Auto Finance May Be DOJ’s Next Focus in SCRA Enforcement

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The Department of Justice’s recent announcement that two towing companies have settled an action alleging violations of the Servicemembers Civil Relief Act (SCRA) may portend further SCRA enforcement actions by the DOJ in the auto financing arena.

In its 2009 amended complaint against two towing companies filed in federal court in Virginia, the DOJ alleged that the defendants towed the cars of servicemembers who were on active duty and sold the cars at auction without obtaining a court order. The DOJ claimed the sales violated the SCRA provision prohibiting someone who holds a storage lien on property of a servicemember from enforcing the lien while the servicemember is on active duty, and for 90 days thereafter, without a court order.

The DOJ’s consent order provides relief to 26 servicemembers whose cars were alleged to have been towed and sold by the defendants in violation of the SCRA. It requires the defendants to pay $75,000 in damages and request that all major credit bureaus remove any negative entries resulting from information reported by the defendants. We have counseled auto finance companies on the implications of the consent order on their operations as well as on the likelihood of related DOJ enforcement actions.

If the DOJ targets auto financing in future SCRA enforcement actions, we would expect those actions to allege SCRA violations such as failing to reduce a servicemember’s interest rate as required, repossessing property purchased by a servicemember under an installment contract without a court order, or failing to comply with SCRA requirements related to a lease termination requested by a servicemember.

Because the SCRA’s impact is not limited to auto financing, companies engaged in all types of consumer lending and related collections should review their policies and procedures for compliance with SCRA requirements. This is particularly important since the Consumer Financial Protection Bureau, through its Office of Servicemember Affairs, has identified the SCRA as a focus for its own examinations and enforcement actions. As a result, the SCRA is one of several areas we are focusing on in the compliance assessments we are conducting for clients to help them prepare for their first CFPB exams.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).

The group also produces the CFPB Monitor, a blog that focuses exclusively on important CFPB developments. To subscribe, use the link provided to the right.

For more information, please contact Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com; Practice Leader Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com; Mercedes Kelley Tunstall at 202.661.2221 or tunstallm@ballardspahr.com; Barbara S. Mishkin at 215.864.8528 or mishkinb@ballardspahr.com; or Mark J. Furletti at 215.864.8138 or furlettim@ballardspahr.com.