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).

 

The FTC has entered a proposed consent order with Victory Media, Inc. (VMI) to settle the FTC’s charges that VMI violated Section 5 of the FTC Act by engaging in deceptive acts or practices in connection with its promotion of post-secondary schools to military veterans and servicemembers.

According to the FTC’s complaint, VMI creates advertising, marketing, and promotional content for schools that VMI disseminates through various media, such as magazines, and that targets veterans and servicemembers seeking new education and employment opportunities.  VMI also operates several websites directed at military consumers on which it posts articles and other information on educational topics and schools and describes itself as an advisor to such consumers on social media sites.  In addition, on one of its websites, VMI operates a search tool for military consumers seeking to identify schools in their fields of interest.

The FTC claimed that the following conduct by VMI constituted false, misleading or deceptive acts or practices in violation of Section 5:

  • Representing that its search tool only searched schools that met VMI’s “military friendly” criteria.  According to the FTC, the tool actually searched any schools that paid to be included, whether or not VMI had designated them as “military friendly.”  As a result, the tool’s search results included schools that VMI had not designated as “military friendly.”
  • Endorsing specific schools in articles, emails and social media.  According to the FTC, although they were paid advertising, VMI represented in such communications, expressly or by implication, that such endorsements were independent sources of information and not paid advertising.
  • Representing, expressly or by implication, in articles, emails and social media that it recommended specific schools.  According to the FTC, VMI failed to disclose or disclose adequately that many of such schools had paid VMI to be recommended.

In addition to reporting and recordkeeping and requirements, the terms of the proposed consent order include the following:

  • In connection with paid promotional content, VMI is prohibited from making any misrepresentations, expressly or by implication, (1) regarding the scope of any search tool, including whether the tool only searches “military friendly” schools, (2) about material connections between VMI and any schools, or (3) that paid commercial advertising is independent content.
  • In connection with any endorsement of a school (or third-party endorsement VMI prepares), VMI must clearly and conspicuously disclose, in close proximity to the endorsement, any payments or other material connections between VMI or the other endorser and the school.  For purposes of this requirement, an endorsement is any advertising message that consumers are likely to believe reflects the beliefs of a party other than the school.

Enough is enough!

I recognize that reasonable minds can differ with respect to whether the Senate should override the CFPB arbitration rule.  However, it is inexcusable when plaintiffs’ lawyers and consumer advocates blatantly distort the impact that the override of the arbitration rule will have on members of the military.

In a recent article urging the Senate not to override the arbitration rule, Philadelphia plaintiffs’ lawyer James Francis argued that the override would “strip away our right of access to the courts – a right that is especially important for service members.”  In an attempt to justify the rule, he claimed that “[m]ilitary consumers report identity theft at roughly double the rate of the general public” and linked that claim to the recent Equifax data breach.  According to Mr. Francis, “[c]lass actions are uniquely suited to helping our military.”

In a similar vein, consumer advocate Paul Bland wrote in a recent tweet that the CFPB rule is “also an attack on the rights of service members, who’ve often gotten real relief from cheating banks through class actions.”

Like some lawmakers, Mr. Francis and Mr. Bland have either chosen to ignore or have overlooked the Military Lending Act, which already prohibits the use of arbitration agreements in most consumer credit contracts entered into by active-duty servicemembers and their dependents.  Since 2007, creditors have been prohibited by the MLA from including arbitration agreements in contracts for consumer credit extended to active-duty service members and their dependents where the credit is a closed-end payday loan with a term of 91 days or less in which the amount financed does not exceed $2,000, a closed-end vehicle title loan with a term of 181 days or less, or a closed-end tax refund anticipation loan.  In 2015, the Department of Defense adopted a final rule that dramatically expanded the MLA’s scope.

The final rule extended the MLA’s protections to a host of additional products, including credit cards, installment loans, private student loans and federal student loans not made under Title IV of the Higher Education Act, and all types of deposit advance, refund anticipation, vehicle title, and payday loans. The rule applies to transactions or accounts consummated or established after October 3, 2016 for most products, and credit card accounts consummated or established after October 3, 2017.

Mr. Francis’ attempt to link the arbitration rule to the Equifax data breach is also a distortion.  As we have previously commented, the effort of consumer advocates to portray the Equifax data breach as an example of why class actions are needed to protect consumers is a tempest in a teapot.  The breach has nothing to do with the arbitration rule.  While the rule covers some credit reporting company activities, it does not appear to cover data breaches such as this one.

The United States Department of Justice announced last week that Westlake Services LLC and its subsidiary, Wilshire Consumer Capital LLC, have agreed to pay $760,788 to resolve allegations the companies violated the Servicemembers Civil Relief Act (“SCRA”) by repossessing 70 vehicles owned by SCRA-protected servicemembers without obtaining the required court orders.

The CFPB referred the matter to the Justice Department’s Civil Rights Division’s Housing and Civil Enforcement Section in 2016, after receiving a complaint that Los Angeles-based Westlake Services and Wilshire Consumer Capital were conducting repossessions in violation of the SCRA.  The Justice Department sued the companies in United States District Court for the Central District of California.

The United States’ complaint alleged that Westlake and Wilshire repossessed vehicles in violation of 50 U.S.C. § 3952(a) and 50 U.S.C. § 3953(c), respectively.  Both provisions require lenders to obtain a court order before repossessing a covered servicemember’s motor vehicle, with the latter provision extending that protection for one year following the termination of military service.  The complaint alleged the companies failed to check the Defense Manpower Data Center (DMDC) database to determine whether customers were SCRA-protected servicemembers before repossessing vehicles without a court order.

The settlement agreement requires that Westlake and Wilshire pay $10,000 per violation to each of the affected servicemembers, plus an amount to compensate them for any lost equity they suffered in the repossessed vehicle, plus interest.  The companies must also repair the credit reporting of all affected servicemembers and pay a $60,788 civil penalty to the United States.  The companies also agreed that they would not repossess an SCRA-protected servicemember’s vehicle without obtaining a court order or valid SCRA waiver in the future and that they would implement enhanced policies and procedures and training to ensure compliance with SCRA requirements.  The Settlement Agreement is available here.

This is not the first time that Westlake and Wilshire have been the target of a federal agency.  In 2015, the companies entered into a Consent Order with the CFPB under which the companies agreed to pay a $4.25 million civil money penalty and $44.1 million in refunds and debt forgiveness to borrowers for alleged unlawful conduct including engaging in debt collection practices in violation of the Fair Debt Collection Practice Act and advertising auto financing in violation of the Truth in Lending Act.  The alleged unlawful debt collection conduct included:  threatening to refer borrowers for criminal prosecution; illegally disclosing information about debts to borrowers’ employers, friends and family; and using a software program, Skip Tracy, which disguised the phone number and caller ID text information of outbound calls so that the calls appeared to originate from other callers, such as pizza delivery services, flower shops or the borrower’s family and friends.  See “Consent Order with the CFPB.”

The Military Lending Act (MLA) will apply to credit card accounts starting Tuesday, October 3. The final rule took effect last October but provided a one-year exemption for “credit extended in a credit card account under an open-end (not home-secured) consumer credit plan.” Although the final rule permits the Secretary of Defense to extend the exemption for up to one year (October 3, 2018), the DoD declined to do so and is allowing the exemption to expire next week.

The MLA final rule imposes a host of requirements in connection with extensions of “consumer credit” to active-duty servicemembers and their dependents (“covered borrowers”), including a 36-percent cap on the Military Annual Percentage Rate (MAPR), substantive oral and written disclosures, and prohibitions against subjecting covered borrowers to certain contractual terms. In particular, creditors are prohibited by the final rule from including pre-dispute arbitration provisions in consumer credit contracts extended to covered borrowers, a fact that has been overlooked (or ignored) by some proponents of the CFPB’s arbitration rule. As such, even if Congress were to repeal the CFPB arbitration rule using the Congressional Review Act, servicemembers and their dependents who are protected by the MLA would still have the right to take their cases to court.

Credit card issuers should take steps to ensure that they (and their servicers) are prepared to comply with the MLA final rule with respect to credit card accounts opened on or after Tuesday, October 3.

The FTC has launched a new page on its website dedicated to its Military Task Force.  According to the FTC, it created the Task Force “to focus on identifying the particular needs of military consumers and developing initiatives to empower servicemembers, veterans, and their families more effectively.”  The Task Force consists of representatives of different FTC divisions.

The new webpage includes links to resources for servicemembers and veterans, workshops, related FTC cases and other initiatives, and congressional testimony.