By Amy Holbrook, Attorney/Partner
Changes are coming to Pennsylvania’s Motor Vehicles Sales Finance Act (MVSFA). In November of 2013, Act 98 was passed in Pennsylvania and goes into effect December 1, 2014. This Act will repeal both the MVSFA and the Goods and Services Installment Sales Act (GSISA) and amend and consolidate both sets of statutes. The amendments contained in this new Act will require that both dealers and those offering financing thoroughly review some of the substantive changes by this new statute. Some of the changes include:
• Disclosure of a prescribed notice that advises consumers of their rights under the Pennsylvania Unfair Trade Practices and Consumer Protection Law
• Notices to consumers when a contract has been fully paid
• A change in the definition of “heavy commercial motor vehicle”, reducing the manufacturer’s gross weight to 13,000 pounds. Vehicles defined as heavy commercial motor vehicles are subject to a higher maximum interest rate, and a variable rate of interest is allowable on their financing agreements
• Minimum finance charge authority is removed
• A change in the definition of “motor vehicle” will be expanded to include manufactured homes, mobility devices and recreation vehicles
• A prohibition from adding to the original contract the cost of any necessary repairs after the contact was executed
• Allowance for the acceleration of the balance owed if the consumer files bankruptcy, defaults on payments on a cross-collateralized agreement or provides intentionally fraudulent or misleading information on the credit application
• A minimum type-size for terms in an installment contract as well as a requirement that all headers, disclosures, acknowledgments or notices be in a larger type-size
With these changes on the horizon, dealers and those financing or purchasing auto finance paper in Pennsylvania need to familiarize themselves with this new law. Please reach out with any questions or concerns at weltman.com.
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.
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
- Taking the wrong collateral
- Damaging Property
- Doing anything that might incite violence in another
- Breaking Locks or Windows
- Arguing, Yelling or Acts of Aggression
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.
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.