When I was a kid, I had a dog named Dash. His mamma was a Collie. His daddy was from a good neighborhood, if you get my drift.
Dash's favorite pastime was chasing rabbits among our yard's Georgia pines. Dash was fast, but challenged in the brains department. Sensing that, the rabbits started taking advantage of him.
A rabbit would roar towards a pine tree, gauging his speed so that Dash's snarling jaws were close behind. Just before the tree, the rabbit would quickly turn. Dash wouldn't. He'd slam head first into the tree, knocked senseless until he could collect his wits, find another rabbit, and re-start the process. He never learned.
Dash isn't alone. I meet dealers and sales finance company representatives who keep making the same mistake. They don't, or won't, understand that dealers who sell cars on credit — who have customers sign retail installment sales agreements in exchange for cars — are creditors. They extend credit when they swap those nice, shiny cars for contracts containing promises to pay for them over time.
As creditors, they have obligations under the Equal Credit Opportunity Act, the Fair Credit Reporting Act, and other federal and state laws and regulations. Here's a case illustrating that, involving an Illinois dealer:
John and Paula Payne filed a four-count complaint against Ken Diepholz Ford Lincoln Mercury in connection with her attempt to buy a vehicle in response to a direct mail advertisement from the dealership.
The Paynes alleged violations of the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act and the Illinois Consumer Fraud Act.
The direct mail piece to Mrs. Payne stated that she was “pre-selected to receive approval for an auto loan of up to $19,500 with little or no cash down.”
After pulling her credit report, the dealer's “custom finance manager” told her that her credit application wouldn't “go through” with just her name. Citing the ad, she insisted she wanted to purchase the vehicle in her own name.
The finance manager told her she could not finance the purchase alone. The couple later signed a retail installment contract with an APR of 20.95% and an “Affidavit of Spot Delivery.” Evidently, there were numerous spaces to be filled in on the affidavit, and they were all left blank.
At some point, the dealer asked Mr. Payne to submit a driver's license. Mrs. Payne later produced his expired out-of-state license, which was unacceptable. Two to three weeks after the Paynes had taken possession of the automobile, the dealer told them the “loan” could not be processed. The parties disputed whether she attempted to return the vehicle.
The Paynes sued in U.S. District Court. The dealership argued that it was not a “creditor” under the Equal Credit Opportunity Act and, regardless, the Paynes failed to establish a violation because they did not provide requested paperwork (a valid driver's license for him).
The court ruled the dealer qualified as a “creditor” under the act. The judge said the dealer violated the act by failing to provide written notice of the loan denial and the reasons for it.
The court also said the dealership violated the Fair Credit Reporting Act because the dealership admitted that it refused to submit Mrs. Payne's individual credit application and required her husband to join the application after her credit report revealed an outstanding automobile loan.
The court rejected the dealer's argument that the transaction was never consummated because Payne failed to provide a valid driver's license. The court found nothing in the installment contract that conditioned the sale on a valid driver's license.
How thoroughly does your dealership understand its legal finance obligations? Have procedures been reviewed for compliance? If not, watch out for pine trees.
Tom Hudson is a law partner with Hudson Cook and editor in chief of CARLAW and publisher of Spot Delivery. He's at 410-865-5400.