Guest Contributor Jim Radogna: Dealer Fees Under Attack


jimTwo recent actions for alleged dealer fee violations in South Carolina and Indiana are a potential cause for concern in other states due to the likelihood of copycat legal actions. While these states had no caps on dealer fees, a private lawsuit in South Carolina resulted in a $3.6 million verdict and an attorney general action in Indiana resulted in a $625K settlement. Both cases alleged that the dealers overcharged customers because their fees did not reflect expenses actually incurred by the dealers for services.

Although the state doesn’t offer guidance on what dealers can charge, the court in South Carolina interpreted “closing fee” to mean a “predetermined set fee for the reimbursement of closing costs, but only those actually incurred by the dealer and necessary to the closing transaction.” Under that interpretation, the court reasoned that the dealer had to provide evidence it calculated the cost comprising its closing fee, which it could not do. Further, a justice stated “Although we agree that the Closing Fee Statute is a disclosure statement and the department serves as a repository for the required filings, we find that the Closing Fee Statute does more than require disclosure of the ‘Closing Fee.’”

According to a press release from the office of Indiana attorney general “Under Indiana’s Motor Vehicle Dealer Unfair Practices Act, auto dealers cannot require a motor vehicle purchaser to pay a document preparation fee unless the fee reflects expenses actually incurred for the preparation of documents and was negotiated by and disclosed to the customer.” The dealer was found to have charged doc fees around $479, which the AG ruled was higher than could be justified to cover costs.

Indiana law is more specific than South Carolina as far as the requirement that actual expenses be calculated: “It is an unfair practice for a dealer to require a purchaser of a motor vehicle as a condition of the sale and delivery of the motor vehicle to pay a document preparation fee, unless the fee:

1. Reflects expenses actually incurred for the preparation of documents;
2. Was affirmatively disclosed by the dealer;
3. Was negotiated by the dealer and the purchaser;
4. Is not for the preparation, handling, or service of documents that are incidental to the extension of credit; and
5. Is set forth on a buyer’s order or similar agreement by a means other than preprinting.”

Other states, such as Connecticut, have regulations that are similar to South Carolina’s in that they primarily address disclosure of the dealer fee but do not offer guidance on the amount a dealer can charge: “A ‘dealer conveyance fee’ or ‘processing fee’ means a fee charged by a dealer to recover reasonable costs for processing all documentation and performing services related to the closing of a sale, including, but not limited to, the registration and transfer of ownership of the motor vehicle which is the subject of the sale.”

So, in a private lawsuit or AG action in a state like Connecticut, the questions may well be what amount is considered “reasonable” and how are the costs justified?
Although all cases are different, information from the South Carolina court may lend some insight on how to avoid or defend against dealer fee attacks. The following excerpts from the case would seem relevant:

• The dealership’s expert witness in the SC case testified that the dealership’s average closing costs, which were $506.96, greatly exceeded the $299 fee the plaintiff paid. But in calculating the average closing cost, he included expenses for the salaries of finance and sales managers, the building, utilities and outside services.” The court disagreed. “All of these are general operating expenses and not directly tied to the closing of motor vehicle sales. If a motor vehicle dealer wishes to be compensated for these expenses, it may include them as part of the overall purchase price of a vehicle.”
• The court further opined that the term “cost” in the context of the “Closing Fee” Statute “would refer to the amount of money a dealer is required to expend to perform the services it provides to a customer at closing, and to otherwise comply with the disclosure, documentation, and record retention requirements imposed under state and federal law. While we recognize the difficulty a dealer may face in determining the exact amount of a specific purchaser’s closing fee prior to closing, we agree with the trial judge’s interpretation that the amount charged must bear some relation to the actual expenses incurred for the closing.”
• The court emphasized that a “closing fee” is not limited to expenses incurred for document preparation, retrieval, and storage. However, any costs sought to be recovered by a dealer under a closing fee charge must be directly related to the services rendered and expenses incurred in closing the purchase of a vehicle. Given that each vehicle purchase is different, compliance with the “Closing Fee” Statute does not require that the dealer hit the “bull’s-eye” for each purchase. A dealer may comply with the statute by setting a closing fee in an amount that is an average of the costs actually incurred in all closings of the prior year.

Based on the above, some ideas for what may constitute “reasonable costs for processing all documentation and performing services related to the closing of a sale” include:

• Processing and submission of credit applications to finance companies*
• Preparation of finance or lease documents*
• Preparation and submission of vehicle registrations both manually and electronically with the DMV
• Filing and releasing security liens on purchased and traded vehicles as contractually required by lending institutions
• Processing applications for new or duplicate title documents with the DMV
• Processing the pay-off of an existing lien on any vehicle offered in trade
• DMS (Dealer Management System) costs to process paperwork
• Software such as Dealertrack or RouteOne to investigate credit, print required disclosures, and run Red Flags and OFAC checks
• Forms, toner, etc.
• Compliance training and auditing costs
• Fees to attorneys for vetting documents

* Some states prohibit the inclusion of fees to process loan documents in the dealer fee.

OTHER DEALER FEE ISSUES

TILA Disclosures – Other lawsuits have claimed that the dealer fee is a finance charge for federal Truth in Lending Act (TILA) disclosure purposes. To avoid this, it’s important to also charge dealer fees on comparable cash transactions. Since you obviously wouldn’t incur credit-related costs listed above on cash transactions, the SC court’s suggested method of averaging the costs in all closings of the prior year would appear to be beneficial.

Negotiation of Dealer Fees – Although a number of state regulations indicate that dealer fees must be negotiated with customers, this raises concerns about potential discrimination claims. The reasoning is that if a dealership charges one customer a fee of any kind they have to charge everyone the same fee, or they open themselves up to a lawsuit.

Another fear is that charging a different dealer fee to different customers is “illegal”. This does not appear to be the case unless state law specifically prohibits dealerships from charging any customer a different doc fee amount than any other customer. The only state of which I’m aware that has such a prohibition is West Virginia. In a 2014 case brought by the West Virginia Automobile & Truck Dealers Association against Ford Motor Company, the court disagreed that charging different doc fees is prohibited by West Virginia Consumer Credit and Protection Act, but agreed that guidance from the West Virginia Motor Vehicle Dealers Advisory Board prohibits dealerships from charging any customer a higher doc fee than any other customer. (Arguably, this is not a violation of WV law and thus not “illegal” per se, but simply guidance from the WVMVDAB who’s “statutory purpose is to assist and to advise the Commissioner of the Division of Motor Vehicles on the administration of laws regulating the motor vehicle industry; to work with the commissioner in developing new laws, rules or policies regarding the motor vehicles industry; and to give the commissioner such further advice and assistance as he or she may from time to time require.” Regardless, WV dealers are bound to follow the Dealer Advisory Board’s directions).

So the easy answer is to just charge everyone the same doc fee, right? Perhaps. But here’s the rub: Conveyance/Processing fees are dealer-imposed charges and therefore not mandatory – only government fees are compulsory. So it is improper to tell a customer that you MUST charge them the fee – this could lead to a deceptive practices claim.

So how do you avoid potential discrimination claims? By being able to show proof that any downward deviations in fees are for valid business reasons. For example, if a manufacturer limits the doc fee for an employee purchase, that reason should be documented in writing and a copy kept in the deal jacket. Another example would be that a competitive dealer offered a lower doc fee that you needed to match to make the deal. Again, documentation is key. This follows the same line of reasoning as NADA’s Fair Credit Compliance Program for rate markups.

The information presented in this article is solely the opinion of Jim Radogna and is not intended to convey or constitute legal advice, and is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any such information without first seeking qualified professional counsel on your specific matter.

Jim Radogna is a nationally-recognized auto industry consultant specializing in dealership sales and regulatory compliance. He is the President of Dealer Compliance Consultants, Inc., based in San Diego, California and a frequent contributor to automotive publications including Dealer Magazine, Automotive News, WardsAuto, Auto Dealer Monthly, DrivingSales Dealership Innovation Guide, AutoSuccess, CBT News Magazine, and F&I Magazine. He can be reached at (858) 722-2726 or by email at jim@dealercomplianceconsultants.com

Posted in Coverage, Doc Fees, Indirect Financing, Regulatory Compliance, TIL Disclosures, Truth in Lending Act | Tagged , , , , | Leave a comment

Times Change and so do Car Prices: Bring back the Gremlin!!


gremlinI remember when my dad sold AMC Gremlins for $1,999 in the early 1970’s.  Yes, I grew up with Hornets, Javelins, Matadors, Pacers and Gremlins — probably the most bizarre car line ever produced in America, or anywhere else for that matter. (I was called “Gremlin Greg” when I was a kid.  I guess I had kinda pointy ears). Fortunately, my dad also had the Jeep line.

The Gremlin was introduced on April 1, 1970 and a red Gremlin was featured on the April 6, 1970 cover of Newsweek magazine for an article, “Detroit Fights Back: The Gremlin”. The “base” two-passenger version (no rear seat and a fixed rear window) had a MSRP of $1,879 and the four-seat hatchback (with opening rear window) listed for $1,959.

Now, according to a recent FTC report:

In 2015, the average price of a new car sold in the U.S. was $33,560, according to Kelly Blue Book (see Kelly Blue Book, Average New Car Transaction Prices Rise Steadily, Up 2.6% in April 2015 (May 1, 2015)) while the average price of a used car was $20,057.  See Used Car Prices Hold Up in Strong New-Vehicle Market), J.D. Power (Sept. 8, 2015). Used cars available from independent dealers and from “buy here pay here” dealers were lower in price.  In 2014, over 42% of cars sold by independent dealers had an average sales price of $5,000 – $10,000; the average cost of cars at “buy here pay here” dealers was $7,150.  See 2015 NIADA Used Car Industry Report, at 6 and 16.

On a much more upbeat note, anyone can buy the dilapidated, tax-foreclosed former American Motors headquarters in Detroit for $500 — provided they also pay the back taxes of around $240,000.  (See, The Detroit News, “Wayne County voids $500 sale of former AMC headquarters” (October 26, 2015)).

Perhaps some young automotive entrepreneur will fix up the place and bring back the Gremlin!!  Nah.

PS:  If sold today, the Gremlin would retail for around $11,500 in 2015 dollars.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2016.

Posted in Auto Dealer, Coverage | Leave a comment

Auto Rental News Special Report: The Problem with Renting Fast Cars


m-gothamaccident-1

I was a featured commentator in this report, the second highest viewed article of Auto Rental News in 2015:

Traditional rental companies and leasing companies are protected by laws that eliminate vicarious liability (such as the federal Graves Amendment) or state laws that cap vicarious liability. These laws usually only apply to vehicle owners “engaged in the trade or business of renting or leasing motor vehicles” and “are not likely to help the individual who owns an exotic car and wants to make some side income by allowing it to be rented out,” says Greg Johnson, a Minnesota attorney focusing on auto dealers and rental car and transportation companies. “Additionally, the vehicle owner remains on the hook for claims of direct negligence, such as negligent vehicle maintenance or even negligent entrustment.”

You can check out the full article here: Special Report: The Problem with Renting Fast Cars

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2015.

Posted in Rentals | Tagged , , ,

Why do Auto Dealers Purchase Limited Truth in Lending Coverage?


insurance-contracts-300x199Why do dealerships keep purchasing statutory errors and omissions coverage that is not likely to protect the dealership if it is sued by a customer for truth in lending violations?

I’ve been handling dealership insurance coverage disputes for a long time. I thought the following insurance coverage form became obsolete by the early 2000’s, but recently learned I was mistaken:

[A]ll sums which the insured shall become legally obligated to pay as damages solely by operation of Section 130, Civil Liability, of Title 1 (Truth in Lending Act) of the Consumer Credit Protection Act (Public Law 90-321; 82 State 146, et seq.) because of error or omission in failing to comply with said section of said Act.

What’s the problem with this type of coverage form? In addition to not providing any protection to dealerships for liability associated with a variety of other consumer protection statutes (which has been the subject of prior articles on this blog), this form does not even purport to protect the dealership against truth-in-lending liability under state automobile financing acts. It is specifically limited to violations of the federal TILA. More specifically, although state automobile financing acts obligate a dealership to disclose the exact same minimal credit information required to be disclosed under the federal TILA (e.g., total sales price, APR, finance charge, itemization of amount financed, monthly payment, etc.) and most truth in lending litigation against dealerships is based on violations of state auto financing laws as opposed to the federal TILA, this insurance form will likely not protect the dealership.

Several courts have interpreted this type of coverage form and held that an insurer will only have an obligation to protect the dealership if the customer’s complaint specifically alleges (1) a violation of the federal TILA and (2) seeks damages under the federal TILA. See e.g., Luna v. Praetorian Insurance Co., 2015 WL 1539041 (Cal. Ct. App. March 30, 2015); TIG Insurance Company v. Joe Rizza Lincoln–Mercury, Inc., 2002 WL 406982 (N.D. Ill. Mar. 14, 2002); John Markel Ford v. Auto–Owners Ins. Co., 543 N.W.2d 173 (Neb.1996); Tynan’s Nissan v. Am. Hardware Mut. Ins. Co. 917 P.2d 321 (Colo.App.1995); Heritage Mut. Ins. Co. v. Ricart Ford, 663 N.E.2d 1009 (Ohio App. 10 Dist.1995). See also, Sonic Automotive Inc. v. Chrysler Insurance Co., 2014 WL 1382070 (S.D. Ohio Apr. 8, 2014) (discussing cases and finding insurer had no obligation to defend dealerships). Stated another way, this coverage form is not likely to protect the dealership against truth in lending claims which only allege violations of a state auto financing act or only seek damages under the state auto financing act – despite the fact that the violation complained of would also violate the federal TILA.

What can a dealership do? First, make sure you know what kind of insurance coverage you are purchasing to protect your sales and F&I operations risk. Many insurers offer statutory errors and omissions coverage for a dealership’s violation of a “federal, state or local” truth-in lending laws. Second, if your current policy is limited to violations of the federal TILA, ask the insurer to issue a manuscript endorsement extending coverage to “any federal, state or local” truth in lending laws. While such a manuscript endorsement would not protect the dealership against liability associated with the myriad of other consumer protection statutes, it would at least protect the dealership if sued under any truth in lending law.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2015.

Posted in ADCF Policy, Auto Dealer, Truth in Lending Act, Truth in Lending Coverage | Tagged , , , , | Leave a comment

Protecting the Dealership’s “Front-End” and “Back-End”: What Does that Mean?


Compliance-InsuranceEveryone in the retail automobile industry is familiar with the terms “front-end” and “back-end.” They represent two sources of potential revenue (and, hopefully, profit) for auto dealerships: The “front-end” refers to revenue realized on the sale of the vehicle and the “back-end” includes revenue on anything sold after the vehicle including dealer reserve on dealer-arranged financing (a/k/a indirect auto loan financing), extended service contracts, maintenance contracts, credit life and disability insurance and other services and add-on products such as paint and fabric protection.

In my legal practice — which revolves around regulatory compliance, auto dealer defense litigation and dealership insurance — the terms take on additional meanings. Protecting a dealership on the “front-end” refers to the process of implementing programs to eliminate (or reduce the risk of) non-compliance before it occurs. It’s no secret that auto dealerships have become subject to increased federal and state regulation, increased enforcement actions and increased litigation over the past several years, primarily in the areas of sales and finance, consumer privacy, vehicle advertising and network and data security. A while back, I posted an article Auto Dealer Arranged Financing: 51 Laws Dealers Must Know which addressed a portion – yes, only a portion — of the federal and state laws and regulating dealers.   Those 51 Laws included:

  1. Federal Trade Commission Advertising Rules
  2. State Advertising Laws & Regulations
  3. CAN SPAM Act & FTC E-Mail Rules
  4. CAN SPAM Act & FCC Texting (Internet Domain)Rules
  5. Telephone Consumer Protection Act & FCC Regulations
  6. Federal Trade Commission Texting (Phone) Rules
  7. Federal Trade Commission Autodialer Rule
  8. Federal Trade Commission Do Not Call Rule
  9. Telemarketing and Consumer Fraud and Abuse Prevention Act
  10. Federal Trade Commission Telemarketing Sales Rule
  11. Deceptive Mail Prevention and Enforcement Act
  12. Junk Fax Prevention Act & FCC Regulations
  13. Gramm-Leach-Bliley Act (GLBA) & Regulations
  14. Federal Trade Commission Privacy (Notice) Rules
  15. Federal Trade Commission Privacy (Information Sharing) Rules
  16. Federal Trade Commission Information Safeguards Rule
  17. Federal Trade Commission Pretexting Provisions
  18. FACTA Red Flags Rule (Identity Theft Prevention Program)
  19. FACTA Information Disposal Rule
  20. Federal Trade Commission Section 5 UDAP Prohibitions
  21. Computer Fraud and Abuse Act (CFAA)
  22. Electronic Communications Privacy Act (ECPA
  23. Driver’s Privacy Protection Act (DPPA)
  24. Truth & Lending Act & Regulation Z
  25. Consumer Leasing Act & Regulation M
  26. State Retail Installment Sales Acts-Disclosure
  27. State Retail Installment Sales Acts-Usury
  28. Equal Credit Opportunity Act-Discrimination
  29. Equal Credit Opportunity Act-Adverse Action
  30. Fair Credit Reporting Act-General Provisions
  31. Fair Credit Reporting Act-Adverse Action
  32. Federal Trade Commission Credit Practices Rules
  33. Federal Trade Commission Risk-Based Pricing Rule
  34. State Insurance Statutes & Regulations
  35. State Service Contract Statutes & Regulations
  36. Electronic Funds Transfer Act & Regulation E
  37. IRS Form 8300 Cash Reporting Rule
  38. USA PATRIOT Act and OFAC Requirements
  39. Servicemembers Civil Relief Act
  40. Fair Debt Collection Practices Act
  41. Uniform Commercial Code (Repossession)
  42. State Consumer Fraud Prevention Acts
  43. State Unfair & Deceptive Trade Practices Acts
  44. Federal Network Security and Data Privacy Laws
  45. State Network Security and Data Privacy Laws
  46. Federal Odometer Act
  47. State Odometer Acts
  48. State Title Branding Laws
  49. Federal Trade Commission Used-Car Rule
  50. Magnuson-Moss Warranty Act
  51. State New Vehicle Lemon Laws

In today’s regulatory environment, pro-active front-end compliance has become a necessity. Non-compliance with any one of the myriad laws and regulations can result in formal enforcement actions, individual or class-action litigation, monetary penalties, damages, attorney’s fees and negative publicity. Some can even lead to criminal liability.

To that end, all dealerships need to have a Comprehensive Compliance Management System (CCMS). A CCMS is how a dealership learns about all of its legal compliance obligations (including the 51 federal and state laws described above), reviews its business operations to make sure responsibilities and obligations are satisfied, takes corrective action as warranted and updates its policies, rules and processes as necessary. An effective CCMS will minimally include the following four components subject to management oversight: (1) written policies and procedures; (2) training on those policies and procedures; (3) auditing of employee compliance; and (4) ongoing monitoring of regulatory and legal changes and developments. A formal, compliance program serves several purposes. In addition to being a planned and organized effort to identify risk and guide the dealership’s compliance activities, it helps reduce risk by serving as an essential source document and reference tool to train all employees, both current and new. A well planned and implemented program will prevent (or reduce the risk of) regulatory violations, provide dealership cost efficiencies and has become a necessary business step.  It may also serve to limit or reduce the penalties and damages the dealership may face should a regulatory authority comes knocking on the dealership’s door. One of the first things a regulatory authority will ask for is a copy of the dealerships current compliance program.

I will be discussing the CCMS components in future articles.

Protecting the dealership’s back-end means implementing programs which will protect the dealership after it has been placed on notice of non-compliance (or alleged non-compliance) by a regulatory authority, consumer or even one of the lending institutions with whom the dealership does business. While employing, or having access to, a dealership litigation attorney is key and appointing a dealership employee to serve as a customer liaison is a good idea (it only makes sense to have one person assigned overall responsibility to discuss concerns and disputes with customers and work with the dealership’s attorney and insurance company), one of the most significant aspects of back-end protection relates to the purchase of liability insurance. Although there is no insurance product on the market which protects a dealership against all types of statutory and regulatory violations (including the 51 laws and regulations referred to above) and all forms of damages, penalties and other relief that may be sought from the dealership, a dealership can significantly reduce its potential liability – i.e., protect its “back end” — by purchasing the “correct” types of insurance coverage when purchasing its garage liability policy (now known as the “auto dealer coverage form”) including what is generically referred to as  “statutory errors and omissions coverage” and “consumer complaint coverage.”

At its most basic level, statutory errors and omissions coverage is designed to protect the dealership against violations of certain specified laws and regulations when a lawsuit is brought by a dealership customer (and sometimes is written broadly enough to protect the dealership against proceedings initiated by  lending institutions and regulatory authorities).  This optional coverage is an absolute necessity for dealerships because such suits will not generally be covered by the basic garage liability coverage form. The basic garage liability policy only extends coverage for claims of “bodily injury,” “personal injury” and “property damage,” not economic losses or statutory damages resulting from the violation of a federal or state consumer protection law.  If applicable, statutory errors and omissions coverage obligates the insurance company to defend the dealership in the suit (or reimburse the dealership for the attorney’s fees it incurs to defend the suit) and will also pay damages on behalf of the dealership in the event the customer prevails, up to the specified policy limit.

Consumer complaint coverage is intended to cover customer suits that are not covered by other portions of the policy including any statutory errors and omissions coverage that may be available under the policy. A typical endorsement defines a “customer complaint suit” to mean “a ‘claim’ or ‘suit’ against you by or on behalf of your customer that results from the leasing or sale of your product to the customer, damage to your product or work you performed for your customer.”  This coverage is typically written on a defense-only” basis, meaning it will only defend the dealership in the suit (or reimburse the dealership for the attorney’s fees it incurs to defend the suit) up to the specified policy limit (often written for fairly nominal limits such as $25,000 per suit) and will not pay any damages the dealership may be legally obligated to pay the customer should s/he actually prevail in the suit against the dealership.

While most dealerships take their compliance obligations seriously and developing and implementing a Comprehensive Compliance Management System will significantly reduce the risk of non-compliance, having liability insurance in place that will protect the dealership — at least pay for the costs of defending the suit — is critical. The biggest exposure in consumer litigation, particularly class action litigation, is often the costs of defending the suit.

Unfortunately, many dealerships do not understand the basic differences between the types of statutory errors and omissions coverage that are available on the market. There are at least seven different types and they do not afford the same protection.  Some forms have been interpreted by courts to only provide coverage when the customer (as opposed to a lender or regulatory authority) alleges a claim for damages under the federal Truth in Lending Act and Regulation Z (law # 24, above) and federal Truth in Leasing Act and Regulation M (law #25, above), statutes which are only occasionally alleged in consumer litigation today.  Other forms extend far broader coverage, protecting the dealership against the violation of several different federal laws and regulations as well as violations of state laws or regulations relating to consumer financing or consumer leasing.  Dealerships need to understand the differences between the coverage forms to protect their “back-end.”  Purchasing coverage which applies only to the violation of a narrow class of federal laws and regulations makes little sense when most litigation is state-law based.

I will be addressing the seven different forms of statutory errors and omissions coverage in future articles.

So, what does” front-end” and “back-end” mean?  It depends on who you are talking to.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2015.

Posted in ADCF Policy, Auto Dealer, Coverage, Duty to Defend, Duty to Indemnify, Truth in Lending Coverage | Tagged , , , , , , , | Leave a comment

Minnesota Dealership and Lenders Prevail in Fair Credit Reporting Act Litigation


images09Y0210OCan an auto dealership be liable for damages when it transmits a customer’s credit application to several financial institutions through an automated on-line credit application system and the financial institutions pulls the customer’s credit report without express authorization from the customer? Does a financial institution need consumer authorization to access the customer’s credit report when evaluating whether to extend financing for the purchase of a vehicle? Is a dealership the financial institution’s “agent” when attempting to arrange financing? Do multiple auto loan credit report inquiries occurring within a relatively short period adversely impact a consumer’s credit score?

A Minnesota federal district court recently addressed many of these issues in Hutar v. Capitol One Financial Corp., 2015 WL 4868886 (D. Minn. July 27, 2015), a case I handled for the dealership. (The decision was a Report and Recommendation of Magistrate Judge Jeffrey J. Keyes, which was later affirmed by order of Chief Judge Michael J. Davis).

In November 2014, Hutar agreed to buy a new vehicle and asked the dealership to arrange financing. She provided basic credit information to the dealership (e.g., her name, address, employment, income and social security number) which the dealership transmitted to nine financial institutions through the DealerTrack on-line system. (A decade or so ago, credit applications would be transmitted to each financial institution separately via fax, a cumbersome and lengthy process. Today, most dealerships subscribe to automated on-line systems where the application can be sent to several lenders simultaneously. See, Consumer Financial & Protection Bureau, Bulletin 2013-02: Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act, at p. 1 (March 21, 2013) (noting that in “indirect auto financing, the dealer usually collects basic information regarding the applicant and uses an automated system to forward that information to several prospective indirect auto lenders”)).

Upon receiving Hutar’s credit application, each financial institution obtained a copy of Hutar’s credit report. (This is a routine practice. Financial institutions will review the credit application information and typically access and review the customer’s consumer credit report to decide whether to extend credit to the customer for the purchase of the vehicle. See, Stergiopoulos and Castro v. First Midwest Bancorp, Inc., 427 F.3d 1043, 1044 (7th Cir.2005) (“[d]ealers routinely attempt to assign tentative financing arrangements to lenders, and those lenders often rely on a consumer’s credit report to determine whether the deal is worth taking”); Federal Trade Commission, Understanding Vehicle Financing (the “potential assignees evaluate [the customer’s] credit application using automated techniques like credit scoring, where factors like [the customers’] credit history, length of employment, income, and expenses may be weighted and scored”)).

Americredit agreed to extend financing to Hutar for the purchase of the vehicle. Hutar signed a retail installment sales contract which was assigned to Americredit and drove away in her new vehicle.

Six months later, Hutar sued. In her complaint, Hutar alleged she “specifically instructed” the dealership to seek financing through only Americredit and Ally Financial. Based on this assertion — which was disputed bt the dealership — Hutar alleged claims against the dealership and the other seven financial institutions.  She claimed the dealership invaded her privacy by sharing her credit application with those financial institutions and those institutions, in turn, lacked a permissible purpose to pull her credit report under the Fair Credit Reporting Act (“FCRA”), 15 U.S.C. § 1681b(f) and also invaded her privacy by accessing her credit report.

Hutar further alleged that if the seven financial institutions did not know of her “specific instructions,” the dealership acted as their “agent” and the dealership’s knowledge could be imputed to them.

She sought actual damages, statutory and punitive damages and attorney’s fees.

After the lawsuit was filed, the seven financial institutions tendered the defense of the lawsuit to the dealership pursuant to the defense provisions of the Lender-Dealer agreements between them. They further claimed that if they were found liable for damages to Hutar under the FCRA or for invasion of privacy, the dealership would be required to reimburse them for any sums they were required to pay Hutar pursuant to the indemnity provisions of the Lender-Dealer agreements.

In ruling on the motion to dismiss, the federal district court was required to accept Hutar’s factual allegations as true. Accordingly, the court was required to assume that Hutar had instructed the dealership to seek financing through only Americredit and Ally Financial and not any of the seven financial institutions who were named as defendants in the lawsuit.

Permissible Purpose Not Dependent on Consumer Authorization

In her pleadings, Hutar had alleged that “she never specifically authorized the lenders to obtain her credit report,” Hutar, at *4, and therefore the financial institutions lacked a “permissible purpose” to access her credit report.  The federal district court rejected this argument.

Whether a permissible purpose exists in a dealer-arranged financing transaction does not depend on the consumer’s consent or intent.  The plain language of the FCRA focuses on the intent of the party obtaining the consumer report – i.e., the financial institution – not the consumer. See 15 USC § 1681b(a)(3)(A) (lender has permissible purpose if it “intends to use the information in connection with a credit transaction involving the consumer on whom it is furnished”). Accordingly, several courts have held a financial institution will have a permissible purpose to obtain a credit report when it receives a credit application from a dealership unless the financial institution knew, or had reason to know, the dealership submitted the application in violation of the consumer’s instructions. See Stergiopoulos and Castro v. First Midwest Bancorp, Inc., 427 F.3d 1043, 1047 (7th Cir.2005) (rejecting argument that financial institution violated FCRA “by requesting consumers’ credit reports without the consumers’ knowledge or explicit consent”); Wells v. Craig & Landreth Cars, Inc., 474 F. App’x 445, 447 (6th Cir.2012) (FCRA claim dismissed against financial institution despite consumer’s contention that credit application was submitted by dealership without consumer’s permission); Kertesz v. TD Auto Fin. LLC, 2014 WL 1238549 (N.D. Ohio Mar. 25, 2014) (granting summary judgment dismissing lender); Shepherd–Salgado v. Tyndall Fed. Credit Union, 2011 WL 5401993 (S.D.Ala. Nov.7, 2011) (granting lender’s motion to dismiss lawsuit); Enoch v. Dahle/Meyer Imports, LLC, 2009 WL 499544 (D. Utah Feb. 27, 2009) (“Enoch II”) (granting lender’s motion for summary judgment); Enoch v. Dahle/Meyer Imports, LLC, 2007 WL 4106264 (D. Utah Nov. 16, 2007) (“Enoch I”) (granting lender’s motion for summary judgment).

The court in Hutar determined the seven financial institutions had a permissible purpose under FCRA to access Hutar’s credit report because they “had a good faith basis to believe Hutar authorized the credit check, and second, [they] intended to use her credit report in connection with Hutar’s application for financing.” Hutar, at *6. Additionally, there was no allegation, much less evidence, that “any of the [financial institutions] actually knew or had any reason to know that Hutar [had allegedly] told a Wilcox employee that she only wanted Americredit and Ally Financial to view her credit report.” Hutar, at *4.

No Invasion of Privacy by Intrusion Upon Seclusion

Minnesota adopted the privacy tort of intrusion upon seclusion in Lake v. Wal–Mart Stores, Inc., 582 N.W.2d 231, 233 (Minn.1998).  The tort requires a plaintiff to prove three elements: (1) an intentional intrusion, physical or otherwise; (2) upon the plaintiff’s solitude or seclusion or private affairs or concerns; (3) which would be highly offensive to a reasonable person. Id.

The federal district court rejected Hutar’s claim because obtaining a credit report is not an “intrusion” where the defendant had a permissible purpose under FCRA to obtain it. “Simply accessing another’s credit report in good faith … does not typically give rise to an intrusion upon seclusion claim.”  Hutar, at *8 (quoting Eaton v. Central Portfolio Control, Inc., 2014 WL 6982807 at *3 (D. Minn. 2014)). See also, Daniel v. Equable Ascent Fin., LLC, 2014 WL 5420058 at *2 (E.D. Mich. Oct. 22, 2014) (dismissing intrusion upon seclusion claim “[b]ecause Defendants’ acquisition of Plaintiff’s credit report was permissible”); Edge v. Professional Claims Bureau, Inc., 64 F.Supp.2d 115, 119 (E.D.N.Y.1999) (“[b]ecause Professional accessed Plaintiff’s address for a permissible purpose under the FCRA, that access cannot be said to have been without ‘authorization’ as required to impose liability under the Computer Fraud Act”).

No Agency Relationship between Dealer and Financial Institutions

The federal district court also rejected Hutar’s alternative argument that the dealership acted as the “agent” of the financial institutions when it submitted her credit application to them through the DealerTrack system. As noted above, Hutar claimed she instructed the dealership to only seek financing through Americredit and Ally.  She claimed the dealership’s knowledge of this “fact” could be imputed to the seven financial institutions as the dealership’s principals. Hutar, at *6. If the dealership’s knowledge could be imputed to the seven financial institutions, she would be able to pursue the FCRA and invasion of privacy claims against them as they would then lack a permissible purpose to access her credit report.

The Lender-Dealer Agreements between the dealership and each financial institution uniformly provided the dealership was not the agent of the financial institution when arranging financing or for any other purpose. However, in light of the applicable standard of review governing the motion to dismiss, the federal district court declined to decide the issue based on the language of the Lender-Dealer Agreements. Instead, the court analyzed the issue under the federal common law of agency. Under the federal common law, to prove an agency relationship, there must be “a manifestation by the principal to the agent that the agent may act on his account and consent by the agent to so act.” Hutar, at *7 (quoting Restatement (Second) of Agency § 15 (1958)).  In addition, “[a] principal [must have] the right to control the conduct of the agent with respect to matters entrusted to him.” Id.

The court scoured Hutar’s pleadings and rejected her agency argument, stating: “[u]nder any applicable standard, [Hutar’s] allegations fail to show the existence of an agency relationship between [the dealership] and the [seven financial institutions].” Hutar, at *7.  The “allegations do not show that the [financial institutions] manifested assent for [the dealership] to act on their behalf. Nor do they show [the dealership] acquiesced or consented to do so . . . [or] … that any [financial institution] controlled [the dealership’s] conduct.” Id.

Decreased Credit Score Damages

In light of its ruling on the liability issues, the federal district court did not need to consider the merits of Hutar’s claimed damages, including her claim that the credit report inquiries made by the financial institutions caused her credit score to be reduced. The credit bureaus combine all the factors in a consumer’s credit history into one numerical score commonly referred to as a FICO score. This ranges from 350 to 800, with the higher score being the best. A credit inquiry means the consumer has applied for some form of credit, prompting a creditor to check his/her credit report.

While a decreased credit score has never been enough by itself to constitute damages (the consumer must prove the decrease in credit score directly caused damage) the so-called “reduced credit score” theory is rarely viable. This is so for two reasons.  First, multiple auto loan inquiries occurring within a relatively short period have no impact on a consumer’s credit score beyond the first inquiry. The FICO credit-scoring model recognizes that many consumers either shop around for auto credit or have dealerships arrange financing and that multiple financial institutions may therefore request the consumer’s credit report. To compensate for this, the older version of the FICO score formula counted all auto loan inquiries with any 14-day period as just one inquiry. “The first inquiry has a minor impact on the credit score, but subsequent inquiries do not,” says Melinda Zabritski, senior director of automotive credit for Experian. “Experian, for example, groups multiple inquires occurring within a two-week period and they have no further effect on a consumer’s credit score.” http://www.edmunds.com/car-loan/seven-things-to-know-about-car-loan-credit-reports.html  In the newest FICO scoring formula, the14-day period was extended to 45-days. The newest version went online at TransUnion, Equifax and Experian in 2004. Because the credit scoring systems count multiple auto loan inquiries as a single inquiry, submitting a customer’s application to multiple lenders does not affect a customer’s credit score.

Second, it would be a rare occurrence where a credit report inquiry, as opposed to other risk factors that make up a FICO score (e.g., payment history, number of open accounts, amount of debt incurred, repossessions, judgments, etc.), directly causes a consumer to suffer actual damages (e.g., be denied credit on a pending transaction or be subjected to an increased APR on an existing credit obligation).  Typically, no more than 10% of a FICO score is determined by a person searching for, or taking out, new credit and a hard inquiry normally subtracts no more than five points from a person’s score and often no points are subtracted.

The federal district court’s ruling in Hutar was not appealed.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2015.

 

 

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The CFPB Strikes Again – Class Action Waivers to be Eliminated? Maybe Not.


untitled (19)The Bad News. At a recent Consumer Financial Protection Bureau field hearing in Denver, the CFPB revealed a proposal to eliminate the use of class action waivers in consumer finance contracts. Many retail installment sales contracts require arbitration for consumer disputes and also contain a waiver against class actions.  This is unfavorable news for dealers, particularly in California, where there has been a recent flood of consumer class action credit litigation and the industry recently obtained a favorable ruling from the California Supreme Court, Sanchez v. Valencia Holding Company, LLC, 353 P.3d 741 (Cal.  2015), holding that arbitration clauses with a class action waiver were valid.

The Good News. The House Financial Services Committee passed  H.R. 1266 by a vote of by 35 to 24, which would replace the CFPB’s sole director with a bipartisan, five-member Commission. The Committee also passed H.R. 957which would create an independent, Senate-confirmed inspector general for the CFPB. This passed 56 to 3.  At present, it is unknown if and when these bills will be considered by the full House. With a change in the structure of the CFPB and legislative oversight, the CFPB’s anti-class action waiver proposal, like many CFBP proposals, would be less likely to gain traction.  Time will tell.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2015.

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