Last Week, This Morning

August 5, 2024

Below you will find several key developments in the financial services industry, including related developments in information privacy and data security, from the past week. We add an "Amicus Brief(ly)¹" comment to each item, where we briefly (see what we did there?) note for friends (and again?) of CounselorLibrary the important takeaways from the developments outlined in the email. Our legal reporters - CARLAW, HouseLaw, InstallmentLaw, PrivacyLaw, and BizFinLaw - provide more comprehensive, real-time updates of federal and state laws, regulations, litigation, and other industry items of interest. For a personal guided tour and free trial of any of these legal reporters, please contact Michael Willer at 614-855-0505 or mwiller@counselorlibrary.com.

On July 26, U.S. Senators Ron Wyden and Edward J. Markey sent a letter to Federal Trade Commission Chair Lina Khan urging the FTC "to investigate automakers' disclosure of millions of Americans' driving data to data brokers." The senators noted that automakers have been sharing data from their customers' internet-connected cars, without informed consent and through use of deceptive tactics, with data brokers, which pay the automakers a per-car fee for that data.

General Motors, Honda, and Hyundai apparently confirmed to Senator Wyden's office that they disclose driver data to Verisk and other brokers, which use that information to create driver behavior reports that the brokers then sell to insurance companies. Moreover, GM confirmed that it shared location data on all drivers who activated the internet connection for their car without the drivers' informed consent.

Additionally, the senators shared that some automakers may have deceived customers by telling them that sharing their driving data would reduce their insurance bills. However, the senators stated that customers were not informed that the shared information would not necessarily result in discounts and that, as confirmed by an insurance industry trade association expert, the data might cause insurers to charge drivers higher premiums based on their data.

The senators concluded the letter by noting that the "problematic practices [they] have uncovered and documented ... are likely just the tip of the iceberg" and that, therefore, the FTC should "broadly investigate these auto industry practices" and hold automakers, data brokers, and their senior officials "responsible for their flagrant abuse of their customers' privacy."

Amicus brief(ly): The concerns expressed by the senators in their letter to Chair Kahn are consistent with those expressed by the Consumer Financial Protection Bureau and the states that have taken action to slow down the sharing of consumer data. The use of telematics in vehicles is not new, and, as with most advancements in technology, it was designed to enhance the consumer driving experience. The senators are unhappy that the car companies were sharing the data they collected with insurance companies - for compensation - without having explained to their customers the nature and extent of their data sharing. All signs from the federal and state governments that have weighed in on data-sharing practices point to increased consumer control of whether and how companies can share their data, especially for marketing purposes. The FTC was probably already following up on the article from The New York Times referenced in the senators' letter, so this is not likely to be the last we hear from the FTC about this matter. And states are likely to continue to make efforts to empower consumers to limit data sharing.

On July 26, the Consumer Financial Protection Bureau sued Acima Holdings, LLC, Acima Digital, LLC, and their former chief executive officer (collectively, "Acima") for violating the Consumer Financial Protection Act, the Truth in Lending Act, the Fair Credit Reporting Act, and the Electronic Fund Transfer Act in connection with Acima's so-called "virtual rent-to-own" product, through which Acima nominally purchases household goods selected by consumers from independent merchant partners and then purports to "lease" the goods to consumers, usually for a 12-month term. The CFPB alleges that Acima used misleading marketing and enrollment practices that materially interfered with consumers' ability to understand the nature and terms of its product and that Acima referred to its product sometimes as a leasing product and sometimes as a credit product in an attempt to avoid certain consumer financial protection laws governing only leasing or only credit products.

Acima allegedly marketed its product to consumers as credit but later called the agreements it entered into with consumers a "lease." The Bureau alleges that the purported "leases" were actually credit. In addition, Acima allegedly marketed its 90-day "early purchase option" with misleading statements indicating that it was offering an interest-free 90-day loan or 90-day purchase for a small pre-determined fee. According to the complaint, Acima also allegedly failed to properly train and adequately monitor its merchant partners that also allegedly used misleading marketing practices in connection with the product.

With respect to Acima's enrollment practices, the complaint alleges that Acima used a mobile application process designed to interfere with the consumer's ability to understand the nature and cost of the product by, among other things, presenting the agreement through a hard-to-read mobile application that physically obscured the fine print through various formatting and design features. In addition, the complaint alleges that Acima made it unnecessarily difficult for consumers to return the goods before the end of the "lease" term.

Finally, the complaint alleges unlawful credit reporting practices by Acima. Acima allegedly furnished inaccurate information about borrowers to consumer reporting agencies. Further, when a consumer alleged fraud or identity theft, Acima allegedly refused to investigate unless the consumer submitted a police report. Acima also allegedly failed to properly notify consumers when reporting negative information and, depending on how its product is construed, may have illegally obtained and used consumer reports to target potential borrowers.

The CFPB's lawsuit seeks, among other things, injunctive relief to prevent future violations, redress for harmed borrowers, and the imposition of a civil money penalty.

Amicus brief(ly): There are several possible explanations for the CFPB filing suit against Acima as opposed to finding a resolution through a consent order, but the most likely explanation is that Acima disputes the CFPB's take on its practices. The allegations are tough, from the purported mischaracterization of the finance product to the consumer reporting allegations. Compliance professionals understand all too well the risks of recharacterization of a credit transaction and the impacts of recharacterization - including the potential for claims like the ones in this case that suggest that the provider gave the wrong disclosures under applicable law. If a court decides that a provider has miscast its product as a lease, credit sale, loan, or something else, the non-compliance conclusions follow pretty easily because of the differences in disclosure requirements by product. For that reason, the fact finding in this case will be critical. This is a case to watch, especially for lease-to-own providers.

On July 31, the Federal Trade Commission filed a complaint and proposed order against NRRM, LLC, d/b/a CarShield, a seller of vehicle service contracts, and American Auto Shield, LLC, the administrator of CarShield's VSCs. The FTC alleged that the defendants violated the Federal Trade Commission Act and the FTC's Telemarketing Sales Rule by advertising, marketing, and selling VSCs to consumers using false or deceptive claims regarding, among other things:

• the types of repairs covered under the VSCs and applicable exclusions;
• the ability to use a vehicle repair facility of the consumer's choice for repairs;
• the ability to receive a rental car at no cost when the consumer's car breaks down; and
• whether celebrity and consumer endorsers have used the defendants' VSCs or have saved the amount of money they claim to have saved by using the VSCs.

The proposed order imposes a $10 million judgment against the defendants and prohibits them from making the alleged misrepresentations in their telemarketing, testimonials and endorsements, and advertisements in the future.

Amicus brief(ly): With a proposed penalty of $10M, CarShield must believe that the FTC can prove that its marketing promises did not align with its VSC terms. That alignment is usually issue #1 for the FTC and other consumer protection agencies. And consumers are unsurprisingly quick to issue informal and then formal complaints when the product they bought turns out to be different from the product they were sold. This is a useful reminder to test and audit marketing - especially through third-party vendors - to ensure that you are not marketing something different from what you are selling.

Michigan recently enacted House Bill 5460, which amends Michigan's Motor Vehicle Sales Finance Act to allow a motor vehicle installment sale contract for a new motor vehicle to provide for unequal payments under certain conditions. The legislation also requires new disclosures and prohibits certain fees.

Before H.B. 5460 took effect, the MVSFA required that a motor vehicle installment sale contract provide for weekly, semi-monthly, or monthly payments of the time balance in substantially equal periods and amounts. There were only a few exceptions to this general rule: installment sales in which the buyer was an employee of the installment seller and balloon payments if the buyer had the right to refinance the balloon payment at a refinance charge that was not greater than the finance charge permitted by the first contract. The law also permitted contracts that extended the time for making installment payments for a period of no more than three months.

H.B. 5460 permits a motor vehicle installment sale contract to provide for unequal payments under the following conditions:

• The contract must be for the sale of a new motor vehicle.
• The installment payments must be monthly.
• The amount of any payment cannot increase more than 40% from the first scheduled payment.
• The amount of each payment must not exceed the buyer's maximum payment threshold, as determined by the installment seller or the sales finance company at the time the buyer completes the installment sale contract.

To accommodate this new exception, H.B. 5460 adds the following new definitions to the MVSFA:

• "New motor vehicle" means a motor vehicle that is not and has not been a demonstrator, an executive or manufacturer's motor vehicle, a leased motor vehicle, or a used or secondhand motor vehicle.
• "Used or secondhand motor vehicle" means a motor vehicle to which a certificate of title and license plates have been issued and which has been registered for use on the highways by a consumer or a dealer.

H.B. 5460 amends Section 13 of the MVSFA to require that the following new disclosure be included prominently in any installment sale contract for a new motor vehicle in 12-point type or larger directly below the federal Truth-In-Lending disclosure box:

"Notice: Customer should review the payment schedule to determine if the contract requires payments in equal amounts."

As amended by H.B. 5460, the MVSFA now prohibits the following fees related to a new motor vehicle installment sale contract that requires unequal monthly payments:

• a fee based solely on the fact that the installment sale contract requires payments in unequal amounts instead of payments in equal amounts; and
• a fee related to the prepayment of the unpaid time balance under the installment sale contract due to the resale of the motor vehicle.

These new requirements take effect immediately, with no grace period to give installment sellers, sales finance companies, and forms providers an opportunity to update their policies, procedures, or forms. For example, Section 13 of the MVSFA now requires a change to every contract for the installment sale of a new vehicle. Generally, these kinds of changes cannot be implemented overnight. Note, however, that the MVSFA also has a "safe harbor" provision stating that compliance with the federal Truth in Lending Act is deemed to be compliance with the disclosure provisions of Section 13 of the MVSFA. In most instances, motor vehicle installment sales must comply with TILA, and contract forms are designed to do so. Any installment sale contract that complies with TILA should (based on the "safe harbor" provision) also comply with Section 13's new disclosure requirement, even if that contract does not include the most recent notice instructing consumers to review their payment schedules.

Amicus brief(ly): As unusual as it is for an amendment like this to be effective immediately, compliance professionals should remember that just because you can offer terms that differ from the typical terms you could offer before does not mean that you have to offer terms that your contract or systems cannot handle. Program adjustments that take these updates into account should wait until pre-printed contracts accurately reflect the terms and newly required disclosures and servicing systems can accommodate different payment schedules. We like to identify trends for you in this report, but this has the trappings of a one-off bill in Michigan designed to address a specific need or desire, but state bills with these kinds of changes are not common at the moment.

On August 2, the Department of Housing and Urban Development published a final rule in the Federal Register, Modernization of Engagement with Mortgagors in Default. The rule, which adopts the July 31, 2023, proposed rule with only minor, non-substantive changes, updates HUD's current regulation that requires mortgagees of Federal Housing Administration-insured single family mortgages to meet in person with borrowers who are in default on their mortgage payments. For most mortgages insured pursuant to 24 CFR Part 203 - Single Family Mortgage Insurance - the amended rule:

• allows mortgagees to use electronic and other remote communication methods for conducting interviews with borrowers to satisfy FHA's early default intervention requirements;
• eliminates the requirement that mortgagees make at least one trip to the mortgaged property to schedule a meeting with the borrower; and
• expands the meeting requirement to include borrowers who do not reside in the mortgaged property or have a mortgaged property that is not within 200 miles of their mortgagee, its servicer, or a branch office.

According to HUD, "this final rule will improve mortgagee engagement with mortgagors, reduce the cost of mortgage default servicing, and align HUD's regulations with advancements made in electronic communication technology and in mortgagor communication preferences, while preserving consumer protections." The amended rule is effective January 1, 2025.

Amicus brief(ly): Industry data is telling us that consumer credit card debt balances and delinquencies have been on a steady rise over the past year or so, suggesting that these updates from HUD will be welcome for consumer borrowers struggling to make payments on their mortgages. Loss mitigation efforts introduced 10 or so years ago as a result of the housing finance crisis have proven effective at keeping consumers in their mortgages. This rule makes it easier for borrowers to connect with servicers and work toward preventing default, which serves all interests well. The effective date is four months out, which will allow for adjustments in policies and procedures to accommodate these new, more flexible, requirements.

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¹ For the unfamiliar, an “Amicus Brief” is a legal brief submitted by an amicus curiae (friend of the court) in a case where the person or organization (the “friend”) submitting the brief is not a party to the case, but is allowed by the court to file the brief to share information or expertise that bears on the issues in the case.