Dealership Arranged Leases: Is the Lessor Liable for the Lessee’s Negligent Operation of the Vehicle?

imagesA dealership leases a vehicle to a customer under a 48 month lease agreement. The lease is assigned to Honda Lease Trust, a leasing company, and administered by American Honda Finance Company. If the lessee-customer negligently causes an accident and injures a third party during the term of the lease, is the lessor (dealership or assignee) also liable to the injured party? Does the lessor have to afford any liability insurance protecting the lessee-customer against the claims of the injured party?

An initial review of Minnesota law would appear to impose vicarious liability on the vehicle lessor and require the vehicle lessor to maintain liability coverage on the leased vehicle that would also protect the lessee against the claims of the injured party.

First, Minnesota requires a vehicle owner to maintain bodily injury and property damage liability insurance on the vehicle in the minimum amounts of $30,000/60,000/$10,000. Minn. Stat. §§ 65B.48, subd. 1; 65B.49, subd. 3.

Second, although Minnesota statutes do not specifically require a vehicle owners policy extend liability protection to permissive users (i.e., omnibus coverage), Minnesota courts have held that vehicle owner policies must afford omnibus coverage in the minimum limits required by law. See e.g., State Farm Mut. Auto. Ins. Co. v. Universal Underwriters Ins. Co., 625 N.W.2d 160, 163-64 (Minn. Ct. App. 2001); Agency Rent-A-Car, Inc. v. American Family Mut. Auto. Ins. Co., 519 N.W.2d 483, 487 (Minn.App.1994).

Third, Minnesota is also one of a dozen jurisdictions that have imposed vicarious liability on vehicle owners. Under a vicarious liability law, the vehicle owner is liable for injuries and damages caused by a permissive user solely by reason of its status as vehicle owner. See Minn. Stat. §169.09, subd. 5a (“[whenever any motor vehicle shall be operated within this state, by any person other than the owner, with the consent of the owner, express or implied, the operator thereof shall in case of accident, be deemed the agent of the owner of such motor vehicle in the operation thereof”).

Based on these statutes, Minnesota law would appear to impose vicarious liability on the vehicle lessor and also require the lessor to maintain liability insurance that would protect the lessee in the minimum amounts of $30,000/$60,000/$10,000. However, that is not the case. Since the enactment of the Minnesota No-Fault Act in 1974, vehicle owners that lease vehicles for a term of six months or more are not deemed the owner for purposes of insuring the vehicle or for purposes of vicarious liability. Minnesota Statute § 65B.43, subd. 4 provides as follows:

“Owner” means a person, other than a lienholder or secured party, who owns or holds legal title to a motor vehicle or is entitled to the use and possession of a motor vehicle subject to a security interest held by another person. If a motor vehicle is the subject of a lease having an initial term of six months or longer, the lessee shall be deemed the owner for the purposes of sections 65B.41 to 65B.71, and 169.09, subdivision 5a, notwithstanding the fact that the lessor retains title to the vehicle and notwithstanding the fact that the lessee may be the owner for the purposes of chapter 168A.

Of course, even if Minnesota Statute § 65B.43, subd. 4 did not insulate vehicle lessors from vicarious liability for accidents caused by the lessee, the federal Graves Amendment, 49 U.S.C. § 30106(a) (2006), would do so. The Graves Amendment provides,

An owner of a motor vehicle that rents or leases the vehicle to a person (or an affiliate of the owner) shall not be liable under the law of any State or political subdivision thereof, by reason of being the owner of the vehicle (or an affiliate of the owner), for harm to persons or property that results or arises out of the use, operation, or possession of the vehicle during the period of the rental or lease, if—

(1) the owner (or an affiliate of the owner) is engaged in the trade or business of renting or leasing motor vehicles; and

(2) there is no negligence or criminal wrongdoing on the part of the owner (or an affiliate of the owner).

Although there are far more cases which have preempted state law vicarious liability claims against car rental companies, several courts have recognized that the Graves Amendment preempts state laws imposing vicarious liability on long-term lessors as well. See e.g., Rosado v. DaimlerChrysler Fin. Servs. Trust, 112 So. 3d 1165 (Fla. 2013) (Graves Amendment preempts vicarious liability under Florida Statute 324.021(9)(b)(1) which defines when a long-term lessor remains the owner of a leased motor vehicle for purposes of vicarious liability under Florida’s dangerous instrumentality doctrine); Rodriguez v. Testa, 296 Conn. 1, 993 A.2d 955 (2010) (Graves Amendment preempts Connecticut statute imposing vicarious liability on the lessor of a motor vehicle for damages caused by the negligent acts of the lessee); Carton v. Gen. Motor Acceptance Corp., 611 F.3d 451, 455 (8th Cir. 2010) (applying Iowa law) (“[e]ven if Iowa Code § 321.493 did not prohibit Appellants’ vicarious liability claims against GMAC, the Graves Amendment would preempt Iowa law and prohibit Appellants’ claims”); Merchants Ins. Grp. v. Mitsubishi Motor Credit Ass’n, 356 F. App’x 548, 551 (2d Cir. 2009) (“if Merchants’ suit against MMCA was commenced after the Graves Amendment’s effective date, the Graves Amendment preempts New York law and precludes Merchants’ claim”); Green v. Toyota Motor CreditCorp, 605 F. Supp. 2d 430 (E.D.N.Y. 2009) (Graves Amendment preempts New York Veh. & Tr. Law § 388(1) which created a cause of action for vicarious liability against even remote title owners and lessors such as TMCC and thereby bars recovery against leasing companies based on vicarious liability); Seymour v. Penske Truck Leasing Co., L.P., 2007 WL 2212609 (S.D.Ga. July 30, 2007).

Thus, under Minnesota law, a vehicle lessor has no vicarious liability for the lessee’s negligent operation of the vehicle during the lease term and has no obligation to provide liability insurance with respect to the leased vehicle. Unless the vehicle lessor has voluntarily purchased liability insurance on the leased vehicle which also extends protection to the lessee (i.e., omnibus coverage) — the sole source of liability coverage for the lessee’s accident will be the policy insuring the only liable party—the lessee.

A vehicle lessor may, of course, incur liability for its own active negligence if that negligence was also a cause of the accident. Neither Minn. Stat. § 65B.43, subd. 4 nor the Graves Amendment insulate a vehicle lessor against claims of direct negligence that may arise when the vehicle is initially leased, such as negligent inspection or negligent entrustment. However, such claims will be evaluated cautiously by courts in light of Congress’s clear intent to forestall suits against vehicle lessors.

Negligent entrustment claims are quite difficult to prove against vehicle lessors. Minnesota adopted the tort of negligent entrustment as it applies to the entrustment of a chattel to an incompetent or inexperienced person in Axelson v. Williamson, 324 N.W.2d 241 (Minn. 1982) (adopting Restatement (Second) of Torts § 390 (1977)). To prevail on this claim, the injured party would have to prove the lessor knew the lessee posed an “unreasonable risk of physical harm to others.” Id. See also, Carton v. Gen. Motor Acceptance Corp., 611 F.3d 451, 453-59 (8th Cir. 2010) (applying Iowa law) (evidence of lessee’s “financial irresponsibility and failure to obtain insurance” was not sufficient to establish negligent entrustment claim because such evidence would not support claim that lessee “pose[d] an unreasonable risk of physical harm to others”); Guinn v. Great W. Cas. Co., 2010 WL 4811042, at *6 (W.D. Okla. Nov. 19, 2010) (“[l]iability for negligent entrustment of a vehicle may be imposed only where person knew or reasonably should have known that the other driver was careless, reckless and incompetent”). A Minnesota lessor may have a duty to check the potential lessee’s driver’s license to ensure that it is facially valid. However, in the absence of a legal obligation (duty) to perform more stringent screening procedures, such as requesting driving records or conducting criminal record searches, the injured party would have difficulty proving the lessor knew the lessee posed an “unreasonable risk of physical harm to others” at the time the vehicle was leased.

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 Auto Dealer, Coverage, Indirect Financing | Tagged , , | Leave a comment

Dealership Arranged Financing: The Indirect Auto Lending Process

imagesKR8TOCTVThis article addresses the indirect auto lending process (a/k/a “dealer arranged financing”). While the article relies heavily on cases I have defended for dealerships here in Minnesota, the same process is involved across the nation. In Minnesota, an automobile dealership is a “retail seller” as defined by the Motor Vehicle Retail Installment Sales Act (“MVRISA”), Minn. Stat. §53C.01, subd. 10 (defined to mean “a person who sells or agrees to sell a motor vehicle under a retail installment contract to a retail buyer). With the exception of so-called “buy-here, pay-here” used car lots, dealerships do not extend credit to customers for the purchase of motor vehicles as dealerships are not licensed to act as sales finance companies. See Minn. Stat. §53C.01, subd. 12 (defining “sales finance company” to include “a person engaged, in whole or in part, in the business of purchasing retail installment contracts in this state from one or more retail sellers”); Minn. Stat. §53C.02(a) (providing that “[n]o person shall engage in the business of a sales finance company in this state without a license therefor”). The same prohibition exists in most jurisdictions. See e.g., Mass. Gen. Law Ch. 255B §2 (dealership which sells vehicles under retail installment contracts and holds the contract must obtain a “motor vehicle sales finance company” license).

Rather, if a dealership customer needs financing to pay for the purchase of a motor vehicle and the customer does not get financing not through his or her own bank, credit union or other financial institution (a process called “direct auto lending”), the dealership will attempt to arrange financing for the customer’s vehicle purchase through a financial institution (a/k/a indirect auto lending) with whom it has a business relationship. Most states specifically authorized indirect auto lending back in the 1950’s when state retail installment sales legislation was passed. See e.g., Minn. Stat. §53C.08, subd. 4 (“[a]ny sales finance company hereunder may purchase or acquire from any retail seller any retail installment contract on such terms and conditions as may be mutually agreed upon between them”).

Some of the Paperwork

The dealership will typically prepare a vehicle purchase contract detailing the agreed upon terms for the purchase of the vehicle (including the price of the vehicle, taxes and fees associated with the purchase, trade-in value and downpayment and the balance due (or to be financed)) and a retail installment sales contract” (“RISC”) setting forth the agreed upon credit terms and information required to be disclosed by the federal Truth in Lending Act (“TILA”), 15 U.S.C. §1638 and MVRISA, Minn. Stat. § 53.08. See also, Scott v. Forest Lake Chrysler-Plymouth-Dodge, 611 N.W.2d 346, 352 (Minn. 2000) (describing the indirect auto lending process and the difference between a vehicle purchase contract which “sets forth the terms of the actual purchase, including trade-in allowances and identifies the amount to be financed, if any” and a retail installment sales contract, which “sets forth the details of how the financing is to work — the interest rate, the finance charge, amount financed, total payment and total sales price”); Madrigal v. Kline Oldsmobile, Inc., 423 F.3d 819 (8th Cir. 2005) (involving the dealer-arranged financing process); Liabo v. Wayzata Nissan, LLC, 707 N.W.2d 715 (Minn. Ct. App. 2006), rev. denied (Minn. March 28, 2006) (same); Kinzel v. Southview Chevrolet Co., 892 F. Supp. 1211 (D. Minn. 1995) (same).

Customer’s Credit Information

In an indirect auto lending transaction, the dealership will typically collect very basic credit-related information from the customer (e.g., customer’s name, address, employment, income and social security number, etc.). This basic credit information along with the credit terms sought (e.g., amount financed, repayment terms, etc.) is often called the “credit application.” A decade ago, the credit application would be transmitted to each financial institution via fax, a cumbersome and sometimes lengthy process. Today, most dealerships subscribe to automated on-line systems and the credit application can be submitted to several financial institutions 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”).

The CFPB Bulletin is available on-line at

Lender Review of the Credit Information

Upon receiving the credit application, the financial institutions evaluate the 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 also, 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”). This process is often fully automated, such that the financial institution can provide its credit response to the dealership within minutes of the latter’s submission of the customer’s credit application. See, 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”).

The FTC Bulletin is available on-line at

After analyzing the data, “each potential assignee decides whether it is willing to buy the [retail installment] contract [and] notifies the dealership of its decision …” on the credit application. Id.

In the past, consumers and their attorneys occasionally alleged that a dealership’s submission of a customer’s credit application to multiple financial institutions had an adverse effect on a customer’s credit score as each financial institution will request a copy of the customer’s credit report. Such claims are rarely made today as multiple auto loan credit report inquiries occurring within a short period of time have no effect on a consumer’s credit score beyond the first 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. “It’s well known that consumers shop around when they are car buying,” she says. “So Experian, for example, groups multiple inquires occurring within a two-week period and they have no further effect on a consumer’s credit score.”

Dealership Unsuccessful in Arranging Financing

If the dealership is unable to arrange an extension of credit through a financial institution – i.e., all potential assignee financial institutions decline to extend credit to the customer for the purchase of the vehicle — the customer is generally not obligated to continue with the transaction, even if the customer has taken delivery of the vehicle. This is usually made clear in one or more documents such as a conditional delivery agreement (a/k/a “spot delivery” or “bailment” or “financing addendum” agreement) – an agreement which allows the consumer to take immediate (“on the spot”) delivery of the vehicle subject to financing approval by a financial institution. See e.g., Scott, 611 N.W.2d at 352 (Minn. 2000) (noting that a “retail installment contract … becomes effective only if financing is arranged” and a “conditional delivery agreement permits the buyer to take immediate possession of the vehicle, but the buyer is obligated to return it if financing is not approved”); Liabo v. Wayzata Nissan, LLC, 707 N.W.2d 715, 724, 727 (Minn. Ct. App. 2006) (noting that “[g]enerally, a retail installment contract comes into being only after financing is approved”); Madrigal v. Kline Oldsmobile, Inc., 423 F.3d 819, 820 (8th Cir. 2005) (conditional delivery agreement “expressly conditioned the sale of the [vehicle] upon Bank One or another financial institution accepting the assignment” of the retail installment contract); Sharlow v. Wally McCarthy Pontiac-GMC Trucks-Hyundai, Inc., 221 F.3d 1343, 1344 (8th Cir. 2000) (interpreting financing addendum which provided: “[i]n the event that the seller/dealer fails to arrange the subject financing and assign all of its interest … to a lending institution … the vehicle purchase contract and retail installment contract shall become null and void”); Vang v. Morrie’s Minnetonka Ford, 2001 WL 1589614 at *1 (D. Minn. Dec. 11, 2001) (involving conditional delivery agreement which provided in part: “YOU understand and agree that the vehicle has been delivered to YOU conditionally subject to approval of financing … If financing is not approved, any installment sales contract executed for purchase of the above-described vehicle shall be null and void”).

Thus, if the dealership is unable to arrange an extension of credit, the customer has the option of agreeing to different credit terms on the vehicle, purchasing a less expensive vehicle or simply walking away. In the past, consumers and their attorneys have occasionally alleged that “spot delivery” agreements somehow violated the law. However, most courts have recognized that “the fact that the borrower is not bound to the contract unless the agreed upon terms can be obtained from a third-party lender appears to serve the interests of the consumer.” Vang v. Morrie’s Minnetonka Ford, 2001 WL 1589614, at *4 (D. Minn. Dec. 11, 2001). “The fact that a borrower may be disappointed that credit terms cannot be obtained is unfortunate but does not constitute evidence of a TILA violation.” Id.

Dealership Successful in Arranging Financing

If the dealership is successful in arranging an extension of credit for the purchase of the vehicle, the dealership will assign the RISC to the financial institution. See, Federal Trade Commission, Understanding Vehicle Financing (“[t]he dealer … typically sells [the retail installment contract] to a bank, finance company or credit union — called an assignee — that services the account and collects [the customer’s] payments”). Under Minnesota law, the assignee financial institution may buy the RISC on any terms mutually agreed upon between the financial institution and dealership. See, Minn. Stat. §53C.08, subd. 4 (finance company “may purchase or acquire from any retail seller any retail installment contract on such terms and conditions as may be mutually agreed upon between them”).

It is important to recognize that although the dealership does not actually extend credit to the customer in an indirect auto lending transaction, since 1982 the federal Truth in Lending Act (“TILA”), 15 U.S.C. § 1601 et seq., has required the dealership to be identified as the “creditor” on the RISC because the dealership is “the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness.” 15 U.S.C. § 1602(f). In this fashion, it is the dealership, rather than the financial institution, which must give TIL disclosures to the customer prior to consummation of the credit sale. See Kinzel, 892 F. Supp. at 1216 (“only the automobile dealership [is] the TILA ‘creditor’ in dealer-originated credit sale transactions that are assigned to banks); Stevens v. Brookdale Dodge, Inc., 2002 WL 31941158 at*2 (D. Minn. Dec. 27, 2002) (“TILA requires creditors to disclose certain credit terms to consumers”); Vang v. Morrie’s Minnetonka Ford, 2001 WL 1589614 (D. Minn. Dec. 11, 2001) (same); Peter v. Village Imports Co., 2001 WL 1640130 (D. Minn. Oct. 9, 2001) (same); Evans v. Rudy-Luther Toyota, Inc., 39 F. Supp. 2d 1177, 1181 (D. Minn. 1999) (“[t]he TILA provides a Federal cause of action by borrowers against creditors who fail to make the disclosures required by its provisions”).

The financial institution that purchases the RISC and actually extends credit to the customer for the purchase of the vehicle is described as the “assignee.” 15 U.S.C. §1641(a). An assignee is not liable to the customer for any TIL violations unless they are “apparent on the face” of the TIL disclosure statement. Id. “Apparently Congress did not wish to impose liability for damages and attorney’s fees on an assignee who was not responsible for and who had no notice of TILA disclosure violations at the time of the assignment.” Brodo v. Bankers Trust Co., 847 F.Supp. 353, 359 (E.D.Pa.1994).

Benefits of Dealership Arranged Financing

The process described above has been in place for several decades and provides several benefits to consumers. First, it is more convenient than direct auto lending as dealerships have extended business hours and the consumer can buy a vehicle and get financing at one place. Second, the dealership typically has business relationships with many financial institutions and can send the customer’s credit application to several financial institutions at the same time, saving time and expense. Third, the dealerships may be able to offer special manufacturer-sponsored, low-rate or incentive programs to qualified buyers. Finally, the dealership may be willing to deliver the vehicle prior to financing approval.

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 Auto Dealer, Indirect Financing, Regulatory Compliance, TIL Disclosures, Truth in Lending Act | Tagged , , | Leave a comment

Loss of Use: Is the At-Fault Driver’s Insurer Required to Provide a “Comparable” Rental Vehicle?

IMG_3280So my car got rear-ended while legally parked next to the curb in front of my house by a car traveling around 35-40 miles per hour. Fortunately, the teen-aged driver of the other car (depicted in the photograph) was insured and didn’t suffer any injuries. Unfortunately, the teenager’s insurance company (I’ll refer to it as ABC Insurance Company) didn’t understand the law of loss of use damages or its obligations under the property damage liability coverage of the auto policy it issued to the teenager.

My car got hammered. I happened to be on my front steps drinking a cup of coffee at the time and saw the accident. The force of the impact caused my car to be propelled over 150 feet down the street and into and over the curb on the other side. It was in the shop for three weeks.

At the outset, ABC told me they’d only pay for a compact-sized rental car while mine was in the shop for repairs. My car is mid-size. I told them I’d try it, but that ABC was obligated to pay all damages their insured caused and I was entitled to a comparable mid-size car. I tried the compact for three days. It was too small and provided absolutely no lumbar support so I “upgraded” to a Kia Optima – a mid-size car. The upgrade cost around $10 per day. Upon learning of this, ABC refused to pay the $10 daily difference between the compact and the Kia. ABC told me they had an internal rule of only reimbursing third-party claimants for the cost of a compact vehicle, rather than a comparably-sized vehicle, and they were only required to provide “transportation.” I politely disagreed, advising that I didn’t care about their internal rule; that I was entitled to reimbursement based on the cost to rent a comparably sized vehicle.

The amount at issue wasn’t that much (around $190 at the time my vehicle was fixed), but it was the principle of the thing.

So, I did some legal research. I knew I wouldn’t find anything exactly on point in Minnesota, but assumed I’d find law to support my view elsewhere.

The results of my research:

Virtually all states recognize the right of an automobile owner to recover damages for the loss of use of the damaged vehicle while it is being repaired. See, Kopischke v. Chicago, St. P., M. & O. Ry. Co., 230 Minn. 23, 30–31, 40 N.W.2d 834, 839 (1950); Hanson v. Hall, 202 Minn. 381, 387–388, 279 N.W. 227, 230–231 (1938); Restatement (Second) of Torts § 928(b) (1979); 4A Minn. Prac., Jury Instr. Guides–Civil CIVJIG 92.10.

The purpose of awarding loss-of-use damages is to provide compensation for monetary loss and inconvenience suffered during the time required to repair the damaged vehicle.

I found no cases supporting ABC’s internal policy that it was only obligated to provide “transportation.”

I found several cases stating that the reasonable value of the loss of use of an automobile is measured by the rental cost of a comparable vehicle. See, e.g., AT & T Corp. v. Lanzo Const. Co., Florida, 74 F. Supp. 2d 1223, 1225 (S.D. Fla. 1999) (“loss of use damages are measured by the amount necessary to rent a similar article or other suitable article within which to perform the services usually performed by the damaged article during the period of repair”); Lewis v. Lawless Homes, Inc., 984 S.W.2d 583, 586 (Mo. Ct. App. 1999) (“The value of its use is the cost of renting a similar piece of equipment”); Papenheim v. Lovell, 530 N.W.2d 668, 673 (Iowa 1995) (awarding loss of use damages based on rental rate for full-size vehicles similar to plaintiff’s damaged full-size vehicle); Chlopek v. Schmall, 224 Neb. 78, 89, 396 N.W.2d 103, 110 (1986) (“The reasonable value of the loss of use of personal property is generally the fair rental value of property of a like or similar nature or the amount actually paid for rental, whichever is less”); Lamb v. R.L. Mathis Certified Dairy Co., 183 Ga. App. 455, 457, 359 S.E.2d 214, 216 (1987) (“plaintiff would be entitled to reasonable rental value of a comparable car for a reasonable length of time to have the body repairs completed”); Lenz Const. Co. v. Cameron, 207 Mont. 506, 509-10, 674 P.2d 1101, 1103 (1984) (“We do not disagree with using, as a general measure of loss-of-use damages, the reasonable rental value of a comparable machine for the period of time necessary for replacement”); Gillespie v. Draughn, 54 N.C. App. 413, 417, 283 S.E.2d 548, 552 (1981) (“The measure of damages to be recovered is the cost of renting a similar vehicle during a reasonable time for repairs”); Apostle v. Prince, 158 Ga.App. 56(2), 279 S.E.2d 304 (1981) (“The plaintiff expressed his opinion as to the reasonable rental value of a comparable car. There was sufficient evidence presented to allow the jury to determine damages for loss of use”); Roberts v. Pilot Freight Carriers, Inc., 273 N.C. 600, 607, 160 S.E.2d 712, 718 (1968) (“Ordinarily the measure of damages for loss of use . . . is the cost of renting a similar vehicle during a reasonable period for repairs”); Nat’l Dairy Products Corp. v. Jumper, 241 Miss. 339, 344, 130 So. 2d 922, 922-24 (1961) (“In short, loss of use of a repairable vehicle is measured by the reasonable rental value of a similar unit . . . This measure of damages for loss of use has the virtue of certainty and fairness, in that there can ordinarily be determined specifically the value of the loss of use, by ascertaining the rental value of a similar vehicle”); Naughton Mulgrew Motor Car Co. v. Westchester Fish Co., 105 Misc. 595, 597, 173 N.Y.S. 437, 438 (App. Term 1918) (“The practice has obtained in these damaged vehicle cases of allowing the cost of the actual hire of another vehicle similar to that damaged”).

Stated simply, the liability insurer of the at-fault driver is obligated to pay for the rental cost of a vehicle similar or equal to the vehicle that was damaged while the damaged vehicle is undergoing repairs. If a compact car was damaged, the owner is entitled to recover the cost to rent a similar compact-size car. If a mid-size car was damaged, the owner s entitled to recover the cost of a similar mid-size car. If a truck was damaged, the owner is entitled to recover the cost to rent a truck. It’s pretty simple — at least in my view.

I gave ABC one more chance to pay my bill. I figured if they told me “no” three times, they’d strike out and I’d have to sue.

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 Coverage, PAP, Rentals | 1 Comment

Auto Dealer Risk Management: Negotiating Dealer-Lender Agreement Terms

images (15)Car sales are booming and lenders are clamoring for indirect financing business.  Now is a great time for dealers to dust off and review their Dealer Agreement (a/k/a lender master financing agreements) with lenders, particularly the warranty, indemnification and repurchase provisions. Dealerships can, and should, review the terms of their Dealer Agreements on an annual basis and negotiate the provisions of those agreements to reduce the potential of a large, uninsured repurchase exposure. 

Dealer Agreements (“DA”) are drafted by attorneys for the lender and, as such, are quite favorable to the lender. The typical DA requires the dealership to warrant that it “will comply with all applicable federal, state and local laws, rules and regulations including without limitation all consumer protection and consumer credit laws, the Federal Truth in Lending Act and Regulation Z, the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act and the Federal Equal Credit Opportunity Act and Regulation B.” 

The DA will then mandate that the dealer repurchase any retail installment sales contract (RISC) the lender violates federal or state law regardless of whether (a) the customer defaulted on the RISC; (b) the customer claimed the dealership violated any law; (c) the violation (if proven) caused the customer or lender any damage or harm; (d) the dealership had actual knowledge or even reason to know it was violating a law; or (e) the dealership was even the party responsible for the violation. 

For a partial listing of federal and state laws that regulate auto dealerships, see my article: Auto Dealer Arranged Financing:  51 Laws Dealers Must Know (here) 

The lender repurchase exposure is quite problematic from a dealership’s standpoint: 

First, typical garage liability (a/k/a auto dealer coverage form) policies will not protect the dealership against lender repurchase claims. Many garage policies are limited to suits brought by customers, not suits brought by lenders. A typical policy requires the insurer to “pay on your behalf all sums you legally must pay as damages because of a claim or suit brought against you by a customer during the policy period.” In addition, most liability policies contain a contractual liability exclusion barring coverage for “liability for which the [dealership] has assumed in a contract or agreement.” This means the dealership’s policy will not cover the cost of defending the dealership in litigation commenced by the lender much less indemnify the dealership for any amounts it may be required to pay the lender to repurchase the RISC. The uninsured exposure can be significant, particularly if the violation stemmed from an ongoing business practice and affected hundreds, if not thousands, of RISCs. 

Another problem is that the typical DA obligates the dealership to pay the full repurchase price regardless of whether the vehicle has been damaged or has been forfeited due to seizure, impoundment or abandonment. Further, the typical DA provides that the lender has no obligation to repossess or otherwise secure the vehicle for the dealership as a condition of requiring the dealership to repurchase the RISC. In short, the dealership may be contractually obligated to pay the full repurchase price on a vehicle (or vehicles) that is entirely worthless or cannot even be located. 

The dealership in Mid-Century Ins. Co. v. Vinci Inv. Co., Inc., 2010 WL 673267 (Cal. Ct. App. Feb. 25, 2010), was lucky, at least in part. In that case, the credit union’s lawsuit against the dealership involved the RISCs of over 200 customers. The credit union claimed the dealership was required to repurchase those contracts because it had failed to disclose deferred downpayments which it claimed violated the California Automobile Sales Financing Act (“ASFA”) and Regulation Z, 12 C.F.R. section 226.18. The credit union demanded in excess of $1.5 million in settlement. The dealership’s insurer, Mid-Century denied coverage for the repurchase lawsuit. However, the policy contained a rather bizarre insuring clause obligating the insurer to defend against and “pay all sums . . . involving any negligent act, error or omission committed by the [dealership] in failing to comply with [TILA] or any State law on Truth in Lending.” Noting that the term “involving” is a very broad term, the California Court of Appeals determined that Mid-Century was at least obligated to pay for the dealership’s defense in the lawsuit. The case was remanded to the trial court for a determination of whether Mid-Century was obligated to pay any part of the $1.5 million dollar demand.  It is important to note that the term “involving” does not appear in any current dealership garage liability policy forms. 

Dealerships can, and should, review the terms of their DAs on an annual basis and negotiate the provisions of those agreements to reduce the potential of a large, uninsured repurchase exposure. This annual review should be incorporated into the dealership’s Compliance Management System. While lenders hold the cards and can insist on their boilerplate contract terms when the economy is down and credit is tight, dealerships can demand modification of terms today, particularly if they do a large amount of business with the lender and have the ability to direct that business elsewhere. 

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, Indirect Financing, Regulatory Compliance | Tagged , , , , , | Leave a comment

CFPB to Allow Consumers to Voice Complaints Publicly

untitled (19)Auto Dealer Monthly recently reported on the Consumer Financial Protection Bureau’s announcement that it is finalizing a policy to allow consumers to voice publicly their complaints about consumer financial products and services:

Now, when consumers submit a complaint to the CFPB, they have the option to share their account of what happened in the CFPB’s public-facing Consumer Complaint Database. The CFPB is also publishing a request for information seeking public input on ways to highlight positive consumer experiences, such as by receiving consumer compliments.

“Consumer narratives shed light on the full consumer perspective behind a complaint,” said CFPB Director Richard Cordray. “Narratives humanize the problems consumers face in the marketplace. Today’s policy will serve to empower consumers by helping them make informed decisions and helping track trends in the consumer financial market.”

The announcement didn’t sit well with American Financial Services Association, which issued a statement critical of the CFPB’s new policy to F&I and Showroom. “Because consumers are likely to assume a level of accuracy and validity in the complaints posted on a government website, the CFPB’s publicizing unsubstantiated consumer narratives that could mislead consumers,” stated Bill Himpler, the association’s executive vice president. “In additional, publishing unverified and unfiltered claims could pose significant brand and reputational risk to financial services companies.”

You can read the full article here:

CFPB to Allow Consumers to Voice Complaints Publicly.

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 CFPB | Leave a comment

Auto Dealers & Regulatory Compliance: If the FTC Comes Knocking

images (8) Dealerships have become subject to increased regulation and enforcement, particularly in the areas of consumer advertising, consumer finance and consumer privacy. I recently posted an article to this blog entitled: Auto Dealer Arranged Financing: 51 Laws a Dealer Must Know. You can read the full article here.

Most dealers recognize that the legal landscape has changed. While consumer litigation and associated class actions persist (and the incidence of class action litigation has increased over the past few years), federal regulatory authorities are the new player in town and they are joining with the Department of Justice and local authorities to enforce compliance with federal and state laws. Indeed, on March 26th, the Federal Trade Commission (FTC) and 32 law enforcement partners announced the ongoing results of Operation Ruse Control, a nationwide and cross-border effort which has thus far resulted in over 250 enforcement actions (187 in the U.S.) as well as six new FTC cases. The FTC cases have included allegations of deceptive advertising, auto financing application fraud, odometer fraud and deceptive marketing of car title loans. In addition, and for the first time since receiving expanded authority over auto dealers under the Dodd-Frank Act, the FTC has taken two enforcement actions involving F&I product add-on charges. Examples of F&I product add-ons include service contracts and extended warranties, guaranteed automobile protection (commonly called GAP or GAP insurance), credit life and disability insurance, road service, theft protection, undercoating and payment programs. The six new FTC cases include more than $2.6 million in monetary judgments. The sweep follows on the heels of the FTC’s Operation Steer Clear campaign against 10 dealerships in 2014.

“The clear message is that across this country, and indeed internationally, law enforcement agencies are on the lookout for deceptive and illegal practices by auto dealers, and will take whatever action is necessary to protect consumers,” said Jessica Rich, director of the FTC’s Bureau of Consumer Protection.

The majority of dealers take their compliance obligations very seriously as non-compliance can result in consumer litigation, regulatory enforcement actions and lender repurchase claims as well as the payment of actual damages, statutory damages, monetary penalties and fines, injunctive relief and potentially punitive damages and criminal fines. Negative publicity is a virtual certainty as well. Those striving to comply with the myriad laws regulating the dealership industry are (1) appointing a Consumer Regulatory Compliance Officer; (2) integrating an Advertising, Sales and F&I Manual (with federal and state specific policies and procedures) into their Compliance Management System (CMS); (3) providing regular training to their staff on those policies and procedures; (4) auditing compliance with those policies and procedures; and (5) monitoring legal and regulatory changes. A well planned, implemented, and maintained compliance program will prevent or reduce regulatory violations, provide dealership cost efficiencies and is just sound business. If the FTC comes knocking on your dealership door, you should not only be able to tell them what you are doing, but also show them what you are doing to comply with the laws. If your CMS does not specifically address the 51 laws and regulations cited in my article as well as the practices which have historically produced the greatest amount of consumer litigation and regulatory actions (call me and I’ll tell you what they are – I’ve defended dealerships in litigation alleging each one), your compliance program is not a true CMS – it is inadequate.

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 Auto Dealer, Consumer Leasing Act, Errors & Omissions, Indirect Financing, Regulatory Compliance, TIL Disclosures, Truth in Lending Act | Tagged , , , | Leave a comment

Auto Dealer Arranged Financing: 51 Laws Dealers Must Know

Compliance PICIt’s no secret that auto dealerships have become subject to increased regulation over the past several years, primarily in the areas of consumer advertising, consumer finance and consumer privacy. Although the recession of 2007-2009 was primarily related to mortgage financing, regulatory agencies such as the Consumer Financial Protection Bureau (CFPB) (created by the Dodd-Frank Act in 2010), Department of Justice (DOJ), Federal Trade Commission (FTC) and state attorney’s general are focusing on auto dealership financing as well. While the CFPB does not have regulatory authority over auto dealerships, they are exercising indirect authority through their authority over lenders that buy retail installment contracts from dealers. In addition, the CFPB has collected a great deal of information on the dealership industry that they, in turn, share with other government agencies that do have regulatory authority over dealers.

At present, the CFPB is attacking the dealer reserve, where dealerships typically add one percentage point or two to a lender’s wholesale interest rate as compensation for facilitating the indirect financing. The CFPB contends the dealer reserve system has led to unintended lending discrimination and wants to impose a flat fee system. Next up, the CFPB will probably attempt to regulate the pricing of ancillary F&I products sold by dealerships. The CFPB has been collecting data and will likely claim that charges for certain products by some dealerships exceed their value and will attempt, through enforcement actions, to impose retail price caps.

Meanwhile, dealerships must comply with all existing federal, state and local laws and regulations that pertain to the sale and financing of motor vehicles and the non-public, personally identifiable information provided to the dealership by its customers. This is an absurdly large and exceptionally complex task, even for large auto dealerships who employ in-house legal counsel. Below is a list of my top 51 laws and regulations that auto dealerships must thoroughly understand (and should incorporate into their Compliance Management System (CMS)) to avoid liability, whether in the form of consumer litigation or regulatory enforcement actions. Keep in mind that this list is not all-encompassing (it’s only my top 51) and each law or regulation cited has many sub-sections (i.e., even more laws and regulations):

  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 and State Odometer Acts
  47. State Title Branding Laws
  48. Federal Trade Commission Used-Car Rule
  49. Magnuson-Moss Warranty Act
  50. State New Vehicle Lemon Laws
  51. State Dealership Licensing Laws & Regulations

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 Auto Dealer, Dealer Reserve, Errors & Omissions, Indirect Financing, Regulatory Compliance, TIL Disclosures, Truth in Lending Act | Tagged , , , | 3 Comments