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On March 28, the Department of Justice (DOJ) brought another lawsuit against an auto finance company alleging the company violated the Servicemembers Civil Relief Act (SCRA) by repossessing vehicles owned by servicemembers without obtaining necessary court orders.

The case, brought against California Auto Finance, was preceded by an investigation that DOJ launched after receiving a single complaint from a servicemember. According to DOJ, the servicemember whose car was repossessed complained that the company had no process to determine customers’ military status.

Notably, the lawsuit filed in federal court does not allege other specific instances of improper repossession beyond the one alleged by the individual servicemember who complained. Rather, DOJ argues that because the company “had, and still has, no policies or practices in place to verify the military status of borrowers before repossessing their vehicles,” the company “may have repossessed motor vehicles, without court orders, from other servicemembers who had made a deposit or installment payment to [California Auto Finance] prior to entering military service and were in military service at the time of the repossession.” Per the complaint, this amounts to “a pattern or practice of violating Section3952(a)(1) of the SCRA, 50 U.S.C. § 3952(a)(1).”

Allegations that a defendant failed to perform an SCRA scrub have become a recurring feature of DOJ complaints in this area, although it’s worth noting that the statute itself does not require checking the Department of Defense’s Defense Manpower Data Center database to verify military status, as opposed to using other methods to determine whether a borrower might be a servicemember. Rather, this apparent requirement has evolved over the course of various consent orders.

DOJ is seeking monetary damages, civil monetary penalties, and injunctive relief to “prevent future repossession that violate the SCRA.”

This suit follows several others filed by DOJ in the past year claiming SCRA violations related to vehicle repossession and disposition. In February, for example, DOJ settled with the City and County of Honolulu, Hawaii and its general contractor for towing services after alleging  these entities violated the SCRA by auctioning or otherwise disposing of motor vehicles owned by servicemembers that were deemed abandoned without first obtaining court orders. Likewise, in October of last year, DOJ entered into a settlement with Westlake Services LLC over allegations that the company and a subsidiary had repossessed vehicles owned by SCRA-protected servicemembers without obtaining the required court orders. So, while military finance in general continues to be an active area of federal enforcement, repossession and disposition is emerging as a sphere of heightened regulatory risk. Here, DOJ bringing suit in response to a single servicemember complaint and a single alleged instance of wrongful repossession speaks for itself.

 

We previously reported that several trade groups had sent letters petitioning the Department of Defense (DoD) to rescind or withdraw Question and Answer #2 (Q&A 2) from its 2016 interpretative rule for the Military Lending Act (MLA) final rule and its December 2017 amendments. Q&A 2 generated much uncertainty regarding application of the MLA’s exemption for purchase money transactions that also finance the purchase of GAP insurance.

In addition to the letters mentioned in our earlier post, the American Bankers Association (ABA) submitted a similar petition to DOD, and the National Automotive Dealers Association (NADA) and the American Financial Services Association (AFSA) likewise sent a joint letter to DoD requesting withdrawal of Q&A 2.

Both letters highlight a key concern that has arisen in light of  Q&A 2: that MLA–covered borrowers and their families are likely to have diminished access to GAP insurance as a result of Dodd’s guidance. The NADA/AFSA petition describes Q&A 2 as “drying up the availability of these products to covered members (and in some cases all consumers) overnight,” with association members “seeking to structure their transactions so as not to trigger application of the statute in the first instance by staying within DOD’s newly constricted motor vehicle financing exclusion.” The ABA letter also states that, “the new interpretation in the amendments has created uncertainty and confusion in the market and potential substantial liability for automobile dealers and lenders who in good faith relied on the plain language of the statute and regulation,” noting that because the December 2017 amendments appear to be retroactive, “vehicle financing loans made after the MLA Regulation effective date of October 3, 2016 may be void and subject to significant penalties and attorneys’ fees.”

It seems these petitions may be achieving their desired effect. We are hearing murmurings that DoD intends to rescind its prior guidance. At least one other blog has made a similar observation,  and our understanding is that the interpretation could be withdrawn as soon as May of this year. If these predictions prove true, it would be a welcome development.

 

Yesterday, the Department of Defense’s (DoD) Military Lending Act website was temporarily taken offline to accommodate various “security and performance enhancements.”

Notably, the DoD has added the ability to search using an Individual Taxpayer Identification Number (ITIN). An ITIN is a tax processing number that the IRS makes available to certain nonresident and resident aliens, their spouses, and dependents who are unable to get a Social Security Number (SSN). This change was needed in light of the fact that being a U.S. citizen is not a requirement to serve in the armed forces, and thus the prior search functionality (which only used SSNs) potentially excluded covered individuals.

The full notice posted on the website read as follows:

Changes to MLA

The MLA website will be unavailable from 4 p.m. Pacific Standard Time on Thursday, March 15, 2018 to 12 a.m. Pacific Standard Time on Friday, March 16, 2018. During that time, security and performance enhancements will be made to the MLA website to include updates to the reCAPTCHA functionality and increasing search capabilities by adding Individual Taxpayer Identification Number (ITIN) as a search parameter.

The U.S. Senate on March 14 passed S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act), by a vote of 67 to 31.  Although the Act would not make the sweeping changes to the Dodd-Frank Act found in the Financial CHOICE Act of 2017 (CHOICE Act), it, nevertheless, would provide financial institutions welcome relief from a number of specific Dodd-Frank provisions.

Representative Jeb Hensarling, Chairman of the House Financial Services Committee, has indicated that further negotiations between the House and Senate must take place before the House votes on the Act.  House Speaker Paul Ryan has taken a more conciliatory tone, commenting on the need for common sense bipartisan solutions in the final bill.  As a result, while a final bill can be expected to include changes to the Act, it is unclear how substantial those changes will be.  Assuming a final bill signed by President Donald J. Trump retains many, if not most, of the Act’s provisions, the Act should positively impact both smaller and larger financial institutions.  The Act would make a number of changes to provisions of Dodd-Frank and other federal laws regarding consumer mortgages, credit reporting, and loans to veterans and students.

On June 19, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar: Economic Growth, Regulatory Relief, and Consumer Protection Act: Anatomy of the New Banking Statute.  The webinar registration form is available here.

The Act would also reduce the regulatory burdens on financial institutions—particularly financial institutions with total assets of less than $10 billion.  Bank holding companies with up to $3 billion in total assets would be permitted to comply with less restrictive debt-to-equity limitations instead of consolidated capital requirements.  This change should promote growth by smaller bank holding companies, organically or by acquisition.  Larger institutions should benefit from the higher asset thresholds that would apply to systemically important banks subject to enhanced prudential standards.  The higher thresholds may lead to increased merger activity between and among regional and super regional banks.

Although the banking industry can be expected to view the Act positively should it become law, it falls short of the CHOICE Act in several important respects. The CHOICE Act would:

  • reduce regulatory burdens on institutions based on capital levels irrespective of asset size
  • reduce the Financial Stability Oversight Council’s powers
  • repeal Dodd–Frank’s orderly liquidation authority, and
  • scale back the CFPB’s powers.

For a summary of some of the Act’s key provisions applicable to financial institutions, click here for our full alert.

The Washington state Senate and House of Representatives have passed a bill (House Bill 1056) that would expand the coverage of the Washington Service Members’ Civil Relief Act (WSCRA) and provide additional protections to active duty service members.  The bill is now awaiting signature by the state’s Governor, who is expected to sign it.  The bill is effective 90 days after the current legislative session is adjourned, which is expected to occur by March 8.

The WSCRA is the state’s version of the federal Servicemembers Civil Relief Act (SCRA).  Like the SCRA, the WSCRA provides various protections for active duty military service members, including reduced interest rates on preexisting debts, foreclosure and eviction protections, and protections from default judgments.  On March 28, 2018, from 12 p.m. to 1 p.m ET, Ballard Spahr attorneys will hold a webinar, “Update on Federal and State Military Finance Developments.”  Click here to register.

In 2014, the WSCRA was amended to create a private right of action and to authorize the Washington state Attorney General to enforce the WSCRA.  House Bill 1056 would further amend the WSCRA by expanding its definition of “service member” to mean “an active member of the United States armed forces, a member of a military reserve component, or a member of the national guard who is either stationed in or a resident of Washington state.”  The current definition only covers Washington state residents who are members of the national guard or a military reserve component.

The bill would also add a new section to the WSCRA that allows a service member to terminate or suspend certain service contracts at any time after he or she receives orders for a permanent change of station or a military deployment for 30 days or more.

The service contracts covered by the new section are: contracts for telecommunications services from a telecommunications company; health studio services from a health studio; subscription television services from a television service provider; and internet services from an internet service provider.  To terminate or suspend a contract, a service member must provide written proof of his or her official orders.

A termination or suspension is effective upon the service provider’s receipt of the service member’s written notice of termination or suspension (which can include email notice).  The service member remains obligated to pay for services rendered before the effective date of the suspension or termination, cannot be charged a penalty, lose a deposit, or incur any additional cost due to the suspension or termination, and can reinstate the services by giving written notice to the provider within 90 days after the service member’s military service terminates.

The bill specifies that the renewed services must be on the same terms and conditions that originally applied if the service member served for no more than 12 months.  For longer service, the terms and conditions for the renewed services must be the same as those offered to any new consumer at the lowest discounted or promotional rate within the previous 12 months.

In the absence of federal action, state legislators continue to propose bills that would increase data privacy and security protections for consumers.  Any entity that does business in these states or maintains confidential information of their residents should monitor the legislation to determine whether and how the proposed changes may affect operations.

The bills are a direct reaction to Equifax’s data breach disclosure last summer.  Oregon, New York, Alabama, and Rhode Island have now joined the list of states considering new data breach legislation.  Such legislation has already been proposed in Arizona, Colorado, North Carolina, and South Dakota.

See our legal alert for an analysis of how the new bills could affect covered entities.

The Department of Justice recently announced it had entered into an agreement with the City and County of Honolulu, Hawaii (Honolulu) and its general contractor for towing services to settle a lawsuit filed by the DOJ alleging that Honolulu and the general contractor violated the Servicemembers Civil Relief Act (SCRA) by auctioning or otherwise disposing of motor vehicles owned by servicemembers that were deemed abandoned without first obtaining court orders.

The SCRA requires a person holding a lien on the property of an active-duty servicemember to obtain a court order before enforcing the lien.  The DOJ’s complaint alleges that Honolulu and the general contractor violated the SCRA in connection with the towing of vehicles belonging to three active-duty servicemembers identified in the complaint and the subsequent disposition of such vehicles without court orders.  The settlement agreement states that a DOJ investigation (which was launched in response to information provided by military attorneys), revealed that between 2011 and 2016, Honolulu auctioned 1,440 vehicles registered to individuals who had identified themselves as servicemembers on City forms during the motor vehicle registration process.

The settlement agreement requires Honolulu to compensate the three servicemembers identified in the complaint and to establish a $150,000 settlement fund to compensate other servicemembers who are identified pursuant to the notice procedure set forth in the agreement and determined by the DOJ to have been similarly harmed by SCRA violations.  Honolulu must also adopt SCRA-compliant policies and procedures for the disposition of towed vehicles and provide SCRA compliance training to employees involved in Honolulu’s abandoned vehicle program.

Such policies and procedures must include:

  • Steps to prevent the disposition of vehicles registered to active-duty servicemembers without a court order or executed SCRA waiver, such as amending the certificates for military Hawaii residents and non-residents used by Honolulu’s Division of Motor Vehicles, Licensing and Permits to include specified contact information for the servicemember and an emergency contact, and amending  Honolulu’s form for providing notice that an abandoned vehicle is in custody to inform servicemembers that they have 60 days to reclaim a vehicle, complete a power of attorney, and designate a representative to reclaim a vehicle, or complete an SCRA waiver.
  • Providing active-duty servicemembers adequate notice that a vehicle has been taken into custody by using the contact information provided in the certificates to notify the servicemember, or the servicemember’s emergency contact if the servicemember is unreachable, and providing at least 60 days for a servicemember to respond to such a notice before initiating court proceedings to auction, sell or otherwise dispose of the vehicle post-auction.
  • Providing active-duty servicemembers an opportunity to recover or relinquish a vehicle taken into custody by contractually requiring all towing companies providing services to Honolulu to accept a servicemember’s copied, scanned, or faxed power of attorney and release the vehicle to the servicemember’s designated representative upon payment of outstanding towing and storage fees and by accepting a signed SCRA waiver by a representative under a power of attorney if the power of attorney is submitted with the SCRA waiver.

 

Four trade groups have sent letters to the Department of Defense (DoD) asking the DoD to rescind or withdraw Question and Answer #2 (Q&A 2) from its 2016 interpretative rule for the Military Lending Act final rule (MLA Rule) and its December 2017 amendments to the interpretive rule.  One letter was sent by the National Association of Federally-Insured Credit Unions (NAFCU) and the Defense Credit Union Council (DCUC) and another was sent by the Credit Union National Association (CUNA) and the DCUC.

In amended Q&A 2, the DoD addressed the application of the MLA Rule’s exemptions for credit transactions that are intended to finance the purchase of a motor vehicle or personal property when the credit is secured by the purchased motor vehicle or personal property.  The amended question to which the DoD responded asked whether the exemptions would apply where the creditor simultaneously extends credit in an amount greater than the purchase price of the motor vehicle or personal property.  The DoD’s amended answer stated that the exemptions are available where credit beyond the purchase price of the object is used to finance “any costs expressly related to the that object…provided it does not also finance any credit-related product or service.”

In the amended interpretive rule, the DoD used a credit transaction that finances the purchase of a motor vehicle (and is secured by that vehicle) and also finances optional leather seats and an extended vehicle warranty as an example of a credit transaction that would be eligible for the MLA exemption.  In contrast, the DoD used a credit transaction that includes financing for GAP insurance or a credit insurance premium as an example of a credit transaction that would not be exempt from the MLA.

In their letter, the NAFCU and DCUC assert that the DoD’s interpretation, by virtually prohibiting an MLA-covered borrower’s access to GAP insurance when purchasing a motor vehicle, “has the potential to cause significant financial hardship as GAP insurance is protection against situations when the purchased vehicle is destroyed or stolen when the value of the car is less than the remaining loan balance.“  They also assert that “[u]nlike other forms of insurance coverage, there is no equivalent to GAP insurance protection provided to active duty servicemembers or their dependents by mere virtue of their service status.”  They state that they “continue to hear from {their respective credit union] members that many third-party vendors are no longer providing the option for a servicemember to obtain GAP insurance,” a result the trade groups call “a byproduct of the Department’s promulgation of Question #2.”

The letter from the CUNA and DCUC similarly asserts that the language in Q&A 2 “is harmful [to servicemembers]” and also asserts that such language is “seemingly inconsistent with a common reading of the regulatory text.”

In asking the DoD to rescind or withdraw Q&A 2, we presume the trade groups are seeking a further amendment to Q&A 2 that would provide that a credit transaction that finances the purchase of a motor vehicle (and is secured by that vehicle) can also finance the purchase of GAP insurance without losing the MLA exemption for purchase money financing.  If the DoD guidance were to be rescinded or withdrawn rather than amended, uncertainty would likely remain over the application of the MLA exemption to purchase money transactions that also finance the purchase of GAP insurance.

Last week the Department of Defense (DoD) issued an interpretive rule under the DoD’s Military Lending Act final rule (MLA Rule). The interpretive rule amends four of the “Q&A” format interpretations that DoD issued on August 26, 2016. Readers may recall that the DoD published this guidance just over one month before the MLA Rule’s October 3, 2016  compliance deadline for most products other than credit cards. This new guidance adds to these interpretations.

The first interpretation should be of particular interest to the auto finance industry. Specifically, the DoD has clarified application of the MLA Rule’s exemptions for purchases of a motor vehicle or personal property under circumstances where the creditor simultaneously extends credit in an amount greater than the purchase price of the motor vehicle or personal property. The basic rule stated by DoD is that the exemption is available  where credit beyond the purchase price of the motor vehicle or personal property is used to finance costs related to the object securing the credit. The interpretive rule offers optional leather seats and extended vehicle warranties financed in connection with a vehicle purchase as examples of items “related” to the object securing credit. In contrast, credit-related products or similar services, such as GAP insurance, credit insurance premiums, or cash advance credits, are not sufficiently “related” to the underlying purchase and thus not exempt from the MLA.

Next, the DoD stated that the MLA Rule’s limitation on creditors using a check or other method of access to a deposit, savings, or other financial account maintained by a covered borrower does not prohibit the borrower from granting a security interest to a creditor in such an account. Thus, while using a covered borrower’s account information to generate a remotely created check or remotely created payment is prohibited, taking a security interest in an account is permissible under the MLA Rule (although the practice may still be prohibited under other applicable law). Furthermore, the MLA Rule does not, according to DoD, prohibit a creditor from exercising rights to take a security interest in funds deposited into a covered borrower’s account at any time.

Finally, the DoD has provided further guidance on when creditors must check a credit applicant’s status using the DoD’s database in order to fall under the MLA Rule’s safe harbor provisions. Under the MLA Rule, using information obtained directly or indirectly from the DoD’s MLA Website is one of the safe-harbor methods for conclusively determining whether a credit applicant is a covered borrower eligible for MLA protections. Per the new interpretive rule, a creditor meets the timing requirement for the safe harbor when the creditor checks the consumer’s status at the time the consumer either initiates the transaction or submits an application to establish an account, or anytime during a 30-day period of time prior to such action.  Additionally, a creditor may qualify for the safe harbor when it checks a borrower’s status during the course of processing a consumer application for credit.

Another development worth noting  is that on December 12, President Trump signed legislation passed by Congress  to extend until January 1, 2020 a provision of the Servicemembers Civil Relief Act (SCRA) that prohibits the sale, foreclosure or seizure of a servicemember’s house for one year following the servicemember’s return from active duty. Without the amendment, the provision would have sunset on December 31, 2017.

The CFPB’s October 2017 complaint report, which the CFPB calls a “special edition” monthly complaint report, departs from the format of the CFPB’s standard monthly reports.  (The CFPB’s June and July 2017 complaint reports were also called a “special edition.”)  Instead of analyzing monthly complaint trends and highlighting complaints received about a particular product and from consumers in a particular state and city, the new report provides data on servicemember complaints on a nationwide and state-by-state basis.  Entitled “50 state snapshot of Servicemember complaints,” the report is based on data as of October 1, 2017.

The report states that nationwide, the CFPB has handled 91,482 complaints from servicemembers, veterans, and their families since 2011, and that it handled 8% more servicemember complaints in 2016 than in 2015.  Companies provided timely responses to 97% of nationwide servicemember complaints.

The report shows the top five products that were the subject of the most complaints submitted by servicemembers and non-servicemembers on a nationwide and state-by-state basis.  For each state, the report also shows the percentage of servicemember complaints to which companies provided timely responses and the top issue reported by servicemembers for each of the top five products.  It also provides a percentage breakdown of servicemember complaints by branch of military service and a state map showing the volume of complaints submitted by geocoded zip codes.

The CFPB also published a blog post about the report that focuses on the differences between complaints submitted by servicemembers and non-servicemembers.  In the blog post, the CFPB notes the following “important national highlights”:

  • Servicemembers are more likely to submit complaints about debt collection as compared to non-servicemembers (39 percent of all servicemember complaints are about debt collection, compared to 26 percent from non-servicemembers).
  • Servicemembers are less likely to submit complaints than non-servicemembers about the other top four types of complaints (i.e. mortgages, credit reporting, credit cards, checking or savings accounts).