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The Business Lawyer

Spring 2023 | Volume 78, Issue 2

No Time to Brake: Regulators Drive Full Speed Ahead in Auto Finance

Kevin M McDonald and Kenneth J Rojc


  • This article summarizes the major legal and regulatory developments affecting the U.S. automotive finance industry.
  • During the past year, the Federal Trade Commission (“FTC”) entered into a $10 million consent order with a dealership group, its largest on record, for unfair and deceptive acts and practices and racial discrimination.
  • The Consumer Financial Protection Bureau (“CFPB”) warned lenders and servicers not to engage in various unfair and deceptive acts and practices involved in repossessing vehicles.
  • The U.S. Department of Justice (“DOJ”) continued to aggressively enforce the Servicemembers Civil Relief Act (“SCRA”), resulting in consent decrees with a large auto finance company and a credit union.
  • At the state level, Colorado and Massachusetts enforced GAP refund requirements against auto lenders doing business there.  
No Time to Brake:  Regulators Drive Full Speed Ahead in Auto Finance Woyshnis

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During the past year, the Federal Trade Commission (“FTC”) entered into a $10 million consent order with a dealership group, its largest on record, for unfair and deceptive acts and practices and racial discrimination. It also advised that consumers are not barred from recovering attorneys’ fees and costs under the FTC’s Holder Rule. Just a few months later, this viewpoint found judicial approval in the California Supreme Court. The Consumer Financial Protection Bureau (“CFPB”) warned lenders and servicers not to engage in various unfair and deceptive acts and practices involved in repossessing vehicles. The U.S. Department of Justice (“DOJ”) continued to aggressively enforce the Servicemembers Civil Relief Act (“SCRA”), resulting in consent decrees with a large auto finance company and a credit union. At the state level, Colorado and Massachusetts enforced GAP refund requirements against auto lenders doing business there. On the arbitration front, the Ninth Circuit held that a vehicle manufacturer may not compel arbitration when it is not an intended third-party beneficiary of a vehicle purchase agreement.

FTC and Illinois Settlement with Napleton Automotive Group

In March 2022, the FTC and the Illinois attorney general sued the Napleton Automotive Group of dealerships, their parent company, and the general manager of two of the dealerships in Illinois for a variety of deceptive practices related to add-on products and services (“Add-ons”) financed in connection with vehicle purchases. The deceptive practices included the misrepresentation of Add-ons as “free,” the misapplication of down payments to pay for Add-ons instead of reducing the price of the vehicles, the failure to remove Add-ons when requested to do so by the buyers, charging for the Add-ons without the buyers’ consent, and the misrepresentation that Add-ons were required to purchase or finance a vehicle. The complaint also alleged that the defendants charged African Americans an average $190 (approximately 18.4 basis points) more in interest than non-Latino White buyers. The defendants also allegedly charged African Americans an average of $99 more for Add-ons than non-Latino White buyers.

Based on these allegations, the parties entered into a consent order that addressed both the alleged unfair and deceptive acts and practices and the alleged discrimination. The defendants were permanently enjoined from misrepresenting the nature, amount, and costs of Add-ons and from charging for Add-ons without obtaining the buyer’s express, informed consent. They were also permanently enjoined from advertising any consumer credit without clearly and conspicuously disclosing the amount of the down payment, the terms of the repayment, and the annual percentage rate, and from discriminating based on race, color, religion, national origin, sex or marital status, or age. The defendants were required to establish and maintain a fair lending program that safeguards credit applicants from discrimination. Finally, the defendants agreed to pay $9,950,000 to the FTC for monetary relief, and the two Illinois dealerships agreed to pay $50,000 to Illinois for its costs. The $10,000,000 compensation element represents the FTC’s largest settlement in an automotive finance case.

FTC Holder Rule Revisited

The FTC issued an advisory opinion in January 2022 that addressed whether consumers may recover attorneys’ fees and costs under its Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses (“Holder Rule”). The Holder Rule permits consumers who purchase goods or services on credit to assert against the subsequent holder of the contract, e.g., an assignee finance company, claims and defenses the consumer has against the seller of the goods or services, e.g., a car dealer. The language that the Holder Rule requires to be included in credit contracts (“Holder Rule Notice”) has the following limitation: “Recovery hereunder by the debtor shall not exceed amounts paid by the debtor hereunder.”

The advisory opinion observed that the issue of whether the Holder Rule Notice language limits recovery of attorneys’ fees and costs “when state law authorizes awards against a lender” is one that “has arisen repeatedly in court cases,” with some courts “correctly concluding” that it does not limit such a recovery and others “misinterpreting the Holder Rule as a limitation.” Statements made in the FTC’s 2019 Holder Rule Confirmation also were misconstrued.

In its advisory opinion, the FTC clarified that “if the applicable law requires or allows costs or attorneys’ fee awards against a holder, the Holder Rule does not impose a cap on the award.” It stated that the last sentence in the Holder Rule Notice limiting recovery to “amounts paid by the debtor” applies only to monetary recovery against holders, i.e., recovery on the claims or defenses the debtor could assert against the seller. Thus, according to the agency, the Holder Rule places “no cap” on a consumer’s right to recover from the holder for other reasons, for example, “if applicable law requires or allows costs or attorneys’ fees awards against a holder.” The FTC pointed to its statement in the 2019 Holder Rule Confirmation that “nothing in the Holder Rule limits recovery of attorneys’ fees and costs if a federal or state law separately provides for recovery of attorneys’ fees.”

Five months later, following the FTC advisory opinion, the California Supreme Court held in Pulliam v. HNL Automotive Inc. that an assignee of an automobile installment sales contract can be liable for attorneys’ fees. In Pulliam, the plaintiff purchased a used Nissan Altima advertised as “Certified Pre-Owned” with cruise control and adjustable seats under a retail installment sales contract from HNL Automotive Inc. (“HNL”). The contract was assigned to TD Auto Finance, LLC (“TDAF”). Shortly after the purchase, the plaintiff sued HNL and TDAF, alleging misconduct by the dealership in the sale of the car, which allegedly did not meet the Certified Pre-Owned requirements or include the advertised features. The jury found that the dealership failed to adequately package and label the car and that the vehicle failed to conform to the promises of fact made on the label, in violation of the implied warranty of merchantability under the Song-Beverly Consumer Warranty Act and awarded her $21,957.25 in damages.

The plaintiff then moved to recover attorneys’ fees of $169,602 against TDAF, the assignee and holder of the sales contract. TDAF argued that the Holder Rule’s limiting sentence restricted its liability to only those amounts paid by the debtor and those amounts did not include attorneys’ fees. The trial court rejected the argument and granted plaintiff ’s motion for fees. This was affirmed on appeal. The California Supreme Court then granted review.

According to the supreme court, the Holder Rule’s “ambiguous” sentence provides no answer to whether states may allow consumers greater recovery than what is provided under the Rule. However, it found that the history of the Rule “indicates that the FTC intended the Rule to serve as a national floor, not to restrict the application of state laws authorizing additional awards of damages or attorney’s fees against a seller or holder.” The Pulliam court interpreted the FTC’s 2022 advisory opinion to mean that the limiting language in the Holder Rule Notice does not apply where the claim for fees “lies against the third party creditor in the first instance.” Finally, the court interpreted the award of attorneys’ fees under the Song-Beverly Consumer Warranty Act as an award to the prevailing party in litigation rather than a claim against a selling dealer that is extended to an assignee by the Holder Rule. The Pulliam court concluded that “the FTC contemplated that state law might offer greater protections for consumers” in excess of the amount the consumer paid under the contract, so that the attorneys’ fees awardable under the Song-Beverly Act could be recovered in addition to any contract recovery under the Holder Rule.

CFPB Warns Against Unfair and Deceptive Practices in Repossessions

The CFPB expressed concerned that lenders and their servicers, including repossession agents, might commit unfair or deceptive collection and repossession practices to obtain the vehicles for resale “since repossessed vehicles can command higher prices when resold.” It published a compliance bulletin in March 2022 that identified unfair and deceptive practices in the repossession process, citing examples of servicers providing payment or other options to allow consumers to avoid repossession, but then still repossessing the vehicle after the consumer already satisfied his or her side of the agreement. The CFPB also noted a recent enforcement action against Nissan Motor Acceptance Corp. where servicers provided consumers with other options to avoid repossession, but nevertheless still repossessed their vehicles, such as when consumers “[m]ade and kept promises to pay that brought the account current; [m]ade payments that decreased the delinquency to less than 60 days past due; [m]ade promises to pay where the date had not passed; or [a]greed to extension agreements.”

The CFPB identified as unfair trade practices servicing errors leading to vehicle repossession even though consumers met the conditions of forbearance, such as “[s]ervicers incorrectly coding consumers as delinquent; [s]ervicer representatives failing to cancel repossession orders previously communicated to repossession agents; or [r]epossession agents failing to confirm that the repossession order was still active before repossessing a vehicle.” Unfair practices also related to bankruptcy, such as repossessing vehicles in violation of the automatic stay “from the moment a consumer has filed a bankruptcy petition.”

The CFPB also considers charging fees for storing debtors’ personal property taken from repossessed vehicles to be illegal, again noting the enforcement action against Nissan Motor Acceptance Corp. based on such practices. Finally, the CFPB identified the practice of continuing to assess charges for force-placed collateral protection insurance after repossession, the subject of its enforcement action against Wells Fargo that resulted in a $1 billion civil money penalty, to be an unfair and deceptive practice. To avoid these unfair and deceptive acts and practices and others, the CFPB suggested a series of best practices that should be adopted.

State GAP Refund Enforcement Actions

In March 2022, the Colorado attorney general announced three Assurances of Discontinuance (“AOD”) with Credit Union of Denver, Premier Members Credit Union, and Ent Credit Union. In separate proceedings, the AODs stipulated that the credit unions failed to comply with the Colorado administrative rule that requires creditors to refund unearned premiums for guaranteed automobile protection (“GAP”) products upon repossession. The credit unions allegedly purchased retail installment sale contracts that financed GAP products but did not process GAP refunds without a consumer request. Under the AODs, the credit unions are required to implement internal processes to automatically process and pay GAP refunds and to make payments to identified consumers who were owed GAP refunds. Over $6.5 million in refunds were made to consumers.

The Massachusetts attorney general’s office announced that it had entered into a similar AOD in March 2022 with Americredit Financial Services, Inc. based on allegations that Americredit failed to refund interest on unearned GAP premiums, in violation of state law. The AOD also stated that Americredit sent defective pre-sale and post-sale repossession notices to consumers who were not eligible for compensation in connection with the class action settlement in Hartwell v. Americredit Financial Services, Inc. With respect to the Hartwell allegations, the AOD does not explain the issue, but Hartwell was filed as a putative class action consisting of consumers that received post-repossession notices that did not indicate that the “fair market value” of the vehicle would be deducted from the amount owed to determine the deficiency balance on repossessed vehicles. The AOD applies to consumers who received defective notices between July 17, 2013, and July 18, 2014, that were not eligible for compensation under the Hartwell settlement. Americredit was required to pay a total of $1,849,182 for compensation to consumers, administrative costs, and the attorney general’s costs of investigation.

In a related development on GAP refunds in Massachusetts, the Massachusetts Division of Banks issued an opinion in February 2022 that stated that in light of the limitation on credit contract charges under Massachusetts law, and in light of the Division’s longstanding position regarding permissible fees, no other fees or charges may be taken, received, or contracted for, including a cancellation fee for cancellation of a GAP waiver.

UDAP Enforcement in Mississippi

In December 2021, Credit Acceptance Corporation (“CAC”), a large financier of subprime automobile loans, disclosed in a Form 8-K filing that the company had settled a lawsuit with Mississippi by the payment of $325,000 to the state and a charitable donation of $125,000. In the complaint, which had been removed from state court to federal court, the Mississippi attorney general alleged that CAC engaged in unfair and deceptive business practices in violation of the Mississippi Consumer Protection Act by inflating vehicle prices and requiring customers to buy ancillary products despite laws mandating that these products must be sold as optional. For instance, it was alleged that “[o]n top of grossly overpriced cars and ancillary products, CAC charge[d] consumers extremely high interest rates.” CAC’s slogan, “We change lives,” was described as misleading and contrary to its own data on customer outcomes. Its business model was described as requiring dealers to sell overpriced, low-quality cars with expensive, largely valueless ancillary products to offset the risk in lending to subprime consumers; charging extremely high interest rates; charging Mississippi subprime consumers much more than the stated interest rate to finance their cars, sometimes greatly exceeding the maximum finance charge under Mississippi law, due to the hidden finance charges in inflated sale prices and overpriced add-ons; and, after default, engaging in aggressive and harassing collection, repossession, and litigation practices to pursue every last penny to maximize profits, pushing consumers further into financial crisis.

The DOJ Enforces the SCRA Against Two Auto Finance Companies

The DOJ continues to enforce aggressively the financial protections afforded to servicemembers under the SCRA. In September 2021, the DOJ entered into a consent order with American Honda Finance Corporation (“AHFC”) for violating the SCRA by failing to provide requisite refunds as part of the company’s lease termination process. Individuals who lease vehicles from AHFC, including servicemembers, often contribute an up-front monetary amount at lease signing; this contribution can be in the form of a cash payment, credit for a trade-in vehicle, or rebates or other credits. The remaining amount, called the capitalized cost reduction (“CCR”), operates to reduce the monthly payment the lessee must make over the term of the lease.

The DOJ contended that although AHFC paid servicemembers pro rata refunds of the cash part of the CCR, it did not refund any amounts for vehicle trade-in credits. AHFC argued that CCR is a form of down payment retained by the motor vehicle dealer, that no part of the CCR is paid to or received by AHFC, and that it was not a lease amount paid in advance within the meaning of the SCRA. The company argued further that its practice of refunding CCR amounts paid in cash, in effect since 2016, was appropriate under the SCRA and resulted in refunds to servicemembers not otherwise entitled to such payments. The DOJ disputed AHFC’s contentions.

Since at least 2014, AHFC allegedly received thousands of requests from servicemembers to terminate their motor vehicle leases, including many instances involving leases where the servicemember provided CCR amounts in the form of cash or vehicle trade-in credits. Until at least July 2019, when the DOJ began its investigation, AHFC’s written policy was not to refund any portion of CCR amounts attributable to vehicle trade-in value to servicemembers who terminate their motor vehicle leases. Between July 2014 and July 2019, AHFC allegedly regularly failed to timely refund to servicemembers all of their lease amounts paid in advance for periods after the termination of their motor vehicle leases. Based on its review of these AHFC’s lease terminations, the DOJ identified 714 servicemembers who did not receive a refund of their trade-in value paid as part of their CCR.

AHFC changed its policy in 2019 after it received notification of the DOJ investigation. The consent order requires AHFC to refund, on a pro rata basis, lease amounts paid in advance in the form of CCR from both cash and vehicle trade-ins on early terminations for qualifying servicemembers. AHFC must also designate a team of customer service representatives specifically trained on the protections of the SCRA regarding motor vehicle leases to be responsible for responding to servicemembers’ inquiries regarding the SCRA. As a matter of relief, AHFC must pay up to $1.6 million to the 714 SCRA qualifying servicemember lessees who received non-compliant refunds of prepaid amounts, and it must pay $65,000 to the United States.

A few months later, the DOJ entered into a consent order with BayPort Credit Union (“BayPort”) to resolve claims that the company violated the SCRA by allegedly failing to lower interest rates to 6 percent on retail installment sales contracts executed prior to military service and obtain court orders before repossessing servicemembers’ motor vehicles. The failure to lower interest rates allegedly affected twenty-one servicemembers since October 2013. There were three repossessions that violated the statute since February 2016.

Under the consent order, BayPort is enjoined from violating the interest rate reduction and repossession provisions of the SCRA. It was also required to refund all interest and fees charged above the 6 percent limit plus pay the greater of $500 or three times the interest refund. BayPort will be credited for prior remedial action. For the repossession violations, BayPort must pay $10,000 for each of the three accounts, plus any lost equity in the vehicles and interest on the lost equity. BayPort was required to deposit $69,443.10 to fund the payments, to correct the servicemembers’ credit bureau reports, and to pay $40,000 to the United States Treasury as a civil penalty.

Ninth Circuit Holds Auto Finance Company May Not Compel Arbitration

In Ngo v. BMW of North America, LLC, the Ninth Circuit reversed a district court order that would have compelled the plaintiff to arbitrate her claims about defects in her vehicle against the manufacturer, BMW of North America, LLC (“BMW”), based on the arbitration provision in her purchase agreement with the motor vehicle dealership. The purchase agreement listed the plaintiff, the dealership, and BMW Bank of North America as the financing assignee of the agreement, but it did not list BMW.

BMW argued that despite being a non-signatory to the purchase agreement, it could enforce the arbitration provision of the agreement as a third-party beneficiary to it. Under California law, a non-signatory is a third-party beneficiary only to a contract “made expressly for [its] benefit.” Thus, to compel arbitration, BMW had to show that the parties intended their contract to benefit it as a third party.

Since the purchase agreement did not refer to BMW, the Ngo court concluded that “[n]othing in the contract here evinces any intention that the arbitration clause should benefit BMW.” Although BMW was not a “stranger” to the transaction, the court stated that BMW’s “relative proximity to the contract confirms that the parties easily could have indicated that the contract was intended to benefit BMW—but did not do so.” For these and other reasons, the court found that BMW was not a third-party beneficiary of the agreement and therefore could not compel arbitration.

The opinions expressed are those of the authors and are not intended in any way to represent the views of their employers or clients.