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6 Lawsuits to Watch and Lessons Learned

  • Natalie Mattila
  • August 30, 2017
  • 0

As the powersports industry grows, regulatory scrutiny will also increase, prompting lenders to devote more time and resources to compliance due diligence, several lawyers told Powersports Finance.

Powersports lenders are already on regulators’ radars, because they have been particularly focused on the auto finance industry, and the powersports industry is considered by many as a subset of auto finance.

As such, lenders can learn from litigation in auto finance and peripheral markets to bolster compliance practices and prepare for increased regulatory attention.

Here are six lawsuits lenders should be paying attention to right now — and some of the key takeaway lessons:

1. Wells Fargo Insurance Scandal

Wells Fargo Dealer Services charged between 570,000 and 800,000 consumers for a force-placed auto insurance policy borrowers had already purchased from an outside source. The practice sent nearly 274,000 borrowers into delinquency between 2012 and 2016, according to a 60-page report prepared by consulting firm Oliver Wyman. The bank also wrongfully repossessed some 25,000 vehicles, including those of active-duty military members.

Wells Fargo confirmed that the practices took place, and agreed to refund $80 million to consumers affected. The lender is also still determining the full impact this policy had on active-duty servicemembers, a spokeswoman told sister publication Auto Finance News.

“We have a huge responsibility and fell short of our ideals for managing and providing oversight of the third-party vendor and our own operations,” Franklin Codel, the head of consumer lending at Wells Fargo, said in a statement. “We self-identified this issue, and we made the right business decisions to end the placement of the product.”

Lender-placed insurance has been and continues to be an increasing area of focus for regulators and in civil litigation, John Redding, partner at Buckley Sandler LLP, told Powersports Finance.

“It’s an area in which consumers will frequently end up paying more in premium for coverage than they otherwise would if they were to obtain insurance themselves. That’s the reason so many notices are sent in advance of using lender-placed insurance and even after it’s been placed — informing consumers of what will and has taken place and what consumers can do to eliminate that insurance.”

2. Santander Settlements in Massachusetts and Delaware

Santander Consumer USA entered into a $25.9 million written agreement with the Attorneys General of Massachusetts and Delaware in March over allegations that the company funded loans consumers could not reasonably repay and knew about a network of dealers offering these loans, but did not stop it. Those allegations were from 2015, and Santander claims it has since changed policies.

“While somewhat limited in scope, given that it only involves Massachusetts and Delaware, it presents an interesting and instructive view of ability to repay and also the need to take action when you learn that a dealer is allegedly engaged in wrongful acts,” Redding said.

“Basically, the states settled a case on the underlying assumption that because the financial institution has knowledge of what was occurring but allegedly failed to take steps to prevent that conduct going forward, that the institution was therefore responsible,” Redding said. “The key takeaway form that is that where a finance source is aware of activities taking place at the dealership that may cause harm to consumers; they need to take action to address that potential for harm.”

3. Mensie vs. Toyota

An Arkansas woman, Marian Mensie, filed a suit against Toyota Motor Credit Corp., alleging the captive failed to abide by the terms set in Mensie’s GAP coverage contract.

In April 2015, Mensie’s vehicle was involved in an accident, totaling her vehicle with $38,100 still due on the loan, according to the case filing from February. Her primary insurance provider paid Toyota Motor Credit $24,431 — the value of the vehicle, and Toyota paid Mensie $4,000 for the unused portion of a mechanical repair agreement and a prepaid maintenance agreement. That left a $10,000 “gap” between the money she still owed TFS under her contract and her cash settlement, according to the filing.

Mensie claims that contrary to the terms of the GAP contract, Toyota did not waive the her liability for the $10,000 “gap.” Instead, the captive waived $7,997 and notified the consumer that she was liable to Toyota for the remaining $2,328 owed under the contract.

“When we look at the marketing and sale of GAP products, it’s important to make sure that the marketing and sales practices accurately and conspicuously inform consumers of the benefits and limitations of those products,” Redding said. “We have to recognize that most of the activity taking place in that regard happens at the dealership. These are not products that the finance source is selling, these are products the dealer is selling. To the extent a financier is providing support materials or other information, we just need to make clear that the benefits and limitations are clearly spelled out for consumers. Otherwise, the UDAPP (unfair, deceptive, or abusive acts or practices) risk is heightened. Regulators have never liked ancillary products.”

4. SNAAC Consent Order

Security National Automotive Acceptance Co. (SNAAC) was issued a consent order by the Consumer Financial Protection Bureau in April, claiming the lender did not properly repay military service members harmed in a 2015 consent order from the bureau, and instead rewarded “worthless credits” to the consumers.

SNAAC offered to “pay all the disputed amounts in order to move forward,” after it discovered there was an issue with the refunds from the 2015 consent order, but the CFPB declined, and instead opened an inquiry, the lender said in a statement sent to sister publication Auto Finance News. SNAAC said it fully cooperated with the investigation and has decided to pay all fees “without admitting” to the CFPB’s findings.

SNAAC was fined an additional $1.2 million on top of the original consent order and repayment costs. The issue was that the lender issued credits to affected servicemembers rather than cash refunds. These credits were worthless to consumers who already discharged their debt in bankruptcy and others unknowingly received more credits than thought they were owed and wound up overpaying out of pocket. 

“The April order is significant because it demonstrates that entering a consent order with the CFPB is not the end of a matter — CFPB will monitor and penalize lack of compliance,” Molly Calkins, partner at Akerman LLC, told Powersports Finance.

5. DOJ Settlement With Evergreen Bank Group

In May 2015, the Department of Justice reached a settlement with Oak Brook, Ill.-based Evergreen Bank Group to resolve allegations of discriminatory lending practices relating to indirect motorcycle lending. The consent order required the bank to pay $395,000 in consumer redress and to implement dealer compensation policies.

Overall, to prepare for regulation, lenders and buy-here, pay-here dealers “should be cautious of how they are upselling consumers on ancillary products, how they are doing their advertising, and whether those ads are vetted through the Truth in Lending Act,” David Gemperle, partner at Nisen & Elliott’s auto finance group, said last year. Financial providers should also assume fair lending “applies to everybody” and adopt an appropriate policy.

6. TransUnion Settlement With the CFPB

TransUnion agreed to pay the CFPB $19.4 million in the fourth quarter of 2016 for allegedly deceiving consumers about the usefulness and cost of credit scores they bought, according to a January 2017 press release.

In connection with the agreement, the CFPB required TransUnion to implement certain agreed practice changes in the way TransUnion advertises, markets, and sells products and services offered directly to consumers. The CFPB also required the company to develop a comprehensive compliance plan detailing the steps for addressing each action required by the terms of the consent order and specific timeframes and deadlines for implementation.

Also, approximately $13.9 million of the settlement will be used to compensate eligible consumers, and $3 million will be used to pay a civil money penalty to the CFPB, according to an 8-K filed with the Securities and Exchange Commission. An estimated $2.5 million will also be put towards additional administrative, legal, and compliance costs incurred by TransUnion in connection with the settlement.

Many financial institutions rely on credit scores from TransUnion when lending money, but the CFPB claimed TransUnion “falsely represented” that the credit scores they sold to consumers were the same scores that lenders used, according to a published report.

Calkins, Redding, and Gemperle will all speak on a panel entitled “Regulatory Compliance Update” at the upcoming PowerSports Finance 2017 conference, which is slated for Oct. 24-25 at the Wynn Las Vegas. During the session, the lawyers will discuss alerts on new rules and guidance, lessons in proactive regulatory compliance, dealer marketing and management, and more.

Other sessions include: Finding Loan Growth Amid Increasing Competition, F&I Dos and Don’ts, and Regulatory Compliance Update. The full agenda can be viewed here. To learn more — or to register — for this year’s event, visit the PowerSports Finance 2017 homepage here.

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