Auto Coverage: Are Household (Family Member) Step-Down Exclusions Void Under Minnesota Law?

1273a11By Greg Johnson. A 2014 decision of the South Carolina Supreme Court decision invalidating a household (a/k/a “family” or “intra-family”) “step-down” (a/k/a “drop-down”) to a personal auto policy caused me to dust off my research from over a decade ago to determine whether such provisions would be invalid under Minnesota law as well. In Williams v. Gov’t Employees Ins. Co. (GEICO), 409 S.C. 586, 594, 762 S.E.2d 705, 709 (2014), the court held that a household step-down provision which purported to reduce the policy limits from $100,000 to $15,000 when the named insured or resident family member was injured, was void and unenforceable.

The Minnesota Supreme Court has not determined whether step-down provisions are enforceable under the Minnesota No-Fault Automobile Insurance Act. In a step-down provision, “the coverage ‘steps down’ from the actual policy limits to the minimum required by statute.” Liberty Mut. Ins. Co. v. Shores, 147 P.3d 456, 458 n. 4 (Utah Ct.App.2006) (quoting 1 Rowland H. Long, The Law of Liability Insurance, § 2.05[5] (2003)). Although such provisions are typically found in the exclusions section of the policy and may be called “exclusions” in court opinions, they are not actually exclusions because they do not bar all coverage under the policy.

The Minnesota No-Fault Act refers to bodily injury and property damage liability coverage as “residual liability coverage.” When addressing liability step-down provisions, it is important to distinguish between two different types: (1) those in a vehicle owner’s liability policy which reduces the liability coverage available to a permissive user-driver (a/k/a “omnibus”) insured (but not the named insured); and (2) those which purport to reduce the coverage available to the named insured or resident family member when injured in an accident.

The Minnesota Standard

The validity of step-down provisions must be measured against the following standard: Minnesota courts first consider whether the provision is unambiguous. Pepper v. State Farm Mut. Auto. Ins. Co., 813 N.W.2d 921, 925 (Minn.2012) (citing Latterell v. Progressive N. Ins. Co., 801 N.W.2d 917, 920 (Minn.2011)). If the provision is unambiguous, courts “then consider whether the exclusion omits coverage required by the No–Fault Act or contravenes the No–Fault Act. Id. (citing Latrell at 921). See also, Lobeck v. State Farm Mut. Auto. Ins. Co., 582 N.W.2d 246, 249 (Minn.1998) (same). “[S]o long as coverage required by law is not omitted and policy provisions do not contravene applicable statutes, the extent of the insurer’s liability is governed by the contract entered into.” Am. Family Mut. Ins. Co. v. Ryan, 330 N.W.2d 113, 115 (Minn.1983).

Omnibus Step-Down Provisions

A step-down provision which reduces the amount of liability coverage available to an omnibus insured should be found enforceable by the Minnesota Supreme Court. Omnibus step-down provisions are usually only found in the commercial auto context. The Minnesota Court of Appeals approved omnibus “step-down” provisions in Agency Rent-A-Car, Inc. v. American Family Mut. Auto. Ins. Co., 519 N.W.2d 483 (Minn. Ct. App. 1994) and State Farm Mut. Auto. Ins. Co. v. Universal Underwriters Ins. Co., 625 N.W.2d 160 (Minn. Ct. App. 2001), review denied (Minn. June 27, 2001), cases I handled for the involved rental car company and auto dealership insurer.

In Agency Rent-A-Car and Universal Underwriters, the insuring agreements provided one stated limit of liability for the named insured vehicle owner (a car rental company in Agency Rent-A-Car and dealership in Universal Underwriters) and another, lower limit (statutory minimum) for permissive user-customers. A typical provision provides that the permissive user-customer qualifies as an “insured” under the policy only to extent of the minimum limits required by law. In both cases, the step-down provisions were upheld. The vehicle owner’s self-insurance plan (in Agency Rent-A-Car) and liability insurer (in Universal Underwriters) was only required to extend minimum limits omnibus liability coverage to the customer on a primary basis, followed by the non-owned vehicle liability coverage available to the customer under his or her own personal auto policy, which applied on an excess basis. If uncompensated damages remained and the vehicle owner had any tort liability to the injured party (vicarious or active), the vehicle owner’s self-insurance plan or insurance policy would come back into play to pay up to the difference between its full liability limit and the minimum limits omnibus coverage afforded the permissive user-customer.

While nothing in the No-Fault Act expressly authorizes an omnibus step-down provision in a vehicle owner’s policy, such provisions do not contravene any provision of the No-Fault Act or public policy because they do not reduce the bodily injury liability protection the named insured purchased and, thus, do not reduce the coverage that is available to injured accident victims or any class of accident victims. The vehicle owner’s insurer remains liable to pay up to its full limits of liability regardless of the step-down provision. Omnibus step-down omnibus provisions only operate to allocate liability coverage between the policy issued to the vehicle owner and the permissive-user customer’s policy, if any. In Universal Underwriters, State Farm argued the No-Fault Act “prohibits [an] owner’s residual liability policy from providing different liability limits for the permissive user and the owner.” Id. at 164. Relying on Agency Rent-A-Car, the court rejected State Farm’s argument, holding: “[n]othing in [the No-Fault Act] shows a clear intent by the legislature to restrict an insurer’s right to freely contract for different liability limits for permissive drivers and owners so long as the minimum statutory coverage is provided.” Id. The permissive user-customer has no grounds to object to a step-down provision; a non-family member permissive user cannot claim any reasonable expectation that the vehicle owner’s policy would afford him or her more than minimum limits coverage.

It should be noted that the omnibus step-down provisions at issue in Agency Rent-A-Car and Universal Underwriters are distinguishable from the policy provisions at issue in Illinois Farmers Ins. Co. v. Depositors Ins. Co., 480 N.W.2d 657, 661 (Minn.Ct.App.1992). In that case, three men were killed in a single-vehicle accident in 1989. Donald Olson owned the vehicle and insured it through Depositors. His son, Joseph, had permission to use his father’s car. He allowed a friend, Kevin Redlund, drive the car. Two passengers’ heirs brought wrongful-death claims against Donald Olson and Redlund. Depositors insured Olson’s vehicle, with liability limits of $500,000 per person/$500,000 per accident. Farmers insured Redlund. The Depositors’ policy extended omnibus coverage to anyone using the insured vehicle with permission. Unlike the step-down omnibus provisions in Agency Rent-A-Car and Universal Underwriters — which specifically restricted the omnibus liability coverage to the minimum limits required by law — the Depositor’s policy contained an endorsement stating that the insurance available for any person other than the named insured or a resident relative (i.e., a permissive user) “that exceeds the financial responsibility law limits where the auto is principally garaged shall be excess over any other collectible insurance.” The “other insurance” clause of the Farmers’ policy likewise stated that “any insurance we provide for a vehicle you do not own shall be excess over any other collectible insurance.” Because the other insurance clauses of the two policies in Depositors conflicted, the Court of Appeals applied Minnesota’s three-part “closeness-to-the risk” test and held that Depositor’s policy was primarily liable up to its $500,000 limits, followed by the Farmers’ policy.

Household Step-Down Provisions

Household (a/k/a “family” or “intra-family”) step-down provisions differ significantly from omnibus step-down provisions. First, household exclusions have been banned in Minnesota since 1969. Hime v. State Farm Fire & Casualty Co., 284 N.W.2d 829 (Minn.1979) (citing Minn. Stat. § 65B.23, repealed by Laws 1974, c. 408 s 33 and noting that “Minnesota law has prohibited household or family exclusions in automobile liability insurance policies since 1969”), cert. denied, 444 U.S. 1032 (1980)).

Prior to 1969, household (a/k/a “intra-family”) exclusions for bodily injury sustained by the named insured and members of his or her family residing in the same household were held enforceable on the grounds that they served to prevent fraud and collusion by family members. See, Tomlyanovich v. Tomlyanovich, 239 Minn. 250, 58 N.W.2d 855, 862 (1953) (upholding household exclusion and noting that the “obvious purpose of the clause here involved is to exempt the insurer from liability to those persons to whom the insured, on account of close family ties, would be apt to be partial in case of injury”).

However, with the erosion of the common-law doctrines of inter-spousal and parental immunity and rejection of their purported rationale (i.e., the possibility of family members engaging in fraud and collusion), the legislature rejected the auto insurance industry’s efforts to incorporate those immunities into their policies by use of contractual household exclusions. Minnesota Statute § 65B.23, subd. 1(a) provided that “No policy of automobile liability insurance … shall contain an exclusion of liability for damages for bodily injury solely because the injured person is a resident or member of an insured’s household or related to the insured by blood or marriage.” Subdivision 1(b) prohibited exclusions for “bodily injury sustained by any person who is a named insured, except where such injury is sustained by a named insured who is driving the insured automobile at the time such injury is sustained.”

In 1979, in Hime, the Minnesota Supreme Court addressed a household exclusion in connection with an accident that occurred in 1972, before the No-Fault Act was in effect. The policy obligated State Farm to “pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages …,” but excluded “bodily injury to the insured or to any member of the family of the insured residing in the same household as the insured.” Id. at 831. The issue was whether Florida law (which enforced household exclusions) or Minnesota law (which did not) would apply as the policy was issued in Florida, but the accident occurred in Minnesota. The court held that application of Minnesota law was proper under Minnesota’s “choice-influencing considerations” and invalidated the household exclusion.

Second, while household step-down provisions do not eliminate all coverage as would be the case with a true household exclusion (the lone fact relied upon by auto insurers in support of the validity of household step-down provisions) household step-down provisions differ from the omnibus step-down provisions found enforceable in Agency Rent-A-Car and Universal Underwriters as the former purport to reduce the liability protection the named insured purchased, often significantly so, and thereby also serve to reduce the insurance coverage available to an entire class of accident victims based solely on the injured party’s status as a named insured or resident relative of the named insured’s household. Further, unlike omnibus step-down provisions – where the permissive user-customer has no expectation of being afforded more than minimum limits coverage –, a household step-down “may be a surprise to most policy holders. The insurance-buying public may assume that injured family members have the benefit of the full policy limits.” Frey v. United Servs. Auto. Ass’n, 743 N.W.2d 337, 343 (Minn. Ct. App. 2008).

The Minnesota Court of Appeals and Eighth Circuit Court of Appeals approved household step-down liability provisions in Frey v. United Servs. Auto. Ass’n, 743 N.W.2d 337 (Minn. Ct. App. 2008) and Babinski v. Am. Family Ins. Grp., 569 F.3d 349 (8th Cir. 2009). In Frey, the Minnesota Court of Appeals upheld a household step-down “exclusion” which reduced the stated policy limits from $300,000 to $30,000, the minimum amount required by Minnesota law. See Minn. Stat. § 65B.49, subd. 3(1). In Babinski, 569 F.3d 349 (8th Cir. 2009) (applying Minnesota law), the court, relying in large part on Frey and Universal Underwriters, upheld a household step-down “exclusion” which reduced the stated policy limits from $1,000,000 to $30,000.

In Frey, seventeen-year-old Nathan Frey was permissively operating a vehicle owned by his father, Stephen Frey, when he caused a one-vehicle accident. Stephen Frey and Thomas Alexander were killed in the accident and Nathan’s mother, Patricia Frey, and sister, Aven Frey, who was a college student in Iowa, sustained injuries. The vehicle was insured under a policy issued to Stephen Frey by USAA. The policy had stated limits of liability of $300,000 per person/$500,000 per accident. However, the exclusions section contained a step-down limit for bodily-injury liability coverage to $30,000 per person or $60,000 per accident when a “covered person” was legally liable to pay “a member of that covered person’s family residing in that covered person’s household.” It was undisputed that Nathan Frey was a covered person under policy. When Aven Frey submitted a claim for her injuries, USAA denied coverage for amounts above the policy’s step-down limits of $30,000/$60,000, claiming that Aven also resided in the home with her brother Nathan.

In holding the step-down provision valid and enforceable, the court first held the USAA policy did not “omit” any coverage required by Minnesota law because the policy still provided the minimum limits of liability coverage required by the No-Fault Act after application of the step-down provision. Id. at 341. The court next found that the step-down provision did not “contravene” applicable statutes. Id. Aven Frey argued, and the district court concluded, the step-down provision contravened Minnesota law and was unenforceable because USAA’s reduction of coverage for family members (i.e., a status-based exclusion) was not one of the enumerated grounds for cancellation or reduction of liability insurance under Minnesota law. However, the statute relied upon by the district court, Minn. Stat. § 65B.15 (2006), only governs changes in coverage during a policy term and, thus, had no applicability. The Court of Appeals also noted that while the Minnesota Department of Commerce’s 2005 procedure manual prohibited drop-down limits on bodily-injury coverage for resident family members (see Minn. Dep’t of Commerce, Private Passenger (Personal) Automobile Insurance, 7 (2005)), the “disapproval was withdrawn and there is no claim that this policy provision violates or violated a regulation of the Minnesota Department of Commerce or other state agency.” Id. at 342.

In Babinski v. Am. Family Ins. Grp., 569 F.3d 349 (8th Cir. 2009) (applying Minnesota law to an auto policy issued in South Dakota where the accident occurred in Minnesota), Kathi Babinski was killed in an automobile accident in Minnesota while her husband John, who was also killed, was driving a Dodge Ram pickup. The vehicle was insured under a policy issued by American Family. The policy required American Family to “pay compensatory damages an insured person is legally liable for because of bodily injury” and had liability limits of $1,000,000. However, the policy contained an exclusion providing that coverage did not apply to bodily injury to “[a]ny person related to the operator and residing in the household of the operator.” An exception to the exclusion then stated: “This exclusion applies only to the extent the limits of liability of this policy exceed the limits of liability required by law.”

After Kathi’s heirs commenced a wrongful death claim against John’s estate in Minnesota, American Family commenced a declaratory judgment action claiming that, pursuant to the “household drop-down exclusion,” it was only obligated to pay $30,000, the amount required by law, not the $1 million limits. See Minn. Stat. § 65B.49, subd. 3(1). Kathi’s heirs contended that the household step-down provision was unenforceable.

The Minnesota federal district court found the policy “vague, ambiguous, and [fell] far below any ordinary consumer’s reasonable expectation” as “it [was] impossible to tell from within the policy’s four corners the amount it [would] pay.” Id. at 351. The Eighth Circuit found the policy unambiguous. The court noted that in Agency Rent–A–Car, Inc. v. Am. Family Mut. Auto. Ins. Co., 519 N.W.2d 483 (Minn.Ct.App.1994), the Minnesota Court of Appeals found no ambiguity in a policy that limited liability coverage to “the MINIMUM dollar amount required” by a state’s “motor vehicle financial responsibility laws” and did not provide a specific dollar amount. “[T]he mere fact that we must look beyond the Policy’s four corners to state law in order to determine the exact dollar amount of coverage does not render the drop-down exclusion ambiguous under Minnesota law.” Id. at 352. The court also rejected application of the reasonable expectations doctrine, holding the doctrine “applies only on the few ‘egregious’ occasions when an exclusion is disguised in a policy’s definitions section.” Id. at 353 (quoting Allstate Ins. Co. v. Steele, 74 F.3d 878, 881 (8th Cir.1996)). According to the court, the household step-down provision was not hidden and “appear[ed] exactly where an insured would expect — in the Policy’s exclusions section.” Id. The court rejected Babinski’s assertion that because the provision was actually only a “limitation” or “reduction” of the liability limits, a reasonable insured would not expect to find it in the “exclusions” section of the policy. Id.

The court then addressed the issue of whether the step-down provision was valid and enforceable. In determining the provision was enforceable, the court noted that while the Minnesota Supreme Court had not specifically addressed the enforceability of household step-down exclusions, “the purpose of the no-fault act is to fully compensate the insured to the extent of the mandated insurance” (quoting Scheibel v. Ill. Farmers Ins. Co., 615 N.W.2d 34, 39 (Minn.2000)), and “the Minnesota Court of Appeals has consistently held that drop-down exclusions are enforceable so long as they satisfy the minimum coverage limits in Minnesota’s no-fault act.” Id. at 354 (citing Frey v. United Servs. Auto. Ass’n, 743 N.W.2d 337 (Minn.Ct.App.2008); Bundul v. Travelers Indem. Co., 753 N.W.2d 761 (Minn.Ct.App.2008) and State Farm Mut. Auto. Ins. Co. v. Universal Underwriters Ins. Co., 625 N.W.2d 160 (Minn.Ct.App.2001). Because the step-down provisions in these cases reduced the liability coverage “only to the extent the limits of liability of this policy exceed the limits of liability required by law,” the court held that it was enforceable in Minnesota.


The Minnesota Supreme Court has not determined whether step-down provisions from residual liability coverage are enforceable under the No-Fault Act. However, the Minnesota Supreme Court should hold that step-down provisions which reduce coverage to a non-family member omnibus insured (such as those involved in Agency Rent-A-Car and Universal Underwriters) are valid and enforceable. Such provisions have no adverse impact on the policyholder or accident victims.

While the Minnesota Court of Appeals and Eighth Circuit Court of Appeals upheld household step-down provisions in Frey (which could be viewed as dicta as the court ultimately held the step-down provision did not apply because the injured claimant did not qualify as a resident relative under the policy) and Babinski, the Minnesota Supreme Court would likely hold that household step-down provisions contravene the provisions of the No-Fault Act and are void and unenforceable. This assumes, however, that the correct legal arguments are made. The courts in Frey and Babinski were either not presented with, or overlooked, the strongest legal argument against the validity of household step-down provisions — a basic and fundamental concept I located in my decades old research that was built into the No-Fault Act when passed in 1974.

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 licensed in your jurisdiction. © All rights reserved. 2016.

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Guest Contributor Jim Radogna: F&I Fact vs. Fiction

Fact v Fiction By Jim Radogna. It’s not uncommon for me to be asked to weigh in on the occasional compliance conundrum posed on some social media forum. Many such inquiries involve disagreements about long-held beliefs in F&I and whether or not they’re legally valid. So I’ve decided to take a crack at clarifying some of the issues surrounding these pervasive compliance myths. Now, there’s no legal advice here — just my thoughts based on a bit of common sense and my years of being a compliance car guy. Ultimately, it’s up to you to decide what works best for you, your customers and your dealership.

Myth No. 1: The 300% rule is a compliance tool

Many F&I processes that started out as solid sales techniques have somehow morphed into compliance requirements. The 300% rule is a great example of this phenomenon. I wholeheartedly agree with this rule from a sales perspective. As they say, you’ll miss 100% of the shots you don’t take. But as a compliance requirement, I’m not so sure.

First, let’s look at why failing to adhere to the 300% rule is considered a compliance blunder. A common rationale is that if you don’t offer protection products to your customers that they end up needing, you can be sued. I have, in fact, heard of lawsuits where a customer wasn’t offered credit life insurance, subsequently died and the spouse sued the dealership.

However, this scenario seems far less likely when it comes to other products. For instance, credit life insurance is only available from the dealer at the time of sale, so there may indeed be an obligation to inform eligible customers of its availability. On the other hand, many other products sold in the F&I office are available elsewhere. I recently purchased a new car, and within days my inbox was full of offers from independent service-contract providers. I’m not sure even the most desperate attorney would want to file a lawsuit against a dealer for not offering products that are readily available on the open market.

But some F&I pros insist on practicing the 300% rule without exception and having a signed declination sheet in every deal jacket to avoid claims of discriminatory treatment. Discrimination is defined as treatment of an individual or group based on their actual or perceived membership in a certain group or social category, “in a way that is worse than the way people are usually treated.”

In my view, if you fail to offer all of your customers all of your products all of the time, it would be a big hill to climb to prove that you’re being discriminatory. On the other hand, if you adhere to the 300% rule but offer your products at different prices, that discrimination claim may very well be low-hanging legal fruit. But there are other potential issues that subscribing to the 300% rule could raise.

Let’s say, for example, you present your customer with 100% of your products and she says, “I’ll take it all.” So far, so good, right? But you then discover your lender won’t allow you to finance it all. Besides the obvious customer satisfaction issues, you’ve made an offer on which you can’t deliver. Is it conceivable that a lawyer may try to make a contractual legal issue out of that? It certainly wouldn’t surprise me. The same applies with max loan-to-value (LTV) or amount-financed callbacks. If you present 100% of your products in these scenarios, I suggest you let the customer know up front how much more money he or she will need to come up with.

There are also situations where the customer shouldn’t be offered all of your products. For instance, you wouldn’t sell GAP protection on a cash or low LTV deal (especially when the LTV falls below state or lender limitations), or a service contract on a car that’s exceeded your program’s mileage limit. Offering such products in these situations could result in deceptive practices or fraud claims.

The same principle applies to declination sheets. They certainly come in handy when a customer complains that he wasn’t offered a product that turned out to be needed. But the significance of declination sheets as a compliance tool has been somewhat overstated, in my opinion. From a sales standpoint, declination sheets can provide you with one additional chance to sell products, but they should be used accurately. Products that aren’t available to particular customers shouldn’t show up on their declination sheets. If they do, they should be marked “N/A” or “Unavailable.”

Myth No. 2: It’s illegal to give a customer a copy of their credit report

This myth has no basis in law, as far as I am aware. In fact, the Fair Credit Reporting Act specifically states that a credit bureau provider cannot prohibit a user (the dealer) from disclosing the contents of the credit report to the consumer. However, contracts with some credit bureau providers may prohibit the dealer from giving the consumer a copy of his or her credit report.

Telling customers it’s illegal to give them a copy of their credit report when that information is inaccurate is not a good idea, at least in my opinion. On the other hand, telling the customer you can’t hand over a copy of his or her credit report because your company’s contract with the credit reporting agency prohibits it is accurate and true. There’s never a downside to telling the truth.

Myth No. 3: It’s illegal to highlight a contract

Many automotive professionals believe that this is a no-no because you can be accused of “leading” the customer to sign the highlighted areas without reading the rest of the contract. In reality, you can lead a customer by pointing your finger to the signature sections and saying, “Sign here.” It appears this folklore originated with a case where a creditor utilizing a motor vehicle pawn contract was sued for failure to disclose the APR as conspicuously as other disclosures on the contract.

The court ruled that the creditor violated the Truth in Lending Act (TILA) because it put dashes and arrows pointing to the due date, thereby making the due date disclosure more conspicuous than the APR and finance charge. So there was far more going on than highlighting. In fact, according to the court’s decision, there was handwriting and other markings on the contract, and the annual percentage rate on the contract was 304.24%. No surprise there.

So while highlighting customer signature areas probably isn’t a big issue, make sure certain TILA disclosures aren’t more prominent than others. Of course, if you work with a lender that won’t accept a contract with highlighted signatures, you’ll probably want to avoid the practice altogether.

Myth No. 4: A contract is valid once signed by both parties, even if the customer hasn’t taken physical delivery

The validity of this statement depends on where you conduct business. Some states specifically define when a contract is considered valid. For instance, California law states that “a 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.”

So before you attempt to hold a customer’s feet to the fire prior to the delivery of the vehicle, you may want to check the laws in your state.

Myth No. 5: Menus are required to disclose the base payment

This has been the subject of much spirited debate in F&I circles. First, menus are not required by law at all. In fact, contrary to popular opinion, even California doesn’t require the use of a menu. All that is required is a “pre-contract disclosure” that shows the monthly installment payment with and without the optional products or services.

So, really, there is no such thing as a legally compliant menu as some vendors claim. But it’s not a bad idea to include the base payment in your menu presentation (and in your write-up as well).

Myth No. 6: Everyone must be charged the same doc fee

This notion again stems from worries about discrimination claims. The thought is that if a dealership charges one customer a fee, it has to charge everyone the same fee to avoid potential litigation.

So, could charging varying doc fees attract the attention of regulators? Well, we’ve certainly heard enough about alleged discrimination in rate markups over the last few years. And as recent actions by the Consumer Financial Protection Bureau (CFPB) and Department of Justice (DOJ) show, even if there’s no intent to discriminate, you can still face fines if protected classes pay more than non-protected classes.

So the easy answer is to just charge everyone the same doc fee, right? Perhaps. But here’s the rub: Doc 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, as you could be setting yourself up for a deceptive practices claim. Some states, like Washington, require you to inform the customer that the doc fee is negotiable.

So to avoid potential discrimination claims, be sure you can show proof that any downward deviations in fees are for valid business reasons, such as needing to match the doc fee offered by a competitive dealer in order to close the deal. Remember, documentation is key.

Myth No. 7: Payment ranges up to $XX are allowed

To many regulators and plaintiffs’ attorneys, using a payment range in certain circumstances could be a sign of payment packing. While it’s generally acceptable to quote a range of payments using an average APR before the customer’s credit report is pulled, once a credit profile is accessed, a best practice is to quote an exact payment.

Let’s say you’ve pulled the customer’s credit but aren’t sure what her rate is because you’re waiting for a callback from the bank. If you pencil the deal back with a payment range, it’s a good idea to include an APR range as well. Once you determine the actual terms of the deal, a final base payment should be disclosed. Also, if you’re using a payment range to account for variations in days to first payment, you should disclose the exact payment at each level. In other words, never give any impression that would allow a regulator or court to infer that the payments quoted are in any way misleading.

So there you have it: my take on some of F&I’s most common compliance myths. Again, how you handle these issues may depend on the laws in your state and your individual processes and philosophies. You may agree or disagree with my analysis and that’s OK. My goal here is not to steer you in any particular direction, but to simply give you something to think about beyond the status quo.

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

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Auto Coverage: “Absolute” & “Frozen” Liability under the Minnesota No-Fault Act

1273a11By Greg Johnson. A parent completes a personal auto application for automobile insurance and does not disclose that there are any other licensed drivers in the household that will operate the insured vehicle. Later, after the policy is issued, a minor child who was a licensed driver and resided with the parent at the time of the application, permissively operates the insured vehicle and causes an accident injuring an innocent third party. Is the insurer entitled to rescind the policy after the occurrence of the accident based on alleged fraud in the procurement of the policy to avoid coverage for the accident?

Many states have statutes which allow an insurer to cancel a policy based on misrepresentations, omissions, or concealment of facts which are fraudulent and material to the acceptance of the risk, or allow cancellation where the insurer in good faith would have either not issued the policy or would not have provided coverage with respect to the hazard resulting in the loss, if the true facts had been made known to the insurer.

The answer to this question depends in part on where the policy was issued and whether the jurisdiction has enacted a compulsory financial responsibility law as well as a “frozen-liability” (a/k/a “absolute-liability”) statute which makes the coverage “absolute” after an accident. Mandatory liability insurance coverages hold a special status under the law. Like many other jurisdictions, the Minnesota No-Fault Automobile Insurance Act contains a “frozen liability” statute. Minnesota’s statute provides:

(a) The liability of the insurance carrier with respect to the insurance required by this chapter becomes absolute whenever injury or damage covered by the policy occurs. The policy may not be cancelled or annulled as to such liability by any agreement between the insurance carrier and the insured after the occurrence of the injury or damage. No statement made by the insured or on behalf of the insured and no violation of the policy defeats or voids the policy.

Minn. Stat. § 65B.49, subd.3(3)(a).

Statutory frozen-liability provisions bar rescission after an accident has occurred and require the insurer to pay statutorily required liability coverage to an innocent accident victim regardless of an insured’s conduct. See Nimeth v. Felling, 282 Minn. 460, 165 N.W.2d 237 (1969) (applying similar, pre-No-Fault Act absolute liability statute and holding that insured’s failure to comply with policy condition requiring notification of change in vehicles could not defeat injured party’s claim under the policy). The language of the Minnesota frozen liability statute is clear: (1) no “agreement between the insurance carrier and the insured” can defeat or void the policy; (2) no “statement made by the insured” can defeat or void the policy; and (3) no “violation of the policy” by an insured can defeat or void the policy. In short, nothing the insured did or said prior to the accident and nothing the insured does or says after an accident provides a basis for the insurer to avoid liability coverage. Thus, even if the insured misrepresents the risks insured under the policy, violates a policy condition or the insurer fails to collect a premium commensurate with the risks insured, the policy will afford coverage. The liability coverage contained in the policy as written (or as required to be provided by law) is “frozen” after an accident occurs.

Many other states (27 in addition to Minnesota) have enacted similar “frozen- liability” statutes. See e.g., Torres v. Nev. Direct Ins. Co., 353 P.3d 1203 (Nev. 2015 (insured’s violation of notice and cooperation provisions of policy was not binding on injured party as no post-injury violation of a policy releases insurer under the absolute-liability statute); Cowan v. Allstate Ins. Co., 357 S.C. 625, 594 S.E.2d 275 (2004) (noting that breach of a policy’s notice requirements by the insured did not release the insurer from liability); National Ins. Ass’n v. Peach, 926 S.W.2d 859 (Ky. App. 1996) (insurer required to extend mandatory liability limits to accident victim despite fact that insured misrepresented on his application that he would be the sole operator of the motorcycle); Midland Risk Mgmt. Co. v. Watford, 179 Ariz. 168, 876 P.2d 1203 (Ariz. Ct.App.1994) (requiring insurer to indemnify the insured despite misrepresentations on the insurance application because of absolute-liability statute); Harris v. Prudential Prop. & Cas. Ins. Co., 632 A.2d 1380 (Del.1993) (holding that non-cooperation of insured cannot defeat application of absolute-liability statute where innocent third-party is injured); Odum v. Nationwide Mut. Ins. Co., 101 N.C.App. 627, 401 S.E.2d 87 (1991); Safeway Ins. Co. v. Harvey, 36 Ill.App.3d 388, 343 N.E.2d 679 (1976); Allstate Ins. Co. v. Dorr, 411 F.2d 198 (9th Cir.1969).

These holdings are consistent with the public policy underlying mandatory automobile liability systems. Compulsory auto insurance systems are based on an interest in protecting accident victims and were enacted to benefit the public as well as the insured. States that require liability insurance have a strong public policy interest in assuring that individuals who are injured in motor vehicle accidents have a source of indemnification. Frozen-liability statutes are consistent with these purposes by providing a mechanism for an injured party to recover his or her damages despite any wrongdoing or breach of contract on the part of the policy insureds. Allowing rescission of an insurance contract after an accident would strike at the heart of compulsory liability insurance and would operate as the functional equivalent of a contractual exclusion. The result would likewise defeat minimum coverage, with the consequence that an innocent, injured third-party would bear the burden of intentional misrepresentations by the insured. It would shift the loss to one who was entitled to rely on obedience to the law and one who was without any means of determining whether a policy had been fraudulently procured. As between an injured third-party and the insurer, the latter is in the far superior position to protect itself.

Some jurisdictions, which have enacted automobile financial responsibility statutes but not frozen-liability statutes, have likewise prohibited rescission of an auto policy after the occurrence of damage or injury to an innocent third-party. See e.g, Erie Ins. Exch. v. Lake, 543 Pa. 363, 671 A.2d 681 (1996); Munroe v. Great American Ins. Co., 234 Conn. 182, 661 A.2d 581 (1995); Van Horn v. Atlantic Mut. Ins. Co., 334 Md. 669, 641 A.2d 195 (1994); Continental Western Ins. Co. v. Clay, 248 Kan. 889, 811 P.2d 1202 (1991); Ferrell v. Columbia Mut. Cas. Ins. Co., 306 Ark. 533, 816 S.W.2d 593 (1991); Fisher v. New Jersey Auto. Full Ins. Underwriting Ass’n, 224 N.J.Super. 552, 540 A.2d 1344 (App.Div.1988); American Underwriters Group v. Williamson, 496 N.E.2d 807 (Ind.Ct.App.1986); United Sec. Ins. Co. v. Commissioner of Ins., 133 Mich.App. 38, 348 N.W.2d 34 (1984). Cf Colonial Penn Ins. Co. v. Guzorek, 690 N.E.2d 664 (Ind.1997) (holding that financial responsibility act did not abrogate common law right of rescission even after an accident and injury to an innocent third-party because minimum compensation protection for an accident victim could be satisfied by the injured party’s uninsured motorist (UM) coverage).

Whether an insurer can pursue an action against its insured for any amounts it is required to pay an innocent, injured party due to a frozen-liability statute is an open question in most jurisdictions. Some states have statutes which directly address the issue by allowing insurers to recoup such losses. For example, North Carolina G.S. § 20–279.21(h) states: “Any motor vehicle liability policy may provide that the insured shall reimburse the insurance carrier for any payment the insurance carrier would not have been obligated to make under the terms of the policy except for the provision of this Article.” Minnesota does not contain a similar statutory provision. Of course, whether a claim against the insured would be significant or illusory would depend upon the financial resources of the insured. It may not be worth the effort.

In addition, some states have held that their frozen liability statutes bar rescission only to the extent of the minimum liability insurance limits required by law, at least in cases of fraud in the procurement of the policy. Stated another way, an insurer is not barred from asserting the defense of fraud as to any coverage in excess of the statutory minimums. See Prudential v. Estate of Rojo–Pacheco, 192 Ariz. 139, 962 P.2d 213 (1997); Harris v. Prudential Prop. & Cas. Ins. Co., 632 A.2d 1380 (Del.1993); Farmers Ins. Exch. v. Anderson, 206 Mich.App. 214, 520 N.W.2d 686 (1994); Odum v. Nationwide Mut. Ins. Co., 101 N.C.App. 627, 401 S.E.2d 87 (1991); Dairyland Ins. Corp. v. Smith, 646 P.2d 737 (Utah 1982). These holdings are often based on statutes which bifurcate a policy’s stated limits of liability between the minimum liability amounts required by the compulsory financial responsibility law and amounts in excess of those minimum amounts. A North Carolina statute, for example, states that “Any policy which grants the coverage required for a motor vehicle liability policy may also grant any lawful coverage in excess of or in addition to the coverage specified for a motor vehicle liability policy and such excess or additional coverage shall not be subject to the provision of this Article. With respect to a policy which grants such excess or additional coverage the term “motor vehicle liability policy” shall apply only to that part of the coverage which is required by this section.” North Carolina G.S. § 20–279.21(g).

The Minnesota No-Fault Act contains a somewhat similar statute, but it distinguishes between mandatory and optional “benefits” and “coverages,” not between minimum and excess amounts for mandatory coverages that have been purchased. Minnesota Statute § 65B.49, subd. 7, entitled, “Additional benefits and coverage not prohibited,” states: “Nothing in sections 65B.41 to 65B.71 shall be construed as preventing the insurer from offering other benefits or coverages in addition to those required to be offered under this section.” Unlike the North Carolina statute, the Minn. Stat. § 65B.49, subd. 7, does not specifically state that the portion of liability coverage in excess of the minimum liability amounts required by the No-Fault Act may be treated differently than the portion included within the minimum amounts. On the flip side, Minnesota’s frozen-liability statute states that “The liability of the insurance carrier with respect to the insurance required by this chapter becomes absolute whenever injury or damage covered by the policy occurs,” Minn. Stat. § 65B.49, subd.3(3)(a), which could be read to suggest that an insurer is not barred from asserting the defense of fraud as to liability coverage in excess of the statutory minimums.

So is the parent’s insurer entitled to rescind the policy after the accident based on the parent’s alleged fraud in the procurement of the policy to avoid coverage for the accident? As noted above, the answer depends, in part, on the jurisdiction where the policy was issued. In many states, the insurer will not be able to avoid coverage, at least for the minimum liability limits mandated by state law, due to the frozen-liability statute.

But that is not the end of the inquiry. One also has to look into whether the parent’s non-disclosure of the minor-child actually had any material effect on the insurer’s acceptance of the risk and/or whether the insurer would not have issued the policy or adjusted the premium had the true facts had been made known to the insurer. The internal underwriting guidelines of insurance companies vary. Some only require an adjustment of premium when a resident relative will be a “primary” or “occasional” operator of a vehicle and define those terms based on certain usage of a vehicle. In the case of a minor child of divorced parents, some will only require the parent who has primary custody of the minor child to list the child as a driver on their policy. As noted in one insurance website: Now when teenagers split time between divorced parents on a regular basis it is a common question of which parent should include the teen on his or her auto insurance policy. Many insurance providers suggest the parent, who has custody of the teen the most, should add the child to his or her policy. In some cases, insurance companies say it is whichever parent has custody of the teen when the child is attending school.”

So what’s the answer? Can the insurer avoid coverage (or limit coverage to the minimum limits)? Since insurance companies’ underwriting guidelines, rating manuals and insurance policies differ, the ultimate answer is: it depends. Typical attorney answer.

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 licensed in your jurisdiction. © All rights reserved. 2016.

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Auto Dealers Entitled to Money Distribution in Auto Parts Antitrust MDL Case

thXO2B22BG By Greg Johnson. On November 19, 2015, U.S. District Judge Marianne O. Battani of the Eastern District of Michigan issued an Order Granting Final Approval of an initial, partial settlement of $59 million to auto dealers in the multi-district (MDL) antitrust litigation against certain Japanese parts manufacturers. The MDL alleges that the parts manufacturers rigged bids and fixed the prices of auto parts to the detriment of auto dealers and retail consumers over the period of January 1, 1998 to September 12, 2015.

My firm, G Johnson Law LLP, represents White Bear Lake Superstore GMC-Buick, one of the lead plaintiff auto dealers in the case. On a national level, the auto dealer class is represented in the MDL by Attorney Shawn Raiter of Larson King LLP in St. Paul, MN as well as the law firms of Cuneo Gilbert & LaDuca LLP and Barrett Law Group PA.

Auto dealers in over 30 jurisdictions (full list below) can make a claim for money benefits from the settlement fund if they purchased certain component parts or vehicles containing the parts and submit a claim. The Notice of Settlement and Claim Form can be accessed on the settlement website at The amount a dealership may be entitled to receive from the settlement depends on the number, make and model of vehicles purchased during the period of January 1, 1998 to September 12, 2015.

The process to submit a claim is simple as all information needed to fill out the Claim Form can be derived from the dealership’s year-end financial statements for each OEM.

The Claim Form must be postmarked no later than March 31, 2016 or the dealership will not be eligible.

Auto dealers in the District of Columbia and the following states are eligible: Arizona, Arkansas, California, Florida, Hawaii, Illinois, Iowa, Kansas, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, New York, North Carolina, North Dakota, Oregon, South Carolina, South Dakota, Tennessee, Utah, Vermont, West Virginia, and Wisconsin.

The MDL is In re: Automotive Parts Antitrust Litigation, Case Number 2:12-md-02311 (U.S. District Court for the Eastern District of Michigan). Please note that the MDL is ongoing as some defendants have not settled. The Claim Form submitted by March 31, 2016 can be used to claim money benefits from future distributions as well.

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.

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Guest Contributor Jim Radogna: Dealer Fees Under Attack

jimBy Jim Radogna. Two 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.


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

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!!

gremlinBy Greg Johnson. I 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


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.

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Why do Auto Dealers Purchase Limited Truth in Lending Coverage?

insurance-contracts-300x199By Greg Johnson. Why 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-InsuranceBy Greg Johnson. Everyone 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

images09Y0210OBy Greg Johnson. Can 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.”  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.



Posted in Auto Dealer, Fair Credit Reporting Act, Regulatory Compliance | Tagged , , , | Leave a comment