By 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.
Under the federal Truth in Lending Act (“TILA”), 15 U.S.C. § 1601 et seq., and its implementing provision (“Regulation Z”), an auto dealer in a dealer-arranged financing transaction must provide Truth in Lending (“TIL”) disclosures to the consumer before “consummation” of a credit transaction. Consummation occurs when a consumer “becomes contractually obligated on a credit transaction.” Among other things, the TILA and Regulation Z require the auto dealer to disclose the following information:
Identity of the creditor;
The amount financed;
An itemization of the amount financed;
The finance charge;
The annual percentage rate;
The total of payments;
The total sale price; and
The payment schedule.
Although the TILA allows a creditor (which includes an auto dealer) to furnish a separate TIL disclosure statement, virtually all retail installment sales contract (“RISC”) forms — which are written by lending institutions or third-party companies – contain TIL disclosures. Typically, “consummation” occurs at the moment a consumer executes a retail installment sales contract for it is at that moment the consumer becomes legally obligated to credit terms. Generally, then, a dealership complies with TILA by presenting the RISC to the consumer for review and signature and giving her a copy of the signed contract. See, Peter v. Village Imports Co., 2001 WL 1640130, at *3 (D. Minn. Oct. 9, 2001) (“[t]he court finds that Village Imports satisfied TILA when it gave Peter the unsigned contract containing the TILA disclosures and Peter had the opportunity to defer signing it if he found the terms unacceptable”).
Distinction between Sale and Credit
In determining whether “consummation” has occurred for purposes of triggering the disclosure requirements of the TILA and Regulation Z, it is important to distinguish between an obligation to purchase a vehicle and an obligation to purchase a vehicle on credit. While a consumer’s obligation to purchase a vehicle may coincide exactly with the customer’s to a particular credit arrangement, the two obligations are analytically separate.
This point is often confused. For example, in Raceway Ford Cases, 229 Cal. App. 4th 1119, 177 Cal. Rptr. 3d 616 (2014), the defendant dealership argued that “consummation” for purposes of the TILA and the Automobile Sales Finance Act, also known as the Rees–Levering Motor Vehicle Sales and Finance Act (“ASFA”), California Civil Code, § 2981 et seq., occurred when the consumer executed a purchase contract and took physical possession of the vehicle. Under California law, a vehicle sale is “deemed completed and consummated when the purchaser of the vehicle has paid the purchase price, or, in lieu thereof, has signed a purchase contract or security agreement, and has taken physical possession or delivery of the vehicle.” California Vehicle Code, § 5901, subd. (d). The appellate court rejected the argument. Raceway, 177 Cal. Rptr. 3d at 629. (“[t]his reasoning inappropriately muddles together consummation of the sale with consummation of the credit transaction”). (Fortunately, the court in Raceway Ford Cases ruled in favor of the dealership on other grounds).
The Liabo v. Wayzata Nissan Case
The case that most concretely illustrates the distinction between these two obligations is Liabo v. Wayzata Nissan, LLC, 707 N.W.2d 715 (Minn. Ct. App. 2006), review denied (Minn. March 26, 2006), a case I handled for the defendant dealership.
There, Liabo agreed to purchase a 1998 Nissan Altima GXE for $19,158, contingent upon being approved for special 2.9% APR financing. The terms of Liabo’s purchase offer were recorded in a “Delivery Sheet.” Because Liabo wanted to ensure that her $1,200 down payment would be refunded if she did not qualify for the special 2.9% APR financing, she insisted that the financing condition be recorded on the Delivery Sheet. At her insistence, handwritten on the Delivery Sheet were the words “Special 2.9% O.A.C.” Liabo then signed the Delivery Sheet immediately above a statement providing: “I UNDERSTAND THAT THIS IS A BINDING CONTRACT AND I WILL LOSE ANY DEPOSIT IF I DO NOT PERFORM ACCORDING TO TERMS.”
Both Liabo and the dealership understood that if Liabo did not qualify for the 2.9% APR, her down payment would be refunded and she would not obligated to purchase the 1998 Altima GXE. Both understood that if she was approved for the 2.9% APR, she would be obligated to purchase the 1998 Altima GXE. After considerable effort, Wayzata Nissan secured the 2.9% APR financing for Liabo. However, Liabo changed her mind and decided she wanted to purchase a different model, an Altima GLE, instead of the GXE, which retailed for a higher price and did not qualify for the special 2.9% APR financing. Liabo decided not to purchase the 1998 Altima GXE. Wayzata Nissan then refused to refund her $1,200 deposit under the terms of the Delivery Sheet.
Later, Liabo commenced a class action styled lawsuit against Wayzata Nisan alleging violations of the federal TILA, the Minnesota Motor Vehicle Retail Installment Sales Act (“MMVRISA”), Minn. Stat. § 168.66 et seq. (now Minn. Stat. § 53C.08 et seq) and deceptive trade practices in violation of Minn. Stat. §§ 325D.44 and 325F.69.
Liabo contended the Delivery Sheet obligated her to purchase the 1998 Altima GXE vehicle on credit and, therefore, the dealership violated the TILA and MMVRISA by not providing her with the credit disclosures required by the TILA and MMVRISA.
The trial court granted Wayzata Nissan’s motion for summary judgment and dismissed the class allegations. The Minnesota Court of Appeals affirmed the trial court.
The Minnesota Court of Appeals first held that Liabo was contractually obligated to purchase the 1998 Altima GXE from Wayzata Nissan or forfeit her $1,200 down payment. As noted above, the Delivery Sheet contained a condition precedent which required Wayzata Nissan to secure financing at 2.9% APR before the Delivery Sheet became binding on Liabo. Because Wayzata Nissan secured the financing, the condition precedent was satisfied and the Delivery Sheet was binding on Liabo. Thus, Wayzata Nissan was entitled to judgment against Liabo for the $1,200 downpayment.
The appellate court next addressed Liabo’s argument that Wayzata Nissan was required to provide TIL disclosures. On behalf of Wayzata Nissan, I argued that while the Delivery Sheet was a binding contract, it did not obligate Liabo to purchase the vehicle on credit thereby triggering TILA (and MMVRISA’s) disclosure requirements. TILA disclosures are only required to be made “when a consumer becomes contractually obligated on a credit transaction.” 12 C.F.R. § 226.2(a)(13). Although Liabo conditioned her purchase on qualifying for the 2.9% APR financing, the Delivery Sheet did not require that she accept the 2.9% APR financing if Wayzata Nissan was, in fact, able to arrange it. Rather, Liabo remained free to forego the 2.9% APR financing and purchase the vehicle for cash (or obtain her own financing).
The appellate court agreed with Wayzata Nissan’s position and held that no TIL disclosures were required. The court first noted that the Delivery Sheet was not a contract setting out the particulars of a credit arrangement. Rather, it functioned as purchase contract stating the price of the automobile, the fees associated with the purchase, Liabo’s trade-in value and down payment, and the amount to be financed. The court noted that had Liabo proceeded with the transaction after Wayzata Nissan satisfied the financing contingency, she would have been presented with a retail installment sales contract containing TIL disclosures. However, she chose to back out of the transaction.
Most importantly, the Delivery Sheet did not contractually obligate Liabo to any credit terms. The fact that she would lose her $1,200 downpayment if Wayzata Nissan satisfied the financing contingency and she did not proceed with the purchase the vehicle did not obligate her to any credit terms – at all times, she remained free to pay cash to purchase the vehicle or obtain financing elsewhere through a lender that did not involve Wayzata Nissan. In support of its holding, the court of appeals cited the Official Staff Commentary to Regulation Z:
The Official Staff Commentary to Regulation Z states that consummation “does not occur merely because the consumer has made some financial investment in the transaction (for example, by paying a nonrefundable fee) unless … applicable law holds otherwise.” 12 C.F.R. Pt. 226, Supp. I, § 2(a)(13). Additionally, the commentary explains that consummation “does not occur when a consumer becomes contractually committed to a sale transaction, unless the consumer also becomes legally obligated to accept a particular credit arrangement.” Id. The commentary uses an example with facts similar to here to demonstrate its language. “When a consumer pays a nonrefundable deposit to purchase an automobile, a purchase contract may be created, but consummation for purposes of the regulation does not occur unless the consumer also contracts for financing at that time.” Id.
The Minnesota Court of Appeals also rejected Liabo’s argument that Wayzata Nissan had violated the MMVRISA by failing to provide her with the disclosures required by Minn. Stat. § 168.71(b). The trial court held that MMVRISA disclosures were not necessary because the Delivery Sheet was not a retail installment sales contract under the MMVRISA. In affirming the trial court’s ruling, the appellate court stated:
The Delivery Sheet executed by appellant was not a retail installment contract. Under Minn. Stat. § 168.66, subd. 4, a retail installment contract is defined as “any agreement … evidencing a retail installment sale of a motor vehicle.” A retail installment sale is defined as a “sale evidenced by a retail installment contract wherein [the] retail buyer agrees to buy and [the] retail seller agrees to sell a motor vehicle at a … price payable in one or more installments.” Id. at subd. 3. Here, the Delivery Sheet did not list any finance charges, nor the total amount of installment payments, the amount of each installment payment, or the date the payments were due. There was no “retail installment” contract at the point that appellant backed out of the transaction.
Finally, the Minnesota Court of Appeals affirmed the trial court by rejecting Liabo’s argument that Wayzata Nissan had engaged in deceptive trade practices in violation of Minn. Stat. §§ 325D.44 and 325F.69. Liabo could not establish that Wayzata Nissan engaged in any misrepresentation or that she had suffered any damages. The court stated:
[Wayzata Nissan] did not engage in deceptive trade practices or misrepresent the facts. [Wayzata Nissan] took extra care to note on the Delivery Sheet that [Liabo] was obligated to purchase the vehicle only if she was approved for the special financing. This is exactly what happened. [Liabo] was initially denied financing but through the efforts of [Wayzata Nissan] and her own, she was eventually approved for the financing. She understood exactly what she was getting into. [Liabo] suffered no damages. She executed a contract that stated her $1,200.00 down payment would be refunded if she did not qualify for the special 2.9% APR financing. She was approved for that financing, but then rejected it for the car she had intended to buy, wanting to switch the preferential financing to a more expensive vehicle. When that request was denied, [Liabo] tried to back out of the contract, not buy any car, and get back her down payment. We conclude [Wayzata Nissan] was entitled to [Liabo] down payment. That was a term of the agreement.
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.