VSI Catch 22

Joseph Heller’s 1961 World War II novel, “Catch 22,” dealt with the rules that governed how many deadly missions B-25 pilots had to fly before they could go home. The book popularized its title to the point that its common meaning is a “no-win” or “double-bind” situation. I’ll bet Mr. Heller never envisioned that the phrase would be used in connection with the sale of VSI insurance in an auto finance transaction.

But that’s a pretty good description for a situation in which a government rule requires a creditor to lie to a customer, don’t ya’ think? Here’s a recent court decision dealing with the issue.

Andrew Block bought a car from North Shore Auto Sales in 1996 and entered into a retail installment sales contract with North Shore Auto Financing, Inc. (NSAF) d/b/a Car Now Acceptance Corporation (CNAC). At some point, Block stopped making payments.

CNAC brought a collection action against Block. Block counterclaimed, alleging that NSAF failed to include the vendor’s single interest insurance premium as part of the finance charge in the Truth in Lending Disclosures. Block also claimed that the retail installment sales contract was usurious under Ohio’s Retail Installment Sales Act.

The trial court decided that the premium was not a finance charge under the Truth in Lending Act and was not part of the finance charge under Ohio law. Block appealed.

The Court of Appeals of Ohio reversed the trial court ruling. Here’s where it gets interesting.

The appellate court determined that TILA allows a creditor to exclude the cost of VSI from the finance charge if certain conditions are met. The creditor must disclose the amount of the premium, the fact that the consumer has the right to buy VSI from anyone the consumer wants, and the insurer may not have any subrogation rights back against the consumer.

CNAC did not disclose that Block had the right to buy the VSI from third parties. CNAC knew that insurers sell VSI only to creditors and that no insurer sells VSI coverage directly to consumers. Therefore, CNAC didn’t want to make a disclosure that was untrue. After all, doesn’t the government frequently prosecute creditors, including car dealers, for making untrue statements? Sounds like a winning argument to me.

The appellate court decided that TILA required CNAC to give the disclosure, even though CNAC knew the disclosure was untrue. Yes, you read that correctly. The creditor is required to make a disclosure that the creditor knows is a lie.

The appellate court also addressed some finer disclosure points dealing with VSI. The court found that CNAC failed to disclose the amount of the premium. CNAC disclosed the sum as an amount paid to insurers in the itemization of amount financed, but the appellate court stated that this way of disclosing the premium was incomplete and that CNAC should have explained that the sum was used to pay for the VSI premium. As a result, the amount of the premium should have been included in the finance charge calculation in the TILA disclosures.

The appellate court then determined that because the fee is a TILA finance charge, it is also part of the finance charge under Ohio’s RISA. As a result, the transaction was usurious under state law.

CNAC would have probably been safer riding in one of Heller’s bombers.

Vol. 7, Issue 8