A used car dealer that demanded an additional down payment from a buyer when hoped-for financing fell through was a creditor that was covered by the Equal Credit Opportunity Act adverse action notice requirement, the U.S. Court of Appeals for the Sixth Circuit has decided. The court rejected the dealer’s claim that it was just a middle man, not a creditor. The court also reversed rulings that the buyer could not seek injunctive relief under the ECOA and could not pursue state-law conversion claims (Tyson v. Sterling Rental, Inc., Sept. 2, 2016, Clay, E.).
The buyer agreed to pay $8,525 for her purchase by making a $1,248 down payment and financing the balance. The dealer, which operated under the name Car Source, entered the buyer’s financial information into a proprietary computer program provided by Credit Acceptance Corporation to prepare a finance agreement. The program’s output determined whether CAC essentially would buy the loan or service it.
Car Source benefitted if CAC bought a loan and, in this case, the program said the buyer’s loan was approved for purchase.
The problem arises. Unfortunately, the information the Car Source salesman entered into the program was erroneous, more than doubling the buyer’s income. As a result, CAC rejected the purchase and, two days later, the buyer was told to come back to the dealership. While precisely what happened next was disputed, it was agreed that the salesman demanded another $1,500, but the buyer refused and left the dealership without the car.
The buyer never was told why the extra down payment was needed. In fact, in a subsequent deposition, the salesman said that Car Source never provided adverse action notices.
ECOA requirement. Under the ECOA, if a consumer is subjected to a denial of credit or a change in the terms of an existing credit arrangement, the creditor must provide a written explanation of the specific reasons for the action or, at the least, a notice that the consumer can demand to be told the reasons (15 U.S.C. §1691(d)). Car Source admitted that it never gave that notice. Instead, it claimed that CAC, not Car Source, was the creditor.
The court noted that there is a discrepancy between the definition of "creditor" in the ECOA (found at 15 U.S.C. §1691a) and the definition in Reg. B—Equal Credit Opportunity (found at 12 CFR §1002.2). However, under either definition, a person who "regularly arranges for the extension, renewal, or continuation of credit" is a creditor, and Car Source fit that description.
The salesman’s account of how the finance agreement was structured made clear that Car Source set the terms of credit by deciding the necessary down payment, interest rate, and monthly payments, the court explained. All CAC did was decide whether it would buy the loan by paying an advance to Car Source, and that decision was reached based on the finance agreement that Car Source submitted. Moreover, it was Car Source that decided to demand the higher down payment, which changed the terms of credit.
That meant Car Source was a creditor.
Injunctive relief. The district court judge was mistaken when she decided that the ECOA did not permit the buyer to ask for injunctive relief, the appellate court continued. The ECOA section that gives the attorney general the authority to seek an injunction does not deny that authority to private parties. In fact, the act specifically authorizes any "aggrieved applicant" to seek equitable relief (15 U.S.C. §1591e(c)).
Conversion claims reinstated. Making matters worse for the dealer, the appellate court reinstated the buyer’s claims for conversion based on Car Source’s decision to take possession of the car when the buyer left it behind. Michigan’s economic loss doctrine did not bar the conversion claim.
As summarized by the court, the economic loss doctrine says that an economic loss arising from a commercial transaction cannot be recovered by a tort action like a conversion claim. However, that principle simply did not apply to the case, the court said.
The basis of the economic loss doctrine is that the risks from a commercial transaction are subject to the contractual bargaining process, the court noted. However, the doctrine applies only if the duty alleged to have been violated was "implicated by the relevant contract."
In the case of the buyer’s purchase, the sale of the car was complete and Car Source’s interest in the car was ended when the contract was signed and the car was delivered to the buyer, according to the court. Car Source had completed its performance under the contract at that time, so its decision to later reclaim the car could not have breached a duty that arose from the contract. The buyer could not have been expected to bargain over the risk that Car Source would take the car back without legal authority, the court said.
The case is No. 15-1465/1468.
Attorneys: Ziyad Kased (Kased Law) for Sterling Rental, Inc., Al Chami, and Rami Kamil. Deepak Gupta (Gupta Wessler PLLC) for SeTara Tyson.
Companies: Car Source; Credit Acceptance Corporation; Sterling Rental, Inc.
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