We wrote in our March 2021 Maryland Legal Alert about a class action case in federal court in Virginia involving the application of the federal Military Lending Act (MLA). The case involved a creditor that allegedly failed to comply with the MLA in connection with retail installment contracts for the sale of motor vehicles.
When the MLA applies to a credit transaction, specific MLA disclosures must be provided and the loan is subject to a 36% Military Annual Percentage Rate (MAPR). The MLA does not apply to loans that are “expressly intended to finance the purchase” of motor vehicles where the loan is secured by the motor vehicle.
The Virginia class action alleged that because the creditor financed the cost of guaranteed asset protection (GAP) waivers, the creditor’s loans were covered by the MLA. The plaintiff argued that the creditor failed to provide required MLA disclosures and charged more than the permitted MAPR. The plaintiff sought a number of remedies, including rescission and damages.
The case involves guidance from the U.S. Department of Defense (DOD) concerning the MLA. The DOD guidance issued in February 2020 provided updates to prior MLA guidance from 2017, which made it clear that financing GAP coverage would pull a loan out of the exception to MLA applicability. The 2017 Q&A No. 2 indicated that if a creditor financed certain ancillary products (e.g., a GAP waiver) in connection with the purchase of a motor vehicle, then the MLA would cover that loan. The 2020 interpretive guidance rescinded the 2017 Q&A and restored a 2016 version of Q&A No. 2, which only addressed cash-out loans involving personal property. With the restoration of the 2016 interpretive guidance, the effect of including GAP coverage on purchase-money loans secured by motor vehicles remains unclear.
The creditor in the Virginia case moved to dismiss earlier this year and argued that the DOD’s action in reversing the 2017 guidance should be interpreted to mean that purchase-money auto loans where GAP and similar “directly related” ancillary charges are financed are exempt from the MLA. The court agreed last week and granted the creditor’s motion dismissing the case. While it is possible the plaintiff may appeal the dismissal, the case is good news for auto loan lenders in Virginia.
In a recent decision, the U.S. Court of Appeals for the Eleventh Circuit issued a ruling bearing on potential liability under the Fair Credit Reporting Act (FCRA). The case arose from a lawsuit by an individual against a credit reporting agency. After receiving a discharge following a Chapter 7 bankruptcy proceeding, the plaintiff noticed that the credit reporting agency continued to list a mortgage debt on his credit report. The plaintiff disputed the debt, which prompted the credit reporting agency to request that the mortgage servicer confirm the validity of the debt. The mortgage servicer confirmed the debt and added additional past due amounts to the report. Subsequently, the plaintiff filed suit against the servicer and the reporting agency for, among other things, violation of the FCRA.
The FCRA requires credit reporting agencies to follow “reasonable procedures to assure maximum possible accuracy” in their reporting. Additionally, the agencies are required to conduct reinvestigations of credit report items if they are notified of a potential inaccuracy. At the trial court, the credit reporting agency successfully moved for summary judgment, arguing that its inquiry about the mortgage debt with the servicer satisfied its obligation under the FCRA.
The Eleventh Circuit disagreed, holding that the credit reporting agency did not satisfy its FCRA obligations as a matter of law. According to the court, after the plaintiff requested that the credit reporting agency remove the mortgage debt from his credit report, the reporting agency needed to, at least, review the bankruptcy court docket. Because it failed to do so, a jury could find that the reporting agency was negligent with respect to its FCRA obligations. Plainly, when presented with sufficient evidence of a bankruptcy discharge by a debtor, the reporting agency must do more than merely forward the letter to the mortgage servicer.
This opinion leaves some uncertainty in its wake. Credit reporting agencies cannot foreclose any liability by simply reaching out to the debt servicing company. However, debtors will not prevail just because of a mistake on a credit report.
Practice Point: If a debtor raises a specific, plausible dispute with a matter on a credit report, the credit reporting agency must do more than confirm the debt with the debt servicing company to avoid costly litigation.
Please contact John H. Hykes, III with any questions concerning this topic.
Last month, we reported on a decision by a panel of the U.S. Court of Appeals for the Eleventh Circuit that has caused much consternation within the debt collection industry. In that case, an Eleventh Circuit panel held that the plaintiff had stated a viable claim under the Fair Debt Collection Practices Act (FDCPA), by alleging that a debt collector violated the FDCPA’s prohibition against communicating a consumer’s personal information to a third party “in connection with the collection of any debt” because it transmitted the plaintiff’s information to a third-party mailing vendor to send out a dunning letter.
Recently, the debt collector filed a petition for an en banc rehearing. In the petition, the debt collector asserts that Eleventh Circuit panel improperly held that the plaintiff had standing to bring the claim.
To have standing, a plaintiff must have suffered a concrete invasion of a legally protected interest. The Eleventh Circuit panel previously held that the plaintiff had standing, reasoning that concrete injury may be present where an intangible harm relates to a recognized protected legal interest. The panel compared the plaintiff’s claim — based on a statutory violation — to a claim arising from a breach of privacy under common law, in that both involved “public” disclosure of private facts.
In the petition for rehearing, the debt collector argued that the panel decision overlooked precedent, which requires a finding of a particularized injury in order to confer standing on a plaintiff. The debt collector noted that the panel’s opinion candidly doubted that the alleged harm occurred or would have occurred. The debt collector further noted that FDCPA legislative history and the recently proposed debt collection regulations contemplate that honest debt collectors will work with third-party mailing vendors and that this practice was not challenged or otherwise questioned. The debt collector further disputed the notion that the alleged FDCPA violation was tantamount to privacy breach, noting that the debtor’s information is sent to private servers solely for the ministerial purpose of producing dunning letters.
Practice Point: This matter has garnered significant interest in the debt collection industry, given that roughly 85% of debt collectors use third-party mailing vendors. This case could implicate many other types of common third-party vendors, such as court couriers and asset search and skip-trace services. We will continue to monitor this case and its fallout for further developments.
Please contact Bryan M. Mull with any questions concerning this topic.
Maryland’s General Assembly recently completed its legislative session for 2021. Each year, our Financial Services team analyzes the new laws that may be of interest to our clients and friends in our annual Maryland Laws Update. Our team is hard at work on this year’s edition, and we look forward to sharing our thoughts on the new laws that may affect the financial services industry in Maryland.