Last Week, This Morning

August 19, 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 August 13, the Consumer Financial Protection Bureau released an advisory opinion and a research report on contracts for deed, otherwise known as "land contracts," "installment land contracts," "land sales contracts," or "bonds for deed." The advisory opinion affirms the applicability of certain consumer protections and creditor obligations under the Truth in Lending Act and its implementing Regulation Z to contracts for deed. The advisory opinion describes contracts for deed as a form of home seller financing, where a homebuyer agrees to make periodic payments to the seller for a specified period of time, and the seller retains the deed to the property until the borrower completes the payments. During the contract term, the buyer has the exclusive right to occupy the home and often assumes the responsibilities of the homeowner, including paying for property taxes, insurance, and home maintenance. Contracts for deed also typically provide for forfeiture in the event of default, such as missed payments. Upon forfeiture, the seller may retake possession of the home and retain the buyer's downpayment, principal payments, any increase in home equity, and improvements made to the home.

The advisory opinion reaches three main conclusions:

• Because contracts for deed allow buyers to acquire property and defer payment, contracts for deed are generally "credit" under TILA and Reg. Z;
• Contracts for deed secured by a dwelling generally will be "residential mortgage loans" under TILA and Reg. Z; and
• Creditors selling homes using contracts for deed must comply with applicable requirements under TILA and Reg. Z.

The CFPB's research report on contracts for deed makes the following key findings:

• Many contract for deed loans involve the sale of substandard housing that require buyers to make expensive repairs and improvements, title defects that can limit the buyer's ability to assume legal title to the home, and inflated home prices and interest rates;
• Contract for deed loans surged during the recession between 2007 and 2016 when investors purchased foreclosed homes in bulk at low prices and then resold and financed many of these homes through contracts for deed;
• Contract for deed loans are disproportionally concentrated in low-income, Black, Hispanic, immigrant, and some religious communities; and
• Contract for deed loans can harm housing markets by causing or perpetuating substandard housing stock, inflated home prices, and less access to mainstream mortgage credit.

Amicus brief(ly): Though you would not necessarily derive this information from the CFPB's report, a contract for deed transaction is actually a viable tool in the affordable housing market, and not every provider is a predator with designs to take unfair advantage of consumers. State law allows for this form of seller-financed home buying, which is different from traditional mortgage lending, and the CFPB has no trouble making laws that facially do not apply to this type of transaction apply by a wave of its regulatory wand. As has become commonplace for the CFPB, the report and advisory opinion rely on examples showing that "some" contracts for deed are bad and that "in some cases" things can go wrong, without quantifying the frequency or sharing what might be inconvenient facts in its narrative, which paints the industry in a very specific (dim) light. It is true that there is some risk to consumers with respect to contracts for deed; there is also risk to providers that consumers whose creditworthiness is imperfect will not make payments. In the appendix to its report, the CFPB takes us through the unfortunate history of the product, but it could be a little more honest about the state of the industry today. This rulemaking-through-advisory-opinion might be a good case for a post-Loper Bright industry challenge to the CFPB's interpretation.

On August 16, Rohit Chopra, the director of the Consumer Financial Protection Bureau, released a blog post about the Bureau's May 2024 interpretive rule that concluded that Buy Now, Pay Later products are subject to certain provisions of Regulation Z applicable to credit cards and the Bureau's intention to issue Frequently Asked Questions regarding the interpretive rule.

Director Chopra states: "We received feedback through the comment period [for the interpretive rule] and held meetings with Buy Now, Pay Later providers to answer questions, including about which sections of Regulation Z specifically apply to different business models. Many Buy Now, Pay Later lenders are working diligently and in good faith to come into compliance. To support this transition, respond to questions we received in the comments, and ensure all entities benefit from the clarifications provided in those meetings, we plan to issue a set of Frequently Asked Questions next month to help lenders make transitions. In addition, the CFPB does not intend to seek penalties for violations of the rules addressed in the interpretive rule against any Buy Now, Pay Later lender while it is transitioning into compliance in a good faith and expeditious manner. We expect that other federal and state regulators will follow the same path."

Amicus brief(ly): The CFPB's position on the regulation of BNPL transactions under TILA's credit card rules still feels strained, but Director Chopra opens this blog post by stating that the Bureau promotes innovation in the market by "increasing transparency about how existing laws apply to emerging products." In the absence of specific regulation of a new product that does not fit squarely into any regulatory regime, innovative providers often analogize their products to an existing product to try and figure out what sort of disclosures to give and what rules might eventually apply to the new product. The CFPB says that its pending FAQs (coming in September) will address how BNPL providers should transition their products to comply with certain TILA credit card lending requirements. While the Bureau appears impatient with regard to regulating BNPL, eschewing a formal rulemaking and moving right into the interpretive rule and the pending FAQs, specific guidance about how it views the product is useful. Knowing and adhering to the Bureau's compliance position should help providers avoid long and adversarial investigations.

On August 15, the Federal Trade Commission and the State of Arizona announced that they filed a complaint and obtained a proposed court order against Coulter Motor Company, LLC, an Arizona-based company that operates two vehicle dealerships, and its former general manager for misrepresenting the price of new and used vehicles in advertisements, unfair and deceptive add-on practices, and discriminatory financing practices, in violation of the FTC Act, the Equal Credit Opportunity Act, and the Arizona Consumer Fraud Act.

The complaint alleges that Coulter's advertisements on its own websites and third-party websites misrepresented prices for new and used vehicles and that, when consumers visited the dealerships and began the purchase process, they learned that the actual price of the vehicle was often hundreds or thousands of dollars more than advertised due to a previously unmentioned "market adjustment," purportedly for preinstalled add-ons, and other miscellaneous fees. The complaint also alleges that the "Defendants' advertisements on third-party websites do not mention the additional charges. And Defendants obscure any reference to these charges on their websites at the bottom of the page, only visible if consumers scroll, or behind small gray hyperlinks appended to its advertisements. Even if a consumer were to find this information, it does not indicate whether the listed charges are part of, or in addition to, the advertised price."

With respect to the unfair and deceptive add-on practices allegations, the complaint alleges that the defendants charged consumers for add-ons that they did not agree to purchase, falsely claimed that add-ons were required, and charged consumers twice for the same add-on, once individually and again as part of an add-on "package." Add-ons included items such as theft protection, paint coating, window tint, vehicle identification number etching, and nitrogen tires. The complaint references a survey of consumers who purchased or leased vehicles from Coulter that found that 92% of those surveyed were charged for at least one add-on without their authorization or because they thought it was required.

Finally, the complaint alleges that the defendants, when arranging vehicle financing for Latino consumers, charged them higher interest rate mark-ups than similarly situated non-Latino white consumers. In addition, the defendants allegedly charged Latino consumers more in add-on costs than similarly situated non-Latino white consumers.

Under the proposed court order with the FTC and the State of Arizona, the defendants are required to pay a $2.6 million judgment, $2.35 million of which will be used to provide refunds to harmed consumers. Among other things, the order also requires Coulter to establish a comprehensive fair lending program that includes appointing a fair lending officer, conducting employee training, and implementing policies for charging fees and markups.

Amicus brief(ly): If the facts alleged in this complaint and proposed order are true, but the issues are unfamiliar to you, then we recommend you spend some time with these documents and their policies and procedures to make sure these avoidable problems are not present in your companies. Regulators and attorneys general have long found alleged bait-and-switch pricing techniques to be problematic and actionable under unfair and deceptive trade practices laws. The same is true when it comes to charging consumers for optional add-on products without clear disclosure and consent. The fair lending issues that arise as a function of pricing discretion have a long history in public enforcement actions and are avoidable with careful pricing practices. The proposed redress of $2.6 million is an expensive lesson to learn about practices we know are problematic.

On August 13, Texas Attorney General Ken Paxton sued General Motors and OnStar LLC, a subsidiary of GM that provides subscription-based security, navigation, and diagnostic services, for false, deceptive, and misleading acts and practices related to the collection, use, and sale of GM customers' driving data, in violation of the Texas Deceptive Trade Practices-Consumer Protection Act. This lawsuit comes on the heels of a July 26 letter sent by two U.S. senators urging the FTC to investigate automakers' disclosure of driving data to data brokers without informed consent and through the use of deceptive tactics.

The Texas AG's complaint alleges that GM uses technology in most 2015 model year or newer GM vehicles to collect, record, analyze, and transmit highly detailed driving data of its customers. The driving data collected and sold by GM allegedly included data from over 14 million of its vehicles and the data of more than 1.8 million Texans. The AG's complaint alleges that GM sold this driving data to other companies, including for the purpose of generating "Driving Scores" about GM's customers and selling these scores to insurance companies. Insurers could then, according to the complaint, use these Driving Scores to make insurance coverage and insurance premium decisions. In addition, the AG's complaint alleges that GM misrepresented to the companies purchasing the driving data that its customers had consented to the collection, use, and sale of that data. GM allegedly used misleading and deceptive tactics to obtain customers' "consent" to enroll in OnStar products by making enrollment part of its "onboarding" process, which took place immediately after customers bought or leased a vehicle at the dealership. According to the complaint, customers viewed the onboarding process to be a "mandatory pre-requisite to taking ownership of the vehicle," and GM "incentivized dealership employees, often through commissions, to enroll customers in its Driving Data collection scheme which ... resulted in many customers being enrolled without their knowledge or consent. Further, if a customer attempted to decline to enroll, they would be shown various 'warning' messages which represented that declining would result in the de-activation of several of their vehicle's safety features."

The Texas AG is seeking an order that permanently enjoins the defendants from violating the Texas DTPA, imposes civil penalties, provides restitution to harmed consumers, and requires the defendants to destroy all driving data collected, including driving data in possession of any third party.

Amicus brief(ly): Data use and sharing issues continue to be prominent concerns for regulators. The FTC letter referenced in our summary above highlights those concerns that are now the subject of this suit in Texas. Companies should be actively reviewing their data collection and use policies to ensure that their customers understand what information companies are gathering about them and how they are using that information. This issue is not going away.

Illinois Governor J.B. Pritzker recently signed Senate Bill 2919, which allows judicial foreclosure sales in Illinois to be conducted online. S.B. 2919 adds a new Section 15-1507.2 to the Mortgage Foreclosure Article of the Illinois Code of Civil Procedure to govern online judicial sales.

S.B. 2919 allows the person conducting the sale to engage a third-party online sale provider to assist with performance of the online sale and charge an additional fee - not to exceed $400 for any foreclosure involving residential real estate unless a higher fee is approved by the court - for costs associated with conducting the sale online. The new law requires the person conducting the sale online to obtain court approval and demonstrate documented processes and procedures for conducting online auctions, adequate recordkeeping, and adequate data security. If the sale takes place online and in person, all bids accepted during the auction must be simultaneously announced at the in-person sale and visible to the public online at the time the bids are placed. The new law also prohibits a fee from being charged to the public to view properties for sale online or to participate in any auction in person or online. Persons seeking to bid online are required to complete a registration form and have their identity verified before a bid can be placed. In addition, the new law provides that the purchaser at the online sale submit to the person conducting the sale certain specified information prior to the sale being finalized. Finally, the person conducting the sale and the third-party online sale provider may engage in activities to promote and market the sale to encourage and facilitate bidding, including listing the property on real estate websites and conducting email campaigns, and must pay all fees and expenses incurred in connection with such activities.

S.B. 2919 also adds Section 15-1510.1 to provide that no fee, including a buyer's premium, may be charged to a third-party bidder or purchaser who is not a party to the case at the sale of real estate beyond the winning bid amount to cover an expense of conducting the sale.

Amicus brief(ly): This is an interesting and apparently first-of-its-kind state law allowing for online judicial foreclosure sales. It appears to be carefully considered, and, with a long history of judicial foreclosure sale experiences to draw from, Illinois has created an easier, virtual environment for those sales that may provide a roadmap for other states to follow. The virtual format may be less expensive, ultimately saving mortgage holders and consumers money when foreclosure becomes unavoidable. And the guardrails requiring registration by bidders and specific information from the successful buyer at the sale appear to be informed by the in-person foreclosure sale process, which should help avoid fraud in the virtual process.

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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.