My firm currently is defending several lawsuits against a dealership filed by customers who entered into “spot delivery” transactions. Spot delivery is the practice whereby a dealership delivers the vehicle on a conditional basis pending the approval of a third-party lender. Typically, lawsuits involving spot delivery are based upon situations in which the customer signed a sales contract, but later was denied credit by a lender either because of bad credit or for failure to submit supporting documents. While the law in Florida, and most other states, is fairly strong for dealerships that face these types of lawsuits, it is important to make sure that your dealership has complied with both state and federal law in selling a car using spot delivery.
Consumers generally bring lawsuits under federal statutes including the Truth in Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act, as well as numerous state statutes regulating fraudulent sales and credit acts. First, with respect to claims under the Truth in Lending Act (“TILA”), it is important that a dealership has all the required disclosures of the terms on which credit will be extended noted in the sales paperwork including language that makes clear that the information contained in the documentation is accurate at the time of signing. TILA itself states that if information disclosed in accordance TILA is not rendered inaccurate as a result of any act, occurrence, or agreement after the delivery of the required disclosures, the inaccuracy does not constitute a violation. As such, if the information included in the documentation is correct at the time of signing and something occurs afterwards, such as a rejection of a credit application by a lender, then there is no violation so long as the disclosures are clear and accurate.
Some attorneys suing dealerships in spot delivery cases have advanced the theory that even if the required disclosures are given under TILA, they are “illusory” because of the conditional nature of the transaction and thus there is still a violation of the statute. However, Florida state and federal case law indicate that as long as the conditions are fairly disclosed in the contract, there is no violation of the statute. Thus it is important to make sure that the fact that the deal is subject to the approval of a third-party lender is clearly expressed.
Under the Equal Credit Opportunity Act (“ECOA”) a dealer must make sure the disclosures contain language explaining the that the dealership is not providing credit to the consumer and that the dealer will simply be referring credit applications to third party lenders. As long as the dealership is not providing credit, the case law is fairly clear that the only sections of the ECOA that a dealership is subject to would be the anti-discrimination and anti-discouragement provisions. The dealership is not obligated to provide a consumer with an adverse action notice to a consumer stating the reasons why credit was denied. However, once a dealership becomes actively involved in setting the terms of credit and in situations where a dealership unilaterally chooses not to send the consumer’s application to any lender, a dealership is considered a creditor for purposes of complying with the notice requirement under the statute.
Under the Fair Credit Reporting Act (“FCRA”) it is permissible for a dealership to obtain a consumer’s credit report in accordance with the terms of the written authorization executed by the consumer. It is a good idea to be fairly clear in setting out the permissible reasons that the dealership may pull a consumer’s credit including investigating their credit history, in connection with any proposed transaction, any update, renewal, refinancing, modification, or extension of a transaction, and any efforts related to a collection in the event financing is denied and the vehicle is not returned. The last scenario may seem unlikely, but there have been multiple lawsuits related to a dealership pulling a credit report in an effort to track down a vehicle after a failure to acquire financing and a customer failed to return the vehicle.
Additionally, it is important to review your state’s laws and make sure you include the required disclosures. Some state statutes require specific disclosure language. For example, in Florida the Motor Vehicle Retail Sales Finance Act (“MVRSFA”) requires that certain credit disclosures be made and the statute actually includes specific language that must be contained in those disclosures. While case law in Florida indicates that compliance with TILA constitutes compliance with the MVRSFA, that is only if the dealer provides separate written itemization required by the MVRSFA. There are also statutes that require disclosures as to whom will actually be providing financing, explaining the conditional nature of a spot delivery, and requiring receipts for deposits or down payments.
In order to avoid lawsuits related to spot delivery it is important that you have your attorney review your sales documents prior to use to make sure they comply with federal and state statutes. It is also advisable to have your attorney periodically review and update the documents to comply with any changes in the law. While no dealership likes to spend money to have attorneys repeatedly review documents, state and federal law does change and some of these statutes include attorney’s fees provisions which make even an inadvertent failure to comply with them a much more expensive proposition.