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The Consumer Financial Protection Bureau (“CFPB”) has released an “auto loan shopping sheet” and other online resources as part of its “Know Before You Owe” initiative, which aims to assist consumers with comparison shopping and financing auto purchases. The initiative “walks consumers through each step of the auto finance process to help them decide how much they can afford to borrow and what options are right for them.”

According to the CFPB, the initiative was spurred by research regarding consumer behavior during the auto financing process, as well as complaint data evidencing difficulty understanding loan features prior to negotiations. The CFPB seeks to educate consumers regarding the total cost of the loan rather than just the monthly payment, encourage comparison shopping, and to be cautious regarding “financing features and add-ons that could lead to costly surprises down the road.”

The shopping sheet is a two-page document that the CFPB hopes consumers will print and use when discussing financing options with lenders and dealers in conjunction with vehicle purchases. The document “helps consumers understand loan factors, compare loans apples-to-apples, and get the financing that is right for their budget,” and specifically indicates which factors are negotiable.

In addition to the shopping sheet, the CFPB website offers a guide assisting consumers with the auto loan process, providing helpful tips and warning regarding potential red flags. The CFPB notes that lenders are not required to offer the best interest rate available, and advises consumers to be careful regarding “optional add-on products like extended warranties, specialty insurance, or credit insurance” that increase total purchase costs.

In recent years, the CFPB launched similar initiatives under the “Know Before You Owe” banner regarding mortgages, student loans, and prepaid financial products.

Troutman Sanders LLP has extensive experience representing automotive lenders, and will continue to monitor CFPB and other regulatory activity in this area.

On September 17, the Seventh Circuit Court of Appeals declined to rehear an appeal it decided against Neiman Marcus over a payment card data breach, leaving in place the precedential ruling that held plaintiffs can sue for the trouble and expense of preventing fraud on their accounts.

The decision stems from a class action suit against Neiman Marcus over the alleged 2013 hack that compromised the credit card numbers of approximately 350,000 shoppers.

As we previously reported, the Seventh Circuit ruled in July that a group of plaintiffs who sued Neiman Marcus over the theft of their credit card information in a data security breach had standing to sue for fraudulent charges, as well as fraud-prevention expenses and credit monitoring.  The appellate court reversed a prior decision from the U.S. District Court for the Northern District of Illinois, holding that the plaintiffs’ injuries via unauthorized charges were insufficient to confer standing.  The appellate decision is styled Remijas et al. v. The Neiman Marcus Group LLC, Case No. 14-3122.

Neiman Marcus asked the appellate court to rehear the appellate court decision en banc, claiming the court erred in its ruling and that the decision “all but declares that such breaches automatically confer standing.”  The same Circuit judges who decided the appeal rejected Neiman Marcus’ request for rehearing.  The ruling will allow the suit in Illinois federal district court to move forward.

The Federal Reserve Bank of New York released its Household Debt and Credit Report this month.  The report, which uses anonymous credit data to generate a nationally representative sample, found that consumers’ overall indebtedness increased $2 billion to $11.9 trillion in the second quarter of 2015.

This number was aided by the increased number of Americans buying cars which pushed auto loan debt above $1 trillion for the first time in U.S. history.  According to the report, Americans took out $119 billion in auto loans from April through June, up from $95 billion in the first quarter of the year.  Through the first half of the year, auto sales are on pace to challenge the record of $17.4 million set in 2000.

Outstanding mortgage debt dropped by 0.7 percent in the second quarter to $8.12 trillion.  Mortgage debt declined by $55 billion quarterly, while total household indebtedness increased just $2 billion from Q1 2015 up to $11.85 trillion in Q2.  Foreclosures hit their lowest point in the 16-year history of the bank’s Consumer Credit Panel, with 95,000 new foreclosures in the second quarter – down from 112,000 at the same time last year.

The report found that mortgage balances and HELOC dropped by $55 billion and $11 billion, respectively.  In the second quarter, there were $466 billion in new mortgage originations, and almost half of those originations were driven by borrowers with credit scores over 780.  Only 8 percent ($38 billion) of all new mortgages were originated by borrowers with credit scores 660 and below.

Finally, credit card balances increased by $19 billion, while student loan balances – which totaled $1.2 trillion in June – remained flat.  However, although student loans make up only 10% of all consumer debt, the amount of seriously past due student loan payments total nearly one-third of all seriously past-due debt payments.

 

On July 29, the Consumer Federation of America and the North American Consumer Protection Investigators released their annual survey of consumer complaint data from state and local consumer agencies, which is based on 280,000 claims to thirty-seven agencies from twenty-one states and the District of Columbia.

Just as in 2013, the most common complaints arose from auto-related problems, a broad category including misrepresentations in advertising or sales of new and used cars, “lemons”, faulty repairs, leasing disputes, and towing disputes.  A new auto-related problem cited in the report is the practice of “curbstoning,” which involves dealers evading responsibilities by displaying used cars on the side of the road, in parking lots, and in other off-site locations to make it appear as if they are being sold by private individuals.

Credit/debit complaints, including illegal or abusive debt collection tactics, billing and fee disputes, mortgage-related fraud, credit repair, debt relief services, and predatory lending, were third on the 2014 overall complaint list.  Earlier this month, the Consumer Financial Protection Bureau released its first monthly complaint report, noting that it had received 163,000 debt collection complaints to date, the second highest industry tracked by the CFPB, and the top consumer complaint for the month of June 2015.

The fastest growing complaint in 2014 was identity theft, due in part to numerous recent large-scale data breaches at major retailers.  A recent fast-growing identity theft problem cited in the report involves the use of consumers’ personal information to collect their tax refunds.  Identity theft was responsible for 13% of overall complaints to the Federal Trade Commission, the top FTC complaint category for 2014.

 

On April 13, 2015, a bipartisan group of 34 members of the United States House of Representatives introduced a bill that would repeal a Consumer Financial Protection Bureau (CFPB) bulletin from 2013 challenging a common practice in the indirect auto finance industry where automobile dealers would set interest rates on consumer financings.

The bill, entitled Reforming CFPB Indirect Auto Financing Guidance Act, would nullify the CFPB’s indirect auto finance guidance and require the CFPB to provide for a notice and comment period before issuing any new guidance on indirect auto finance.

In a press release, the National Automobile Dealers Association applauded the bipartisan measure. “Consumers have the right to obtain auto financing at discounted rates, and those rights should be protected, not threatened,” said National Automobile Dealers Association President Peter Welch. “There is bipartisan support in Congress to require the CFPB to consider how harmful its guidance could be to consumers, and we applaud Reps. Guinta and Perlmutter for their leadership on this issue.”

The bill also would require the CFPB to (1) provide for a public notice and comment period before issuing the guidance in final form; (2) make available to the public, including on the website of the Bureau, all studies, data, methodologies, analyses, and other information relied on by the Bureau in preparing such guidance; (3) consult with the Federal Reserve System, the Federal Trade Commission, and the Department of Justice. These requirements would significantly hinder the CFPB’s ability to promulgate guidelines related to indirect auto financing.

The bill was referred to the House Committee on Financial Services, where action the Committee will take it under consideration.

We have reported on the ongoing controversy caused by the CFPB’s efforts to fundamentally reform the indirect auto lending industry here, here, here, and here.

Follow the Consumer Financial Services Law Monitor for further updates on this and other events.

On February 17, the District Court for the Northern District of Illinois in Telephone Science Corp. v. Trading Advantage LLC, et al. denied a motion to dismiss and a motion to compel discovery in an action alleging violations of the Telephone Consumer Protection Act.  The interesting thing about the orders were not the denials themselves but the manner in which they were framed.  The Court appeared to indicate that a business which collects “dirty” telephone numbers (e.g., previously abandoned numbers that are rejected by a telephone carrier as receiving a large number of calls) can state a claim for automatic telephone dialing system (ATDS) calls made by businesses to those numbers.  Such a finding would increase the already broad reach of the TCPA, potentially allowing companies to foster TCPA violations in order to take advantage of the statute’s significant monetary penalties.

The plaintiff in the case, Telephone Science Corporation (“TSC”), operates a service that is designed to stop calls delivering a prerecorded message by hanging up on and “blacklisting” certain callers.  TSC has a “honeypot” of telephone numbers that it uses to conduct research and improve its call blocking process, and has purchased more than 65,000 “dirty” numbers from telecommunications carrier Twilio to create a data research set.  TSC alleges that Defendants made calls to 61 phone numbers that were part of its “honeypot” in violation of the TCPA.  Defendants, however, contend that they only contact individuals who have responded to advertisements made by Trading Advantage, and that each of the phone numbers at issue formerly belonged to individuals who contacted Trading Advantage.  Defendants assert that TSC is using the TCPA for personal profit, by purchasing second-hand numbers and preying on companies that had a legitimate reason for contacting the prior number owner.  In support of their contentions, Defendants sought discovery relating to the operation of TSC’s business and “honeypot” to, among other things, obtain information about whether TSC is a “called party” under the TCPA.  In addition, Defendants sought to dismiss the case, asserting that the relevant section of the TCPA does not apply to calls made to businesses.

The court denied Defendants’ motion to compel and motion to dismiss, foreshowing a possible gross expansion of the reach of the TCPA.  In denying Defendants’ motion to dismiss, the court rejected the notion that the section of the TCPA prohibiting ATDS or prerecorded voice calls does not apply to calls made to businesses: “The plain language of the statute states that it is unlawful to make ‘any call using any automatic telephone dialing system’ to ‘any telephone number assigned to … any service for which the called party is charged for the call.’”  (Emphasis in original.)  In addition, the court found that Defendants did not need additional discovery to reach the issue of whether TSC is a “called party” under the TCPA, or in support of their affirmative defenses for lack of standing and unclean hands.

As the case develops, the import and reach of the court’s orders will likely become more clear.  In addition, the issue of whether a call to a ported number violates the TCPA, where the call to the original number owner would have been made with consent, is pending before the FCC.

The American Financial Services Association (AFSA), a consumer credit industry trade association, released a study this month that took issue with the Consumer Financial Protection Bureau’s method of measuring discrimination in the automotive lending business.

The study, which was carried out by Charles River Associates and based on over eight million vehicle finance contracts issued in 2012 and 2013, concluded that the CFPB has been using an unreliable estimating method to find discrepancies in lender compensation to dealers based on minority status.

The CFPB’s methodology estimates race and ethnicity based on a loan applicant’s name and census data, to determine whether minority groups are hurt by auto lending practices.

The AFSA study compared the CFPB’s methodology against a population with known race and ethnicity and found that the CFPB’s method of estimating often misidentified car buying groups as minorities.  As a result, according to AFSA, the CFPB overestimates disparities in reimbursement between dealerships based on customers’ minority status.

The AFSA study also concluded that the CFPB’s methodology failed to account for legitimate factors that may cause disparities in dealership compensation.

The CFPB responded, saying that it will carefully review the AFSA study.

The Office of the Comptroller of the Currency (OCC) in its Spring 2014 Semiannual Risk Perspective report has stated that signs of risk in the auto lending industry are beginning to emerge, based on data that the OCC reviewed as of December 31, 2013.  The OCC’s Semiannual Risk Perspective is published by the OCC’s National Risk Committee, which monitors the condition of the federal banking system and emerging threats to the system’s safety and soundness.  The Committee includes senior agency officials who supervise banks of all sizes, as well as officials from the law, policy, accounting, and economics departments.

The Spring 2014 report explains that the OCC has observed risk-increasing trends in auto lending, including lengthening loan terms, increases in advance rates, and origination of loans to borrowers with lower credit scores.

The OCC notes that substantial deterioration in loan portfolios has not yet been seen, but several indicators of increasing risk are nevertheless evident.  Average loan-to-value (LTV) rates for both new and used vehicles are above 100%, due to higher vehicle prices and the inclusion of add-on products (such as service contracts, credit life insurance, and aftermarket accessories) as part of the amount financed.  Further, the average loss per vehicle has risen substantially in the last two years, and average charge-off amounts are higher for auto loans over the last year.  The OCC concludes that “these early signs of easing terms and increasing risk are noteworthy, and the OCC will continue to monitor product terms and risk layering practices to ensure that banks manage growth and exposure prudently.”

On May 12, the Colorado legislature passed Senate Bill 26‑189, a substantial rewrite of its 2024 law establishing consumer protections for artificial intelligence (formerly referred to as the CO AI Act), and replaced it with a more targeted framework for “automated decision‑making technology” (ADMT). The changes will take effect on January 1, 2027.

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