Life in the Fast Lane: Automotive Finance Developments

Introduction

Over the past year, legal and regulatory developments affecting automotive finance sped ahead in the fast lane. In pole position at the federal level, the Consumer Financial Protection Bureau (“CFPB”) continued its drive into ancillary products by entering into a major consent decree with the country’s largest automotive captive finance company. The CFPB also entered into a consent decree with a national bank in connection with the bank’s alleged unfair practices related to force-placed insurance on direct and indirect motor vehicle loans. Not far behind was the Federal Trade Commission (“FTC”), with which the State of Wisconsin announced a significant settlement over pricing discrimination and ancillary products affecting Native Americans. Turning to the courts, leasing remained a hot topic of litigation. A federal court upheld use of a “holdover” clause protecting lessors. Separately, several settlements were struck at the state level over lease purchase options. A federal court ruled that a class action waiver provision in a lease agreement was unenforceable and violated Rhode Island public policy. Finally, a nationwide class action settlement with one of the country’s largest banks was reached over vehicle repossessions.

Federal Regulatory Developments

CFPB Settlement Over Ancillary Products and Credit Reporting

In November 2023, the CFPB entered into a consent order with Toyota Motor Credit Corporation (“TMCC”) to address its conclusions that TMCC failed to properly cancel ancillary products or provide proper refunds for these products. The CFPB asserted that these actions violated the prohibition on engaging “in any unfair, deceptive, or abusive act or practice” under the Consumer Financial Protection Act (“CFPA”).

Among other improper practices, the CFPB found that TMCC made cancelling ancillary products unreasonably difficult by: (1) directing consumers to call a hotline staffed by representatives instructed to promote products until the consumer made three separate requests to cancel; (2) requiring consumers to then request their cancellation via mail or fax (rather than email, for example); and (3) using a refund procedure consisting of a principal deduction with unchanged payment amounts instead of just issuing a check. Even when customers successfully cancelled, the CFPB asserted that TMCC did not provide proper amounts of refunds. The company also allegedly reported lessee accounts as delinquent to credit reporting agencies for failing to make timely payments even though these customers had already returned their leased vehicles to a TMCC dealership.

The order requires the company to improve its policies and procedures to ensure call representatives are not compensated or evaluated based on the retention of ancillary product customers (e.g., the representatives should not benefit from a hotline caller’s decision not to cancel) and that cancellation is made easier for the consumer. Upon early termination of the finance contract, and regardless of a state law that might require otherwise, the company must either “issue a check (or otherwise remit funds) to the consumer in the accurately calculated amount of the unearned premium(s) or credit the amount of the refund if the consumer has an outstanding” finance contract. TMCC must also provide a written communication confirming the amount and manner of refund to the extent it “issues or receives” the refund. Finally, the company must pay $60 million in consumer redress and penalties: $48 million to harmed consumers and $12 million into the CFPB’s victims relief fund.

CFPB Settlement Over Force Placement of Insurance

In July 2024, the CFPB entered into a consent order with Fifth Third Bank, N.A. (“Fifth Third”) arising out of certain alleged unfair acts or practices in connection with Fifth Third’s force placement of insurance on direct and indirect motor vehicle loans. The consent order detailed that Fifth Third committed unfair acts or practices by: (1) placing, charging, and maintaining duplicative force-placed insurance on motor vehicle loans in violation of the CFPA; (2) furnishing inaccurate or incomplete information to consumer reporting agencies regarding vehicle repossessions that were caused by unfairly placed force-placed insurance in violation of the Fair Credit Reporting Act; (3) making false or misleading representations to borrowers about the time to cancel force-placed insurance policies in violation of the CFPA; (4) charging premiums on force-placed insurance policies that had terminated in violation of the CFPA; (5) failing to give sufficient notice to consumers of increased monthly payment amounts due to force-placed insurance in violation of the CFPA; (6) failing to notify consumers of increases in the amounts of preauthorized fund transfers due to forced-placed insurance in violation of the Electronic Fund Transfer Act; and (7) making false or misleading statements to borrowers about the total amount due in right-to-cure letters in violation of the CFPA.

The scope and duration of the alleged unfair practices was very extensive. The consent order noted that from 2011 through 2019, Fifth Third force-placed or maintained unnecessary duplicative insurance over 37,000 times. The CFPB asserted that borrowers paid over $12.7 million in force-placed insurance premiums and were entitled to a refund of those paid premiums, instead of having those premium refunds applied to the balance of their loans. As part of corrective actions designed to address these alleged unfair acts or practices, Fifth Third agreed to establish a redress plan to provide monetary relief to affected consumers, pay a $5 million civil penalty to the CFPB, and submit a compliance plan to the CFPB in the event that Fifth Third decided to place, charge, or maintain force-placed insurance on the direct or indirect loans. In addition, Fifth Third agreed to submit compliance reports on any development that may affect their compliance obligations under the consent order and to retain all business records necessary to demonstrate full compliance with the compliance plan.

FTC and Wisconsin Settlement on Pricing Discrimination

In October 2023, the FTC and Wisconsin filed a joint consent order against Rhinelander Auto Center, Inc., Rhinelander Motor Company, Rhinelander Auto Group LLC, and Rhinelander Import Group LLC (collectively “Rhinelander”) and Daniel Towne, individually and in his capacities with Rhinelander, to settle federal and state claims involving unfair lending and unfair trade practices. In their complaint, the FTC and Wisconsin asserted that from 2016 to the present, the defendants charged a “large percentage” of customers for additional products and services (“ancillary products”) without authorization; the defendants unlawfully discriminated against American Indian customers by assessing higher interest rates compared to similarly situated non-Latino white customers; and the defendants frequently imposed ancillary product charges on American Indian customers without obtaining express, informed consent.

Under the terms of the consent order, the defendants must improve their sales and financing processes. First, consumers must clearly see what charges, products, and services are either optional or required. Second, consumers must provide their “express informed consent” to being charged for (1) any ancillary product or service; (2) any fees and costs to be charged with and without the service; and (3) whether the charge is optional.

Third, Rhinelander must also establish a fair lending program that includes designating a fair lending compliance manager and ensuring that all employees receive compliance training at least once a year. All customers must be offered subvented contracts when they qualify. Ineligible customers and customers that are not interested in the subvented financing must be offered “all contracts the consumer is eligible for that are financed with an assignee that does not allow an interest rate greater than the Buy Rate”; and all contracts that limit the number of basis points of the markup to less than an annually set standard markup. If the customer rejects those or is ineligible, Rhinelander must offer an annually set standard markup not to exceed 115 basis points to these customers. The compliance officer must maintain a signed written record showing the offers presented, any rejection, and that any charge above the Buy Rate follows the terms of the settlement. Discriminating employees must be terminated promptly. Complaints of discrimination must be retained for ten years.

Finally, the defendants must pay monetary judgment of $1,000,000 with the funds to be used by the FTC for consumer redress.

Federal and State Litigation

Lease “Holdover” Clause Enforced

In November 2023, the U.S. District Court for the Western District of Washington granted a motion for judgment filed by Ferrari Financial Services, Inc. (“FFS”) over a motor vehicle lease agreement with ZCrete Systems International Inc. and Brian Brogie as the lessees. The lessees refused to pay what they owed under the lease agreement and defaulted. In response, FFS filed a replevin action. The lessees did not appear before the court and the court entered a default judgment granting a writ of replevin for recovery of the vehicle and general damages of $209,513.24 plus reasonable attorneys’ fees and costs, which were later calculated at $23,046.44 and reflected in an amended judgment of $233,034.68 for FFS.

The lessees never returned the vehicle and FFS did not recover it. FFS then moved to amend the judgment, this time seeking “additional unpaid lease payments” of $194,679.32 and additional attorneys’ fees of $25,415.00. Lease agreements are often structured to allow the lessor to recover additional unpaid payments through a “holdover” clause, under which the lessee is responsible for the amount of the monthly payment for each month (or part thereof ) that the lessee keeps the vehicle after termination. Finding that the FFS lease agreement contained such a clause and that Washington law permits usage of such a clause, the court granted FFS’s request for an amended judgment and increased the total judgment to $453,129.00.

Lease Purchase Option Litigation

In October 2023, the U.S. District Court for the Southern District of Florida affirmed an arbitration award in connection with a lessee claiming that he was overcharged for various fees that were not disclosed in the lease in connection with lessee’s exercise of a purchase option at the end of the lease term. In this case, the lessee was awarded in arbitration $1,172.80 in actual damages, $2,000.00 in statutory damages, and $21,430.00 for attorneys’ fees and costs. The court noted that arbitration awards are presumptively enforceable and the court’s review is highly deferential. The court found no basis to vacate, modify, or correct the final arbitration award. The lease purchase option price was most likely inflated with fees related to documenting the lessee’s exercise of his purchase option.

The New York Attorney General announced in two settlements on claims that seven Nissan motor vehicle dealers overcharged lessees by adding “dealership fees” or “administrative fees” when the lessees exercised their purchase options under their leases. In the first settlement, more than 1,100 lessees were awarded $1.6 million in restitution and five dealers were assessed an aggregate civil penalty of $340,000. In the second settlement, more than 200 lessees were awarded over $72,000 in restitution and two dealers were assessed a civil penalty of over $281,000. In addition to the overcharging of lessees, the New York Attorney General determined that certain dealers were providing lessees with deceptive invoices, such as a $300 state inspection fee that is ordinarily $37 and a $500 title fee that is ordinarily $50. With respect to the overcharges, the New York Attorney General stated that in some instances customers were overcharged as much as $7,000 on an $18,000 vehicle. Finally, the dealers agreed to an audit of all lease transactions between 2020 and 2023 and will provide additional refunds identified as a result of that audit.

Class Action Waiver Unenforceable

In October 2023, the U.S. District Court for the District of Rhode Island reviewed the following class action waiver provision included in a consumer motor vehicle lease contract:

CLASS ACTION WAIVER: TO THE EXTENT PERMITTED BY APPLICABLE LAW, YOU HEREBY WAIVE ANY RIGHT YOU MAY HAVE TO BRING OR PARTICIPATE IN A CLASS ACTION RELATED TO THIS LEASE.

In this case, the plaintiff had entered into a lease agreement in which the purchase option price was stated at $9,520.80. However, the plaintiff purchased the leased vehicle for $2,000 more than the agreed-to price. The plaintiff filed a class action against the defendant motor vehicle dealer. The question presented to the court was whether a class action waiver in a motor vehicle lease agreement that does not contain an arbitration clause violated Rhode Island public policy, and if so, is such a waiver enforceable. The court found that the Rhode Island Deceptive Trade Practices Act (“DPTA”) provides that consumers can bring an action on behalf of themselves and other similarly injured and situated persons to cover damages. Because of the clear reference to collective actions in the DPTA, the court concluded that the class action waiver is unenforceable as against Rhode Island public policy. In framing the issue of the enforceability of the class action waiver, the court noted that the lease agreement did not contain an arbitration clause, which could imply that the presence of an arbitration clause could have rendered the class action waiver enforceable.

Pennsylvania Class Action Settlement: Repossession Notices

In February 2024, Wells Fargo Bank, N.A. (“Wells Fargo”) agreed to settle a class action litigation with over 22,000 class members as approved by the U.S. District Court for the Eastern District of Pennsylvania. The named plaintiffs in the class action alleged that Wells Fargo violated Pennsylvania law by using deficient disclosure notices and practices when it repossessed motor vehicles. The plaintiffs alleged that the repossession notices violated the Uniform Commercial Code and the Pennsylvania Motor Vehicle Sales Finance Act by failing to inform them of the intended method of vehicle disposition and their redemption rights. Furthermore, it was alleged that: (1) the repossession notices improperly limited the amount of time to redeem; (2) the repossessed vehicles were improperly taken to auction prior to a required fifteen-day redemption period; and (3) Wells Fargo attempted to collect unnecessary and unreasonable expenses related to the repossessions. The class consisted of persons who entered a retail installment sales contract in Pennsylvania for the financing of a motor vehicle purchased primarily for personal, family or household use and whose retail installment sales contract was assigned or sold to Wells Fargo.

Under the settlement, Wells Fargo agreed: (1) to pay $15,000,000 into a settlement fund, (2) to make refund payments totaling $6.87 million to class members whose vehicles were repossessed and sold, and who subsequently made payments toward the remaining deficiency balance, (3) to provide cash distributions to all class members, (4) to distribute “incentive” payments to the class representatives of $10,000 for each of the eight class representatives, and (5) to pay administrative costs and attorneys’ fees and expenses from the settlement fund. In addition, Wells Fargo agreed to forgive class members’ debts, which the court estimated at $65,000,000. Wells Fargo will also request that the consumer reporting agencies delete the negative tradelines of class members associated with the accounts related to the settlement. In exchange, Wells Fargo will be released from all claims from each class member’s accounts related to the financing of their motor vehicles which were subsequently repossessed and subject to the class action.