Auto Dealer-Arranged Financing: Compliance with TILA May Satisfy State Retail Installment Sales Act — TILA Preemption and TILA Safe Harbors.

th151P2G0QBy Greg Johnson. I recently posted an article, “Auto Dealer-Arranged Financing and the Truth in Lending Act: Understanding the Basics.”  This is one of several posts that get more specific.

Prior to the passage of the federal Truth in Lending Act (“TILA”), 15 U.S.C. §1601 et seq. in 1968, many states adopted retail installment sales legislation to regulate the retail sale and financing of motor vehicles and require dealerships to disclose credit cost information.

For example:

The Minnesota Motor Vehicle Retail Installment Sales Automobile Act (“MVRISA”), Minn. Stat. § 53C.08 et seq., (formerly Minn. Stat. § 168.71), became effective in 1957.

The Rees-Levering Automobile Sales Finance Act (“ASFA”), California Civil Code § 2981 et seq., replaced the 1945 Automobile Sales Act and became effective on January 1, 1962.

The Illinois Motor Vehicle Retail Installment Sales Act (“MVRISA”), 815 Ill. Comp. Stat. Ann. 375/1 et seq., was enacted in 1967.

While the disclosure requirements of state retail installment sales acts differ in some respects, they generally have similar purposes and require that similar information be disclosed to consumers before the consumer gets locked into credit terms.  The disclosure requirements of most state acts are similar, if not identical, to those required by the federal Truth in Lending Act (“TILA”) 15 U.S.C. § 1601 et seq., and Regulation Z, its implementing provision, requiring that a retail installment sales contract disclose important credit terms such as the cash sales price, finance charge, amount financed, annual percentage rate, total payment, total sales price and payment schedule.

TILA Preemption

However, on occasion, a state act may require a disclosure which is more demanding or exacting than that required by TILA and Regulation Z.  In such cases, an issue of federal preemption may arise. Generally, federal preemption occurs when: (1) Congress enacts a statute that explicitly preempts state law; (2) federal law occupies a legislative field to such an extent that it is reasonable to conclude that Congress left no room for state regulation in that field; or (3) state law actually conflicts with federal law. With regard to the TILA, Congress has preempted all state laws that are “inconsistent with the provisions of [TILA] and then only to the extent of the inconsistency.” 15 U.S.C. § 1610(a)(1). See also Regulation Z, 12 C.F.R. § 226.28(a)(1) (2005).

Thus, not all state laws are preempted by the TILA. TILA preempts only those state laws that are inconsistent with the TILA. State and federal laws are inconsistent when “compliance with both federal and state regulation is a physical impossibility” or when state law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Psensky v. Am. Honda Fin. Corp., 378 N.J. Super. 221, 225-26, 875 A.2d 290, 293 (App. Div. 2005) (quoting Fid. Fed. Sav. & Loan Ass’n v. de la Cuesta, 458 U.S. 141, 153, 102 S. Ct. 3014, 3022, 73 L.Ed.2d 664, 675 (1982)).

Generally, a state law will not conflict with the TILA merely because it provides a greater level of protection (disclosure) to consumers than proscribed under the TILA and Regulation Z. See, e.g., Beaver v. Tarsadia Hotels, 2014 WL 3002297 (S.D. Cal. July 2, 2014).

TILA Safe Harbors

However, to avoid inconsistency between federal and state law and ease the burden on creditors where the disclosure requirements of state and federal law are largely duplicative, some state motor vehicle retail installment sales acts were amended afer passage of the federal TILA to provide that compliance with TILA satisfies the state act.

For example, the California Automobile Sales Finance Act, California Civil Code § 2982(m) provides in part:

Notwithstanding any other provision of this chapter to the contrary, any information required to be disclosed in a conditional sale contract under this chapter may be disclosed in any manner, method, or terminology required or permitted under Regulation Z, as in effect at the time that disclosure is made … if all of the requirements and limitations set forth in subdivision (a) are satisfied.

The Illinois Motor Vehicle Retail Installment Sales Act, 815 ILCS 375/5, provides:

A retail installment contract which complies with the federal Truth in Lending Act, amendments thereto, and any regulations issued or which may be issued thereunder, shall be deemed to be in compliance with the provisions of this Section.

The Minnesota Motor Vehicle Retail Installment Sales Act, § 53C.08, subd. 2(7) (formerly Minn. Stat. § 168.71(b), provides:

In lieu of the above [disclosures], the retail seller may give the retail buyer disclosures which satisfy the requirements of the federal TruthInLending Act in effect as of the time of the contract, notwithstanding whether or not that act applies to the transaction.

The TILA safe harbor incorporated in the Minnesota MVRISA was addressed in Kinzel v. Southview Chevrolet Co., 892 F. Supp. 1211 (D. Minn. 1995), a class action styled lawsuit I handled for the defendant dealership.  The court held the dealer’s compliance with the federal TILA constituted compliance with the MMVRISA resulting in dismissal of the lawsuit In that case, Kinzel financed the purchase of an automobile pursuant to a retail installment sales contract.  In order to pay the downpayment identified on the RISC, the dealership sent her to Security Pacific, a third-party lender providing personal loans, to obtain a downpayment “side-loan.” Kinzel sued the dealership in a class action styled complaint alleging the dealership violated the MMVRISA by not providing her with a compound disclosure which incorporated the Southview Chevrolet and Security Pacific transactions. At the time of the transaction, the Official Staff Commentary to Regulation Z provided that “[t]he separate financing of a downpayment in a credit sale transaction may, but need not, be disclosed as 2 transactions (a credit sale and a separate transaction for the financing of the downpayment.” 12 C.F.R. § 226.17, Supp. I, Commentary 17(c)(1)–16, p. 363 (1994), Because the disclosures Southview Chevrolet provided in the retail installment sales contract satisfied TILA, and compliance with TILA satisfied MMVRISA pursuant to Minn. Stat. § 168.71(b) (now Minn. Stat. § 53C.08, subd. 2(7)), the federal district court granted the dealership’s motion for summary judgment terminating the litigation.

In Franks v. Rockenbach Chevrolet Sales, Inc., 1998 WL 919714 (N.D. Ill. Dec. 30, 1998), Franks purchased a used 1993 Chevrolet Astro van from Rockenbach Chevrolet, a car dealership.  In connection with this purchase, he signed a retail installment sales contract which was subsequently assigned to a bank. Franks sued, claiming Rockenbach violated the Truth in Lending Act, 15 U.S.C. § 1601 et. seq. (“TILA”) with regard to its disclosure relative to a service contract he purchased. Franks conceded that a recent Seventh Circuit Court of Appeals decision mandated dismissal of his TILA claim, but sought to impose liability under the Illinois Motor Vehicle Retail Installment Sales Act, 815 ILCS § 375/5 (“MVRISA”).  The court rejected the claim:

Section 5 of the MVRISA provides that “[a] retail installment contract which complies with the federal Truth in Lending Act, amendments thereto, and any regulations issued or which may be issued thereunder, shall be deemed to be in compliance with the provisions of this Section.” 815 ILCS § 375/5. *** To the extent that Franks is attempting to seek relief under the MVRISA itself, his claim is frivolous as the MVRISA expressly provides that compliance with the TILA is a complete defense to an action brought under the MVRISA. 815 ILCS § 375/5.

In order to successfully handle auto dealer litigation – and particularly lawsuits arising out of auto dealer arranged financing transactions — you have to know both federal and state laws.  Conduct which may violate a state motor vehicle retail installment sales act may be legal if authorized by TILA (or Regulation Z) and the state act contains a safe harbor provision.

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. 2014.

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