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The Business Lawyer

Spring 2024 | Volume 79, Issue 2

Fast and Furious: Tracking Automotive Finance Developments

Kevin M McDonald and Kenneth J Rojc

Fast and Furious: Tracking Automotive Finance Developments

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  • At the federal level, the Federal Trade Commission (“FTC”) entered into its second major consent order against a dealership group for junk fees and discriminatory practices. A federal court addressed the issue of whether a non-franchised dealer could claim that a manufacturer and its captive finance company violated California law by refusing to accept lease payoffs.
  • At the state level, this article examines enforcement actions in Massachusetts and Colorado and a settlement in New York.
  • Also, eight states enacted statutes or issued guidance on how auto lenders can handle ancillary products with customers.


Over the past year, automotive finance developments continued to emerge at a fast and furious pace. At the federal level, the Federal Trade Commission (“FTC”) entered into its second major consent order against a dealership group for junk fees and discriminatory practices. A federal court addressed the issue of whether a non-franchised dealer could claim that a manufacturer and its captive finance company violated California law by refusing to accept lease payoffs. At the state level, the Massachusetts attorney general brought enforcement actions against a dealership group for discriminatory practices in connection with ancillary products and against a nationwide captive finance company for improper vehicle repossession practices. The New York State Department of Financial Services announced a settlement with a New York State chartered bank for discriminatory auto lending practices. The Colorado attorney general continued to flex its enforcement muscle against credit unions that improperly processed ancillary product refunds. On the state regulatory front, eight states enacted statutes or issued guidance on how auto lenders can handle ancillary products with customers.

FTC Settlement on “Junk Fees” and Discriminatory Practices

In May 2023, the FTC announced that it was sending payments totaling more than $3.3 million to customers of Passport Automotive Group, Inc. (“Passport”) as part of an October 2022 consent order between the FTC and Passport. This was the FTC’s second major enforcement effort against motor vehicle dealers that charge illegal or “junk” fees and discriminate against customers.

The FTC’s complaint alleged that Passport, through nine of its motor vehicle dealers using the “Passport” name, engaged in a common enterprise of assessing “junk” fees for services already included in advertised vehicle prices and discriminating against Black and Latino customers in interest rate mark-ups. Among the alleged deceptive and discriminatory practices were: advertising low vehicle sale prices and failing to honor them; adding redundant or hefty additional fees for reconditioning, inspection, preparation, and Certified Pre-Owned Certification; charging average Black purchasers approximately twenty-eight basis points ($291) and average Latino purchasers approximately twenty-six basis points ($261) more than similarly situated non-Black and non-Latino customers; ignoring notifications from a finance company of the interest rate disparities; ignoring notifications from its e-commerce director of the illegal fees related to vehicle reconditioning and preparation; and charging such illegal fees more frequently to Black and Latino customers than to their non-Black and non-Latino customers.

The consent order imposed a monetary judgment of $3,380,000 against Passport and prohibited it from misrepresenting: the cost or terms of vehicle purchasing, financing, or leasing; the availability of vehicles at an advertised price; whether products or services were optional or required; whether the products or services are authorized by the customers; and any material fact applicable to the purchase of any product or service. In addition, Passport was prohibited from engaging in unlawful credit discrimination and was required to: create a fair lending program; implement employee training every twelve months for fair lending compliance; maintain written guidelines specifying the reason to assess any fee and the objective factors for calculation; offer subvented retail installment sales contracts (“RISC”) to each eligible customer; establish interest rate caps at the Buy Rate (the rate at which Passport purchases the RISC from the lender) or charge the same number of basis points in rate participation programs to all non-subvented customers; and terminate any employee who engaged in discriminatory conduct. Finally, Passport was required to implement extensive reporting and disclosure requirements under which, for the next twenty years, it must submit any complaint of discrimination to the FTC within fourteen days and it must obtain express informed consent for all charges in a conspicuous disclosure, either orally or in writing, of what the charge represents and the amount of the charge.


In Calabasas Luxury Motorcars, Inc. v. BMW North America, LLC, the dealer alleged that the policy of BMW of North America, LLC and BMW Financial Services, LLC (collectively, “BMW”) not to honor third-party payoffs allegedly violated California Civil Code § 2987 and California Vehicle Code § 11709.4 and, therefore, violated California’s unfair competition law (“UCL”) as an “unlawful” and “unfair” business practice. On a motion to dismiss the UCL claim, the court rejected the dealer’s claim predicated on a violation of section 2987. Although that statute provides a lessee with a statutory right to terminate a lease at any time prior to its expiration, the court reasoned that this statute does not guarantee a right to trade in a vehicle with an unaffiliated third-party dealer. It concluded that nothing in BMW’s lease agreement prevents the termination of the lease, only that the purchase option may not be assigned without the lessor’s prior written approval. Consequently, the dealer did not allege facts to show that BMW violated section 2987.

With respect to the alleged violation of section 11709.4, which restricts how dealers may purchase or obtain a vehicle with a prior credit or lease balance, the Calabasas Luxury Motorcar court held that the statute does not imply that consumers have an absolute right to trade in a vehicle at the location of their choice, let alone that a competitor has the right to accept certain vehicles as trade-ins.

Finally, with respect to the plaintiff ’s claim of “unfair” business practice, the court dispensed with this allegation based on the fact that the dealer’s analysis relating to unfair consumer practices is inapplicable to this business competition-based claim. It also noted that the plaintiff did not allege any plausible anticompetitive aspects of BMW’s lawful policy choice to implement an exclusive dealing arrangement when competitive products are available.

State Enforcement Actions

Massachusetts Attorney General Takes on Dealership and Captive Finance Company

During the past year, the Massachusetts attorney general brought actions against an automobile group operating two dealerships in Massachusetts and against a nationwide automobile captive finance company. In January 2023, the attorney general entered into an assurance of discontinuance (“AOD”) with Hometown Auto Framingham, Inc. to settle claims over the company’s ancillary or “add-on” product sales practices in its dealerships. The attorney general alleged that between January 1, 2016, and March 31, 2018, Hometown allowed its finance and insurance managers broad discretion to modify prices and incentivized their compensation by paying them more for selling products at higher profit margins, which resulted in a disparate impact on Black and Latinx consumers because these consumers paid more, on average, than white consumers when purchasing add-on products.

To settle these claims, Hometown agreed to: provide mandatory anti-discrimination and anti-bias training to its management staff, sales staff, and finance staff for seven years; implement and maintain a standard retail price or margin for add-on products that can only be deviated from for specific, identified reasons for three years; clearly display the monthly and total prices of add-on products for three years; and scan and store its deal jackets in electronic form for seven years and to maintain a spreadsheet of all add-on product sales in a prescribed format. Hometown also agreed to pay $350,000 to the attorney general, with $200,000 allocated as restitution to affected consumers.

The Massachusetts attorney general also announced an AOD with Toyota Motor Credit Corporation (“TMCC”) in January 2023 to settle claims that the captive finance company allegedly failed to provide proper repossession notices and called debtors more than state law allows. After reviewing TMCC’s servicing practices from October 26, 2017, forward, the attorney general found “instances in which TMCC provided post-repossession notices [including notices sent pre-auction/sale and post-auction/sale] to borrowers and co-borrowers . . . [that] failed to reference the use of Fair Market Value in the calculation of deficiency amounts.” TMCC represented that it corrected the “fair market value” practice as of at least August 2018. The attorney general also alleged that TMCC violated Massachusetts law by “initiating communications to debtors via telephone in excess of two communications in a seven-day period.”

To settle these claims, TMCC agreed to pay $2,117,000 into an independent trust fund that would make payments to eligible borrowers, pay the costs of implementation, and pay the costs of the attorney general’s investigation. TMCC also agreed to change its servicing practices by (1) ceasing to collect from and waiving deficiencies for any borrowers who received post-repossession notices that failed to reference the use of “fair market value” in the calculation of any deficiency amount; (2) requesting that the credit reporting bureaus remove the tradeline associated with those borrowers while TMCC waives any deficiencies for them; and (3) complying with the statutory two call per week limit to debtors.

New York Department of Financial Services Continues Enforcing Fair Lending Law Under Disparate Impact Theory

As reported in a previous Annual Survey, the New York Department of Financial Services (“NYDFS”) has been one of the country’s most aggressive state enforcers of fair lending law against automobile lenders. This proved true again in October 2022, when the NYDFS announced another fair lending consent order against Rhinebeck Bank, a New York state-chartered bank. At issue were allegations that the bank violated the state’s fair lending law while engaged in indirect automobile lending. The NYDFS alleged that the bank’s business practices resulted in members of protected classes paying higher interest rates for reasons having nothing to do with creditworthiness.

According to the NYDFS, between January 1, 2017, and December 15, 2020, Rhinebeck “maintained a general policy” permitting the difference between its “buy rate,” the rate at which it offered to purchase RISCs from auto dealers, and the higher contract rate that dealers charge auto purchasers on RISCs set by the dealers in their sole discretion (the difference called “dealer markup”) within the following upper limits: for contract terms up to sixty-six months, 2.5 percent; for terms between sixty-seven and seventy-five months, 2 percent; and for terms between seventy-six and eighty-four months, 1.5 percent. Relying on the Bayesian Improved Surname Geocoding, the NYDFS observed the following rate disparities within Rhinebeck’s portfolio:

Hispanic Markup over Non-Hispanic White
January 1, 2017, to September 30, 2018 +0.33%
October 1, 2018, to August 31, 2020 +0.32%
September 1, 2020, to December 31, 2021 +0.21%
Black or African-American Markup over Non-Hispanic Whites
January 1, 2017, to September 30, 2018 +0.39%
October 1, 2018, to August 31, 2020 +0.31%


Markup over Non-Hispanic Whites
October 1, 2018, to August 31, 2020 +0.15%

The disparities allegedly violated both New York fair lending law and the federal Equal Credit Opportunity Act, which may be enforced by the NYDFS under New York law. Since creditors may price loans and RISCs only on creditworthiness criteria, the NYDFS found no permissible reason for the disparity between these protected classes and non-Hispanic whites. Although the NYDFS found no evidence of intentional discrimination, no such evidence is needed under the disparate impact theory, which focuses solely on outcomes: “the Bank’s specific policies and practices allowed automobile dealers to mark up a consumer’s interest rate above the Bank’s established Buy Rate, which resulted in a disparate impact on the basis of race and national origin.” In addition, until 2020 Rhinebeck did not monitor its RISC portfolio for any disparate impact.

To settle, the bank agreed to pay a civil monetary penalty of $950,000. The bank also agreed to provide restitution to affected borrowers of protected classes “who paid more than the average markup for non-Hispanic white borrowers” between January 1, 2017, through March 31, 2022. Finally, the bank agreed to develop a fair lending compliance plan to be approved by the NYDFS and that must contain these elements: sending annual dealer notices that outline fair lending compliance expectations and articulate the dealer obligation “to price retail installment contracts in a non-discriminatory manner”; conducting a portfolio assessment at least quarterly with restitution under the compliance plan; developing and implementing a dealer escalation program with parameters to switch a dealer to a flat-fee model; and continuing with the rate caps that the bank implemented on December 15, 2020, of up to 2 percent for RISCs with terms up to seventy-two months and up to 1.5 percent for RISCs with terms between seventy-three and eighty-four months.

Colorado Attorney General Settles Another GAP Refund Case

The previous Annual Survey reported that the Colorado attorney general entered into AODs with three credit unions that required them to refund unearned premiums for guaranteed automobile protection (“GAP”) products upon an early termination event of the credit contract, e.g., a repossession or early payoff. In January 2023, the Colorado attorney general entered into nearly identical AODs with two credit unions acting as indirect auto finance creditors to settle claims that they violated the Colorado consumer protection law banning unfair and deceptive trade practices by financing GAP fees, but upon the credit contract’s early termination, not refunding unearned fees. Under the AODs, the credit unions agreed to: begin automatically processing and paying GAP refunds when a credit contract is paid off early (where no GAP claim was paid during the term of the contract); continue funding unearned GAP premiums upon a vehicle’s repossession; and with no admission of liability, paying identified consumers GAP refunds of up to $4 million on a pro rata basis. In addition, the credit unions agreed to pay $100,000, in lieu of reimbursing the attorney general’s cost to investigate, and permit the state to inspect the companies’ books and records related to GAP refunds for one year. According to the Colorado attorney general, his office’s actions related to GAP have yielded a total of $23.5 million in consumer refunds.

State Regulation of Ancillary Products

State legislatures and regulators clarified the responsibility of automotive finance lenders in the financing and refunding of ancillary products, with a particular emphasis on GAP waivers. California, Colorado, Indiana, Iowa, Missouri, Texas, and Virginia each recently enacted statutes while the NYDFS published an Industry Guidance Letter.

In California, the Rees-Levering Automobile Sales Finance Act was revised effective January 1, 2023, to cap permissible charges for GAP waivers at 4 percent of the amount financed, to require conspicuous disclosures in the GAP waiver contract, including the right to a refund, and to prohibit GAP waiver sales where the Loan-to-Value ratio is 70 percent or less. Under the amended statute, the holder of a conditional sale contract is obligated to either tender the GAP waiver refund or cause the refund to be made by instructing in writing the administrator or any other appropriate party to make the refund.

In Colorado, effective January 1, 2024, the fee cap on GAP waivers was increased to 4 percent of the amount financed or $600, whichever is greater. Colorado also imposed a duty on the assignee of the RISC an obligation to provide the refund to the consumer, and on the original creditor, the motor vehicle dealer, to reimburse the assignee for the amount of the refund no later than forty-five days after the original creditor or the GAP administrator has received notice from the assignee.

Indiana and Virginia enacted similar ancillary product statutes, effective May 1, 2023, and July 1, 2023, respectively, that prohibit vehicle manufacturers from coercing motor vehicle dealers to purchase sponsored ancillary products from the manufacturer, an affiliated entity, or a captive finance company. Iowa seemed to buck the trend of broadening creditors’ responsibility in connection with GAP waiver refunds by enacting a statute, effective July 1, 2023, which stipulates that financial institutions that purchase RISCs with debt cancellation coverage need only notify the motor vehicle dealer within thirty days after an RISC is prepaid. The motor vehicle dealer would then be required to make any refund within sixty days of notice of prepayment. Given that “financial institutions” under Iowa law are defined include banks, savings and loan associations, credit unions incorporated under state law, those creditors who are not classified as “financial institutions,” such as captive finance companies, would likely still have to directly provide the debt cancellation contract refunds to the consumer.

In Missouri, a statute effective June 30, 2023, requires borrowers to provide a written request to the creditor, administrator, or other such party in order to receive a refund on a debt waiver contract. In addition, a separate Missouri statute effective August 28, 2023, broadens the types of ancillary products that are exempt from the finance charge and insurance classification, including excess wear waivers and diminished value agreements. In Texas, effective September 1, 2023, assignees of RISCs may either provide the refund of a debt cancellation agreement within sixty days of termination of the RISC or provide written notice to the administrator of the need for the refund within thirty days of termination of the RISC.

The Industry Guidance Letter issued by the NYDFS instructed all regulated auto lenders and their servicers that it expects them to calculate, obtain, and credit to consumers, either by application to a deficiency balance or by check, rebates from the cancellation of ancillary products arising from vehicle repossessions and total losses, although it made no mention of consumer prepayments that may trigger refunds. The NYDFS also proclaimed that a failure to obtain and credit a consumer with the full rebate would be considered an unfair and deceptive practice. The issuance of the Letter may have been generated because New York does not currently impose statutory restrictions on ancillary products with respect to auto lenders.