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Repossessions: 3.8.6 Force-Placed Automobile Insurance As a Future Advance

Car and manufactured home loans often state that the collateral secures not only that loan, but any preexisting loan with that creditor or any future loan with that creditor or both. A clause stating that the collateral secures preexisting loans in addition to the current loan is known as a preexisting or antecedent debt clause, while a clause stating that the collateral for the current loan also secures future loans or future advances on the current loan is referred to as a future advance clause.582

Repossessions: 3.8.7.2 Applicable Law

Although there are many unique factors associated with automobile title loan repossessions—low loan amount and collateral value, high ratio of collateral value to loan amount, and, sometimes, use of pawn or pledge terminology—automobile title loans are typically governed by Article 9 like any other secured transaction.597 Article 9 covers such loans even if the transaction is structured as an outright sale of the vehicle to the lender with a side agreement giving the debtor the right to buy it back.598

Repossessions: 3.8.7.3 Has the Lender Created an Enforceable Article 9 Security Interest?

In most states, Article 9 applies to most automobile title loans, and thus the lender can seize the vehicle on the consumer’s default only if the lender has a proper security interest in the vehicle: an explicit, signed, written grant of the interest, identifying the vehicle.608 This requirement is avoided only if other state law clearly allows seizure without such an Article 9 security interest.609

Repossessions: 3.8.7.4 Pre-Repossession Notices and Redemption Rights

In general, Article 9 rules regarding repossession and redemption apply to automobile title loans. However, these loans are subject to any special provisions found in state automobile title loan statutes, and some of those statutes give consumers additional rights not found in Article 9. While Article 9 does not provide for notice prior to repossession, several automobile title loan laws require either a notice or notice of a right to cure prior to a repossession.623

Repossessions: 3.8.7.5 Can an Automobile Title Lender Keep the Collateral in Satisfaction of the Debt?

Article 9 prohibits the creditor from keeping consumer goods collateral in satisfaction of the debt if the consumer has paid more than sixty percent (60%) of the debt.625 A sixty percent payment is rare for an automobile title loan in default (in a single payment loan partial payments will be unusual). But even if the consumer has not paid sixty percent of the loan, the creditor cannot unilaterally decide to keep the collateral.

Repossessions: 3.8.7.6 Notice and Manner of Conducting Repossession Sale

When a creditor sells or otherwise disposes of collateral, Article 9 requires it to send the consumer a notice of the sale,630 and the sale must be commercially reasonable in all respects.631 Typically automobile title loan statutes track these Article 9 requirements,632 refer to Article 9 for these requirements,633 or are silent on these requirements.

Repossessions: 3.8.7.7 Surpluses and Deficiencies

Article 9 authorizes the creditor to proceed against the debtor for any deficiency that remains after the repossession sale.637 In a number of states, the automobile title loan law limits the lender’s right to a deficiency and provides that sale or disposal is the lender’s only recourse.

Repossessions: 3.8.7.8 Automobile Title Loans in Bankruptcy

A consumer’s options to deal with an automobile title loan in bankruptcy will depend on whether the loan has become due. In general, the automobile title lender has a non-possessory, non-purchase-money security interest, and consumers may deal with title loans using the Bankruptcy Code’s tools to address the claims of such secured creditors. The debtor may redeem the vehicle by paying the value of the creditor’s claim under Bankruptcy Code § 722.

Repossessions: 3.9.2.1 UCC Requirements

Store credit cards can create security interests in the property being purchased only if they meet the minimum UCC Article 9 requirements for the creation of a security interest. The debtor must sign a security agreement granting the security interest.654 It is not enough that the debtor sign a credit card application and credit agreement, and also sign the charge slip. There must be an explicit, signed grant of a security interest.655

Repossessions: 3.9.2.2 Can the Store Produce the Necessary Records?

Because merchants that issue credit cards rarely have a real interest in enforcing their security interests, they may be sloppy in keeping records of their security interests. In many cases, the store’s records of the credit contract or the signed sales slip will be missing, illegible, or unintelligible as to the items purchased. Even if the merchant has the records somewhere, it may fail to produce them at a court proceeding.669 It is for these reasons that documentation should always be requested.

Repossessions: 3.9.3 Is the Collateral Adequately Described?

The creditor must identify the collateral being taken so that repossessors, sheriffs, and others know which property to seize and which to leave alone.670 The typical credit card security agreement merely states that the interest is in the property being purchased.671 There then must be some mechanism to identify what property has been purchased.

Repossessions: 3.9.4 Determining Which Collateral Is Paid Off First

Card issuers seeking security interests in the property being purchased also must be able to identify which items have been paid in full (thus extinguishing the security interest in those items). The card issuer will have to specify in the security agreement the method of allocating the consumer’s payments to various items purchased; this method must comply with state law; and the merchant must in fact have records reflecting its compliance with this method.

Repossessions: 3.9.6 False Threats to Enforce Credit Card Security Interests

Federal and state law prohibits collectors from threatening actions they do not intend to take. As there is no economic gain for creditors in seizing most collateral purchased with store credit cards, threats to seize such property are generally false. In fact, the creditor may not even have sufficient records to determine what collateral is in fact at risk.

Repossessions: 3.10.2 When Unnecessary Filing Fees or Non-Filing Insurance Charged

When a creditor takes a security interest, it often charges the debtor for the fees that it will have to pay for filing a financing statement to perfect that security interest. Other times, creditors do not file their security interests, but purchase non-filing insurance that protects them against the same risks that they avoid by filing the security interest.691 This non-filing insurance premium is then passed on to the consumer, usually as part of the amount financed.

Repossessions: 3.10.3 When Description of Collateral Is Overly Inclusive

Identification, in the security agreement and other loan documents, of a security interest that is in fact invalid may also lead to violation of federal and state laws concerned with accurate disclosures to consumers. Many of these statutes provide for minimum statutory damages and attorney fees even when actual damages are not proven.

Repossessions: 3.10.4 When Threats to Enforce an Invalid Security Interest Are Made

The threat to enforce a security interest that is in fact invalid and unenforceable violates several laws: the federal Fair Debt Collection Practices Act,700 state debt collection laws,701 and state deceptive practices statutes.702 Because many of these statutes are limited in scope, it is important, before bringing an action, to consider all of them. The Fair Debt Collection Practices Act applies only to debt collectors, not creditors.

Repossessions: 3.10.5 When Creditor Enforces Invalid Security Interests

A valid security interest in secured property is a prerequisite to the seller’s repossession of that property. When the security interest has not attached or is unenforceable, repossession is unlawful. The UCC gives the debtor a number of remedies against a creditor who repossesses without a valid security interest.

Repossessions: 3.9.1 Overview

Bank and other third party credit card issuers (for example, VISA, Master Card, Discover, American Express, and Diners Club) do not take security interests in the property purchased with the card. But some merchants, such as sellers of jewelry and electronics, may issue store credit cards that attempt to take security interests in items purchased with the card. This practice was fairly common in years past but its use has declined.

Repossessions: 3.2.1.1 Basic Requirements

UCC Article 9 sets out a single set of minimum requirements for creation of any valid security interest. No matter how a transaction is structured, if UCC Article 9 applies, the creditor must meet these minimum requirements to obtain an enforceable interest in the property.