The CARLAWYER©

By Thomas B. Hudson and Nicole Frush Munro

Welcome back to our monthly collection of selected federal and state legislative and regulatory highlights, and a recap of some of the many auto sale and financing suits we track each month.  Remember - what we report here is not every recent development, just ones that we think are of particular interest to car dealers - and note that this column does not offer legal advice.  You need to consult your dealership lawyer with any legal questions.

We include items from other states.  Why?  We want you to be able to see trends.  Also, another state’s laws might be a lot like your own state’s laws – if new laws are being enacted there, or AGs or plaintiffs’ lawyers are pursuing particular types of claims, those laws and claims might soon appear in your state.  As always, though, there is no substitute for checking with your own lawyer before you rely on anything we report or if you have any questions.

Federal Law

On Friday, June 25, 2010, the House and Senate conferees working on the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the new name for the financial reform bill) agreed to a final version of the bill. The final version creates a Consumer Financial Protection Bureau (“CFPB”) housed in the Federal Reserve Board, but largely independent of oversight.  The House promptly passed the bill, and, as we write this, the Senate considers the bill.  Senate Democrats appear to have the 60 votes necessary to prevent a Republican filibuster of the bill.  If they are successful, we expect the President will have the measure on his desk late in the week of July 12.  By the time you read this, we should have a new law.  Or not.

You’ve probably seen all the hoopla about an exemption for dealers from the scope of the CFPB’s authority.  The final version of the bill generally exempts only dealers who provide vehicle servicing and who assign their retail installment contracts to nonaffiliated finance companies.  We say “generally,” because we expect the new Bureau to weigh in on the details of any exemptions.  

On May 28, the Federal Trade Commission announced that it was delaying enforcement of its Red Flags Rule until January 1, 2011. The FTC explained that this latest delay came at the request of several members of Congress while Congress considers legislation that would affect the scope of entities covered by the Rule. The Fair and Accurate Credit Transactions Act directs the FTC and the federal banking agencies to establish rules requiring covered entities to develop Identity Theft Prevention Programs. The FACT Act mandates that these rules apply to “creditors” and “financial institutions.” The federal banking agencies’ Red Flags Rule required full compliance by November 1, 2008, but the FTC has never begun to enforce its version of the Rule. The FTC announced a series of enforcement delays while it considered issues relating to the scope of covered entities. Attorneys, accountants, and the medical industry have challenged the FTC’s position that they are covered “creditors” under the Rule. The May 28th FTC announcement explains that if Congress passes limiting legislation with an effective date earlier than December 31, 2010, the FTC will begin enforcement as of that earlier date. The FTC’s announcement notes that the enforcement delay does not apply to related provisions of the FACT Act provisions enforced by the FTC: the rule regarding address discrepancies applicable to users of consumer reports and the rule regarding changes of address applicable to credit card issuers. In addition, the FTC’s delay does not affect Red Flags Rule enforcement by the federal banking agencies.  Dealers should note that the Rule is now in effect, even if the FTC isn’t presently enforcing it.

State Legislative and Regulatory Developments

Another quiet month as legislators are mostly off for the summer.  Here are a few developments. 

Connecticut SB 414 relates to motor vehicle licensing, registration, and titling.

Delaware HB 247 concerns the enforcement and regulatory authority of Delaware’s Division of Consumer Protection.

Kansas HB 2660 makes several changes to the law concerning motor vehicle registration, and provides a definition of “recreational off-highway vehicle,” among other provisions.

Louisiana HB 452 amends the Louisiana Motor Vehicle Sales Finance Act to provide for changes in definitions, provide for debt waiver or debt forgiveness agreements, and provide for requirements for GAP coverage, liability, disclosures, or cancellations regarding debt waiver or debt forgiveness agreements, among other provisions. HB 591 amends the Louisiana MVSFA to prohibit any act that lessens or eliminates competition, and to prohibit a lender in a motor vehicle retail purchase from requiring a dealer to sell any insurance coverage, service, or product in order to secure preferential financing rates, among other provisions. SB 198 authorizes a creditor to charge fees and expenses for electronic lien and title services provided in connection with motor vehicle credit transactions. The Louisiana Office of Financial Institutions streamlined its existing record retention rule for all non-depository persons subject to the supervision of the Commissioner of the Office of Financial Institutions.

Oklahoma HB 2359 amends Oklahoma’s tax code concerning the use tax. HB 2883 amends the Oklahoma Vehicle License and Registration Act to define “powersports vehicle” and “powersports vehicle dealer.”

South Carolina, HB 4607 imposes strict new dealer advertising restrictions.  The measure was enacted via an overridden veto on May 26, 2010, takes effect January 1, 2011.

The Wisconsin Department of Revenue adopted as final its emergency sales and use tax rules. The Wisconsin Department of Transportation adopted rules concerning electronic recording and release of liens on vehicles by non-individual creditors.

Litigation

California’s Foreign Translation Requirement Applied to Transaction Negotiated in Korean Even Though One Borrower Spoke and Read English Fluently: This is a case involving housing finance, but dealers frequently ask us about foreign language requirements, so we thought we’d include it.  Korean-speaking borrowers obtained two loans that were negotiated in Korean. The borrowers were not provided Korean translations of the loan documents. After the borrowers defaulted and the lender filed suit, the borrowers counterclaimed that the lender and broker violated California’s Civil Code Section 1632, which requires that any person that negotiates certain contracts primarily in Korean, among other languages, provide a translation of the contracts in the language in which the transaction is negotiated. The borrowers moved for summary judgment on their counterclaim against the broker, but the broker argued that Section 1632 did not apply because one of the borrowers, who reads and speaks English fluently, acted as an interpreter. The U.S. District Court for the Northern District of California rejected this argument, explaining that a party’s fluency in English is irrelevant to the application of Section 1632 and that the borrower did not qualify as an interpreter because the transactions were negotiated in Korean and he did not translate from Korean to English in the course of the negotiation. Not many states impose laws like California’s.  See ING Bank v. Ahn, 2010 U.S. Dist. LEXIS 47447 (N.D. Cal. May 13, 2010). If you don’t know your state’s stance on foreign language documentation requirements, maybe it’s time for lunch with your lawyer.  

Dealer Breached Contract with Financing Source by Misrepresenting Vehicles’ Values: After a dealership represented to its financing source that each vehicle description was accurate and complete, the dealership sold two vehicles to consumers where the amount due on the retail installment sale contracts was based on the Kelley Blue Book retail value for cars with optional equipment that was not part of the two sold vehicles. The vehicle purchasers subsequently surrendered the vehicles, and the assignee of the RISCs discovered the overvaluations. After the assignee demanded that the dealership repurchase the contracts and the dealership refused, the assignee sued for negligent misrepresentation and breach of contract. The trial court found that the dealership did not breach the contract, but did breach its duty to disclose accurate information relating to the vehicle accessories and, therefore, the vehicles’ values. The Court of Appeal of California reversed, concluding that the trial court’s finding that the dealership misrepresented the vehicles’ values necessarily meant that the dealership breached the contract. See South Western Federal Credit Union v. Kennedy Easton, LLC, 2010 Cal. App. Unpub. LEXIS 3391 (Cal. App. May 10, 2010).

Acceptance of Late Payments Does Not Waive Right to Strictly Enforce Repossession Provision in Light of Contract Language: After a creditor apparently accepted several late payments on a vehicle installment sale contract and then entered into a 2-month extension agreement with the car’s owner, the owner filed for bankruptcy, and his debt to the creditor was discharged. The creditor sent the owner a letter telling him he would have to make payments to avoid repossession. The creditor eventually repossessed and sold the car. The owner sued, arguing that the creditor waived its right to strictly enforce the contract’s repossession provision without providing prior notice, despite the existence of non-waiver and “no unwritten modification” clauses in the parties’ contract. The trial court granted judgment to the creditor, and the debtor appealed. The Supreme Court of Arkansas accepted certification of the case. The high court found that if a contract includes non-waiver and “no unwritten modification” clauses, a creditor, in accepting late payments, does not waive its right under the contract to declare default of the debt and need not give notice that it will enforce that right in the event of future late payments. See Minor v. Chase Auto Finance Corporation, 2010 Ark. 246 (Ark. May 20, 2010).

Notice to Co-Signer Not Required for Non-Obligor Who Pledged Collateral: A mother owned a vehicle that her son used as security for a loan. The mother did not sign the loan agreement, and the lender did not provide her with the notice to co-signer required under the South Carolina version of the Uniform Consumer Credit Code. After the mother and son filed for bankruptcy and listed the lender as an unsecured creditor, the lender objected to its unsecured status, arguing that South Carolina law did not require it to give the mother the notice to co-signer. The U.S. Bankruptcy Court for the District of South Carolina agreed, finding that the definition of “co-signer” requires the person to be personally obligated to make payments on a consumer loan extended to another. In this case, the mother had no personal obligation to pay her son’s loan, but merely pledged collateral for the loan. See In re Mattison, 2005 Bankr. LEXIS 2718 (Bankr. D.S.C. December 29, 2005).

Deficiency Judgment Barred Where Creditor Failed to Comply with Georgia Notice Provisions: After a creditor repossessed a car upon the owner’s default on a retail installment sale contract, the creditor sold the car for almost $8,000 less than it was owed. The creditor assigned its rights to the deficiency to a company, which then sued the car owner to collect the deficiency. At trial, the company introduced evidence of a notice letter the creditor sent to the debtor advising him that the creditor intended to pursue a deficiency claim. The trial court granted summary judgment to the company, and the debtor appealed, arguing that there was no evidence that the notice letter was sent by registered or certified mail or overnight delivery, as required by the Georgia Motor Vehicle Sales Finance Act. The Court of Appeals of Georgia reversed the grant of summary judgment, finding that there was no receipt or envelope showing that the notice letter was forwarded to the car owner by registered or certified mail or overnight delivery and that the notice letter listed the owner’s address as a post office box, which was not the address listed for him on the contract. See Beacham v. Calvary Portfolio Services, LLC, 2010 Ga. App. LEXIS 447 (Ga. App. May 11, 2010).

VSI Must Be Disclosed as Finance Charge Unless Premium and Right to Purchase from Third Party Disclosed: What do you do when the law requires you to make a disclosure that you know is incorrect?  When a car owner was sued for defaulting on his retail installment sale contract, the owner counterclaimed, alleging that the RISC failed to include the vendor’s single interest insurance premium as part of the finance charge. The trial court rejected the counterclaim. The Court of Appeals of Ohio reversed, determining that the Truth in Lending Act allows a creditor to exclude the cost of VSI from the finance charge if the creditor, among other things, discloses the amount of the premium and the fact that the consumer has the right to purchase the VSI from anyone the consumer wants. The car owner claimed that he was not notified that he had the right to buy the VSI from third parties, but the assignee of the contract explained that this provision was excluded because no insurer will sell VSI directly to a consumer. The appellate court decided that TILA required the disclosure, even though the disclosure was untrue. The appellate court also found that the RISC failed to disclose the amount of the premium because the sum was disclosed as an amount paid to insurers in the itemization of amount financed, but the contract should have disclosed that the sum was used to pay for the VSI premium. See North Shore Auto Financing, Inc. v. Block, 2010 Ohio App. LEXIS 2009 (Ohio App. June 3, 2010).

 So there you have it!  Stay legal, and we’ll see you next month.   

____

Tom (thudson@hudco.com) and Nikki (nmunro@hudco.com) are partners in the law firm of Hudson Cook, LLC.  Tom is the author of a book, CARLAW®, and is the Editor/author of the CARLAW® F&I Legal Desk Book.  The books are available at www.counselorlibrary.com.  Tom is also the publisher of Spot Delivery®, a monthly legal newsletter for auto dealers, and the Editor in Chief of CARLAW®, a monthly report of legal developments in all states for the auto finance and leasing industry (not to be confused with the book).  Nikki is a contributing author to the F&I Legal Desk Book and frequently writes for Spot Delivery.  Spot Delivery, CARLAW and the books are produced by CounselorLibrary.com LLC.  For information, call 410-865-5411 or visit www.counselorlibrary.com.  Copyright CounselorLibrary.com 2010, all rights reserved.  Single publication rights only, to the Association. (7/10). H/C 4820-2657-7670.