Gorsuch Opinion in Epic Systems Expresses Openness to Re-examination of Chevron

Yesterday, the Supreme Court held that the Arbitration Act allows employers to enforce mandatory arbitration clauses and bans on class actions in employment contracts. Epic Systems Corp. v. Lewis, 584 U.S. _____, slip op. at 2 (2018). The decision was a defeat for employee class actions, which will be closely scrutinized in the area of employment law for years to come. However, in dicta that should not be ignored, Justice Gorsuch also hinted at openness to re-examining the foundational administrative law doctrine of Chevron deference. Id. at 19-21. Currently under Chevron, courts defer to an agency’s reasonable interpretation of the law it administers when a statute leaves a gap or ambiguity for the agency to interpret. Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842 (1984). 
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Hurricanes, wildfires and other natural disasters devastate communities and threaten the financial well-being of residents. The National Consumer Law Center (NCLC) works at the national and state levels to develop innovative policy solutions, train and support local advocates, and educate consumers about their financial options. After the 2017 hurricanes and wildfires that tore apart communities in Puerto Rico, the Virgin Islands, Texas, Florida, California and elsewhere, NCLC launched its Disaster Relief and Consumer Protection project. NCLC's leadership is helping communities deal with the financial devastation of natural disasters while building a network of advocates in affected areas who can share information and learn from one another.

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Auto Add-Ons Add Up

How Dealer Discretion Drives Excessive, Inconsistent, and Discriminatory Pricing

This groundbreaking National Consumer Law Center analysis of a large national data set unlocks the door on what car dealers pay for auto add-on products and what they charge consumers. Pricing of these optional products involves large mark-ups and arbitrary and discriminatory pricing for consumers.
addon report coverPublished: October 11, 2017

Report (PDF)

Executive Summary

Key Findings

Key Recommendations 

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Executive Summary 

Add-on products sold by car dealers, such as service contracts, Guaranteed Asset Protection (GAP) insurance, and window etching, make up a large share of dealers’ profits. They also significantly increase car buyers’ costs. While many have questioned the value of these products for consumers, the pricing of these products has received less attention, largely because pricing is not transparent. Even regulators lack information about what car buyers pay for these products. Dealers decide what to charge each consumer and generally only the dealer, the finance company, and the third party provider of the add-on ever know what other consumers are paying. This National Consumer Law Center analysis of a large national data set is a revealing first look at what dealers pay for auto add-on products and what they charge consumers.

Key Findings

  • Add-on products are sold at prices far higher than dealer costs. Dealers mark up add-on products more than other similar products are marked up. They mark up add-on products by a far higher percentage than they mark up cars. One dealer sold over 1,000 window etching products, each with a dealer cost of $16 and a charge to the consumer of $189, for a markup of $173 or 1,081%. For Guaranteed Asset Protection (GAP) insurance products, 38 dealers had average markups of 300% or more, and 38 dealers marked up service contracts by an average of more than 300%.
  • Dealers are inconsistent in the pricing of add-on products. Individual dealerships charge some consumers many times more than other consumers for the same product with the same dealer cost.

Dealers and Window Etching Pricing
Dealer etching

  • This inconstant pricing for the same add-ons leads to pricing discrimination, with Hispanics charged higher markups than non-Hispanics.

Markup

  • Companies that provide car financing play an important role in allowing excessive and discriminatory markups of auto add-ons.

These abuses, damaging enough in themselves, set in place a chain of other consequences for consumers. The expensive add-ons increase the price of cars, putting them out of reach for some consumers.

They also increase the loan to value (LTV) ratio for cars, as they increase the amount that consumers finance without providing any real increase to the value of the car. These higher LTVs result in more negative equity, which hurts consumers and other players in the auto sales and finance market because a consumer who owes more than his or her existing car is worth will have a hard time trading it in and buying a new car. High LTVs have also been associated with higher default rates, again harming consumers and the industry as a whole.

Recommendations

  • Dealers should be required to post the available add-ons and their prices on each car in the lot, along with the price of the car. To prevent the dealer from reintroducing non-transparency by offering discounts to some customers but not others, the prices for the add-on products must be non-negotiable.
  • To root out pricing discrimination, the federal Equal Credit Opportunity Act regulations should be amended to require documentation of the customer’s race or national origin for non-mortgage credit transactions, as is currently required for home mortgage transactions. If discrimination remains hidden, it will not be possible to end it.
  • State and federal enforcement authorities should investigate discrimination in pricing of add-on products and bring enforcement actions against a dealer if discrimination is shown. The Consumer Financial Protection Bureau, the Federal Trade Commission, the Federal Reserve Board, and state attorneys general all have authority in this area.

Learn more about the National Consumer Law Center’s work on consumer auto sales and financing and NCLC’s Working Cars for Working Families project.

ConsumercreditregulationConsumer Credit Regulation ConsumerwarrantyConsumer Warranty Law udapUnfair and Deceptive
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Servicemembers, Veterans, and Forced Arbitration

How the New Consumer Protection Financial Bureau Rule 

Enhances the Military Lending Act 

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The Consumer Financial Protection Bureau’s (CFPB) new arbitration rule will promote accountability and transparency for a wide variety of consumer financial products and services offered to servicemembers and veterans. The rule allows people to band together in court and prevents companies from using fine print to take away access to the courts through forced arbitration clauses with class action bans.

The CFPB rule has the strong support of The Military Coalition, representing 5.5 million servicemembers, The American Legion, 29 military groups, and leading veterans.

The Military Lending Act (MLA) already bans forced arbitration of certain disputes. So what does the CFPB add to the arbitration ban in the MLA?

The CFPB rule provides essential protection for our military families and veterans (the MLA only applies to servicemembers) and covers a broader range of financial products. For example, unlike the MLA, the CFPB rule covers these areas:

  • Purchase money loans, such as auto loans;
  • Credit monitoring and other credit reporting services;
  • Bank accounts, prepaid cards, and other noncredit accounts
  • Loans before military service, such as a credit card that a servicemember still uses;
  • Debt collectors and debt buyers pursuing debt not covered by the MLA; and
  • Home equity lines of credit.

The MLA provides no protection in these situations that ARE covered by the CFPB rule:

  • Credit bureau giant Equifax’s initial effort to block victims of its massive data breach from access to the courts through a forced arbitration clause hidden on the website for the free credit monitoring it is offering.
  • Wells Fargo’s use of older bank account and credit card agreements to block lawsuits over the theft of consumers’ identity used to open fake accounts.
  • Banks’ rampant violation of the Servicemembers Civil Relief Act through illegal repossession of cars while servicemembers are away on active duty, as happened to Sergeant Charles Beard and Sergeant Jin Nakamura. Beard’s attempt to bring a class action was thrown out due to a fine-print arbitration clause.
  • Army soldier Prentice Martin-Bowen, who sued a buy-here-pay-here used car dealer that repossessed his car despite on-time payments, and kept two trade-in cars and the down payment. Martin-Bowen was forced into arbitration and won a small amount, but he couldn’t pay his lawyer a penny in fees and he couldn’t bring a class action to help the 100 others who suffered the same result. The arbitrator admitted that a jury would likely have awarded more.
  • Wells Fargo’s illegal padding of auto loan payments with duplicative car insurance, including for servicemembers on active duty. Some contracts had arbitration clauses.
  • TransUnion’s reckless mismatching of consumers, including active duty service-members serving abroad, to people with similar names on a government watch list of suspected terrorists and drug traffickers. TransUnion did not have an arbitration clause in that case, and a jury ordered it to pay $60 million ($7,337 to each class member), but the company has tried in the past to trick people into giving up their day in court.
  • Army veteran Joshua Hause, who was given “no choice” and was forced to convert his existing payday loan to a 279% open-end “flex” loan that “I’ll never get out of.” A class action lawsuit over these practices was thrown out of court due to a forced arbitration clause.
Four of the five top areas of servicemember complaints to the CFPB are not covered by the MLA. And credit cards are covered by the MLA only if they are opened by active duty servicemembers after October 3, 2017 and only while the member continues to serve.
servicemembers complaints

Our men and women in uniform fight to protect our constitutional rights, including our day in court guaranteed by the Seventh Amendment. Congress must not strip away the rights of our military by repealing the Consumer Financial Protection Bureau’s arbitration rule.

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