Insights

Today's Trends in Credit Regulation

States Regulate Payment Assurance Devices – Isolated Instances or the Start of a Trend?
By Daniel J. Laudicina

Payment assurance devices, in the form of GPS and so-called “starter interrupt” devices, are not new to our industry. Dealers and other creditors have been relying on payment assurance technology to reduce risk, bolster sales, and assist in asset recovery for the better part of the last decade. And, with only a handful of exceptions, states have avoided direct regulation of the devices, choosing instead to regulate their use through existing laws (including right to cure, privacy, and unfair and deceptive acts and practices laws).

However, there has been an increased focus on consumer financial regulation in response to the financial crisis of 2008, a crisis that was largely blamed on ineffective government oversight of consumer credit transactions (primarily in the mortgage market). That increased focus resulted in the creation of a federal watchdog – the Consumer Financial Protection Bureau – and a sharper focus by state legislatures on consumer credit financial regulation and practices those legislatures believe are ripe for abusive or unfair practices. Recently, that attention has turned to the payment assurance technology industry.

For instance, on September 29, 2012, California Governor Jerry Brown signed into law AB 1447. The California law, effective on January 1, 2013, was designed to provide new industry standards in response to several articles published in the Los Angeles Times alleging bad practices by buy-here, pay-here dealers. With respect to payment assurance technology, the bill prohibits a BHPH dealer from, after the sale of the vehicle, tracking the vehicle using electronic tracking devices and disabling the vehicle with starter interrupt technology unless the dealer satisfies certain disclosure requirements. Specifically, the law provides that a dealer may not disable a vehicle by using starter interrupt technology unless:

(A) the dealer notifies the buyer in writing at the time of the sale that the vehicle is equipped with starter interrupt technology, which the BHPH dealer can use to shut down the vehicle remotely;

(B) the written disclosure provided to the buyer at the time of the sale informs the buyer that a warning will be provided no less than 48 hours before the use of the starter interrupt technology to shut down the vehicle remotely and discloses the manner and method in which that warning will occur. The dealer must offer the buyer a choice of warning methods, including warning from the device, telephone call, email, or text message, if available, provided that the warning method does not violate applicable state or federal law; and

(C) in the event of an emergency, the buyer will be provided with the ability to start a dealer-disabled vehicle for no less than 24 hours after the vehicle’s initial disablement.

While the new law imposes requirements on dealers, it could have been much worse. As originally introduced, the bill would have completely banned the use of starter interrupt and GPS tracking technology in vehicle financing. What followed the bill’s introduction, however, is an example of the type of result the industry is capable of if it keeps abreast of proposed legislation, actively engages legislators about concerns with legislation, and works with interested parties in creating a law that provides the desired consumer protection in a context that is fair and workable to the industry.

Many industry members, including member companies of the Payment Assurance Technology Association, voiced objections over provisions in the original bill and engaged in a strong effort to push the bill toward a version that, if adopted, would not outlaw the devices. Some members of PATA, for instance, joined together and provided the necessary funding to engage a California lobbying firm to represent PATA’s interests in the legislation.

The bill that was ultimately enacted largely represented agreements among many interested parties, including the bill’s author, PATA, the American Civil Liberties Union, the Electronic Frontier Foundation, the Privacy Rights Clearinghouse, and Consumers for Automobile Reliability. (The ACLU, EFF, and PRC all had concerns about privacy as it relates to the use of the tracking technology.) Thus, while the California bill creates new obligations on dealers and creditors who use payment assurance technology, the industry scored a victory by working with those who initially proposed to ban the technology to reach a compromise that was acceptable to those involved in the process.

Notably, HB 1447 was not the only California legislation that would have regulated BHPH dealers. At the same time he signed AB 1447, Governor Brown vetoed SB 956. In his veto message, the governor stated that he had already signed two BHPH consumer protection bills that session, and “[i]f consumers need added protection once those bills are implemented, [his] administration will work with the Legislature to find appropriate, measured solutions.” Accordingly, it appears that California lawmakers remain open to additional regulation of BHPH dealers and, perhaps, the payment assurance industry.

In any event, we can expect other states to follow California’s lead in regulating payment assurance devices. In fact, two states introduced bills in the current legislative session. Virginia House Bill 1981, signed by the governor on March 16, 2013, generally prohibits any person from installing or placing, or causing to be installed or placed, an electronic tracking device in a vehicle “through intentionally deceptive means and without consent” and using the device to track the vehicle’s location. This bill will require full disclosure to the consumer and his or her agreement to installation and use of a payment assurance device in order to avoid claims of deceit.

Similarly, Illinois HB 1199 provides that a person or entity may not use an electronic tracking device to determine the location or movement of a person but exempts situations where the registered owner, lessor, or lessee of a vehicle has consented to the use of the electronic tracking device. Again, dealers or creditors can insulate themselves from liability by making full disclosure and obtaining consumers’ agreements to use of the devices and tracking technology. The Illinois bill is on second reading in the House.

We expect that other states will begin to more directly regulate payment assurance technology in the coming years. Dealers and creditors can go a long way in preparing themselves for state regulation by providing written disclosures and obtaining agreements from consumers regarding installation and use of the devices – a “best practice” already in widespread use in the industry.

However, those who provide and use payment assurance technology will need to be flexible in order to respond to unique state laws, such as the California law requiring a warning prior to disabling a vehicle’s starter. But, ultimately, perhaps the best lesson to come from the recent California legislation is that the industry has a strong voice in the legislative process and can, with the proper diligence and effort, affect the way states regulate its business.

Daniel J. Laudicina is a partner in the Maryland office of Hudson Cook, LLP. Dan can be reached at 410.865.5435 or by email at dlaudicina@hudco.com.

Article Archive

2019   2018   2017   2016   2015   2014   2013   2012   2011   2010   2009