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01
June
2024
The CARLAWYER - June Legal Developments
Here’s our monthly article on selected legal developments we think might interest the auto sales, finance, and leasing world. This month, the developments involve the Department of the Treasury, Senate and House Committee Chairs, Federal Communications Commission, and the Consumer Financial Protection Bureau.
Here’s our monthly article on selected legal developments we think might interest the auto sales, finance, and leasing world. This month, the developments involve the Department of the Treasury, Senate and House Committee Chairs, Federal Communications Commission, and the Consumer Financial Protection Bureau. As usual, our article features the “Case(s) of the Month” and our “Compliance Tip.” Note that this column does not offer legal advice. Always check with your lawyer to learn how what we report might apply to you or if you have questions.
FEDERAL DEVELOPMENTS
On March 27, the Department of the Treasury released a report on the current state of artificial intelligencerelated cybersecurity and fraud risks in the financial services sector, including an overview of current AI use, trends of threats and risks, best practices for managing risks, and next steps to address AI-related operational risks, cybersecurity, and fraud challenges. The report's findings are based on 42 indepth interviews conducted in late 2023 with representatives from the financial services sector, information technology firms, data providers, and anti-fraud/antimoney laundering companies.
On April 7, U.S. Senator Maria Cantwell (D-WA), chair of the Senate Committee on Commerce, Science, and Transportation, and U.S. Representative Cathy Rodgers (R-WA), chair of the House Committee on Energy and Commerce, released draft federal data privacy legislation titled the American Privacy Rights Act. According to the joint press release by Cantwell and Rodgers, the APRA would establish uniform data privacy rights for individuals; preempt existing state comprehensive data privacy laws; minimize the personal data that companies can collect, store, and use to what those companies actually need to provide individuals with products and services; give individuals control over their personal data, including the ability to prevent the transfer or sale of their data; require affirmative express consent before sensitive data can be transferred to a third party; require companies that collect personal data to let individuals access, correct, delete, and export their data; allow individuals to opt out of targeted advertising; and disallow mandatory arbitration for claims involving minors, a substantial privacy harm, or specific physical or mental harms. The APRA would allow individuals to opt out of a company's use of algorithms to make decisions about, among other things, housing, employment, healthcare, credit, education, and insurance. The APRA would also require companies subject to the Act to implement data security standards. Individuals would have a private right of action for violations of the Act, and the Federal Trade Commission and the states would be authorized to enforce the Act. Small businesses, as defined, would be exempt from the APRA.
On April 8, the Federal Communications Commission issued a notice of proposed rulemaking that seeks comment on the types and frequency of use of connected car services offered by wireless service providers and auto manufacturers in order to help protect survivors of domestic violence from misuse of such services. The FCC also seeks comment on whether changes to its rules implementing the Safe Connections Act are necessary to address the impact of connected car services on survivors of domestic violence. Finally, the notice seeks comment on what steps connected car service providers can proactively take to protect domestic violence survivors from stalking, harassment, and intimidation through the misuse of connected car services. Comments are due by May 23, 2024.
On April 8, the Consumer Financial Protection Bureau issued a new edition of Supervisory Highlights, which focuses on the Bureau's findings from recent examinations of consumer reporting agencies ("CRAs") and furnishers concerning their obligations under the Fair Credit Reporting Act and its implementing Regulation V. The spring edition of the publication covers certain examinations in connection with credit reporting and furnishing that were completed from April to December 2023. CFPB examiners found several deficiencies in CRAs' compliance with the requirements of the FCRA and Reg. V.
Specifically, examiners found that CRAs: (1) automatically refused to implement identity theft blocks upon receipt of the requisite documentation based on "overbroad disqualifying criteria" and without making an individualized determination that there was no statutory basis to decline the block; (2) failed to give timely and compliant notices to consumers after declining to implement an identity theft block or after rescinding an identity theft block; (3) failed to provide identity theft victims with the required identity theft summary of rights; (4) violated Reg. V's new human trafficking rule by failing to timely block, or in some cases failing to block whatsoever, adverse items of information identified by the consumer as resulting from human trafficking; and (5) failed to maintain procedures designed to ensure maximum possible accuracy with respect to oversight of furnishers. Specifically, examiners found that CRAs failed to adequately monitor dispute metrics that would suggest a furnisher may not be an accurate source of reliable and verifiable information. CRAs also failed to implement procedures to assure the accuracy of information reported by unreliable furnishers. The CFPB required the CRAs to revise their internal policies and procedures to address the issues cited above as well as revise template notices to confirm that the required information is included.
The spring edition of Supervisory Highlights also addresses FCRA compliance issues that CFPB examiners uncovered during examinations of furnishers. Notably, examiners found that furnishers: (1) failed to promptly correct and update furnished information after determining that the information was incomplete or inaccurate, sometimes for several months or years; (2) failed to investigate direct disputes that did not satisfy the furnisher's enhanced identity verification requirements (despite satisfying the statutory identity verification requirements); (3) deleted tradelines upon receipt of disputes rather than conducting investigations; (4) inaccurately reported dates of first delinquency (e.g., furnishers of information concerning auto financing often reported the date of first delinquency as the first day of the statement cycle following the consumer's missed payment rather than 30 days after the missed payment due date); (5) failed to promptly send corrections or updates to CRAs after determining that accounts were paid in full, particularly in the case of auto leases; and (6) continued to furnish information identified in a consumer's identity theft report to CRAs before knowing or being informed by the consumer that the information was accurate. As with the CRAs, the CFPB required furnishers with the above-referenced deficiencies to update their policies and procedures to address the issues cited and to engage in lookbacks to correct the furnishing of inaccurate information.
On April 16, the Consumer Financial Protection Bureau issued a rule to update its procedures for designating nonbank covered persons for supervision. Section 1024(a)(1)(C) of the Consumer Financial Protection Act authorizes the CFPB to supervise a nonbank covered person that it "has reasonable cause to determine ... is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services." In 2013, the CFPB issued a procedural rule to govern supervisory designation proceedings. After years of largely not using this authority, the CFPB issued an amended procedural rule in 2022 and established a process to publicize the director's final decisions and orders. In February 2024, the CFPB published its first decision and order where the nonbank subject contested the CFPB's supervision, and now the CFPB seeks to update its procedures through a new procedural rule. The new procedural rule clarifies that an agreement consenting to the CFPB's supervision does not constitute an admission by the respondent and is not subject to the public release process. Orders issued because a respondent failed to file a response or has defaulted in the process are subject to public release, however. If a respondent consented to supervision under the 2022 procedural rule, the term was limited to a two-year period of supervision. Under the new procedural rule, the notice of reasonable cause will continue to include a proposed consent agreement, but instead of a twoyear supervision period, the duration of the supervision will be on a case-by-case basis. The CFPB noted that it still expects most of the consent agreements to create a two-year period of supervision.
According to supplementary information to the rule, in February 2024, the CFPB began a transition to a new organizational structure for its supervision and enforcement work. Specifically, the functions of the Associate Director of the Division of Supervision, Enforcement, and Fair Lending ("SEFL") are being transferred to the Supervision Director as head of a Division of Supervision and the Enforcement Director as head of a Division of Enforcement. Although not yet on the CFPB's website, it appears that the SEFL Division is being discontinued and that Enforcement and Supervision will now be their own divisions and report directly to the CFPB Director.
In light of this restructuring, the procedural rule transfers certain functions to the Supervision Director. The CFPB is hopeful that this new structure will streamline the internal decisionmaking process. The procedural rule allows the initiating official to withdraw a notice of reasonable cause and request supplemental briefing. It also imposes word limits for the notice, response, and certain key filings. The procedural rule was effective on April 23, 2024, and applies to all proceedings issued on or after that date. It also applies to proceedings that are pending, unless the director determines that it is not just or practicable. Although the procedural rule is exempt from the notice-and-comment requirements, the CFPB is accepting comments on the rule until May 23, 2024.
CASE(S) OF THE MONTH
Arbitration Agreement Signed on Same Day and as Part of Same Transaction as Vehicle RISC Was Not Enforceable Under Pennsylvania Motor Vehicle Sales Finance Act's One-Document Rule: In separate transactions, two individuals bought used vehicles from a dealership. In connection with the purchases, the buyers each signed a retail purchase agreement, a retail installment sale contract, and an arbitration agreement. The buyers then brought a class action lawsuit against the dealership, alleging that it failed to properly register their vehicles, in violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law and in breach of contract. The dealership moved to compel arbitration or, in the alternative, to dismiss the claims. The trial court denied both motions.
The U.S. Court of Appeals for the Third Circuit affirmed the trial court's decision denying the motion to compel arbitration and remanded the matter. The appellate court looked to Pennsylvania law to determine whether the arbitration agreements signed by the buyers were enforceable.
Under the Pennsylvania Motor Vehicle Sales Finance Act, a contract governing an installment sale must: (1) be in writing; (2) contain all of the agreements between the buyer and the seller relating to the installment sale of the vehicle ("onedocument rule"); and (3) be signed by the buyer and the seller. The appellate court clarified that this one-document rule in the MVSFA requires all agreements between the parties to an installment sale to be incorporated into the RISC. Here, because the arbitration agreement exists independently of the RISC, it is unenforceable. In addition, the RISC itself states that it represents the complete and exclusive agreement between the parties. The appellate court rejected the dealership's argument that, because the buyers signed the RPA, RISC, and arbitration agreement on the same day and as part of the same transaction, the three documents should be considered one contract under Pennsylvania contract law. The appellate court found that all three documents could not be considered one contract because they do not reference or incorporate one another. The RISC unequivocally states that it constitutes the entire agreement between the parties. The dealership also argued that, even if the MVSFA imposes a onedocument rule, it does not apply to the arbitration agreement because the Act is only concerned with financing terms. The appellate court disagreed, finding that the MVSFA requires that certain financing terms be included in a RISC, but it also dictates that all agreements be contained within the RISC. See Jennings v. Carvana LLC, 2024 U.S. App. LEXIS 6705 (3d Cir. (E.D. Pa.) March 21, 2024).
COMPLIANCE TIP
This month’s Case of the Month illustrates why it is so important to not only review all of the documents you ask the consumer to sign at the dealership, but also whether you may be running afoul of other federal or state law in doing so, like a state’s single document rule. There are several states that impose a single document rule that requires a Retail Installment Sales Contract to contain all of the agreements between a buyer and a seller relating to the installment sale of the motor vehicle. If your RISC doesn’t contain an arbitration agreement, or you don’t follow your state’s single document rule (if it has one), then you may end up like the dealer in the case above and have your motion to compel arbitration denied by a court. Time to talk to your friendly lawyer and see if you’re doing things correctly in your state!
As seen in our Magazine
Eric Johnson
Professional Experience
Eric is a partner in the firm's Oklahoma City office and Editor in Chief of CounselorLibrary.com's Spot Delivery publication. He assists national and state banks, savings associations, credit unions, mortgage bankers, other licensed lenders, motor vehicles dealers and automotive finance companies in the development and maintenance of nationwide consumer mortgage and automobile finance programs; online motor vehicle sales programs; litigation funding programs; and electronic payment programs. Eric also assists DMS providers of documents and software with federal and state law compliance. He provides responses to regulator examinations; provides comments on proposed statutes and regulations to legislators and regulators; and assists financial services creditors with statutory and regulatory changes occasioned by the Dodd-Frank Act. Eric also assists financial services providers on e-commerce and information technology issues.
