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In this special episode, Brooke Conkle and Chris Capurso discuss a recently released circular from the Consumer Financial Protection Bureau (CFPB). They are joined by special guest Caleb Rosenberg, who provides insights into the potential impacts this “quietly released” circular may have on the auto finance industry. Caleb brings a wealth of experience, including assisting businesses with secured and unsecured loan agreements, retail installment sales contracts, credit card agreements, and alternative finance agreements. He also helps clients navigate regulatory inquiries, particularly those concerning the application of state law to alternative financing products. While this marks the final episode of our five-part series on auto finance issues, stay tuned for more content. Be sure to listen until the end for a BIG announcement!

Continue Reading Auto Finance – CFPB Circular Release

Today, the Consumer Financial Protection Bureau (CFPB or Bureau) released a report on the state of negative equity in auto lending. The CFPB says it found that financing negative equity creates increased risks for consumers, and states that the CFPB will be putting negative equity under scrutiny.

Continue Reading CFPB Report Foreshadows Increased Scrutiny of Negative Equity in Auto Lending

Join Troutman Pepper Partner Brooke Conkle and Associate Chris Capurso as they delve into the complexities of ancillary products in the auto finance industry. From GAP waivers to extended warranties, discover the latest regulatory developments and compliance challenges that are shaping the landscape for consumers, dealers, and auto finance companies.

Continue Reading Navigating Ancillary Products in Auto Finance

Troutman Pepper attorneys Brooke Conkle and Chris Capurso discuss the Federal Trade Commission’s “Holder Rule” in the third of five special episodes devoted to auto finance issues. Although the Holder Rule has been around since the 1970s and is a staple of consumer finance contracts, there have been several recent, important developments. Brooke and Chris hop behind the wheel of this installment to review these developments, the position taken by the FTC and courts, and the potential impacts to dealers and finance companies.

Continue Reading Auto Finance – The Holder Rule

On July 31, the Board of Governors of the Federal Reserve System (Federal Reserve) issued its July Senior Loan Officer Opinion Survey on Bank Lending Practices, which addressed changes in the standards and terms on, and demand for, bank loans to businesses and households in the second quarter of 2023. Banks reported that lending standards are currently on the tighter end of the range for all loan categories. Specifically, standards tightened for all consumer loan categories and demand weakened for auto and other consumer loans, while it remained basically unchanged for credit card loans. Looking forward, banks reported expecting to tighten standards further on all loan categories citing an uncertain economic outlook and expected deterioration in collateral values and the credit quality of loans.

Continue Reading Federal Reserve’s July Senior Loan Officer Opinion Survey Shows Tightened Auto Loan Standards and Weakened Demand Amid Uncertain Economic Outlook

The modern “Information Age” has been defined by rapidly increasing interconnectivity and dependence on the internet by consumers and businesses alike. One side effect of these technological advances has been the increasing frequency of cyberattacks and data breaches perpetrated by sophisticated cyber criminals using ever-evolving methods of infiltration. And, as can be expected, along with the increase in data breaches over the past few decades, we have seen the rise of data breach litigation, and in particular, consumer class action litigation against the companies who have been victimized by those data breaches. The Fourth Circuit has seen several high-profile data breach class actions. Such class actions often face difficult uphill battles in proving the necessary elements for class certification, particularly when it comes to defining a theory of harm that can be proven by common evidence across the class. Last month, Judge Gibney of the Richmond Division of the Eastern District of Virginia dismissed one such data breach class action case for a more basic problem: the named plaintiffs could not demonstrate they had suffered any concrete injury sufficient to establish Article III standing at all, let alone damages that could be proven classwide. Holmes v. Elephant Ins. Co., No. 3:22cv487, 2023 WL 4183380 (E.D. Va. June 26, 2023).

Continue Reading EDVA Judge Dismisses Data Breach Class Action for Lack of Article III Standing

Do companies that use workplace surveillance tools to make hiring and firing decisions risk violating the Fair Credit Reporting Act (FCRA)? According to the Consumer Financial Protection Bureau (CFPB or Bureau) in a recent comment, the answer to that question is yes. The Bureau’s official comment comes in response to a request for information issued by the White House’s Office of Science and Technology Policy on the impact of automated tools used by employers to monitor and evaluate workers. The CFPB’s position that the FCRA applies to automated worker surveillance tools is consistent with the Bureau’s March 2023 request for information on data brokers, discussed here, to determine whether the FCRA applies to modern data surveillance practices.

As background, the FCRA provides protections related to consumer reports. The FCRA defines “consumer report” to include “any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for … employment purposes.”

The gathering and use of information from worker surveillance technologies to support retention and promotion decisions has greatly increased in recent years, in large part because of COVID-19 work-from-home arrangements. But in a now-familiar refrain, the CFPB cautions that such “automated technologies may produce incomplete or inaccurate information or exacerbate biases.”

The CFPB makes clear that the FCRA may apply to worker surveillance when making decisions including hiring, firing, promotion, reassignment, retention, and compensation. The CFPB also expressed interest in exploring how the information employers obtain about their employees through such technologies can find its way into the data broker market as well as when such information is used for employment background screening and other decisions that could impact consumers.

Furthermore, the CFPB expressed significant concerns about whether entities offering evolving worker surveillance technologies to employers are complying with applicable law. The CFPB stated that a company’s choice to use new technologies does not absolve it from its legal obligations.

Our Take:

The CFPB presumably is not going to transform itself into an employment regulator, but its public announcement does signal an interest in protecting employee rights from the types of monitoring discussed by the Bureau in its comment. We expect the Bureau to consider enforcement action on this subject if a company engaged in such practices comes to its attention, which means that employers should consider their use of such technologies to ensure that they are in a defensible position. The subject matter of the Bureau’s statements lies at the intersection of employment, privacy and consumer protection laws, and we believe that all three need to be taken into account in assessing this issue. That’s why the three of us — representatives of Troutman Pepper’s Labor & Employment, Privacy, and Consumer Financial Services groups — wanted to write on this jointly and will be watching this issue together for further developments.

With a roll-out led by Vice President Harris, the federal financial services regulators have released the long-awaited proposed automated valuation model (AVM) rule, referencing both home appraisal bias in mortgage lending and algorithmic bias, but providing no guidance at all about how to address those issues. On June 1, the Consumer Financial Protection Bureau (CFPB), Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, National Credit Union Administration, and Office of the Comptroller of the Currency (collectively, the agencies) published the proposed rule with request for public comment that would implement quality control standards mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The standards would require mortgage originators and secondary market insurers that use AVMs to determine the value of mortgage collateral adhere to quality control standards designed to: 1) ensure a high level of confidence in the estimates, 2) protect against the manipulation of data, 3) seek to avoid conflicts of interest, 4) require random sample testing and reviews, and 5) comply with applicable nondiscrimination laws. In the press release announcing the proposed rule, the CFPB acknowledged, “[t]he proposed rule’s safeguards are not a panacea, but represent a recognition of the risks posed by algorithmic appraisals.”

While the agencies acknowledge that AVMs have the potential to lower costs and quicken turnaround times in property valuations, they are focused on eradicating the potential for bias. According to the CFPB, “unlike an appraisal or broker price opinion, where an individual person looks at the property and assesses the comparability of other sales, automated valuations rely on mathematical formulas and number crunching machines to produce an estimate of value. While machines crunching numbers might seem capable of taking human bias out of the equation, they can’t.” Instead, according to the CFPB, “automated models can embed the very human bias they are meant to correct.”

The proposed rule would require that mortgage originators and secondary market issuers adopt policies and controls to ensure that AVMs used in certain credit decisions or covered securitization determinations adhere to quality control standards. However, to provide flexibility, the proposed rules allow for regulated institutions to adopt their own AVM policies and control systems to satisfy the statutory factors, rather than prescribing those polices and systems. In fact, the proposed rule contains no guidance at all regarding how to address bias or discrimination in AVMs; rather, it simply requires institutions to devise their own policies and procedures to address it. So, for any institution looking forward to concrete guidance on this topic, the proposed AVM rule does not provide it.

Under the proposal, the agencies suggest an effective date of 12 months after issuance of the final rule.

The issue of bias within the appraisal and property evaluation process has been a hot topic for the agencies for a few years now. In 2021, the Department of Housing and Urban Development announced the creation of the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE). As discussed here, in February 2023, the agencies sent a joint letter to The Appraisal Foundation, the private organization that sets appraisal standards, urging it to revise the fourth draft of its 2023 Edition of the Uniform Standards of Professional Appraisal Practice to include a detailed statement of federal prohibitions against discrimination. In March 2023, the Justice Department and the CFPB announced that they filed a statement of interest in a case pending in the U.S. District Court for the District of Maryland to explain the application of the Fair Housing Act and the Equal Credit Opportunity Act to lenders relying on discriminatory home appraisals.

The proposed rule contains 37 questions for comment. Interested parties may submit comments on the proposed rule until 60 days after publication of the proposed rule in the Federal Register.

As discussed here and here, in October 2022, the Federal Trade Commission (FTC) reached a $3.38 million settlement with Passport Automotive Group (Passport) and two of its officers over allegations that the automotive group violated the Equal Credit Opportunity Act (ECOA) and the FTC Act by adding “junk fees” onto the cost of its vehicles and discriminating against Black and Latino consumers by charging them higher financing costs and fees than non-Latino white consumers. Specifically, the FTC alleged Passport violated the law in three areas: Passport had a practice of marking up fees from the advertised price; Passport had a discretionary markup practice that caused Black and Latino customers to pay higher fees; and it charged Black and Latino customers additional fees for markups for extra services.

On May 16, 2023, the FTC announced that it has mailed more than 18,000 checks to affected consumers totaling more than $3.3 million. The FTC’s interactive database provides an up-to-date look into the refund progress.

On January 4, the Consumer Financial Protection Bureau (CFPB) and New York Attorney General (NY AG) filed a joint complaint in the U.S. District Court for the Southern District of New York against Credit Acceptance Corporation (Credit Acceptance), a major subprime indirect auto finance company. On March 14, Credit Acceptance filed a motion to dismiss the complaint, and on March 21, Troutman Pepper filed an amicus curiae brief in support of Credit Acceptance on behalf of the American Financial Services Association, the Consumer Bankers Association, and the Chamber of Commerce of the United States.

Among other things, the complaint asserts that Credit Acceptance engaged in deceptive and abusive practices in financing used automobile sales predominantly to subprime consumers by allegedly: (1) allowing and incentivizing dealers to sell vehicles at inflated cash prices that incorporated “hidden finance charges”; (2) financing sales to consumers without considering whether they have the ability to repay the credit they receive; and (3) allowing and incentivizing dealers to engage in deceptive practices in connection with the sale of add-on products.

As a threshold argument, the motion to dismiss challenges, under the appropriations clause of the U.S. Constitution, the CFPB’s right to use unappropriated funds to bring a lawsuit against Credit Acceptance. This issue is currently pending before the Supreme Court.

The motion to dismiss further argues that the complaint fails to state a valid claim as a matter of law for several reasons, including some of the key arguments highlighted below.

As to the complaint’s “hidden finance charge” claims, the motion to dismiss observes:

(1) The complaint fails to allege that Credit Acceptance deceived any consumers regarding alleged “hidden finance charges.” Indeed, the motion to dismiss explains that consumers receive credit under retail installment contracts with the motor vehicle dealers and that Credit Acceptance has no contact with vehicle purchasers until after the credit agreements are executed and assigned to the company by the dealer.

(2) The complaint does not allege a single instance where a dealer charged a consumer a higher “cash price” on a financed sale because the consumer financed the purchase, as is required to state a claim related to “hidden finance charges.” Rather than comparing the actual prices paid by the consumers at issue to those offered to cash buyers, the complaint alleges that the prices paid by consumers contained a “hidden finance charge” merely because they exceeded a hypothetical “cash price proxy” created by the plaintiffs for the purposes of the litigation. The upshot of the plaintiffs’ theory — which is based on how much a dealer was paid by the finance company — is that every contract contains a “hidden finance charge” any time a finance company accepts assignment of a contract at a “discount.” The Second Circuit has rejected similar pleading tactics in the past, and the CFPB’s official interpretation of the governing disclosure regulations is clear that assignment discounts are not finance charges unless separately imposed on consumers in individual transactions — a test the complaint’s “cash price proxy” theory does not satisfy.

(3) Assignees of consumer credit contracts are only liable under the Truth in Lending Act for violations that are apparent on the face of the TILA disclosure statement and other assigned documents, whereas alleged hidden finance charges, by definition, cannot meet this test.

As to the complaint’s ability-to-repay claims, the motion to dismiss notes that (1) the financed contracts in question clearly state the consumers’ payment obligations, (2) the vehicle purchasers are in a better position than Credit Acceptance to assess their specific financial situations and income stability, and (3) the consumer purchasers are able to consult publicly available information concerning car values and to compare prices available from competitors of the dealers. Credit Acceptance also points out that ability-to-repay requirements should not be imposed ad hoc through private litigation against a single company given there is no express statutory authorization for ability-to-pay mandates in the auto finance context (as opposed to mortgages or credit cards), and the plaintiffs did not engage in the appropriate (and transparent) notice-and-comment rulemaking process.

Lastly, in response to the complaint’s claims concerning add-on products, the motion to dismiss argues that Credit Acceptance cannot be held liable for aiding and abetting alleged dealer deceptive practices when dealers face no primary liability under the Dodd-Frank Act, and that the complaint improperly relies on an analysis of a few post-origination consumer complaints to suggest that Credit Acceptance acted knowingly or recklessly at origination (prior to accepting assignment of a contract).

We believe that the motion to dismiss articulates powerful arguments in opposition to the complaint, which we amplified in the amicus curiae brief we filed in support of the motion to dismiss. Our amicus brief explains that the complaint’s efforts to modify, through litigation, settled law that industry participants have relied on for decades is part of a longstanding CFPB pattern of regulatory overreach — “pushing the envelope,” in the words of the CFPB’s first director.

We argue:

(1) The complaint represents an end-run around the Dodd-Frank Act’s express exclusion of automobile dealerships from the CFPB’s rulemaking, enforcement, and supervisory authority.

(2) The complaint seeks to upend longstanding rules governing consumer credit disclosures, including those concerning the content of the required disclosures and the person responsible for providing them and ensuring their accuracy.

(3) The complaint attempts to circumvent express limitations on disclosure-related liability for assignees of consumer credit contracts.

(4) The complaint attempts to implement a major policy decision — the imposition of ability-to-repay requirements in the auto finance space — without an express statutory authorization (like those that exist in the mortgage and credit card contexts) or compliance with the m rulemaking channels for implementing such policy decisions.

The amicus brief further argues that the inevitable consequence of the plaintiffs’ actions in this case, if permitted to continue by the courts, would be a lack of transparency, the failure to gather necessary data and input from key industry stakeholders, and the potential for significant unintended consequences, including decreased competition in the auto finance space, higher financing costs, and a diminished availability of credit to entire categories of consumers. And, if permitted to proceed past the pleadings stage, the government’s theories could have widespread chilling effects in the auto finance industry and beyond.

We look forward to further developments in this case. Ultimately, of course, we hope to report on the vindication of Credit Acceptance and the court’s rejection of the complaint.