Repossessions: Recent Developments in Auto Finance
Automotive Finance Law on November 13, 2017
Recent action by federal regulators pertains to an area of particular interest to me, and in which I frequently practice – repossessions. For the record, this area of the law is not of specific interest to me solely due to the television shows Operation Repo and Airplane Repo. While I can certainly understand the value of recovering vehicles (they are, after all, the sole security given by the buyer to the auto creditor) in that the sale proceeds are essentially money in hand to be applied towards the buyer’s contractual obligations, which may otherwise be difficult to collect; there are also a number of traps for the unwary. Both the Consumer Financial Protection Bureau (“CFPB” or “Bureau”), and the United States Department of Justice (“DOJ” or “Justice Department”) — in their separate and distinct enforcement capacities — have recently taken action concerning certain repossession activities conducted by auto finance creditors. These actions serve as a reminder of the importance of compliance, and the proactive steps one can take to avoid becoming the subject of a similar action.
Supervisory Highlights – Summer 2017
In September 2017, the CFPB released its Summer 2017 Supervisory Highlights (“Highlights”). The Highlights reflect information obtained from the Bureau’s supervisory activities over financial institutions that were generally completed between January 2017 and June 2017. CFPB supervisory reviews and examinations typically involve assessing a supervised entity’s compliance management systems and compliance with applicable federal consumer financial laws. Notably, the Highlights report supervisory observations in the area of “[a]utomobile loan servicing” and, more specifically, repossessions.
Bureau examiners reviewed how servicers are overseeing repossession agents and how repossessions are conducted. Through its examinations, the CFPB identified what it described as “an unfair practice relating to repossession at one or more automobile servicers.”
The Highlights correctly note that as security for an auto purchase, buyers give creditors a security interest in their vehicle; and that when a buyer defaults, a creditor may exercise its rights under the contract and repossess the vehicle. The Bureau further notes that many auto servicers provide options to debtors to avoid repossession when the debtor is delinquent or in default; servicers may have formal extension agreements that forbear payments for a certain period of time, or may cancel a repossession order when the debtor makes a payment.
Moving on to the CFPB’s specific findings, the Highlights note that examiners found one or more entities were repossessing vehicles when the repossession was supposed to be canceled. The Bureau notes that this occurred when: (1) representatives did not timely cancel the repossession order after the debtor entered into an agreement, or made sufficient payment, to avoid repossession; (2) the servicer wrongfully coded the account as remaining delinquent; or (3) repossession agents had not checked the documentation before repossessing and therefore did not learn that the repossession had been canceled.
Bureau examiners concluded that that it is an unfair practice to repossess vehicles under these circumstances, and directed the servicer(s) to stop the practice. The servicer(s) advised that the affected consumers were refunded the repossession fees, and the servicer(s) also implemented a system that requires repossession agents to verify that the repossession order is still active immediately prior to repossessing a vehicle.
Department of Justice Press Release – September 2017
On September 18, 2017, the Justice Department (“DOJ”) announced that CitiFinancial Credit Company, as successor to CitiFinancial Auto Corporation (“Citi Auto”) agreed to pay $907,000 to resolve allegations that it violated the Servicemembers Civil Relief Act (“SCRA”) by repossessing 164 cars owned by SCRA protected servicemembers without first obtaining the required court orders.
The DOJ’s action is based on the SCRA provision which provides that personal property (including a motor vehicle) purchased or leased by a servicemember under a contract may not be repossessed (for breach of the terms of the contract) after the servicemember enters military service without a court order. This SCRA provision applies only to a contract for which a deposit or installment has been paid by the servicemember before the servicemember enters military service.
During its investigation, the DOJ learned that repossessions were conducted without court orders even when there was evidence suggesting that the debtor could be a protected servicemember; and that in several cases, servicing notes indicated that Citi Auto was informed that the debtor was in military service or had received orders to report for military service. According to the DOJ, Citi Auto nevertheless “continued repossession efforts and eventually succeeded in repossessing the servicemembers’ vehicles.”
The settlement agreement compensates the servicemembers by requiring Citi Auto to pay $5,000 to each impacted servicemember, plus an additional $500 per account to compensate for any lost equity; and requires Citi Auto to take steps to repair the credit of all the affected servicemembers.
The Press Release further notes that “[m]embers or our armed forces make extraordinary sacrifices in order to protect and defend our nation, and they should be able to serve actively without fear that their legal rights will be violated” and that “[t]he enforcement of federal laws protecting current members of the Armed Services, veterans, and their families continues to be an important priority for this Department of Justice.”
Takeaway and Best Practices
In light of these actions, you should ensure that you have proper compliance practices and systems in place, including but not limited to the following:
- When a repossession order is to be canceled: (1) ensure that repossession orders are canceled immediately when the debtor enters into an agreement, or makes sufficient payment, to avoid repossession; and (2) ensure that the account is immediately coded to reflect that it is not delinquent.
- Ensure that your repossession agents verify that a repossession order is still active immediately prior to repossessing a vehicle.
- Prior to proceeding with a repossession, ensure that the debtor is not a servicemember who has entered military service and who has paid a deposit or installment before entering military service (and if the debtor is such a servicemember, ensure that you obtain the appropriate required court order before proceeding with repossession).
William J. Denius is a Shareholder with the law firm of Killgore, Pearlman, Stamp, Denius & Squires, P.A. in Orlando, Florida. Mr. Denius can be reached at 407-425-1020 or via email at email@example.com. This article is provided for informational purposes and is not intended nor should it be taken as legal advice.