Federal and state laws, and how they play off of each other present a combination of potential liabilities for dealerships. And, dealers need to be aware of these interactions of liabilities to help avoid legal action against their business.
Violations of federal consumer protection laws such as Truth in Lending (TILA), the Fair Credit Reporting Act (FCRA), the Equal Credit Opportunity Act (ECOA), and the Credit Repair Organizations Act (CROA) are only the beginning of a dealership’s potential liability. Many states have laws that are automatically violated by any federal consumer protection law violation. They can add fines, private lawsuits, and attorney’s fees to what may at first appear to be a small penalty under laws like TILA, which limit a plaintiff’s recovery to the greater of actual damages or $1,000 per violation.
A good example is in Connecticut where a recent case shows the potential for liability under that state’s law for TILA and CROA violations by an automotive dealership.
The Connecticut Unfair Trade Practices Act (CUTPA) provides in relevant part:
It shall be an unfair or deceptive act or practice for a new car dealer or a used car dealer to violate any provision of a federal or state statute or regulation concerning the sale or lease of motor vehicles.
Similarly, courts in Connecticut have held that a violation of TILA also constitutes a violation of Connecticut’s Retail Installment Sales Finance Act (“RISFA”), entitling the buyer to rescission of the contract if important terms of the contract were fraudulent or purposefully omitted.
Trickle-Down Liability in the Nutmeg State
A recent case shows the operation of these trickle-down liability effects on a dealership. The facts come from plaintiffs’ amended complaint in the action, which the Court allowed to go forward.
Plaintiffs responded to a call from a Connecticut dealer relating to the purchase and sale of a 2012 Chrysler 200LX. After allegedly detaining the plaintiffs at the dealership for approximately six hours, the dealership informed them of a sale price that was good for that day only. They agreed to buy and finance the purchase with the dealer.
“The violation of the federal law is usually only the beginning of the trickle-down effect into state laws that can impact a dealership.”
Plaintiffs were apparently credit-challenged so the dealer prepared the retail installment sales contract in a way to get it financed that the plaintiffs claimed was fraudulent. The price of the vehicle was set at almost $3,000 above NADA book value, but the plaintiffs were given credit on the trade-in of their 2000 Dodge Intrepid for $3,500, which was approximately $3,000 greater than what the vehicle was worth.
The contract also listed a cash down payment of $500, even though the plaintiffs only put down $100 at the time they signed the contract. They apparently made a side deal to obtain the additional $400 from the dealer (if done properly, this would have to be characterized as a deferred down payment and be payable not later than the due date of the second payment with no finance charge accruing on it). The contract did not reflect the deferred down payment or list the $400 in the schedule of payments as required by TILA. The dealer also inflated one of the plaintiffs’ incomes on the credit application and reduced their housing expense.
The subprime lender agreed to accept assignment of the contract several weeks after the contract date of July 24, 2014. Not surprisingly, the plaintiffs defaulted on the contract and the lender repossessed the vehicle in January 2015. Among other things, the plaintiffs asserted violations against the dealer of TILA, the CROA, and CUTA violations for submitting false credit information to the lender which resulted in an approval for a transaction the plaintiffs could not afford.
The plaintiffs asserted TILA violations for the price increase of the vehicle on account of the over-allowance on the trade-in, overstating the APR due to failure to timely assign the contract, and include the deferred down payment in the schedule of payments. The plaintiffs claimed that these acts by the dealer prevented the plaintiffs from knowing the actual amount financed. The Court held these allegations adequately stated claims for violation of TILA.
The plaintiffs also asserted CROA violations based on the dealer overstating their income because the CROA prohibits untrue or misleading statements with respect to the customer’s creditworthiness to anyone to whom the consumer applies for credit. The Court ruled these allegations stated valid claims under the CROA as well.
Then the trickle down liability of Connecticut laws came into play. The Court ruled that plaintiff’s TIILA and CROA allegations were sufficient to support a per se claim under the CUTPA and applicable regulations. CUTPA allows for the Connecticut Attorney General to recover a penalty of $5,000 per violation and plaintiffs can also recover actual damages, punitive damages, and attorney’s fees.
The Court also ruled that the plaintiffs arguably had a right to rescind the contract under the provisions of Connecticut’s RISFA based on the federal TILA violations. Rescission typically involves the customer cancelling the contract and receiving a refund of all consideration paid as well as their attorney’s fees.
So the TILA and CROA violations alone brought into play numerous other liabilities of the dealership under Connecticut state law. These types of provisions are not uncommon in state unfair and deceptive liability statutes which allow actions by State Attorneys General as well as by consumers. And because these are statutory and not contract claims, contractual arbitration clauses and jury waivers are not likely to apply to keep a claim from getting to a court and jury.
It will remain to be seen how much this deal costs the dealer in Connecticut between TILA, CROA, CUTPA, and RISFA claims (none of which are exclusive) as well as being liable for the plaintiffs’ attorneys fees which typically go well beyond $100,000, plus the dealer’s own attorney’s fees in defending all the claims.
This Connecticut case is just one example of how a state’s unfair and deceptive practice laws and their relationship to federal laws can affect your dealership. So work with your legal counsel to better understand how state laws tie in with federal laws.
The violation of the federal law is usually only the beginning of the trickle-down effect into state laws that can impact a dealership. The combination of federal and state laws can take down the business that you have built quickly, if you and your legal counsel are not prepared.
O’Neill v. Country Motors, II, Inc., 2015 U.S. Dist. LEXIS 167686 (D. Conn. December 15, 2015)
Author: Randy Henrick
Randy Henrick is Dealertrack’s Associate General Counsel for regulatory and compliance matters. He authors Dealertrack’s annual Compliance Guide and speaks at numerous industry and state association events throughout the year. He has more than 25 years of experience in banking and consumer financial services. Prior to Dealertrack, Randy served on the legal staffs of GE Capital, Citigroup, MasterCard International, and FleetBoston Financial. He lectures extensively to dealers on consumer credit, privacy, identity theft prevention, FACT Act regulations, and other compliance topics related to automotive retailing. He is an Adjunct Professor of Law at New York Law School where he teaches a course on U.S. Consumer Credit and Privacy Law, and is the former Chairman of the Consumer Financial Services Committee of the Business Law Section of the New York State Bar Association.