Bulletin a nullity until the CFPB properly submits the measure to Congress. Bank examiners, and CFPB examination and enforcement personnel, cannot rely on the Bulletin to guide their supervisory and enforcement activity. Once the CFPB submits the rule – if ever – then Congress is free to challenge the rule under the Congressional Review Act.

“GAO’s decision makes clear that the CFPB’s back-door effort to regulate auto loans, which was based on a dubious legal justification, did not comply with the Congressional Review Act,” said Senator Toomey in a statement. “GAO’s decision is an important reminder that agencies have a responsibility to live up to their obligations under the law. When they don’t, Congress should hold them accountable. I intend to do everything in my power to repeal this ill-conceived rule using the Congressional Review Act.”

However, it is doubtful that the measure will ever make its way to Congress. Under the leadership of Acting Director Mick Mulvaney, it is highly unlikely that the CFPB will work to revive the rule. The Bulletin has long been vilified by many Republicans, as well as some Democrats. In 2015, the House of Representatives passed a bill that would have eliminated the Bulletin, though the measure was not taken up by the Senate.

Troutman Sanders routinely advises clients on the compliance risks posed by direct and indirect auto lending. We will continue to monitor these regulatory developments.

A recent report released by the Center for Microeconomic Data at the Federal Reserve Bank of New York found that American household debt continues to increase, including debt resulting from automobile loan balances.  The third quarter of 2017 saw a $116 billion increase, continuing a march upward since mid-2013.

The report specifically addressed the growth of subprime auto debt, which the New York Fed classified as debt held by borrowers with origination credit scores falling below 620.  In total, there are currently 23 million consumers who hold subprime auto loans.  While banks tend to finance auto debt originated by borrowers with higher credit scores, auto finance companies have long dominated subprime auto lending, and their shares of this market have only increased in recent years.  The New York Fed’s report highlighted three specific areas related to the growth of subprime lending among auto finance companies:

Originations:  Auto finance companies historically have held more than 70 percent of subprime auto loans.  In 2017, lending to borrowers with lower credit scores has not increased as rapidly as in previous years, but lending to borrowers with higher credit scores has kept pace.

Outstanding Balances:  In the third quarter of 2017, auto loan balances increased by $23 billion, with outstanding balances on subprime auto debt currently totaling approximately $300 billion.  Auto finance companies, who own a disproportionate share of subprime auto debt, currently hold more than $200 billion, a share that has nearly doubled since 2011.

Delinquency:  The delinquency rate for auto finance companies has increased since 2014 by more than two percentage points.  The delinquency rate is considerably higher and rising for debt owed to auto finance companies, rather than banks, even when comparing consumers who have roughly the same credit scores.

Troutman Sanders’ Financial Services Litigation practice group has specific expertise in the automotive lending industry and the legal issues these companies face. We maintain a dedicated Auto Finance practice that offers broad industry experience and in-depth subject matter understanding in compliance, litigation, and regulatory matters affecting clients engaged in consumer retail automobile sales, as well as both direct and indirect automobile sales financing.  We will continue to monitor trends in the auto finance industry.

The Board of Governors of the Federal Reserve System recently issued a Consent Order against Peoples Bank, based in Lawrence, Kansas, to settle claims of deceptive residential mortgage origination practices that arose from the bank’s charging of fees in mortgage originations.  The Federal Reserve alleged that Peoples told mortgage borrowers that certain additional fees that the borrowers paid as discount points would lower the borrowers’ interest rates.  The Federal Reserve’s investigation determined that many borrowers did not, in fact, receive a reduced interest rate.  The Federal Reserve alleged this practice violated Section 5 of the Federal Trade Commission Act (“FTC Act”).

The Consent Order requires Peoples to pay approximately $2.8 million into an account to be used to provide restitution to the borrowers.  Additionally, Peoples must develop a plan that provides for restitution to each borrower who, in the course of obtaining a mortgage loan from Peoples, paid discount points that did not reduce the borrowers’ interest rate.  The Consent Order also requires Peoples to avoid any future violation of Section 5 of the FTC Act.

The Third Circuit recently clarified in important ways its ascertainability standard for class actions under Rule 23 in a case that arose from the efforts of an auto finance company to generate business by marketing efforts directed at automobile dealers.  The decision reflects two key findings:  (1) that defendants who argue a class is not ascertainable – i.e., that it is not administratively feasible to identify class members – must produce information in their possession regarding putative class members during discovery; and (2) that affidavits from class members, by themselves, do not satisfy the ascertainability standard, but can suffice when combined with other records.

The genesis of the dispute is a 2012 agreement between Creditsmarts, an internet-based “indirect business-to-business lending tree” that helps independent car dealers connect various lenders with potential customers, and BMW Bank of America, Inc. and BMW Financial Services, LLC.  BMW offers automotive financing to customers through its “up2drive” division, which provides borrowers with financing at independent car dealers, regardless of make or model.  The parties agreed that BMW would use the Creditsmarts system at participating independent dealers to offer up2drive loans to borrowers.  Creditsmarts agreed “to establish electronic systems to permit customers to communicate with up2drive through mutually agreed secure lines of communication” and to “process all application forms using the minimum credit parameters established by up2drive and the information obtained … from the application form including the customer’s credit history, that will provide sufficient data to determine whether the customer may qualify for any loan programs offered … by up2drive.”  In exchange, BMW would compensate Creditsmarts for customers referred through the up2drive system.

In late 2012, Creditsmarts used a fax broadcaster, WestFax, Inc., to fax advertisements to independent dealers, touting the up2drive program.  The advertisements included BMW’s up2drive logo and identified BMW Bank of North America as the sender.  Creditsmarts used WestFax to send 5,480 faxes in late November 2012, 5,107 faxes in early December, and another 10,402 faxes in late December, using a list created from Creditsmart’s customer database.  City Select Auto Sales, a recipient of one of the faxes, brought a putative class action against the three parties, arguing that the unsolicited faxes represented a violation of the Telephone Consumer Protection Act.

The database formed the lynchpin of the parties’ arguments on class certification.  Class plaintiffs moved to compel production of the database, while Creditsmarts resisted, arguing that the database included more entries than the number of BMW faxes sent in 2012.  Plaintiff’s motion to compel production of the database was denied and the district court found that the plaintiff’s proposed class failed to meet the ascertainability standard of Rule 23, because there was no reliable and administratively feasible way to determine whether putative class members received faxes during the three 2012 fax blasts.

The Third Circuit vacated the district court’s decision and remanded for further findings after production of the database.  The court further found that none of its previous decisions foreclosed the possibility that the plaintiff could support a class with affidavits combined with information from the Creditsmarts database, and that the only factual determination necessary for class membership was whether a given dealership in the database received a fax from Creditsmarts on one of the three 2012 dates.

The case is City Select Auto Sales, Inc. v. BMW Bank of North America, Inc., et al., Civil Action No. 1-13-cv-04595 (D.N.J.).