State Attorneys General

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.).

We are pleased to announce that Troutman Sanders partner Ashley Taylor will participate in a webinar hosted by the American Bar Association on “An Inside View – Working with Your Attorney General.” The event will take place on February 13, 2018 from 10:30 a.m. – 12:00 p.m. ET.

Ashley Taylor will interview Attorney General Karl Racine about how multistate investigations work, and why lawsuits and investigations by state Attorneys General are different from private litigation.

For additional information, or to register, click here.

On January 3, a coalition of 49 state attorneys general announced a $45 million settlement with PHH Mortgage Corporation, which was accused of misconduct related to its servicing of single-family residential mortgages.

In announcing the settlement, state attorneys general from across the country touted their commitment to holding mortgage companies responsible for any misconduct that harms consumers.  “We will remain committed to holding mortgage companies accountable for harms homeowners suffered from improper loan servicing, especially improper foreclosures,” said Virginia Attorney General Mark Herring.  New York Attorney General Eric Schneiderman echoed this sentiment in stating, “The foreclosure crisis continues to devastate communities across New York.  We have zero tolerance for the types of practices that helped create the crisis – and will hold mortgage companies to account.”

According to the complaint filed by the attorneys general, PHH:

  • Failed to timely and accurately apply borrower payments and failed to maintain accurate account statements;
  • Charged unauthorized fees for default-related services;
  • Threatened foreclosure and conveyed conflicting messages to borrowers engaged in loss mitigation;
  • Failed to properly respond to borrowers’ complaints and reasonable requests for information and assistance;
  • Failed to properly process borrowers’ applications for loan modifications;
  • Failed to properly oversee third-party vendors; and
  • Used incorrect, incomplete, or inadequate affidavits and other documents as part of foreclosure proceedings.

The settlement includes $31.4 million for borrowers, $5 million for attorneys’ fees and costs, and an $8.8 million penalty.  It also requires PHH to adhere to comprehensive mortgage servicing standards and audit and compliance reporting requirements.

On January 29, a California state court approved a $2.25 million settlement to be paid by Walgreen Co., commonly known to consumers nationwide as the drug store chain Walgreens. The settlement stems from a consumer protection lawsuit by the district attorneys of four California counties (Santa Clara, Contra Costa, San Mateo, and Santa Cruz) in and around the San Francisco Bay area relating to selling expired over-the-counter drugs, baby food, and infant formula and charging consumers more than the lowest posted or advertised price for items.

The settlement concludes a months-long investigation by state regulatory agencies and county district attorneys’ offices into Walgreens, which operates more than 600 stores in California. The state will receive the entirety of the penalty paid by Walgreens, due to the difficulty in determining which or how many customers were affected. In addition to the financial penalty, a court order requires Walgreens employees “to make quarterly patrols to remove expired items and to post ‘clear and conspicuous’ signs asking consumers to inspect expiration dates.”

The California probe is another recent example of the foray of state attorneys general and local district attorneys into the consumer protection space. Companies should be mindful that despite the lessened reach of the Consumer Financial Protection Bureau and federal regulators over the past year, state enforcement—in California, at least, extending down to local district attorneys—has increased and will likely continue to do so.

The New York Attorney General’s Office has requested that a New York federal court compel a debt collection company and its owner to turn over documents in connection with a lawsuit alleging the defendants were part of a multimillion-dollar illegal debt collection scheme.

The lawsuit, brought by the Attorney General and the Consumer Financial Protection Bureau in November 2016, alleged that Mark Gray and Douglas MacKinnon orchestrated a massive scheme through their companies Delray Capital LLC, Northern Resolution Group LLC, and Enhanced Acquisitions LLC.

Specifically, the suit alleges that Gray and MacKinnon, through their companies, purchased tens of millions of dollars of defaulted consumer debt, added $200 to each debt (regardless of whether the contracts or law allowed such), and then collected the inflated debts through illegal tactics, including impersonating law enforcement officials and threatening consumers with arrest or legal action they had no intention of taking.

The motion specifically addresses defendants Gray and Delray Capital, alleging that both were served with interrogatories and requests for production more than two months prior to the motion being filed, and that neither had responded, despite repeated attempts by counsel for the Attorney General’s office to elicit responses.

The motion is the latest in a series of motions filed in the suit since discovery began. In October of 2017, the Court ordered MacKinnon and his companies to comply with a similar request that they had ignored. If the Court orders Gray and Delray to respond and they fail to do so, the A.G. intends to request that the Court strike their answer and enter default against them.

On January 3, the Ninth Circuit Court of Appeals found that Section 1748.1 of the California Civil Code – which bars sellers from imposing surcharges for credit card payments, while still permitting discounts for payment by cash or other means – was an impermissible content-based restriction under the First Amendment of the United States Constitution as specifically applied to the plaintiffs.

The plaintiffs in Italian Colors Restaurant et al. v. Becerra, No. 15-15873, 2018 WL 266332 (9th Cir. Jan. 3, 2018) were five California businesses and their owners or managers that “pay thousands of dollars annually in credit card fees.” Although it is in their interest to collect cash payments to avoid credit card fees, Section 1748.1 prevented them from imposing credit card surcharges, which they contended would be more effective than discounts to encourage buyers to use cash. Despite there being no apparent measurable difference between consumers’ response to the two approaches, research indicates that surcharges may be more effective because “economic actors are more likely to change their behavior if they are presented with a potential loss than with a potential gain.”

The Ninth Circuit deferred to the recent Supreme Court decision in Expressions Hair Design v. Schneiderman, 137 S. Ct. 1144 (2017), in which the Court held that New York’s surcharge ban tells merchants nothing about the amount they are allowed to collect from a cash or credit card payer, but does regulate how sellers may communicate their prices. The Ninth Circuit reasoned that Section 1748.1 regulates commercial speech because it regulates how sellers can communicate their prices rather than how much sellers can charge. As a result, the restriction implicated the First Amendment. The Court conducted a two-prong intermediate scrutiny test, finding that: (1) the regulated speech (namely, imposing credit card surcharges) was not misleading or related to unlawful activity; and (2) the law did not further the state’s interest in protecting consumers from deceptive price increases and was not narrowly tailored to achieve the state’s interest.

For these reasons, the Court found the law violated the First Amendment only as applied to the plaintiffs, with respect to the specific pricing practice that the plaintiffs wanted to use. This ruling is the latest in a series of other appellate decisions analyzing state law surcharge bans under the First Amendment, indicating that such restrictions may continue to be challenged in court.

On January 9, Georgia Attorney General Chris Carr announced a settlement with a debt collector that will wipe out $8.8 million in consumer debt.

“It is plain and simple, any debt collector that employs abusive, deceptive and illegal tactics in Georgia will be held accountable,” Carr said in announcing the settlement.

Carr alleged that the debt collector – Williamson and McKevie, LLC – violated the federal Fair Debt Collection Practices Act and the Georgia Fair Business Practices Act by:

  • threatening consumers with arrest or imprisonment if they did not pay a debt;
  • falsely representing that consumers had committed criminal acts and would be sued if they did not pay a debt;
  • falsely implying that its representatives were attorneys;
  • contacting third parties and divulging information about the debtors’ accounts; and
  • failing to disclose that they were attempting to collect a debt and that any information obtained would be used for that purpose.

Under the terms of the settlement, which was entered as an assurance of voluntary compliance, Williams and McKevie must stop collecting on 10,922 accounts that represent approximately $8.8 million in consumer debt and must also pay a $20,000 civil penalty.  In addition, Williams and McKevie agreed to a five-year monitoring period during which it will be subject to an additional $230,000 civil penalty if it violates any provision of the settlement.

Carr’s press release announcing the settlement is available here.

2017 was a transformative year for the consumer financial services world. As we navigate an unprecedented volume of industry regulation and forthcoming changes from the Trump Administration, Troutman Sanders is uniquely positioned to help its clients find successful resolutions and stay ahead of the compliance curve.

In this report, we share developments on consumer class actions, background screening, bankruptcy, credit reporting and consumer reporting, debt collection, payment processing and cards, mortgage, auto finance, the consumer finance regulatory landscape, cybersecurity and privacy, and the Telephone Consumer Protection Act (“TCPA”).

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

ACCESS THE REPORT HERE

A group of 17 state attorneys general issued a letter to the White House on December 12, promising that they will “continue to vigorously enforce consumer protection laws regardless of changes to the [Consumer Financial Protection] Bureau’s leadership or agenda.”  The letter, coupled with other efforts, shows that regulatory relief in Washington may be offset by increased activity at the state level.

Expressing concerns regarding President Trump’s appointment of Mick Mulvaney as Acting Director of the CFPB, the attorneys general noted that they “retain broad authority to investigate and prosecute those individuals or companies that deceive, scam, or otherwise harm consumers.  If incoming CFPB leadership prevents the agency’s professional staff from aggressively pursuing consumer abuse and financial misconduct, we will redouble our efforts at the state level to root out such misconduct and hold those responsible to account.”

Led by New York A.G. Eric Schneiderman, the coalition includes attorneys general from California, Connecticut, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Mexico, North Carolina, Oregon, Vermont, Virginia, Washington, and the District of Columbia.  The coalition formed in response to a November 27 letter supporting Mulvaney from attorneys general from West Virginia, Texas, Alabama, Arkansas, and Oklahoma.  The earlier letter supported President Trump’s appointment, saying Mulvaney would help curb “the CFPB’s practice of overreaching regulation that harms the interests of consumers and small financial institutions.”

The December 12 letter foreshadows a new wave of state enforcement of consumer protection laws following the election of President Trump.  Among other powers, states can taking advantage of a little-known provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the CFPB, that gives state attorneys general the authority to enforce the CFPB’s rules and its broad ban on “unfair, deceptive, and abusive acts or practices,” commonly referred to by the acronym “UDAAP”.

There are other signs of plans for increased state-level enforcement activity.  For example, Pennsylvania A.G. Jack Shapiro has been quickly building up his own consumer finance unit since taking office nearly a year ago.  The Pennsylvania unit is staffed with more than a dozen people and led by a former senior CFPB attorney.  Shapiro and his team have already filed cases against a student loan servicer, which is accused of deceiving borrowers in order to drive up profits, and are leading a 48-state investigation into the security hacking of a consumer credit bureau.

“We’re demonstrating a capacity to handle these big, complex, consumer financial protection cases,” Shapiro told Reuters, adding that attorneys general from both parties have asked about how they can “mimic our efforts.”

In Washington state, Attorney General Bob Ferguson has enlarged his consumer finance division to 27 attorneys, compared to 11 attorneys in place four years ago.  Similarly, California A.G. Xavier Becerra has promised to “carry the torch and build on [former CFPB] Director Cordray’s good work to protect and empower consumers.”

“Regardless of what President Trump and the CFPB do moving forward,” said Virginia A.G. Mark R. Herring, “my fellow attorneys general and I remain committed to fighting to protect consumers across the country, and we will not waver from that commitment.”  Herring, like many of his counterparts nationwide, has also reorganized and expanded his state consumer protection organization in the wake of the election of President Trump.

Just shy of one year as the N.C. Attorney General, Josh Stein has reorganized NC DOJ – eliminating one prior Division (the Administrative Division), shifting responsibilities within DOJ, and renaming certain Divisions. Additionally, several recent retirements, new hires and promotions have significantly altered the senior attorneys at the helm of the DOJ’s legal services.

Under the reorganization, the eight Divisions providing legal services at NC DOJ consist of Civil (education; insurance; labor; property control; revenue; and legal services to state agencies); Consumer; Criminal; Environmental; Health and Human Services; Litigation; Medicaid Investigations; and Transportation. The functions of the previous Administrative Division have been shifted to other Divisions.