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Automobile Fraud: 4.2.10 UDAP and Other Consumer Remedies When Cancellation Not Valid

When the dealer does not have the right to cancel the agreement, the dealer’s attempt to undo a binding credit agreement is unfair, deceptive, and wrongful, leading to potential UDAP, fraud, and breach of contract claims.51 Clearly seizing the vehicle when the dealer has no legal basis for the seizure is conversion or a related tort.52 It is also a deceptive practice for the dealer to misrepresent to the consumer its legal right to recover the vehicle.

Automobile Fraud: 4.3.1 Introduction

Focusing on federal disclosure and notice requirements is one way to approach a yo-yo case. The violation of a specific disclosure or notice requirement may be easy to prove, will provide federal court jurisdiction, and will result in an award to the consumer of statutory, treble, or punitive damages, and attorney fees. In certain situations the dealer’s assignee or even potential assignees who do not purchase the consumer’s paper may be liable as well.

Automobile Fraud: 4.3.2 The Truth in Lending Disclosure Form

A common dealer practice in any yo-yo transaction is to have the consumer sign an installment sales agreement with TILA and state installment sales act disclosures, and then to send the consumer home with the car but without the paperwork.67 If the deal is later rewritten with a new contract, the dealer does not want the consumer to have more than one set of disclosures. A copy of the original disclosures would allow the consumer to see precisely how much worse the second deal is than the first.

Automobile Fraud: 4.3.3.1 General

In the typical car finance transaction at a dealership, the dealer uses the consumer’s credit application and credit report to perform an initial evaluation of the consumer’s credit. This initial evaluation will be a factor in determining which finance companies (if any) that the dealer will contact, either through financing software or directly, for approval. These potential assignees will respond to the dealer indicating whether they would purchase the installment sales agreement, and at what terms.

Automobile Fraud: 4.3.3.2 Is the Dealer a Covered Creditor Under the ECOA?

Dealers, as users of consumer reports, are clearly covered by the FCRA’s notice requirement. But, because most courts are refusing to recognize that there is a private right of action any longer for such FCRA notice violations,89 it is key to establish that dealers are covered by the ECOA adverse action notice requirement.

Automobile Fraud: 4.3.3.3 The Counteroffer Defense

Dealers may argue that, in canceling a sale, they have made a counteroffer, and thus have not denied credit. Regulation B requires notice of such a counteroffer within thirty days.98 In addition, in many yo-yo sales, no counteroffer is made, or an offer is made only some days after an unconditional denial. Query also whether even an immediate offer of lease terms can be considered a counteroffer to a credit application. Moreover, a counteroffer would have to be a firm one; dealers sometimes back out of second deals as readily as first deals.

Automobile Fraud: 4.3.3.4 Other Dealer Defenses

Another possible dealer defense to an ECOA claim is that the consumer did not supply all the required information for the credit application. But the ECOA clearly states that a written notice of adverse action is still required even when the consumer has not provided all the requested credit information.100 On the other hand, if the credit is denied because the application was not completed and not because of information in a credit report, then the FCRA notice may not be required.101

Automobile Fraud: 4.3.3.5 ECOA Remedies

As described above,106 federal courts interpret a 2003 drafting error as eliminating a private right of action under the FCRA for notice violations. For an ECOA notice violation the consumer can obtain federal court jurisdiction and recover actual damages plus punitive damages not greater than $10,000, plus attorney fees.

Automobile Fraud: 4.4.2 Is the Sale an Illegal Condition Precedent or an Illegal Condition Subsequent Yo-Yo Transaction?

In challenging a yo-yo sale, it is imperative to allege all possible law violations, without assuming whether the contract involves a condition precedent or a condition subsequent. To allege that the dealer’s conduct in a condition precedent transaction violates certain laws invites the dealer to argue that the transaction is, in fact, a condition subsequent one, in which such conduct is allowed.112 Instead, the consumer should make allegations in the alternative.

Automobile Fraud: 4.4.3.1 Introduction

In a condition precedent sale, the dealer is the owner and, until the sale is finalized, the consumer’s rights and obligations regarding the vehicle are those of a bailee, not an owner. Rather than consistently retain ownership until the condition precedent has been met, dealers will often treat the consumer as the vehicle’s owner for some purposes, although not for others. These practices can lead to a series of actionable law violations, as described below.

Automobile Fraud: 4.4.3.2 Earning Interest Before the Financing Is Extended

Check to see when the financing documents state that interest charges began accruing. In a condition precedent sale, until the condition precedent (typically the assignee agreeing to purchase the paper) has been met, no sale has occurred. The consumer does not have title to the car, and the consumer has not yet borrowed any money. The dealer still owns the car. Consequently, no finance charges should be accruing. No proceeds have been disbursed, so no interest should be charged on those proceeds.

Automobile Fraud: 4.4.3.4 Service Contract’s Term and Excessive Finance Charges Relating to That Contract

Service contracts purchased by consumers will be for a fixed time period, and typically that period will begin when the contract is signed. But, if the consumer does not own the vehicle and there is no bailment agreement requiring the consumer to repair the vehicle, the service contract term should not begin until the consumer actually owns the vehicle. In addition, the consumer will be paying finance charges on the prepaid service contract before the service contract should actually take effect.

Automobile Fraud: 4.4.3.5 Excess Insurance Premiums and Related Finance Charges

Dealers may also start the term of various insurance policies—such as GAP, credit, and physical damage insurance—from the date the consumer drives off with the car, instead of the date the consumer becomes the owner. The dealer may even force place insurance before the consumer actually owns the car. Any insurance sold in conjunction with the sale should have a start date, not as of the date the car is delivered to the consumer, but as of the date the condition is met and the consumer becomes the vehicle’s owner.

Automobile Fraud: 4.4.3.6 Improper Treatment of the Consumer’s Trade-In

If a sale is truly a condition precedent transaction, then the dealer has no right to sell the consumer’s trade-in until the sale of the new car has been finalized. The trade-in is provided to the dealer on the condition that the sale goes through. The consumer has not separately sold the consumer’s existing vehicle to the dealer; the sale is part of the purchase of the new vehicle. To sell the trade-in before the sale of the new car has been finalized is conversion and a UDAP violation.123

Automobile Fraud: 4.4.3.7 Improper Use of Temporary Tags

Dealers who put temporary tags on a vehicle in the consumer’s name or give the consumer a temporary registration or title create the false impression that the consumer has purchased the vehicle, preventing the consumer from trying to back out of the sale. Such practices may also be illegal. Temporary plates under state law are usually only available when title has been transferred, which is not the case in a condition precedent sale.

Automobile Fraud: 4.4.3.8 Improper Use of Dealer Plates

In a condition precedent sale, the car should be driven with dealer plates, because the dealer still owns the vehicle. In some states though, dealers cannot allow consumers to use the dealer’s plates on a vehicle for a lengthy period of time. For example, Maryland allows such use of dealer plates only for a period of ten days from the date of delivery.126 In effect state law places limits on condition precedent sales, requiring the dealer to quickly decide if the condition precedent has been met.

Automobile Fraud: 4.4.3.9 Dealer Misrepresentation As to Consumer’s Cancellation Rights

Massachusetts UDAP regulations require that, in any condition precedent sale, notice be provided to the consumer that the consumer can cancel the contract and receive a full refund until the dealer accepts the contract.127 Failure to give the notice or abide by its terms is a UDAP violation. Even when state law does not explicitly state that the consumer can cancel a condition precedent sale, the dealer cannot misrepresent the consumer’s rights to cancel.

Automobile Fraud: 4.4.4.1 Titling Practices

In condition subsequent yo-yo transactions, dealers play fast and loose with federal and state titling requirements, because it is inconvenient for them to follow the law. In a condition subsequent sale, by definition, ownership passes to the consumer. If the transaction is legally canceled, ownership transfers back to the dealer. Each of these transfers must be evidenced by signatures on a title document, so that these transfers become a permanent part of the vehicle’s chain of title. Dealers violating these legal requirements are then whipsawed.

Home Foreclosures: 7.1 Introduction

Defending against foreclosures often means challenging unfair lending practices used in originating the loan. Unfair lending practices refer both to substantive terms of a contract and to the process by which the contract is struck and enforced. It encompasses excessive cost in relation to the value of goods and services purchased; excessive cost of the credit itself; taking financial advantage of vulnerable or unsophisticated borrowers and buyers; and, engaging in unfair or deceptive conduct at any stage of the mortgage loan transaction.

Home Foreclosures: 7.2.1 Creditor Overreaching

Creditor overreaching is one of the most common types of unfair lending practice. Sometimes credit transactions, especially those secured by the borrower’s home, are made at considerable expense and risk to the consumer, but with little or no true benefit. Some creditor overreaching is substantive, as in gross disparities between the price of a product or service and its value; some is procedural, as in misrepresentation about terms or benefits, or a failure to disclose material information.

Home Foreclosures: 7.2.3 Loan Churning

Loan churning, also known as loan flipping, is a form of equity stripping that refers to repeatedly refinancing the homeowner’s mortgage, often in short succession.14 With each subsequent financing the borrower incurs additional fees that are rolled into the new principal balance. Prepayment penalties from the old loan may also be tacked onto the new loan. Brokers and lenders are enriched by the additional fees, but the refinancing rarely provides any real benefit to the borrower.

Home Foreclosures: 7.2.4.1 Introduction

Another unfair lending practice is “packing” loans with expensive credit insurance or debt protection products that have limited or no benefit to the borrower.19 Sometimes borrowers are signed up and charged for these products without their knowledge. Because these products are so profitable to both the creditor and insurance industry, there is enormous pressure to sell these products. Credit insurance can also cause problems for borrowers that knowingly obtain it.