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On May 8, the U.S. House of Representatives passed a resolution officially disapproving Bulletin 2013-02, issued by the Consumer Financial Protection Bureau in early 2013.  The Senate passed a similar measure on April 18, meaning the resolution moves to President Trump’s desk for signature.  Though the Senate resolution passed narrowly in a party-line vote, the bill found bipartisan support in the House, passing 234 to 175.  The bill is the latest in a line of agency guidance invalidated under the Congressional Review Act (“CRA”).

The bill was initially introduced by Senator Jerry Moran (R-Kan.) in an effort to overturn Bulletin 2013-02, which set forth the CFPB’s interpretation of the Equal Credit Opportunity Act (“ECOA”) as applied to pricing in indirect automobile lending.  The Bulletin targeted dealer markups, a practice whereby an automobile dealer charges a consumer a higher interest rate than the rate at which an indirect lender is willing to purchase the consumer’s retail installment contract.  The Bureau expressed concern that indirect lenders afforded too much pricing discretion to dealers, potentially opening the door to discrimination against protected groups, including women, African-Americans, and Hispanics.  Further, the Bureau also announced in the Bulletin its intent to use a disparate treatment or disparate impact theory to hold an indirect auto lender liable for allowing prohibited pricing differences created by a dealer’s conduct.

The resolution’s passage marks the likely end of the Bulletin’s checkered history.  In March 2017, Senator Pat Toomey (R-Pa.) asked the Government Accountability Office, Congress’ investigative wing, to determine whether the Bulletin 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 CRA 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.”  Because the CFPB did not present the Bulletin for Congressional review, it was, effectively, a nullity.

President Trump is almost certain to sign the bill into law when it reaches his desk, putting the final nail into the coffin of Bulletin 2013-02.

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

New Jersey Attorney General Gurbir S. Grewal and the New Jersey Division of Consumer Affairs have filed a complaint against luxury used-car dealership 21st Century Auto Group, Inc. and its owner, Dmitry Zeldin, accusing the dealership of violations of state consumer protection laws.  According to the Office of the Attorney General, 21st Century fails to disclose to consumers that certain vehicles have incurred prior damage and also advertises vehicles after they are sold in a “bait and switch” operation.

The A.G.’s Office prosecuted 21st Century and Zeldin five years ago on allegations of the same practices.  In 2014, the parties entered into a settlement agreement, with the dealership agreeing to pay a penalty of $130,000 and make widespread changes to its business practices.  The agreement also prohibited the dealership from engaging in unfair or deceptive acts or practices in the future.  However, the Division of Consumer Affairs reported that it continued to receive complaints about 21st Century following the settlement agreement.

“Businesses can’t just sign a settlement agreement and then go right back to the same dishonest practices that got them into trouble in the first place,” Grewal said in a statement. “They must abide by the reforms set forth in the agreement, especially those requiring them to stop deceiving customers.”

The complaint features new allegations against 21st Century, including the assertion that the dealership sold “gray market cars” – vehicles that are intended for distribution outside of the United States and do not necessarily meet safety and emissions standards required under federal law.  The complaint alleges other violations, including:

  • conducting credit checks without a consumer’s knowledge or authorization;
  • failing to conspicuously post the total selling price of used motor vehicles;
  • submitting false financial information to a lending institution;
  • misrepresenting that certain used motor vehicles advertised and/or offered for sale were covered by a warranty;
  • failing to refund monies paid by consumers after they cancelled the sales transaction;
  • advertising used motor vehicles on the 21st Century Auto Group website at a price much lower than the price posted on the vehicle at the dealership location;
  • failing to disclose to a consumer prior to purchase that a used motor vehicle had sustained major flood damage; and
  • representing that, as part of a negotiated deal, they will make certain repairs to a used motor vehicle and then, after the sale is consummated, failing to do so.

The case is Gurbir S. Grewal, et al. v. 21st Century Auto Group, Inc., et al., pending in the Superior Court of New Jersey, Chancery Division, Union County.

 

 In Echlin v. PeaceHealth, the U.S. Court of Appeals for the Ninth Circuit held that a debt collection agency meaningfully participated in collection efforts even if it did not have authority to settle the account, did not receive payments, and was not involved in collection beyond sending two collection letters.  Accordingly, the collection agency did not violate the Fair Debt Collection Practices Act by sending the letters on its own letterhead. 

Michelle Echlin incurred a debt in the form of medical bills owed to PeaceHealth.  After Echlin ignored multiple requests for payment, PeaceHealth referred her account to ComputerCredit, Inc. (“CCI”).  CCI sent Echlin two collection letters on its letterhead but Echlin did not respond.  In accordance with its agreement with PeaceHealth, CCI returned the account back to PeaceHealth.  Echlin later filed a purported class action alleging that CCI’s letters created a false or misleading belief that CCI was meaningfully involved in the collection of her debt—a practice known as flat-rating.  CCI and PeaceHealth moved for summary judgment.  The district court granted PeaceHealth’s and CCI’s motions for summary judgment, and Echlin appealed. 

The Ninth Circuit found that CCI had meaningfully participated in collection of Echlin’s debt because it controlled the content of collection letters it sent and did not seek PeaceHealth’s approval prior to mailing.  While CCI did not have authority to process or negotiate payments from PeaceHealth, CCI handled correspondence and phone inquiries from debtors.  In addition, CCI personnel returned consumers’ calls if requested.  In rejecting Echlin’s claims that CCI could not have meaningfully participated if it had not handled payments or taken further action in collecting on the account, the Court noted that “[m]eaningful participation in the debt-collection process may take a variety of forms,” as shown by a long, non-exhaustive list of factors considered by courts across the country.   

Notably, the Ninth Circuit distinguished cases that addressed the meaningful involvement by attorneys because those cases reflect concerns regarding the “unique sort of participation that is implied by letters that indicate the creditor has retained an attorney to collect its debts.”  The higher standard of involvement required of attorneys and law firms collecting a debt did not apply to non-attorneys.  

In a short, straightforward opinion, the Eighth Circuit Court of Appeals joined its sister circuits that have applied a materiality standard to consumer claims of falsity and deception under the Fair Debt Collection Practices Act.

Consumer Paul Hill incurred a medical debt, and the creditor hired Accounts Receivable Services, LLC to collect the debt.  In the collections process, Accounts Receivable unsuccessfully filed a lawsuit against Hill to recover the debt.  The state court ruled that Accounts Receivable was not entitled to prevail in the collection lawsuit because it had not established that the documents purporting to show the assignment of debt were authentic.  Hill then sued Accounts Receivable under the FDCPA, claiming false and misleading representations in violation of 15 U.S.C. § 1692e, including threats “to take any action that cannot legally be taken … .”  15 U.S.C. § 1692e(5).  The United States District Court for the District of Minnesota dismissed Hill’s claims and he appealed, arguing that the Court erred in applying a materiality standard to these provisions.

To decide whether a materiality threshold applies, the Eighth Circuit Court of Appeals examined decisions from its sister circuits on the issue, found their reasoning persuasive, and adopted the view that a violation requires a showing of materiality.  The FDCPA was enacted to require that debt collectors provide information which helps consumers choose intelligently their actions with respect to their debts.  As the Seventh Circuit had explained, “immaterial information neither contributes to that objective (if the statement is correct) nor undermines it (if the statement is incorrect).”  An immaterial statement cannot mislead and, therefore, even if technically false, it is not actionable.

Applying the materiality requirement, the Eighth Circuit concluded that, even if Accounts Receivable had misrepresented authenticity of the debt assignment documents, such misrepresentations were immaterial because Hill did not deny that he incurred the debt and owed it.  Just because the debt collection lawsuit was unsuccessful does not automatically establish a violation of the FDCPA, as the Court previously held in Hemmingsen v. Messerli & Kramer, P.A., 674 F.3d 814, 820 (8th Cir. 2012).  “Accounts Receivable’s inadequate documentation of the assignment did not constitute a materially false representation, and the other alleged inaccuracies in the exhibits are not material.”

The Eighth Circuit’s decision is a welcome addition to the growing line of cases adopting the materiality threshold.

In a 51-47 vote on April 18, the U.S. Senate voted in favor of invalidating 2013 guidance from the Consumer Financial Protection Bureau that targeted purported discrimination in the automobile finance market.  The resolution passed on party lines, with Senator Joe Manchin (D-W.Va.) the lone Democrat to join Republicans in voting to overturn the guidance. 

As we reported here, Senator Jerry Moran (R-Kan.) introduced a resolution in March to overturn the CFPB’s highly controversial Bulletin 2013-02, which set forth the CFPB’s interpretation of the Equal Credit Opportunity Act (“ECOA”) as applied to pricing in indirect automobile lending.  The Bulletin targeted dealer markups, a practice whereby an automobile dealer charges a consumer a higher interest rate than the rate at which an indirect lender is willing to purchase the consumer’s retail installment contract.  The Bureau expressed concern that indirect lenders afforded too much pricing discretion to dealers, potentially opening the door to discrimination against protected groups, including women, African–Americans, and Hispanics.  Further, the Bureau also announced in the Bulletin its intent to use a disparate treatment or disparate impact theory to hold an indirect auto lender liable for allowing prohibited pricing differences created by a dealer’s conduct. 

In March 2017, Senator Pat Toomey (R-Penn.) asked the Government Accountability Office whether the Bulletin qualified as a rule subject to Congressional review.  The GAO concluded that the Bulletin was indeed a rule and, as a result, should have been subject to Congressional review.  Based on the decision, Toomey co-sponsored with Moran the resolution to kill the guidance. 

The resolution moves now to the House of Representatives for a vote.

The U.S. Department of Justice recently filed a lawsuit in California federal court alleging that California Auto Finance, a subprime auto lender, violated the Servicemembers Civil Relief Act by repossessing the motor vehicle of an active military servicewoman on her first day of training.

The SCRA prohibits a lender from repossessing a motor vehicle from a servicemember during military service without a court order if the servicemember made a deposit or installment payment on the loan before entering into military service. The DOJ’s complaint alleges that the auto lender violated the SCRA by repossessing the servicewoman’s vehicle without a court order, even after she had provided the lender with her military orders advising of her relocation for active duty.

The DOJ’s complaint alleges that California Auto Finance was aware that the servicewoman had completed at least one loan payment and was in the military at the time of repossession; accordingly, the lender violated the SCRA, which protects the legal rights of active servicemembers from certain civil proceedings. The Justice Department also claims that this auto lender has a stated practice of granting servicemembers repossession protections under the SCRA only if they provide deployment orders, which is actually not a federal requirement and could mean that other servicemembers may have also had their vehicles improperly repossessed.

The DOJ has made compliance with the SCRA a priority, including its enactment in 2016 of the Servicemembers Civil Relief Act Enforcement Support Pilot Program. The Program’s goal is to support enforcement efforts related to protecting the rights of current and former military personnel as part of the DOJ’s Servicemembers and Veterans Initiative. We expect the DOJ to remain active in this area.

Senator Jerry Moran (R-Kan.) recently introduced a resolution to overturn guidance promulgated by the Consumer Financial Protection Bureau in 2013. The resolution seeks to invalidate the Bureau’s guidance under the Congressional Review Act, the same statute that permitted Congress to overturn the arbitration rule. 

The guidance at issue is the CFPB’s highly controversial Bulletin 2013-02, which set forth the CFPB’s interpretation of the Equal Credit Opportunity Act (“ECOA”) as applied to pricing in the indirect automobile lending space. The Bulletin targeted dealer markups, a practice whereby 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 contract. The Bureau specifically expressed concern that indirect lenders afforded too much pricing discretion to dealers, potentially opening the door to discrimination. Further, the Bureau also announced in the Bulletin its intent to use a disparate treatment or disparate impact theory to examine an indirect auto lender’s ECOA liability for prohibited pricing differences created by a dealer’s pricing strategies. 

This is not the first time Bulletin 2013-02 has come under fire. In March 2017, Senator Pat Toomey (R-Pa.) asked the Government Accountability Office whether the Bulletin qualified as a rule. The GAO concluded that the Bulletin was indeed a rule and, as a result, should have been subject to Congressional review. While this likely was the death knell for the Bulletin, a formal invalidation of the guidance could occur if Moran’s resolution, co-sponsored by Toomey, is successful. 

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

We are pleased to announce that Troutman Sanders partner Ashley Taylor will participate in a webinar hosted by the American Bar Association on “Abusive Car Loan and Sale Practices: Scope and Potential Remedies to Strengthen Consumer Protections” The event will take place on March 22, 2018 from 1 p.m. – 2:30 p.m. ET.

Today, there are almost 100 million auto loans outstanding totaling more than $1 trillion. In a society where more than 90% of American households have a vehicle, it represents the third largest type of consumer debt, trailing behind only mortgage and student debt. The purpose of the program is to provide an overview of the trending legal issues relating to auto loan and sale practices that heavily impact low- and moderate income consumers, the magnitude of its impact, and how regulators view these trends. We will discuss the pros and cons of certain proposed legal remedies and practices purportedly designed to strengthen consumer protections, especially in the sub-prime marketplace.

Participants:

John W. Van Alst
Director of Working Cars for Working Families Project
National Consumer Law Center

Delvin Davis
Senior Research Analyst, Lead Researcher on Auto/Car Title Lending
Center for Responsible Lending

Ashley L. Taylor, Jr.
Partner, Consumer Financial Services Practice
Troutman Sanders

Shennan Kavanagh
Deputy Chief, Consumer Protection Division
Office of the MA Attorney General

Moderator:

James J. Pierson
Assistant Professor & Coordinator of Accounting
Chatham University

For additional information, or to register, click here.

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 6, the Conference of State Bank Supervisors (“CSBS”) announced that seven states have entered into a compact that should streamline the process of applying for state money transmitter licenses.

Moving forward, the participating states– Georgia, Illinois, Kansas, Massachusetts, Tennessee, Texas, and Washington – will accept each other’s findings regarding certain “key elements of state licensing.”  The “key elements” include IT, cybersecurity, business plan, background check, and compliance with the federal Bank Secrecy Act.

If the compact works as planned, a company that has obtained a money transmitter license from one of the compact states will be able to obtain a license from any other compact state without the delay and expense of duplicative review and approval requirements, at least as to the “key elements” outlined above.

“This MSB licensing agreement will minimize the burden of regulatory licensing, use state resources more efficiently, and allow for broader participation by other states across the country,” said John Ryan, CSBS president and chief executive officer.

The CSBS’s announcement also noted that more states are expected to join the compact, which is only the “first step among state regulators in moving towards an integrated, 50-state system of licensing and supervision for fintechs.”

A copy of the CSBS’s announcement is available here.