Regulators Take the Wheel in Auto Financing Actions

Financial Services Law

Donna L. Wilson

CEO and Managing Partner, Co-Leader, Privacy and Data Security

From the Department of Justice (DOJ) to the Massachusetts attorney general, auto financing has been the subject of several recent actions.

What happened

The DOJ filed suit against a California-based indirect auto financing company and related auto title lender, accusing the defendants of illegally repossessing at least 70 vehicles owned by protected service members in violation of the Servicemembers Civil Relief Act (SCRA). Both companies targeted junior enlisted service members for their loans and products, the DOJ said.

Section 3952 of the SCRA requires that a court review and approve a lender’s repossession of any motor vehicle owned by a service member if the service member took out the loan and made a deposit or an installment payment before entering military service. Lenders typically rely on the Department of Defense-operated Defense Manpower Data Center (DMDC) database, which they can use to verify a service member’s status.

But from Oct. 21, 2011, through Oct. 21, 2016, the defendants initiated and completed at least 70 repossessions of motor vehicles owned by SCRA-protected service members without court orders, the DOJ alleged. Although the defendants’ policies required them to check the DMDC database to confirm military status prior to granting a rate reduction under the statute, the policies did not mandate that the defendants check the database prior to repossessing vehicles, according to the complaint filed in California federal court.

Alleging the conduct of the defendants was “intentional, willful, and taken in disregard for the rights of service members,” the DOJ sought civil penalties, monetary damages, and an injunction to stop the violations of the SCRA.

The parties reached a deal. Going forward, the defendants are prohibited from repossessing an SCRA-protected service member’s motor vehicle without first obtaining a court order or valid SCRA waiver, and they must establish “enhanced” policies and procedures to ensure compliance with the statute. As part of the new policies, the defendants must search the DMDC database and designate specific employees who are trained on the protections of the SCRA and responsible for any inquiries from service members.

A list of repossessions between Oct. 22, 2016, and the effective date of the settlement must be provided to the DOJ as part of the settlement so the agency can check for additional SCRA violations. The defendants also agreed to pay $700,000 to the affected service members as well as almost $61,000 in civil penalties to the U.S. Treasury.

In Massachusetts, Attorney General Maura Healey announced a case against a “Buy Here Pay Here” used car dealership that provides in-house car loans to consumers who purchase its vehicles at four locations in the state. The company sells only one product: a bundled car sale, financing and repair service arrangement program.

According to the AG, however, consumers who purchase the program “get saddled with poor-quality cars for which they often pay more than double the cars’ fair market retail value,” combined with an extended service contract at a fixed price, all with interest set at 19.95 percent, regardless of credit qualifications.

The defendant’s business model traps vulnerable consumers in unsustainable deals, the complaint alleged, resulting in a repossession rate of over 50 percent. Adding to the problem: misleading marketing and sales tactics that overstate the condition of the cars and “purposefully obfuscate material components of [the] package,” the AG said.

For example, the defendant never tells consumers the price of the car they are purchasing until closing, leaving them unable to evaluate whether the price is fair and consistent with those of other dealers, the complaint alleged, while the extended service contract is of “limited value” given the extensive exclusions and deductible applied to each covered repair.

The AG also objected to the defendant’s practice of requiring a deferred down payment to obtain financing, set up as large scheduled payments made on a periodic basis after the deal closes but before the contractual loan payments begin. These payments always exceed the regular monthly payment, the complaint alleged, and because the defendant does not evaluate consumers’ financial ability to afford the payments, “hundreds” of deals fail during this period.

To encourage salespeople to close deals, the defendant incentivizes its employees with bonuses to approve even unaffordable deals that it knows consumers will be unable to pay for, the AG added.

“When consumers purchase the [defendant’s program], they are set up to fail,” according to the complaint. “The expensive upfront [deferred down] payments place consumers in financial stress at the outset of the deal, the high monthly payments bring them to the edge [of] or beyond their budget and the faulty underwriting puts through loans that should have been declined. The old, high mileage cars need frequent repairs, requiring consumers to take time off work and find the money to cover repair costs not covered by the expensive extended service contract. [The defendant’s] cars are marked so high above retail value that selling the car to fully pay off the loan is not an option.”

The state court complaint seeks restitution, injunctive relief, civil penalties, and reimbursement of the AG’s costs and expenses as remedies for the defendant’s allegedly unfair and deceptive acts and practices.

To read the DOJ’s complaint, click here.

To read the DOJ’s settlement agreement, click here.

To read the Massachusetts attorney general’s complaint, click here.

Why it matters

The DOJ action came to the attention of the agency via the Consumer Financial Protection Bureau’s Office of Servicemember Affairs, which notified the agency in 2016 that it had received a complaint about the defendants. “The members of our armed forces should be able to devote their full attention to their duties without having to worry about whether their legal rights will be violated by creditors,” Acting Assistant Attorney General John M. Gore said in a statement. “We honor all service members for their sacrifice and service to our nation, and this settlement signals our ongoing commitment to protecting the rights of our men and women in uniform.” Vehicle finance companies should also take care in Massachusetts, where in addition to the most recent action, AG Healey already reached a nearly $1 million agreement with a dealership earlier this year requiring it to pay restitution and civil penalties and to forgive loans for misleading consumers about its pricing and the quality of its cars.

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