Repossessions: 4.4.1 If Consumer’s Obligation Is Extinguished
The creditor does not have the right to declare a default or repossess the collateral if the consumer’s obligation underlying the security interest is extinguished.
The creditor does not have the right to declare a default or repossess the collateral if the consumer’s obligation underlying the security interest is extinguished.
A buyer who revokes acceptance of the collateral has the right to cancel the sale.165 Because cancellation extinguishes the obligation, the consumer cannot be in default.166 Revocation of acceptance does not require a court order: if the revocation is valid, then it occurs automatically when the consumer takes the necessary steps to revoke.
A consumer who revokes acceptance agrees to return the collateral in exchange for cancellation of the obligation and return of all payments made. But the consumer retains an interest in the collateral until the seller, the seller’s assignee, or related creditor fulfills its obligations under the revocation to return all payments made and reimburse the consumer for certain expenses already incurred relating to the goods.
The consumer’s revocation of acceptance is effective as against the seller, the seller’s assignee, or a creditor related to the seller. The revocation will not be effective as to a lender completely independent from the seller, as the FTC Holder Rule183 will not apply and the FTC Holder Notice will not be found in the loan agreement. In such a situation, both the consumer and lender have a security interest in the collateral and the lender may be able to repossess the collateral.
Revocation of acceptance may improve the consumer’s position even after repossession.
UCC Article 2 provides a mechanism for consumers to withhold installment payments and prevent the secured party from declaring a default for nonpayment of those installments.191 UCC § 2-717 states that: “The buyer on notifying the seller of his intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract.” This right is examined in detail in NCLC’s Consumer Warranty Law.192
UCC § 2-717 requires the buyer to notify the seller of the intention to deduct damages before the buyer can deduct those damages.195 Section 2-717 does not require that the notice of deduction of damages be given seasonably or within a reasonable time, as is required for other Article 2 remedies such as notices of breach and rejection or revocation of acceptance.196
For purposes of preventing a default, the key issue is against which installment payments the consumer’s damages may be deducted. For example, consider a consumer who notifies the creditor-seller that the seller’s breach of contract has caused the consumer $500 in damages. On that date, the consumer is already $300 delinquent and has ten $100 payments yet to make. Should the $500 be applied to the next five payments, to cure the $300 delinquency and the next two installment payments, or just to the last five scheduled payments?
UCC § 2-717 allows a consumer to withhold payments on a sales contract if the consumer has a claim for breach of that same contract.201 The provision may not apply to a consumer’s causes of action other than for breach of contract, such as for oral misrepresentations or statutory disclosure violations. The provision also does not apply to the consumer’s damages resulting from the breach of another contract with the seller.202
Consumers have the right to withhold payments, but there are risks to that approach, chiefly the possibility of negative credit references and repossession of the collateral. One way to minimize these risks is for the consumer’s lawyer to warn the creditor’s counsel that payments are being properly withheld pursuant to UCC § 2-717, that any repossession would be wrongful, and that any negative credit report would be inaccurate.208
A debtor who does not revoke acceptance or withhold payments pursuant to UCC § 2-717 may have difficulty preventing a default merely by raising claims against the creditor or seller. While the consumer may argue that the legal claims against the creditor offset the delinquent payments, the court may distinguish between claims that dispute the amount of the debt and those that go to the right of the creditor to take possession of the collateral.
A number of state statutes provide a right to cure a default prior to acceleration or repossession for some or all consumer credit transactions. The details vary from state to state and are set out in Appendix B, infra.
Check carefully for creditor compliance with a state right to cure statute’s notice requirements.
The rules that govern the electronic delivery of a notice of the right to cure are determined by the underlying law requiring the notice:
In most state laws requiring a notice of a right to cure, the law requires that it be delivered to the consumer in writing. Generally, whether written notices or contracts can be satisfied by electronic records is governed by the federal Electronic Signatures in Global and National Commerce Act (E-Sign),241 as well as state law.
Violation of a right to cure statute may entitle the debtor to statutory damages under the state law creating the right to cure.248 Repossession not in compliance with a right to cure statute gives the debtor a cause of action for conversion.249 By statute, Massachusetts bars a creditor from bringing an action against the debtor or proceeding against the collateral if it has not given the debtor notice of the statutory right to cure.250
Where a national bank originates a credit transaction, courts are divided as to whether the National Bank Act preempts application of a state right to cure statute to the national bank.252 An additional question is whether any national bank preemption right continues to apply where the national bank assigns the credit agreement to a non-bank and it is the assignee that is seeking to accelerate the credit.
An important but limited federal thirty-day right to cure provision for federally-related254 first mortgage255 manufactured home loans and credit sales is found in Office of the Comptroller of the Currency (OCC) regulations.256 These regulations were initially promulgated by the Federal Home Loan Bank Board (FHLBB), but when it was abolished257 its regulations were republished by the Office of Thrift
The OCC regulation applies to creditors that make “loans,” defined to include credit sales.266 The rule applies only if the loan is a first mortgage loan and “federally-related.”267 A loan is “federally-related” if it is made by a bank, savings and loan association, credit union, mortgage banker, or HUD-approved creditor (including any lender that makes or invests in $1,000,000 or more of residential real estate loans per year).268 Manufactured hom
Except when a debtor has abandoned a manufactured home, a creditor complying with the OCC regulations cannot repossess a home or accelerate an obligation until thirty days after the creditor sends a notice of default by certified mail, return receipt requested.271 The notice must state the nature of the default, the action the debtor must take to cure the default, the creditor’s intended actions upon the debtor’s failure to cure, and the debtor’s right to redeem under the state law.272
A number of courts have analyzed whether credit documents that obfuscate the right to cure violate the OCC regulations, leading to the creditor’s loss of its federal insulation from state usury laws.
Consumers have a right to cure a default if the creditor sends a notice of that right, even if a right to cure is not required by statute.281 The same is true if the creditor by contract subjects itself to the state right-to-cure law or otherwise requires a notice of right to cure before acceleration or repossession.282
Yo-yo transactions, also referred to as spot-delivery, take-back, MacArthur (“I shall return”), or gimme-back transactions, create special issues as to whether a motor vehicle installment sales agreement is in default and whether the dealer has the right to seize the vehicle. In a yo-yo sale, the consumer believes a vehicle’s installment sale is final and the dealer gives the consumer possession of the car “on the spot.” The dealer later tells the consumer to return the car because the financing has fallen through.