Recent Entries

Increased Scrutiny in Subprime Auto Finance

By Amy Holbrook

In the past thirty days, the news in the auto finance world has been focused on the subpoenas that were issued by the Department of Justice to GM Financial and Santander Consumer USA. The subpoenas sought documentation on subprime auto loans dating from 2007 and raised concern about increased scrutiny and regulatory review. According to a statement made by GM Financial, the subpoenas are specifically seeking information about underwriting criteria and the methodology for the securitization for these loans.

It is likely that a number of factors brought about this investigation. In June 2014, the Office of the Comptroller of Currency commented that the average auto loan had a value greater than the actual value of the collateral, particularly when lenders were adding in the costs of extended warranties, credit life insurance and other factors. Others have raised concerns that an increased number of private equity firms willing to purchase subprime auto securities have entered the market. This creates greater competition for originators and lenders, who may elect to reduce their underwriting standards and provide credit to individuals with lower creditor scores in order to keep up.

A side effect to reaching further into the subprime space is that the length of the loan tends to get longer, and the monthly payment obligation gets shorter. It provides a greater length of time for a consumer to default and, with a smaller payment, there is a greater risk that if a vehicle must be repossessed, less will have been paid toward the principal.

Breaching of the Peace

By Amy Holbrook, Partner

If you turn on your television any given day of the week and do a little channel surfing, you’re bound to catch of few minutes a “reality” television show about repossessions. Let’s be honest, these shows do offer some entertainment. There are crazy, angry people hiding in high-end vehicles, people destroying collateral to prevent recoveries and stealthy repo men hiding behind shrubs. Those of us in the industry, however, understand how misleading this entertainment can be.

The climate of our industry requires a stricter adherence to compliance standards than it ever has before, making a regular review of repossession policies and standards a good practice.  Most states allow for secured creditors to repossess their collateral but only so long as there is no “breach of the peace”. So what constitutes a breach of the peace? There is no list that provides for every possible scenario, but listed below are multiple behaviors that may be considered breaching the peace.

  • Threats or Acts of Violence
  • Trespass
  • Taking the wrong collateral
  • Damaging Property
  • Doing anything that might incite violence in another
  • Breaking Locks or Windows
  • Arguing, Yelling or Acts of Aggression

ECOA and the CFPB

The Consumer Financial Protection Bureau issued guidelines for how indirect auto lenders can avoid violating the Equal Credit Opportunity Act (“ECOA”).  In recent months, the Consumer Financial Protection Bureau has focused on auto lenders potential violations of the Equal Credit Opportunity Act (ECOA).

The ECOA prohibits lenders from discriminating against borrowers based on specific protected classes which include race, color religion, national origin, sex, marital status or age.

The CFPB is primarily concerned with situations where the dealer charges additional interest or a reserve.  The concern is that members of protected classes may be charged higher rates for their loans, which may violate ECOA.

While some indirect lenders may claim that they are not liable under the ECOA because they are not originating the credit or directly accepting the application, the CFPB had indicated that they would still be liable if they make a credit decision (such as offering a rate or agreeing to buy a loan at a set rate) or if they know that the car dealer is violating the ECOA.

Although the CFPB has been focusing on indirect auto lenders for ECOA violations, they offered tips for indirect auto lenders which include:

  • Imposing controls on dealer markup, or otherwise revising dealer markup policies;
  • Monitoring and addressing the effects of markup policies as part of a robust fair lending compliance program; and
  • Eliminating dealer discretion to markup buy rates, and fairly compensating dealers using   a different mechanism that does not result in discrimination, such as flat fees per transaction.  (See CFPB Bulletin March 21, 2013).

Indirect auto lenders are facing stricter scrutiny under the CFPB.  They should develop or revise their programs to ensure that the dealers they work with are not engaging in discriminatory practices.  Auto lenders will need to make sure they have a well-developed program and continued monitoring of its dealers.    In this age of heightened scrutiny, the best defense may be a good offense.

Sixth Circuit BAP Ruling Raises Important Issue Regarding Lien Perfection

In an opinion released June 1, 2012, the Bankruptcy Appellate Panel of the Sixth Circuit upheld a Kentucky Chapter 7 bankruptcy trustee’s successful motion to avoid the lien of a creditor on a mobile home. (In Re: Pierce, 11-8065). Notably, the creditor’s lien was both a purchase money security interest AND notated on the certificate of title to the home. The trustee asserted that the creditor failed to properly perfect its security interest by not applying for the title in the county of the debtor’s residence.

The pertinent Kentucky statutes allow for a “first” title issued upon sale of a mobile home or vehicle to be issued by the clerk of either the county where the debtor resides or the county of the dealer’s principal place of business is located. KRS 186A.120.   The Court held, however, that a subsequent section of the same statute requires the clerk in the debtor’s residence county to notate the lien upon the title before issuance, which was not done in this case. Rather, the dealer’s county clerk issued the title with the lien notation. KRS 186A.120 (2)(b)  Accordingly, the Court upheld the bankruptcy court’s order stripping the creditor of their lien and allowed the trustee to sell the mobile home, leaving the creditor without any collateral securing its underlying obligation.

This case drives home a very important point when perfecting a security interest in titled collateral. While being notated on the title is a generally a good indicator of proper perfection, this is not always the case.  If there is even the slightest question as to whether your security interest has been properly perfected, contact your attorney for advice on how to navigate the procedural intricacies of the state and county titling offices.

Indiana Appeals Court Reconciles Statutes to Limit Storage Lien Stemming From Police Impoundment

Storage liens in Indiana are governed by a combination of statutes and case law.  In Northwest Towing v. State, 919 N.E.2d 601 (Ind.Ct.App. 2010), the Indiana Court of Appeals reconciled two of those statutes in the context of storage fees stemming from a police impoundment.  This ruling should provide some guidance to vehicle owners, creditors, and garagemen who must determine if a storage lien is capped at $1,500.

Steven Brinkley was involved in a car accident in Muncie and was charged with leaving the scene.  He was driving a vehicle owned by his mother, Frances.  Following the accident, the Muncie Police Department requested that the vehicle be towed to Northwest Towing.  After the criminal case concluded, Frances moved to have the vehicle returned to her, and Northwest Towing responded by claiming a storage lien in excess of $3,600. The trial court ordered the return of the vehicle to Frances, but ordered Frances to pay storage fees. The Court limited Frances’ liability for storage charges to $1,500.

In affirming the trial court’s decision, the Court of Appeals examined two statutes.  I.C. 9-22-5-15, enacted in 1991, grants a lien to a garage that repairs or stores a vehicle at the request of the owner, with no maximum limit on the amount of fees the garage can charge.  I.C. 32-33-10-5, passed in 2002, grants a lien to a garage that repairs or stores a vehicle, but does not specify that it must be at the request of the owner.  Additionally, I.C. 32-33-10-5(b), a 2005 amendment, establishes a $1,500 limit on storage fees.  Here, since the storage was not requested by the vehicle’s owner, the court found that I.C. 9-22-5-15 did not apply.  Therefore, I.C. 32-33-10-5 and its $1,500 storage fee limit applied.

Under the Northwest Towing decision, if a non-owner requests the initial storage, the storage lien is limited to $1,500.  This would apply in the context of a police impoundment or a traditional repair situation.