Why Auto Lenders Suddenly Face More Legal Risks

Recent action by the Federal Trade Commission could lead to more lawsuits against banks — and larger payouts to plaintiffs — in situations where consumers have been defrauded by car dealerships.

The FTC’s decision involves an obscure consumer protection rule from the 1970s, but its effects are likely to be substantial. This could lead to lenders being more often liable for the legal costs of defrauded borrowers, especially in cases where the car dealership has closed and customers have nowhere to turn for reimbursement.

Right now, defrauded consumers can go to court to get back the money they paid for their car, but filing such claims can cost them thousands of dollars. Banks say they shouldn’t be held responsible for paying clients’ attorney fees in full, and some courts have sided with them.

When used car dealerships defraud consumers, auto lenders may be liable, and a recent advisory notice from the Federal Trade Commission could increase the size of that financial liability.


Legal uncertainty often prompts consumer attorneys to turn down cases because they can’t recover their costs, said Kevin Faulk, a California-based attorney who has sued auto lenders and dealerships.

“A lot of cases never go to trial and people are unable to get their money back,” said Faulk, who estimates he declines two or three cases a week.

Auto lenders have relied on the FTC’s incumbent rule, in effect since 1975, to argue that their liability is limited only to what car buyers paid in the original sales contract. The rule applies to both banks and non-bank lenders who offer car loans through dealerships, an arrangement known as indirect lending.

In an advisory opinion last month, the FTC said its rule does not replace state laws that place more liability on banks that are “holders” of a loan contract.

“Certain courts and financial firms have misinterpreted the Commission’s statements to suggest that the rule overrides state laws that permit attorney fees to be awarded to loan holders,” the FTC said in a statement. hurry. “The advisory opinion emphasizes that the rule does not eliminate any rights a consumer may have under separate state, local or federal law.”

Although the FTC’s opinion is not binding, it already figures prominently in a case currently pending before the California Supreme Court.

Consumer attorneys in other states will also likely review federal and state laws to see if the FTC’s notice can help them in their own cases, the corporate attorneys say.

“This will be a source of work for lawyers and bad news for financial companies,” said Alan Wingfield, a partner at the law firm Troutman Pepper, which represents auto lenders.

The most immediate impact will likely be in California, where a customer named Tania Pulliam is suing TD Auto Finance over a used car she bought in 2016.

Pulliam, who is disabled, says she only realized the car lacked cruise control and adjustable seats, as the dealership had advertised, after making the purchase. She sued the dealership and TD — and argued that the bank, as the loan holder, was liable for the dealership’s actions.

A state court ruled that Pulliam was eligible for $21,957 in damages, plus nearly $170,000 in attorney fees. A court of appeal upheld this decision.

The total price was 15 times more than the roughly $12,500 Pulliam paid for the car, TD lawyers said. But Pulliam’s lawyers argue TD exposed itself to more liability by fighting the case rather than settling the early stages of litigation.

In a filing last year, lawyers for Pulliam wrote that TD’s aim was to make it “impossible for consumers to sue the holders of their consumer credit agreements when they have been deceived by fraudulent sellers “.

TD wrote in its appeal to the state Supreme Court that the Holder rule is clear that “consumers cannot get fifteen times” the amount they spent on the car. The bank pointed to wording in the rule that the potential for customers to recover money “shall not exceed the amounts paid by the debtor hereunder.”

“If creditors risked uncapped attorney fees when funding consumer contracts, they would be less likely to take that risk and fund those contracts,” TD attorneys wrote in a filing last year.

TD also said that if the banks were to be sued under these circumstances, “clean creditors would be discouraged from mounting a legal defense” and would instead offer to settle more cases upfront, due to the “threat to pay hundreds of thousands costs for a multi-thousand dollar consumer claim.

The American Bankers Association and the Consumer Bankers Association, two leading industry groups, filed a brief with the California Supreme Court supporting TD Bank’s position.

The FTC’s advisory opinion is already playing a role in the case, with Pulliam’s attorneys writing in a filing that “this new clarification from the FTC should help” the court in its analysis. “The FTC’s finding that it did not intend to preempt state law in the circumstances raised in this case should be determinative,” Pulliam’s attorneys wrote.

But TD lawyers responded last week that because the Holder rule is “unambiguous, there is no need to delve into the FTC’s comments on the rule.” They argued that the wording of the Holder rule is clear to limit lender liability, and they said the relevant California law was passed years after the 2016 auto purchase and should not be applied retroactively. .

Consumer advocates hope the FTC opinion and California Supreme Court case will push auto lenders to more closely monitor the dealerships they work with.

Rosemary Shahan, president of Consumers for Auto Reliability and Safety, said lenders should make sure used car dealerships aren’t selling vehicles listed as totaled in a federal database.

“If they see a pattern of dealerships selling these vehicles altogether, that’s a red flag,” Shahan said.

Wingfield, the attorney for Troutman Pepper, said the FTC notice “moved the needle,” so he advises customers of auto lenders to assess the increased risk they face in litigation.

Steps lenders can take include reviewing their compliance programs and performing quality checks on the loans auto dealerships send them, as well as reviewing legal agreements with dealerships to ensure that there is an “appropriate allocation of risk,” Wingfield said.

Despite the increased legal risk, Wingfield noted that the auto loan industry is currently booming, with loans booming and delinquencies remaining at low levels.

“Now is, in a way, the best possible time for a bank or a finance company to deal with this increased risk, because times are good,” Wingfield said. “Now is the time to do it.”

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