CFPB Sends Warning to Indirect Auto Lenders

The Consumer Financial Protection Bureau (CFPB) sent out CFPB Bulletin 2013-02 (the “Bulletin”) entitled “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” on March 21, 2013 and once again is flexing its ever growing muscles so as to make even the late Joe Weider proud. The CFPB is taking direct aim at automobile dealer compensation by lenders and dealer markup policies but in my opinion, one of the real goals is to have the indirect vehicle lenders self-police their respective dealers, dealer agreements, and compensation systems and take corrective action to ensure dealers are not discriminating in credit transactions on a prohibited basis before the CFPB gets involved.

The Bulletin provides fairly detailed guidance and is a reminder of the pre-CFPB days in the mortgage lending area and the directives and issues that arose on the use of third-party brokers to help originate mortgage loans, the issues with underwriting and meaningful verification of the borrowers ability to pay the mortgage loan.  CFPB Bulletin 2013-02 provides a framework for what the CFPB will expect to find, at a minimum, in dealer-indirect lender relationships and agreements, to prevent credit decisions from being made in a discriminatory or prohibited manner.

The Bulletin expressly spells out that compliance programs should include employee training, a  review of policies, ongoing monitoring for compliance with fair lending policies and procedures and steps to reel-in (and in my opinion, ultimately to eliminate) dealer discretion to mark-up a lender’s buy rates.  In a less than subtle warning, the CFPB states that for some lenders (i.e. read all) who decide to retain dealer markups and compensation policies [as they currently exist], the lenders should:

a.    send communications to all participating dealers explaining the Equal Credit Opportunity Act and its implementing regulation, Regulation B;

b.   conduct regular analyses of both dealer-specific and portfolio-wide loan pricing data for potential disparities on a prohibited basis;

c.  commence prompt corrective action against dealers, including restricting or eliminating a dealers use of dealer markup and compensation policies or excluding dealers from future transactions; and

d.  promptly remunerating affected consumers when unexplained disparities on a prohibited basis are identified either within the individual dealer’s transactions or across the lenders portfolio.

While these policies continue a disturbing trend of over regulation and will undoubtedly add to the cost of credit (or eliminate it entirely for some), the Bulletin makes it clear that the CFPB will take steps to follow-up on this matter. The collection of the data by the lenders will also make the CFPB’s job, should an action be instituted, much easier.

Indirect auto lenders should act now and institute a systematic and periodic review of their indirect lender programs. Doing nothing is not an option.  Lenders in other areas should pay heed. Auto debt is the third largest source of household debt (after mortgages and student loans) and it appears that the CFPB is addressing issues based on the impact on a consumer’s household budget.

CFPB Bulletin 2013-02 can be found here: http://files.consumerfinance.gov/f/201303_cfpb_march_-Auto-Finance-Bulletin.pdf.

The opinions in this blog are solely the author’s and suggestions, comments and replies can be sent to John@jrjoneslaw.com. Happy Easter to everyone!

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Contractual Choice of Law Clauses in Texas

It is rare today to see a contract that does not contain a choice of law clause. Today’s blog covers choice of law for those transactions that exceed $50,000 but are less than $1,000,000 and do not have a specific statute that determines choice of law.  Transactions under $50,000 must meet the additional requirements set out in Texas Civil Practice and Remedies Code Section 35.53 and transactions that are at least a $1,000,000 and meet the definition of a qualified transaction are governed by Chapter 271 of the Texas Civil Practice and Remedies Code. Now a short discussion about those general run-of-the-mill choice of law clauses seen in other transactions and how to analyze whether the choice of law can be enforced.

The Texas Uniform Commercial Code § 1.301(a) allows parties, with certain specific exceptions, to agree that the law of Texas or another state or nation shall govern their rights and duties. See Tex. Bus. & Comm. Code ann. § 1.301(a). Section 1.301(a) imposes a reasonable relationship test for determining which state law applies. Tex. Bus. Comm. Code ann. § 1.301(a). Section 4.102(b) of the Texas U.C.C. dealing with bank deposits and collections supports the application of a different state’s law to promote uniformity and states that the liability of a bank for action or non-action with respect to an item handled by it for purposes of presentment, payment and collection is governed by the law of the place where the bank is located. Moreover, Section 4.103 of the Texas U.C.C. expressly allows parties to change the provisions of Article 4 by agreement so as to change the choice of law clause.

The parties’ contractual choice of law will be given effect if the contract bears a reasonable relationship to the chosen state and no countervailing public policy of the forum demands otherwise. The state in which a company has its principal place of business has been found to have a reasonable relationship to the parties and the transaction. My Café CCC, Ltd. v. Lunchstop, Inc., 107 S.W.3d 860, 865 (Tex. App. 2003, no pet.).

The policy of the State of Texas is to allow parties to contract for the choice of law they want to govern if the transaction bears a reasonable relationship to the chosen state. See Tex. Bus. & Comm. Code ann. 1.301(a).  In the multi-jurisdictional context, Texas law also allows parties to resolve uncertainty as to the choice of law by including a choice of law provision in their agreement. Chase Manhatten Bank, N.A. v. Greenbriar N. Section II, 835 S.W.2d 720, 723 (Tex. App.-Houston [1st Dist.] 1992, no writ).  Where the parties contract includes a choice-of-law provision that selects the law of a jurisdiction bearing a substantial relationship to the parties or their transaction, the parties contractual obligations are governed by the law chosen by the parties unless:

(1)       there is a state with a more significant relationship to the transaction,

(2)       applying the chosen law would contravene a fundamental policy of the state, and

(3)       the state has a materially greater interest in the determination of the particular issue.

See Chesapeake Operating, Inc. v. Nabors Drilling USA, Inc., 94 S.W.3d 163, 169-170 & n.11 (Tex. App.-Houston [14th Dist.] 2002, no pet.) (citing Restatement (Second) Conflict of Laws §187(1)(2), 188).

A trial court’s determination of choice of law is a question of law and is reviewed de novo. Cudd Pressure Control v. Sonat Exploration, 202 S.W.3d 901, 904 (Tex. App.-Texarkana 2006), affirmed, 271 S.W.3d 228 (Tex. 2008). The underlying principal in any choice of law analysis is to protect the parties’ expectations. Id. at 904.  Texas has applied Section 187 of the Restatement (Second) of Conflict of Laws to contractual choice of law provisions to determine the law that applies. Section 187 of the Restatement (Second) of Conflict of Laws states as follows:

“(1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.

(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either

(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or

(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of section 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.

(3) In the absence of a contrary indication of intention, the reference is to the local law of the state of the chosen law.”

See DeSantis v. Wachenhut Corporation, 793 S.W.2d 670, 677-78 (Tex. 1990).

As stated by the Supreme Court of Texas in the DeSantis opinion, parties may agree as to the law of the state to apply to avoid uncertainty as to which law will govern the rights, obligations and construction of the parties’ contract because an understanding of those rights and obligations depends in part upon the certainty with which they may predict how the law will interpret and enforce the agreement. See DeSantis v. Wachenhut Corporation, 793 S.W.2d 670, 677-78 (Tex. 1990), citing, E. Scoles & P. Hay, CONFLICT OF LAWS 632 (1984); Reese, Choice of Law in Torts and Contracts and Directions for the Future, 16 COLUM. J. TRANSNAT’L L. 1, 21 (1977).  Judicial respect for the parties’ choice advances the policy of protecting their expectations and the concept is referred to as the “party autonomy” rule. See DeSantis v. Wachenhut Corporation, 793 S.W.2d 670, 677-78 (Tex. 1990), citing, R. WEINTTAUB, COMMENTARY ON THE CONFLICT OF LAWS 269-271 (1971).  However, the Supreme Court of Texas recognized (and the Texas Legislature has adopted) limits on the freedom of choice by stating that parties cannot require that a contract be governed by the law of a jurisdiction which has no relation whatever to them or their agreement nor can they by agreement circumvent public policy of the state law of which ought to otherwise to apply. See DeSantis v. Wachenhut Corporation, 793 S.W.2d 670, 677-78 (Tex. 1990); Texas U.C.C. 1.301.  However, when a contract bears a reasonable relation to the laws of a given state, the application of that state’s law agreed to by the parties should be enforced. See Chase Manhattan Bank, N.A. v. Greenbriar North Section II, 835 S.W.2d 720, 724 (Tex. App.-Houston 1st Dist.] 1992, no writ); First Commerce Realty Investors v. K-F Land Co., 617 S.W.2d 806, 808-809 (Tex. Civ. App.-Houston [14th Dist.] 1981, writ ref’d n.r.e.) (citing Restatement (Second) 187). Both the Court in Chase Manhattan Bank and First Commerce Realty have held that the reasonable relationship test is satisfied where a party’s principle place of business and the place of negotiation, execution, and performance of a contract coincide in the state whose law is contractually chosen by the parties.

The opinions in this blog are the author’s. Comments, replies and suggestions can be made by sending an email to John@jrjoneslaw.com.

Offers of Settlement and Shifting of Litigation Costs in Texas

Texas, like many states, has an offer of settlement procedure set out in Rule 167 of the Texas Rules of Civil Procedure (“TRCP”) and Chapter 42 of the Texas Civil Practice and Remedies Code (“TCPRC”). The policies behind the settlement procedure is to encourage early resolution of cases and to punish those who reject fair settlement offers. The settlement procedure in Texas will shift litigation costs to a party that rejected a fair settlement offer and assuming TRCP 167 was properly invoked, the award of attorneys fees is mandatory even if the attorneys fees were not plead for by the offering party. See TRCP 167.4(a).

To invoke the rules governing settlement offers, there are some restrictions and many people wrongfully believe the restrictions and exceptions swallow up the rule. The settlement procedure can only be used for cases seeking monetary damages filed after January 1, 2004. Excluded from the offer of settlement procedures are: 1. class actions; 2. shareholder derivative actions; 3. actions by or against a governmental unit; 4. workers compensation claims; 5. family code actions; 6. ADR proceedings; 7. suits seeking equitable relief; 8. cases filed before January 1, 2004; and 9. cases filed in justice of the peace court or smalls claims court (i.e. damages that do not exceed $10,000).

Assuming your case fits into the settlement offer rules, a written offer to settle a monetary claim must include interest, costs, attorneys fees and damages and must not include non-monetary claims or other claims outside the scope of TRCP 167. The settlement offer must also state an acceptance deadline at least 14 days after the offer is served and a settlement offer must identify the parties making the offer and be served on all parties to whom it it is made and specify and identify the parties to whom it is made.  The offer must also be made at least 45 days before the case is set for trial.

The party receiving the offer has a number of options. First, the party receiving the offer can object to the terms and conditions of the offer if done on or before the acceptance deadline. The receiving party can also accept by serving written notice of acceptance on the offeror. Either party can file the offer and acceptance and Court’s will enforce the settlement. The receiving party can also reject the offer by serving written notice or or before the acceptance deadline or alternatively, by not responding by the acceptance deadline in which case the offer will be deemed to be rejected.  If an offer is rejected and the judgment rendered is significantly less favorable than the rejected offer, the offering party can then recover its litigation costs incurred between the time of rejection and date of judgment.  Litigation costs are defined to include court costs, reasonable deposition costs, the reasonable fee for no more than two expert witnesses and reasonable attorneys fees. See TCPRC 42.001(5).

The judgment award is significantly less favorable to a plaintiff if the plaintiff rejected the defendant’s offer and the award is less than 80% of the rejected offer. The judgment award is significantly less favorable to a defendant if the defendant’s rejected plaintiff’s offer and the award is more than 120% of the rejected offer. See TRCP 167.(b)(2); TCPRC 42.004(b)(1) & (2). For an action commenced before September 1, 2011, the litigation costs are limited so as not to exceed 50% of plaintiff’s economic damages plus 100% of any non-economic, exemplary and additional damages minus some statutory or contractual liens. After September 1, 2011, the formula is different. Litigation costs that are recoverable are limited to no more than the amount the plaintiff recovers or would recover adding an award of litigation costs in favor to plaintiff or subtracting as an offset an award of litigation costs in favor of the defendant.

The provisions of Chapter 42 of the TCPRC and TRCP 167 are not used as much as they could be. Both Chapter 42 and Rule 167 are tools in an attorneys’ arsenal to try to resolve cases as efficiently and economically as possible. As also shown by the recent adoption of the new rules for the early dismissal of cases and expedited handling of cases of $100,000 or less by the Supreme Court of Texas, early resolution of cases by trial or otherwise is going to be the new normal in Texas.

The opinions contained in this blog are those of the author’s and not those of his firm. Comments, suggestions and replies can be sent to John@jrjoneslaw.com.

Chief Justice Wallace B. Jefferson’s Call to Arms

Chief Justice Wallace B. Jefferson of the Texas Supreme Court gave his State of the Judiciary message to the Texas Legislature on March 6, 2013.  The Chief Justice’s message was given on the anniversary of the end of the Battle of the Alamo in 1836 when Texas was fighting for independence from Mexico and the brave defenders of the Alamo died after an eleven day siege.  His speech referenced the battle and made an urgent and eloquent plea for the Texas Legislature to preserve, improve and reform our judicial system in Texas. It also thanked the Texas Legislature for renewing their allocation of $17.5 million dollars to help fund legal aid programs throughout the State of Texas. Chief Justice’s full speech can be found  at the Texas Supreme Court website (or by pasting this link into your browser at www.supreme.courts.state.tx.us/pdf/stateofjudiciary.pdf).  Because of the importance of basic civil legal services to all citizens of Texas, this week’s blog includes an excerpt from Chief Justice Jefferson’s speech. However, if you run across any of the Justices of the Supreme Court, thank all of them for their tireless efforts to ensure all Texans have access to our system of justice. Now the two excerpts:

“For those who can afford legal services, we have a top-notch judicial system. Highly qualified lawyers help courts dispense justice fairly and efficiently. But that kind of representation is expensive. A larger swath of litigation exists in which the contestants lack wealth, insurance is absent, and public funding is not available. Some of our most essential rights – those involving families, homes, and livelihoods – are the least protected. Veterans languish for months before their disability, pension, and educational benefits arrive. As a result of the recent financial crisis, lower- and middle-income homeowners and tenants face foreclosure and eviction. Ever-increasing numbers of consumers and small businesses have filed for bankruptcy. And few can afford a lawyer to guide them through these crises. Nearly six million Texans qualify for legal aid. Yet our state’s legal aid programs meet but 20% of the needs of indigent Texans, forcing many to go it alone in our courts. In South Texas, 2.6 million people qualify for legal aid. That means that there are 21,000 potential clients for each lawyer employed by the region’s main legal aid office. It is clear to me, then, that we must fund our state’s legal aid programs. Fortunately, for our great state, it is clear to you, too. When we told you that the largest source of funding for these programs, interest on lawyers trust accounts, plummeted 75% in the last 5 years, you came to the rescue. The 81st Legislature appropriated $20 million in general revenue for the 2010-2011 biennium. Even as the fiscal crisis hit Texas hard, the 82nd Legislature provided $17.5 million for this biennium. And in this Session, the House and Senate have indicated general revenue funding will remain at these levels. On behalf of desperate Texans who have no other options, I thank you for your continued support of basic civil legal services. Without your assistance, the situation would be utterly hopeless.The legal profession is doing its part. Texas lawyers donate about 2.5 million hours of free legal services to the poor each year. In the Supreme Court, we have had tremendous success with a pro bono program that matches some of our pro se litigants with appellate lawyers who have donated their expertise to the cause of justice. More than 300 lawyers have signed up to participate, and we have referred dozens of cases to that program since 2007. Several of our intermediate appellate courts have adopted similar initiatives. But even if we were to require every Texas lawyer to represent at least one indigent client, we would serve less than 40% of the poor who seek help. We must do more, not to preserve the judiciary, but to keep the courthouse doors open for all of our neighbors……..

On February 24, 1836, Texas forces were under siege from the Mexican army at the battle of the Alamo. William Barret Travis, the commander of the Texian soldiers, sent a desperate plea for help. Addressed to “the People of Texas & All Americans in the World,” he asked “in the name of Liberty, of patriotism & everything dear to the American character, to come to our aid, with all dispatch.” He vowed never to surrender or retreat, promising “victory or death.” His fate was sealed March 6th, exactly 177 years ago.We are at a crossroads 177 years later. Addressing the challenges in our justice system requires a fundamental shift in thinking. Our courts are the final line of protection for individual rights. They provide access to justice, protect us from abuses of power by corporations or the government; they protect our most basic constitutional rights. But the courts must, themselves, reform. We need to change the way we do business to better meet the needs of citizens and employers across our state. That’s why we are investing in technology to save taxpayers money and to provide better customer service to those who come to us for justice. My presentation today is not a State of the Judiciary. It is a call to arms. “[I]n the name of Liberty, of patriotism & everything dear to the American character,” Commander Travis urged Texans to act with dispatch. Today, let’s marshal our forces to confront our challenges so that we can better serve the people. We may not win the entire battle today. But, as we Texans like to say, remember the Alamo!”

The opinions of this blog are the author’s. Comments, suggestions and replies can be sent to me at John@jrjoneslaw.com.