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2018 was a busy year in the consumer financial services world. As we navigate the continuing heavy volume of regulatory change and forthcoming developments from the Trump administration, Troutman Sanders is uniquely positioned to help its clients successfully resolve problems and stay ahead of the compliance curve.  

In this report, we share developments on consumer class actions, background screening, bankruptcy, FCRA, FDCPA, payment processing and cards, mortgage, auto finance, the consumer finance regulatory landscape, cybersecurity and privacy, and TCPA. 

We hope you find this helpful as you navigate the evolving consumer financial services landscape.

Access full report here.

 

A Connecticut-based automobile finance company settled a claim by the Massachusetts Attorney General’s Office that the finance company facilitated the sale of defective vehicles by a group of Massachusetts car dealerships.  As part of the settlement, Sensible Auto Lending LLC has agreed to provide debt relief in the amount of $733,925. 

According to the Massachusetts AG, Sensible Auto Lending facilitated the sale of defective or inoperable vehicles when it supplied dealerships with financing, despite knowing that consumers had complained about the dealerships and, further, knowing of high default and repossession rates of financings of vehicles sold by the dealerships.  The AG’s Office further found that Sensible Auto Lending failed to detail the cost of specific insurance policies that consumers were required to purchase, in violation of the Massachusetts Cost of Consumer Credit Disclosure Act.  The insurance policies, termed vendor single interest (“VSI”) policies, are designed to protect lenders when a vehicle is damaged or deemed a total loss, but the AG determined that Sensible Auto Lending used its VSI claims to recover credit losses.  As a result, consumers’ annual percentage rates on their loans exceeded the Massachusetts statutory cap of 21 percent. 

The terms of the settlement require Sensible Auto Lending to provide refunds to some of its customers, including those who purchased from certain dealerships, those who complained of mechanical defects with vehicles, and those who lost their vehicles to repossession.  In addition, the finance company must also waive all monies owed by the hundreds of consumers who purchased vehicles from other specified dealers.  Finally, the settlement agreement compels the lender to track consumer complaints, repossession rates, and delinquency rates of the dealerships with which it partners.  

“This settlement will give consumers victimized by these dealerships a clean slate by refunding them for faulty cars and repairing their credit,” said Massachusetts Attorney General Maura Healy in a statement.  “Sensible Auto has also changed its business practices so that consumers are protected from fraud in the future.”

A wave of lawsuits filed under the Fair Debt Collection Practices Act, especially in the Second Circuit, continues regarding disclosures of interest and fees in collection letters.  Consumers have complained about failure to warn of interest and fees continuing to accrue, as well as failure to disclose that interest and fees did not accrue.  The Second Circuit addressed these issues three times in the past two years in Avila, Taylor, and Derosa.  However, this has not deterred the consumer bar from bringing new claims over even the most careful disclosures.

In this most recent unsuccessful putative class action, consumer plaintiff Andrew Gissendaner sued Enhanced Recovery Company over a letter that listed interest and fees as “N/A.”  The letter also explained that “upon receipt of [Gissendaner’s] payment and clearance of funds in the amount of $2,562, [his] account will be considered paid in full.”

Gissendaner posited that “N/A” for interest and fees was misleading because “every debt accrues interest” and listing “N/A” for interest could lead a least sophisticated consumer to think that interest never accrued on his debt.  Enhanced Recovery argued in response that the statements were true because no interest or fees accrued since the debt was placed with Enhanced Recovery for collection.  Enhanced Recovery also emphasized that Gissendaner was ignoring the part of the letter which stated that if he paid a specific amount by a certain date, his debt would be satisfied.

In its opinion granting Enhanced Recovery’s cross-motion for judgment on the pleadings, the Western District of New York did not have any difficulty concluding that the Second Circuit’s decision in Taylor governed.  To be sure, Gissendaner admitted that no interest or fees were accruing and “supplied no convincing reason why the Court should find Taylor distinguishable.”  Accordingly, the Court held that the letter was not confusing and that Gissendaner’s claim lacked merit.

Continued development of favorable precedent, such as this case, is vital in helping to deter meritless “current balance” or “reverse-Avila” claims.

In A-1 Premium Acceptance, Inc. v. Hunter, the Missouri Supreme Court upheld the circuit court’s order denying counterclaim defendant A-1’s motion to compel arbitration because the plain language of the consumer arbitration agreement limited the arbitrator to the National Arbitration Forum (NAF).  After the parties executed the arbitration agreement, NAF entered into a consent decree with the Minnesota Attorney General requiring NAF immediately to stop providing arbitration services for consumer claims nationwide.

The parties’ arbitration agreement stated that claims “shall be resolved by binding arbitration by the National Arbitration Forum, under the Code of Procedure then in effect.”  The applicable Code of Procedure provides that only NAP may administer the Code.  Thus, even though the arbitration agreement did not expressly state that arbitration can proceed “only” before NAF, the Court explained that the parties agreed to arbitrate only before NAF because the language identifying NAF was coupled with the reference to a Code of Procedure that mandates only NAF can administer the Code.  The fact that A-1 drafted the agreement and could have included language contemplating the unavailability of NAF precludes any inference that the parties intended to arbitrate before another arbitrator in the event NAF became unavailable.  Accordingly, the Court ruled the parties had agreed to arbitrate “before NAF and no other arbitrator.”

The Missouri Supreme Court’s decision in A-1 Premium may have far-reaching implications for lenders based on NAF’s agreement to withdraw from arbitration services for consumer claims nationwide.  As the Court noted, however, courts are split on whether NAF’s unavailability renders an arbitration agreement unenforceable.

The Bureau of Consumer Financial Protection has continued its series of guidelines specifically addressing servicemembers’ purchases of automobiles.  Recent posts on the Bureau’s blog have provided advice for servicemembers on shopping for auto financing, options for buying new cars versus used cars, as well as recommendations on how to trade in a vehicle.

With regard to auto finance, the BCFP advises servicemembers to shop around for financing terms rather than only considering the financing options offered by dealerships.  Instead, the BCFP suggests that servicemembers contact multiple banks and credit unions, and that they ask about specific military discounts that might be available.  The BCFP also highlights the importance of the annual percentage rate and the length of financing available.

In the new versus used car debate, the BCFP suggests that servicemembers consider buying a used car rather than new.  The BCFP outlined the following factors to consider before buying:

  • How a vehicle responds under varied road conditions;
  • Researching the availability of Certified Pre-Owned (“CPO”) vehicles;
  • The vehicle’s maintenance record;
  • The value of the vehicle based on the Kelley Blue Book, Consumer Reports, and the National Automobile Dealers Association’s guides;
  • Upkeep costs; and
  • Unrepaired recalls.

The BCFP also encourages buyers to rely on the Buyers Guide, required under the FTC’s Used Car Rule.  Notably, the FTC recently updated the Buyers Guide and mandates that all used motor vehicles display the form.  Additionally, the BCFP encourages any servicemember who plans to buy a new car to shop around, negotiate on price, and order a car if a dealership does not have a car that meets their needs.

Finally, for those who intend to trade in their vehicles, the BCFP advises servicemembers to know the value of their cars, noting that dealerships are open to negotiating a trade-in value.  However, the BCFP cautions against trade-ins where a servicemember has negative equity, recommending that they consider postponing purchases until they are in a positive equity position or consider selling their vehicles themselves.  For those members of the military who decide to proceed with a negative equity trade-in, the BCFP suggests that they ask how negative equity would affect their financing and to keep the length of the new financing term as short as possible

Last month, Troutman Sanders reported on the proposed TRACED Act which would instruct the Federal Communications Commission to engage in rulemaking to protect consumers from receiving unwanted calls and text messages from unauthenticated phone numbers.  FCC Chairman Ajit Pai tweeted his approval for the bill, but the FCC is not waiting on Congress to fight robocalls.  On November 21, it released its final report and order on creating a reassigned numbers database.

According to the FCC’s press release, the final draft of the report and order would create a comprehensive database to enable callers to verify whether a telephone number has been permanently disconnected, and is therefore eligible for reassignment, before calling that number, thereby helping to protect consumers with reassigned numbers from receiving unwanted robocalls.

More specifically, this proposal changes the existing federal regulatory scheme by:

  • Establishing a single, comprehensive reassigned numbers database that will enable callers to verify whether a telephone number has been permanently disconnected, and is therefore eligible for reassignment, before calling that number;
  • Establishing a minimum aging period of 45 days before permanently disconnected telephone numbers can be reassigned;
  • Requiring that voice providers that receive North American Numbering Plan numbers and the Toll Free Numbering Administrator report on a monthly basis information regarding permanently disconnected numbers; and
  • Selecting an independent third-party administrator, using a competitive bidding process, to manage the reassigned numbers database.

Pai announced the items tentatively included on the agenda for the December Open Commission Meeting scheduled for Wednesday, December 12. Considering that robocalls are the number one basis of complaints filed with the FCC and the speed in which the issue has been addressed, it will come as no surprise if the proposal is passed at the meeting.

Troutman Sanders will continue to monitor this and related FCC’s rulemaking decisions.

In an ominous sign, Americans’ total debt hit another record high, rising to $13.5 trillion in the last quarter, as student loan delinquencies jumped, according to Reuters. Specifically, flows of student debt into serious delinquency – of 90 or more days – rose to 9.1 percent in the third quarter from 8.6 percent in the previous quarter, reported the Federal Reserve Bank of New York, propelling the biggest jump in the overall U.S. delinquency rate in seven years.  

Total household debt, driven by $9.1 trillion in mortgages, now stands $837 billion higher than its previous peak in 2008, just as the Great Recession took hold and induced massive deleveraging across the United States. In fact, indebtedness has risen steadily for more than four years and sits more than 21% above its 2013 low point, and the $219 billion rise in total debt in the quarter that ended on September 30 amounts to the biggest jump since 2016. 

“The new charts in our report help to better understand how the debt and repayment landscape have shifted in the years following the Great Recession,” Donghoon Lee, research officer at the New York Fed, announced in a press release published on November 16. “Older borrowers now hold a larger share of total outstanding debt balances, while the shares held by younger borrowers have contracted and shifted toward auto loans and student loans.”

As Congress’ emboldened majority has sought to lessen the federal government’s regulatory footprint, the states have not always been quiet, as one summertime example amply shows.

In 2017, two congressmen introduced two bills which, if enacted, would expand the scope of federal preemption to include non-bank entities. Introduced by Rep. Patrick McHenry (R-N.C.), the first of these two bills – the Protecting Consumers’ Access to Credit Act of 2017 (HR 3299) – states that bank loans with a valid rate when made will remain valid with respect to that rate, regardless of whether a bank has subsequently sold or assigned the loan to a third party. A second bill known as the Modernizing Credit Opportunities Act of 2017 (HR 4439), championed by Rep. Trey Hollingsworth (R-Ind.), strives “to clarify that the role of the insured depository institution as lender and the location of an insured depository institution under applicable law are not affected by any contract between the institution and a third-party service provider.” Perhaps most significantly, it would establish federal preemption of state usury laws as to any loan to which an insured depository institution is the party, regardless of any subsequent assignments. In so doing, both bills amend provisions of the Home Owners’ Loan Act, Federal Credit Union Act, and/or Federal Deposit Insurance Act. Such an amendment would invalidate a long-line of judicial precedent barring a non-bank buyer’s ability to purchase a national bank’s right to preempt state usury law, which culminated in the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC, and thereby provide non-originating creditors with a potent – and until now nonexistent – shield against liability under certain state consumer laws.

On June 27, 2018, the attorneys general of twenty states[1] and the District of Columbia stated their opposition to both bills in a letter to Congressional leadership. Beginning with an historically accurate observation – “[t]he states have long held primary responsibility for protecting American consumers from abuse in the marketplace” – the A.G.s attacked these legislative efforts as likely to “allow non-bank lenders to sidestep state usury laws and charge excessive interest that would otherwise be illegal under state law.” The cudgel of preemption, they warned, would “undermine” their ability to enforce their own consumer protection laws. The A.G.s went on to argue many non-bank lenders “contract with banks to use the banks’ names on loan documents in an attempt to cloak themselves with the banks’ right to preempt state usury limits”; indeed, “[t]he loans provided pursuant to these agreements are typically funded and immediately purchased by the non-bank lenders, which conduct all marketing, underwriting, and servicing of the loans.” For their small role, the banks “receive only a small fee,” with the “lion’s share of profits belong[ing] to the non-bank entities.” In support of this position, the A.G.s cite to a 2002 press release by the Office of the Comptroller of the Currency (“OCC”) and the more recent OCC Bulletin 2018-14 on small dollar lending, the latter announcing the OCC’s “unfavorabl[e]” view of “an[y] entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).

The A.G.s concluded by arguing that the proposed legislation would erode an “important sphere of state regulation,” state usury laws having “long served an important consumer protection function in America.”

We will continue to monitor this legislation and other developments in the preemption arena, and will report on any further developments.

[1] The signatories come from California, Colorado, Hawaii, Illinois, Iowa, Maryland, Massachusetts, Minnesota, Mississippi, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia, and Washington.

On November 16, Sen. John Thune (R-S.D.), the current chairman of the Senate Commerce Committee, and Ed Markey (D-Mass.), a member of the committee and the author of the Telephone Consumer Protection Act, unveiled the Telephone Robocall Abuse Criminal Enforcement and Deterrence Act (“TRACED Act”). Among other things, this bill would require carriers to eventually implement “an appropriate and effective call authentication framework” and instructs the Federal Communications Commission to engage in rulemaking to protect consumers from receiving unwanted calls and text messages from unauthenticated phone numbers.

According to its proponents, an “ever increasing number … of robocall scams” prompted this bill. Indeed, one report touted by Markey estimated the number of spam calls will grow from 29% of all phone calls this year to 45% of all calls next year.

In its current form, the TRACED Act gives regulators more time to find scammers, increases civil forfeiture penalties for those caught, promotes call authentication and blocking adoption, and brings relevant federal agencies and state attorneys general together to address impediments to criminal prosecution of robocallers who intentionally flout laws.

More specifically, this act makes the following changes to the existing federal regulatory scheme:

  • Broadens the authority of the FCC to levy civil penalties of up to $10,000 per call for those who intentionally violate telemarketing restrictions.
  • Extends the window for the FCC to catch and take civil enforcement action against intentional violations to three years after a robocall is placed. Under current law, the FCC has only one year to do so. The FCC has told the committee that “even a one-year longer statute of limitations for enforcement” would improve enforcement against willful violators.
  • Brings together the Department of Justice, FCC, Federal Trade Commission, Department of Commerce, Department of State, Department of Homeland Security, the Consumer Financial Protection Bureau, and other relevant federal agencies, as well as state attorneys general and other non-federal entities, to identify and report to Congress on improving deterrence and criminal prosecution at the federal and state level of robocall scams.
  • Requires providers of voice services to adopt call authentication technologies, enabling a telephone carrier to authenticate consumers’ phone numbers prior to initiating any call.
  • Directs the FCC to initiate a rulemaking to help protect subscribers from receiving unwanted calls or texts from callers using unauthenticated numbers.

Announcing the TRACED Act, neither senator minced their words. “The TRACED Act targets robocall scams and other intentional violations of telemarketing laws so that when authorities do catch violators, they can be held accountable,” Thune said in a statement. He continued: “Existing civil penalty rules were designed to impose penalties on lawful telemarketers who make mistakes. This enforcement regime is totally inadequate for scam artists and we need do more to separate enforcement of carelessness and other mistakes from more sinister actors.” Markey added: “As the scourge of spoofed calls and robocalls reaches epidemic levels, the bipartisan TRACED Act will provide every person with a phone much needed relief. It’s a simple formula: call authentication, blocking, and enforcement, and this bill achieves all three.”

Troutman Sanders will continue to monitor this and related legislative proposals.

The Seventh Circuit Court of Appeals has affirmed summary judgment in a recent Fair Debt Collection Practices Act case where the plaintiff alleged that a repossession company demanded payment before she would be allowed to recover personal property left in the vehicle.  The Court held that the plaintiff’s testimony did not create a genuine dispute of fact when compared to documentary evidence showing the alleged payment demanded was in fact an administrative fee paid by the lender. 

The case, Duncan v. Asset Recovery Specialists, Inc. et al., No. 17-2598 (7th Cir. Oct. 31, 2018), arose after plaintiff Danelle Duncan’s vehicle was repossessed by Asset Recovery Specialists, Inc. (“ARS”).  Unable to satisfy the outstanding debt on the loan, Duncan contacted her lender to recover personal property that was left in the vehicle.  This led to communications with ARS, during which Duncan alleged the president of ARS informed her she would have to pay $100 before she could retrieve the personal items.  Duncan then met with ARS in its offices where she claims she was presented with an “assessment fee” form stating she would have to pay the $100, and that she considered it to be a demand to repay her car loan.  

ARS refuted Duncan’s account of events, arguing that the $100 charge was an administrative fee that the lender had already agreed to pay, and that the form she was presented with was simply a receipt for her to sign, acknowledging she had recovered the property.  During discovery, the document in question was produced.  Entitled “Receipt for Redeeming Personal Property,” the document described the $100 charge as a “Handling Fee” and contained handwritten notes stating that the fee had been billed to the lender. 

The district court granted summary judgment for the defendants, concluding that Duncan had failed to produce any evidence refuting the document produced by ARS.  The district court also held that, even if the money had been demanded, as Duncan alleged, there was no evidence to suggest it was anything other than an administrative fee assessed by ARS.  

On appeal, Duncan argued that her testimony was enough to raise a factual question of whether ARS was working on behalf of the lender to collect $100 to apply toward the defaulted loan. The Court of Appeals disagreed, holding that the unrefuted documentary evidence demonstrated the $100 was a handling fee assessed by ARS.  Even with Duncan’s testimony, the Court stated “There is no way on this record to view the handling fee as some sort of masked demand for a principal payment … .”  The appellate court also held that, even accepting there was some verbal demand for payment from ARS, Duncan’s testimony was not sufficient to create a fact dispute over whether that demand was made on behalf of the lender.  

This case highlights the challenges lenders and debt collectors face in lawsuits based solely on plaintiffs’ own testimony and perceptions.  While summary judgment was upheld here, the same is not always true in other courts around the country.  To that end, the case demonstrates the value of creating and retaining records that unambiguously describe fees assessed for administrative tasks as opposed to regular loan payments.  As seen here, there is great benefit to letting the documents speak for themselves.