With the growth of the automotive loan market, which just this month has been the subject of examination by national publications such as the Wall Street Journal, has come a corresponding rise in auto loan delinquencies. For automotive finance companies, auto repossessions represent a risk for affirmative claims by consumers both on an individual and, more significantly, on a class basis. Recently, there has been an uptick in class actions against automotive finance companies alleging technical violations of state and federal law governing repossessions.
In theory, auto repossessions should be a fairly simple process. In all states, repossessions of autos that were purchased by way of a Retail Sales Installment Contract are subject to Article 9 of the UCC governing secured transactions, and in every state except for Louisiana, leases are subject to Article 2A of the UCC governing leases of personal property. But some states have enacted additional requirements, which can be found in the states’ various retail installment sales acts, automotive financing acts, or other consumer protection statutes. As explained below, uniform disclosure requirements combined with varying state laws creates the potential for class litigation.
Common Repossession Issues
The UCC does not require advance notice of the repossession, but instead requires that a notice called a “notification before disposition of collateral” before selling the vehicle. As one court put it, “[t]he purpose of notice is to give the debtor an opportunity either to discharge the debt and redeem the collateral, to produce another purchaser, or to see that the sale is conducted in a commercially reasonable manner.”
For consumer transactions, the UCC notice, subject to additional requirements that may be imposed by state law, must contain all of the following:
- The identity of the debtor and secured party (or lessor);
- The collateral that is the subject of the intended disposition—that is, the vehicle that has been repossessed;
- The method of intended disposition, including whether the sale will be public or private;
- A statement that the debtor is entitled to an accounting of the unpaid indebtedness and states the charge, if any, for an accounting;
- A statement regarding the time and place of a public sale or the time after which any other disposition is to be made;
- A description of any liability for a deficiency of the person to which the notification is sent;
- A telephone number from which the amount that must be paid to the secured party to redeem the collateral under section 9-623 is available; and
- A telephone number or mailing address from which additional information concerning the disposition and the obligation secured is available.
Just like any statutorily-required disclosure, these disclosures provide plenty of opportunities for consumer attorneys to generate claims based on allegedly incorrect or incomplete information contained on the subject disclosure. Indeed, class claims have been generated based on at least the following the allegations: (1) misrepresentation of the condition of the vehicle at the time of the sale; (2) the failure to disclose whether the vehicle will be sold at a private sale; and (3) the failure to properly calculate interest on the amount owing.
Further compounding the issues with providing a compliant UCC notice to consumers are the operational challenges of complying with state laws that impose unique requirements above and beyond those contained in the UCC. Automotive finance companies have therefore been the target of state-wide class actions based on a UCC form that fails to take into consideration the additional requirements imposed by the laws of a particular state.
The Cost of Alleged Non-Compliance with State and Federal Law During Repossessions
Damages and other relief afforded consumers under the UCC and state statutes can be significant:
First, a court may enjoin collection, enforcement, or repossession of vehicles on appropriate terms and conditions.
Second, a creditor may be found liable for actual damages “caused by a failure to comply” with the UCC, including “loss resulting from the debtor’s inability to obtain, or increased costs of, alternative financing.” A consumer may not recover actual damages, however, if the creditor’s noncompliance results in the elimination of a deficiency.
Third, consumers may be entitled to statutory damages in “an amount not less than the credit service charge plus 10 percent of the principal amount of the obligation or the time-price differential plus 10 percent of the cash price.” The UCC does not define the term “credit service charge,” instead “leav[ing] their construction and application to the court,” taking into account the UCC’s goal of “providing a minimum recovery in consumer-goods transactions.” The majority of courts have held that “credit service charge” means the total amount of the finance charge as set forth in the original contract, and not the total amount paid. Consumers are entitled to these damages regardless as to whether they have suffered any actual injury.
Fourth, the creditor may not be able to collect a deficiency judgment. The UCC itself does not set forth any rules on whether a creditor may collect a deficiency, even if it is not in compliance with the notice provisions in the UCC. The UCC comments indicate that this omission is intentional and “is intended to leave to the court the determination of the proper rules in consumer transactions.” Courts have developed different standards, though. Some states provide, either by statute or court decision, that noncompliance constitutes a conclusive presumption that the transaction was not “commercially reasonable” and so the creditor may never collect a deficiency judgment if it has not provided the required notices. Other states follow the “rebuttable presumption” approach in which a sale is presumed to be commercially unreasonable but the creditor may rebut the presumption by showing that a commercially reasonable sale would have yielded less than the balance due.
Finally, consumers may recover the attorneys’ fees under most state laws governing repossessions.
As the automotive loan market continues to grow, so too will repossessions. Auto loan companies would be well served to examine their operations to ensure that the their repossession processes allow for complete and accurate data regarding individual repossessions, and to ensure that their repossession operations conform with applicable state law.