United States: Auto finance companies may face incumbent rule risk, pending California Supreme Court case
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Last month, the FTC released a advisory opinion clarifying that the holder rule is without prejudice to any state law that imposes greater liability on banks that are the “holders” of a loan agreement, and in particular, the rule does not limit the recovery of fees and attorney’s fees where state law permits indemnities against an incumbent (we have already discussed the advisory opinion in a previous Consumer Finance & FinTech blog post here).
The advisory opinion is, in part, a reaction to some courts “misinterpreting the holder rule as limiting the application of state laws on transferring costs to holders.” Auto lenders have relied on the incumbent rule to argue that their liability is limited only to what car buyers paid in the original sales contract. So, historically, in many jurisdictions, defrauded consumers have been able to sue and be reimbursed up to the purchase price of the car, but not the legal fees associated with such actions.
The recent clarification of the holder rule will likely lead to more lawsuits against banks and greater rewards for plaintiffs when consumers allege fraud by car dealerships. For example, in January 2021, the California Court of Appeals upheld a trial court’s decision that allowed a consumer to recover attorneys’ fees based on allegations that an auto finance company, as the holder of the loan, was responsible for the automobile dealer’s misrepresentations concerning the characteristics of the automobile purchased. The attorney’s fees amounted to nearly $170,000 while the total damages were approximately $22,000.
While this case is on appeal to the California Supreme Court, briefing notes filed by both parties have indicated the potential impact of the recent advisory opinion on the outcome of this case. The California Supreme Court’s ruling will resolve a split between California’s appellate districts, with appellate courts in two other districts issuing rulings finding that the holder’s rule recovery limit includes attorney’s fees. .
Put into practice : Auto finance companies should address the risks that have been shifted in their direction as a result of this advisory opinion by reviewing their agreements with auto dealers to ensure that risks are properly allocated between the finance company and the dealer. . These companies must also review compliance programs and perform quality checks to ensure that the retail contracts that car dealerships send to the finance company are properly verified.
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