The CARLAWYER©

By Eric Johnson, Partner, Hudson Cook, LLP, Editor in Chief of CounselorLibrary.com’s Spot Delivery®

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 Federal Trade Commission, Consumer Financial Protection Bureau, and National Credit Union Administration. 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

FTC Provides Annual Report to CFPB on 2020 Reg. Z, M, and E Enforcement

Activities. On June 1, the FTC provided its annual report to the CFPB concerning its enforcement activities during 2020 related to compliance with Regulation Z (Truth in Lending Act), Regulation M (Consumer Leasing Act), and Regulation E (Electronic Fund Transfer Act). The FTC’s report highlights, among other things, enforcement actions, rulemaking, research, and policy development related to vehicle financing and leasing, payday lending, credit repair and debt relief, electronic fund transfers, and the agency’s Military Task Force, which focuses on various initiatives to assist military consumers.

CFPB Updates EFTA FAQs. On June 4, the CFPB updated its frequently asked questions document regarding the Electronic Fund Transfer Act to address unauthorized electronic fund transfers and error resolution issues.

CFPB Issues Spring 2021 Rulemaking

Agenda. On June 11, the CFPB issued its Spring 2021 rulemaking agenda. The agenda lists the regulatory matters that the CFPB is currently pursuing under interim leadership pending the appointment and confirmation of a permanent director. The permanent director’s changes to the regulatory agenda will be reflected in the Fall 2021 rulemaking agenda.

CFPB Examines Trends in Consumer Credit Delinquencies. On June 16, the CFPB issued the first in a series of blog posts examining trends in consumer credit outcomes during the COVID-19 pandemic. The current blog post specifically focuses on trends in delinquencies for mortgage loans, student loans, vehicle financing, and credit card accounts from July 2020 through April 2021. The report uses data from the CFPB’s Consumer Credit Panel, a nationally representative sample of approximately five million de-identified credit records maintained by one of the three nationwide consumer reporting agencies.

CFPB Issues Interpretive Rule on Authority to Conduct MLA-Related

Examinations. On June 16, the CFPB issued an interpretive rule explaining the basis for its authority to conduct examinations of supervised institutions to detect and assess risks to active-duty servicemembers and their dependents arising from conduct that violates the Military Lending Act. In 2018, during the last administration, the CFPB discontinued MLA-related examination activities based on its belief that Congress did not specifically confer examination authority on it with respect to the MLA. The current CFPB leadership does not find those prior beliefs persuasive, and the CFPB will now resume MLA-related examination activities.

NCUA Removes Prohibition on Capitalization of Interest for Loan

Workouts and Modifications. On June 24, the NCUA approved a final rule that removes the prohibition on the capitalization of interest—i.e., the addition of accrued but unpaid interest to the principal balance of a loan— in connection with loan workouts and modifications but maintains the prohibition on a credit union capitalizing credit union fees and commissions. The final rule also establishes certain consumer protections, like ability to repay requirements, to help ensure that the addition of unpaid interest to the principal balance of a loan does not hinder the borrower’s ability to make payments or become current on the loan.

CASE(S) OF THE MONTH

Courts Discuss Military Lending Act's Applicability to Motor Vehicle Retail Installment Contracts that Financed Items in Addition to Cars: Two cases we report on this month discuss whether the Military Lending Act applies to motor vehicle retail installment contracts that financed items other than just the cars being purchased.

In the first case, a servicemember entered into a retail installment contract with a dealership to finance his purchase of a used vehicle as well as add-on items, such as a GPS system and GAP coverage. The RIC also included an arbitration provision. The servicemember sued the dealership, and the dealership moved to compel arbitration. The magistrate judge recommended that the motion to compel arbitration be granted, and the servicemember objected.

The U.S. District Court for the Middle District of Florida adopted the magistrate judge's recommendation to enforce the arbitration provision. The servicemember argued that the MLA prevented the dealership from compelling arbitration. The MLA states that an agreement to arbitrate a dispute involving an extension of consumer credit is void and not enforceable against certain groups, including active-duty servicemembers.

However, the MLA exempts from the definition of "consumer credit" "a loan procured in the course of purchasing a car or other personal property, when that loan is offered for the express purpose of financing the purchase and is secured by the car or personal property procured[.]" Department of Defense regulations also exempt from the definition of "consumer credit" any "credit transaction that is expressly intended to finance the purchase of a motor vehicle when the credit is secured by the vehicle being purchased." The servicemember argued that the bundling of the GPS system and the GAP coverage in the RIC removed his credit transaction from the MLA's exemption.

Various DoD interpretive rules have addressed whether a credit transaction involving the financing of a vehicle and other items related to the purchase of the vehicle is subject to the MLA's exemption, but the court noted that "[i]nterpretive rules do not have the force and effect of law and are not accorded that weight in the adjudicatory process."

The court interpreted the phrase "when that loan is offered for the express purpose of financing the purchase" to determine whether the servicemember's RIC was subject to the MLA's exemption. The court found that the RIC specifically states that it is intended to finance "the Vehicle." The majority of the financed amount in the RIC is attributable to the vehicle price. Moreover, "[a]ll of the additional items bundled into the [RIC], apart from the vehicle, were only purchased because the vehicle was purchased. Without the vehicle's purchase, the other items would not have been purchased. The vehicle is at [the] epicenter of the transaction while the costs for items such as a GPS are ancillary and specifically tied to the vehicle. The presence of the other add-on items does not alter the [RIC's] express purpose, i.e., the purchase of the vehicle."

Accordingly, the court concluded that the servicemember's RIC was exempted from the definition of "consumer credit" in the MLA and DoD regulations and, therefore, that the dealership could enforce the arbitration provision in the RIC. See Juarez v. Drivetime Car Sales Company, LLC, 2021 U.S. Dist. LEXIS 103702 (M.D. Fla. June 1, 2021).

In the second case, a servicemember entered into a retail installment contract with a finance company in connection with his purchase of an SUV. The servicemember sued the finance company for violating the MLA by failing to disclose various fees, failing to disclose the true cost of credit, and requiring him to submit claims to arbitration.

The finance company moved to dismiss the complaint, and the U.S. District Court for the Eastern District of Virginia granted the motion.

In 2016, the DoD issued an interpretation of the MLA exclusion for financing the purchase of personal property. That interpretation stated that credit that a creditor extends for the purpose of purchasing personal property that secures the credit is not exempt from the MLA's definition of "consumer credit" if the creditor simultaneously extends credit in an amount greater than the purchase price.

In 2017, the DoD issued a similar interpretation of the MLA exclusion for financing the purchase of a motor vehicle where the creditor simultaneously extends credit in an amount greater than the purchase price of the motor vehicle being purchased. That interpretation, Q&A #2, stated that whether such a transaction is exempt from the MLA's definition of "consumer credit" depends on what the credit beyond the purchase price is being used to finance. If the extra credit is used to finance a product or service expressly related to the vehicle, then the transaction is still covered by the exception and is not subject to the MLA. If, however, the extra credit is used to finance a credit-related product or service, such as GAP insurance or a credit insurance premium, then the transaction would not be covered by the exception and would be subject to the MLA.

In 2020, the DoD withdrew the 2017 interpretation. The servicemember argued that, despite the withdrawal of Q&A #2, his RIC was subject to and violated the MLA because it included GAP coverage, a processing fee, and prepaid interest, none of which were related to the vehicle he purchased. The finance company argued that accepting this argument would amount to a reinstatement of the 2017 interpretation. The court agreed and added that even if the 2016 interpretation concerning personal property, which was not withdrawn, applied to motor vehicles, the GAP coverage, processing fee, and prepaid interest included in the servicemember's RIC are not "unrelated to the purchase of the motor vehicle; rather, they are inextricably tied to [his] purchase of the vehicle." See Davidson v. United Auto Credit Corporation, 2021 U.S. Dist. LEXIS 95302 (E.D. Va. May 19, 2021).

COMPLIANCE TIP

The Case(s) of the Month provide much needed clarity to auto dealers concerning the applicability of the MLA to vehicle retail installment transactions that include financing for ancillary products. However, note that both cases have been appealed—Davidson to the 4th Circuit and Juarez to the 11th Circuit. In addition, the DoD could reconsider the issue and publish further guidance or interpretations (though there have not yet been any indicators that it plans to do so). Dealers should remain aware of the risks presented by the MLA and its potential applicability to motor vehicle retail installment transactions. n Eric (ejohnson@hudco.com) is a Partner in the law firm of Hudson Cook, LLP, Editor in Chief of CounselorLibrary.com’s Spot Delivery®, a monthly legal newsletter for auto dealers and a contributing author to the F&I Legal Desk Book. For information, visit www.counselorlibrary. com. ©CounselorLibrary.com 2021, all rights reserved. Single publication rights only to the Association. HC# 4853-17384176