In this edition of Faegre Drinker’s State Attorneys General Update, we discuss:

• The Colorado AG’s $4 million settlement with two credit unions related to auto loan GAP fees
• The New Jersey AG’s $27.3 million settlement with Yellowstone Capital LLC relating to allegedly unlawful lending, servicing and collection practices
• The New York AG’s:
  • Suit against an auto-lender for allegedly fraudulent and deceptive lending practices
  • Request for information from Madison Square Garden regarding its use of facial recognition software
• The Kansas AG’s settlement with home warranty companies over allegedly misleading solicitations
• Crypto company Nexo’s settlement with eight AGs and the SEC regarding allegations it improperly marketed securities
• The Florida AG’s consumer protection suit against hot-tub cover sellers relating to slow shipping times and deceptive business practices
• Twenty-one AGs’ letter to proxy companies challenging their ESG practices
• The Rhode Island AG’s criminal charges against a construction company for illegal dumping

Colorado AG Enters Into $4 Million Settlement With Credit Unions Relating to Unrefunded Auto Loan GAP Fees

As part of an effort beginning in 2019 to ensure that Colorado consumers are provided the full benefit of guaranteed automobile protection (GAP), the Colorado AG recently entered a $4 million settlement with credit unions Bellco and Canvas, which requires them to refund consumers’ GAP fees. GAP is an optional benefit offered to car buyers who finance their purchases. The benefit bridges the gap that can arise between the amount owed on a buyer’s loan and the fair-market value estimate that a buyer’s auto insurance will typically pay in the event the car is “totaled” in an accident. Consumers incur the entire GAP fee at the time of purchase, but payment is typically rolled into the principal loan balance and paid over the life of the loan. If the loan is paid off early, Colorado law requires the unused or unamortized portion of the GAP fee to be refunded to the consumer. According to the AG, Bellco and Canvas failed to pay these refunds. The issue has been a particular focus of the AG’s Consumer Protection Section, which has secured over $23.5 million in GAP refunds.

Copies of the AG’s press release and the Assurances of Discontinuance with Bellco and Canvas are available here.

New Jersey AG Enters $27.3 Million Settlement With Yellowstone Capital LLC and Related Entities Over Alleged Unlawful Lending, Servicing and Collection Practices

The New Jersey AG recently resolved a 2020 action brought under the New Jersey Consumer Fraud Act and regulations governing general advertising against Yellowstone Capital LLC and various affiliates relating to their provision of merchant cash advances (MCAs). An MCA is a device that provides cash to a business and requires payment of a portion of the business’s future debit and credit card sales. Because MCAs are not considered loans, but rather an advance against future sales, they are not regulated by small business lending laws. The AG alleged that the companies had targeted small businesses with a wide range of unconscionable, misleading, and abusive lending, servicing, and collection tactics and that they had engaged in “predatory lending arrangements disguised as cash advances on future receivables, effectively charging interest rates far exceeding the interest rate caps in the State’s usury laws.”

The settlement requires the companies to follow specific internal review and notice processes, and enjoins the companies from including several terms in MCAs, including limited reconciliation periods and broad waiver provisions. Further, the companies must disclose specific fees in the agreements. The monetary payment of $27.375 million encompasses forgiveness of outstanding MCA balances worth an estimated $21.75 million as well as $5.625 million paid to the New Jersey Division of Consumer Affairs for restitution, fees and costs.

Copies of the AG’s press release and the Division of Consumer Affairs’ consent order are available here.

New York AG Files Suit Alleging Auto Lender Engaged in Deceptive and Abusive Acts or Practices

In conjunction with the Consumer Financial Protection Bureau, the New York AG sued Credit Acceptance Corporation (CAC) — one of the country’s largest publicly traded auto lenders — over its loan practices. According to the AG, CAC engaged in predatory lending by offering loans to purchase used vehicles at inflated prices, which concealed the true cost of the credit being offered. CAC operates by approving borrowers for loans and referring them to approved car dealers. According to the AG, CAC uses an algorithm to predict how much it will recover over the life of a loan from all sources, including interest, lawsuits and wage garnishment. In making the ultimate decision of whether to lend to a particular borrower, CAC allegedly does not consider the borrower’s ability to pay back the entire loan, but rather only the amount CAC will receive from it. According to the AG, when an approved dealer sells a car to a CAC-approved borrower, CAC pays the dealer a portion (on average, 72%) of the amount that CAC estimates it will recover on the loan. The AG alleges that this incentivized dealers to sell used cars at inflated prices and thereby maximize their revenue. That, in turn, concealed the true cost of credit from the borrowers. According to the AG, when the inflated principal cost is considered in combination with the high interest rates CAC charged, more than 84% of CAC’s New York borrowers were charged a rate in excess of the state’s 25% usury cap.

The AG pled a variety of claims, including violations of the federal Consumer Financial Protection Act and New York executive and general business laws pertaining to fraudulent and illegal conduct. The AG contends that CAC engaged in deceptive trade practices by: (a) misrepresenting “the true principal amount, the true finance charge and the true interest rate” of its loans; (b) advertising that consumers could improve their credit scores through CAC loans (which the AG alleged was false because many CAC customers were likely to fail to repay their loans and thereby harm their credit); (c) not disclosing to borrowers that CAC’s algorithm predicted the borrower would be unable to repay the full value of the loan; and (d) charging interest in excess of the borrower’s loan agreement. Additionally, the AG alleges that CAC engaged in Martin Act (New York’s securities statute) violations by failing to disclose various pieces of information when it securitized and sold its loans.

The AG is seeking financial penalties of $1 million per day for violations of federal statutes and $5,000 for each allegedly false or deceptive representation, disgorgement of profits, restitution, and injunctive relief.

Copies of the AG’s press release and complaint are available here.

New York AG Seeks Information From Madison Square Garden Regarding Its Use of Facial Recognition Software to Bar Adverse Attorneys From Entering Its Venues

The Civil Rights Bureau of the New York AG’s office sent a letter to Madison Square Garden Entertainment (MSG) demanding an explanation for MSG’s practice of using facial recognition software to prohibit lawyers working for firms that represent MSG’s opponents in litigation from entering any of the company’s various New York venues. The AG suggested that the practice could have a chilling effect on lawyers’ willingness to represent clients with legitimate claims against MSG and argued that the practice runs “counter to the spirit and purpose” of various laws prohibiting discrimination or retaliation for engaging in protected activity. The AG also pointed to research suggesting that facial recognition software may be biased and can produce false positive results against people of color and women.

MSG’s use of facial recognition software is not new; in 2018, the New York Times investigated MSG’s use of the technology for security. A widely publicized story last December about a New Jersey attorney barred from entry while her daughter’s Girl Scout troop watched a show at Radio City Music Hall brought new scrutiny. MSG’s CEO James Dolan addressed the charges on television and neither denied the use of facial recognition software nor apologized for its application against adverse attorneys.

A copy of the AG’s press release is available here.

Kansas AG Enters a Consent Judgment With Home Warranty Company for Allegedly Misleading Solicitations

The Kansas AG entered a settlement with home warranty company HomeServe USA to resolve allegations that its solicitation practices were deceptive and unconscionable in violation of Kansas’s Consumer Protection Act. Pursuant to the settlement, HomeServe will pay $500,000 plus an additional $350,000 in restitution, which will be paid directly to consumers. Evergy Kansas Central entered into a $500,000 consent judgment last July as part of the same investigation.

HomeServe contracted with Evergy’s predecessor, Westar Energy, to use Westar’s customer data and logo and to place a link on Westar’s website for the purpose of marketing home electrical repair plans. The AG alleged that some of the 44,000 Kansas consumers who paid for HomeServe’s repair plans received no material benefit because they were deemed “ineligible consumers,” or they were denied service due to certain amperage requirements. The AG further alleged that HomeServe’s solicitations caused reasonable consumers to believe that the repair plans were offered by the consumers’ electrical utility company, Westar, rather than by a third party. In addition to the monetary penalties, HomeServe agreed to include “Clear and Conspicuous” statements to inform consumers that it is an independent company that has paid for the use of any third-party logo and to refrain from methods of solicitation that could “reasonably be interpreted or construed as a bill, invoice or statement of account due.” It must also use “reasonable efforts” to ensure that ineligible consumers are not solicited for plans, and must remove disqualifying amperage requirements from new plans.

A copy of HomeServe’s consent judgment is available here.

Crypto Company Nexo Enters Settlement With Eight AGs and the SEC to Resolve Allegations It Improperly Marketed Securities

Pursuant to a settlement negotiated with eight state AGs, Nexo Capital — a financial services company focused on crypto currencies — will pay up to $22.5 million to states that are members of the North American Securities Administrators Association and $22.5 million to the SEC to settle allegations that it offered interest-earning accounts without registering its products as securities and providing required disclosures. The AGs allege that Nexo’s promotion and sale of a pooled investment product and its virtual currency trading platform constitute the unregistered purchase and sale of securities and commodities. Seven AG’s filed administrative actions, and the New York AG filed a lawsuit alleging that the unregistered offerings constitute fraudulent practices under New York’s Martin Act. The complaint was filed in September 2022; and in early December 2022, Nexo announced that it planned to exit the U.S. market. BlockFi Inc., another web-based cryptocurrency platform, settled similar allegations last February for $100 million.

The New York AG’s press release is available here, and the SEC’s press release is available here.

The Florida AG Files a Lawsuit Against Two Hot Tub and Spa Companies for Deceptive Business Practices

The Florida AG filed a lawsuit against two hot tub and spa companies — Affordable Spa Covers and Coverlex — and their owner, Alejandro Flores-Ramirez. According to the AG, more than 350 consumers collectively paid more than $90,000 for goods that they never received from the companies, that were damaged on receipt or were delivered months after the promised delivery date. The AG’s complaint emphasizes that the companies advertised “fast shipping,” “exceptional customer service,” and the “fastest turnaround,” but that the companies allegedly failed to meet advertised or promised delivery schedules. Further, according to the AG, the companies charged $150 cancellation fees when customers opted to cancel orders that had not been delivered. The AG alleges that this, and related conduct, constituted unfair or deceptive acts in violation of the Florida Deceptive and Unfair Trade Practices Act (FDUTPA). The AG is seeking injunctive relief, restitution, disgorgement, civil penalties and legal costs. Civil penalties may be up to $10,000 per violation of the FDUTPA.

Copies of the AG’s press release and complaint are available here.

Twenty-One State AGs Send Letter to Two Proxy Advisory Companies Challenging Their ESG Practices

Twenty-one state AGs sent a letter to proxy advisors, Institutional Shareholder Services and Glass, Lewis & Co., suggesting that they violated their duties of care and loyalty in providing proxy voting services by advocating for and acting in support of environmental, social and governance (ESG) policies. The essence of the AGs’ allegations is that by prioritizing ESG policies, the proxy advisors are placing social goals over the financial interests of their clients. The AGs specifically raised concerns relating to public statements and voting recommendations pertaining to both environmental net-zero goals and “diversity, equity, and inclusion quotas.”

A copy of the Virginia AG’s press release regarding the letter as well as the letter are available here.

Rhode Island AG Charges Construction Company With Illegal Dumping of Contaminated Fill

The Rhode Island AG recently charged Barletta Heavy Division (Barletta) and its former employee Dennis Ferreira with illegally dumping thousands of tons of contaminated fill at construction sites during the construction of a highway. Mr. Ferreira was the project’s superintendent. The criminal information alleges that Mr. Ferreira and Barletta used the construction site as an environmental dumping ground by authorizing the disposal of 4,500 tons of stone and soil contaminated with hazardous materials despite knowing that the fill came from fill sites known to be contaminated. When asked to provide an environmental certification for the transported fill, Mr. Ferreira allegedly provided an analysis from other (noncontaminated) sites. These charges follow Mr. Ferreira pleading guilty to related charges filed by the federal government and Barletta agreeing to pay $1 million to resolve associated, alleged federal False Claims Act violations.

The AG’s press release and the criminal information can be found here.