Thomas B. Hudson is a Partner in the law firm of Hudson Cook LLP.

Thomas B. Hudson is a Partner in the law firm of Hudson Cook LLP. [email protected]

The magazine’s legal eagle dusts off his soapbox to deliver a warning he’s delivered countless times before. But this time, there’s more at stake than the threat of consumer lawsuits.

You need to be careful not to antagonize your editor. Last month, I e-mailed my editor, chiding him for a reference to “loans" in one of his stories when it was pretty clear that the transactions in question were retail installment contracts, or perhaps a mix of retail installment contracts and loans.

My editor retaliated by assigning me the job of writing an article explaining the differences between the two types of financing, and why it was important not to mislabel them.

“But Greg,” I said, “I’ve written that same article eight times in the last 10 years.” Unmoved by my protest, he asked that I dust one of those “classics” off and reiterate my point about the dangers of mis-describing the way indirect auto finance works.

So, let me begin this article by asking the same question I asked to kick off my 2008 article: Where’s my soapbox?

Usually, when I start my diatribe during a presentation or panel discussion at a conference, it doesn’t take long for the audience to fall asleep. They’ve heard me rant and rave on this topic so many times before that you can almost see their lips forming the words before I say them. When I’m done, as often as not, the next presenter will take the podium and start talking again about “loans” and “lenders.” They think I’m crying wolf.

But we periodically see lawsuits that attack finance companies and dealers by alleging that the retail installment sales contracts that dealers enter into with car buyers and then assign to sales finance companies and banks are not retail installment sales transactions at all. They believe they are disguised loan transactions. The plaintiffs’ lawyers claim that the company that buys the retail installment contract is a “lender” and that the dealer is merely the “lender’s” agent in completing the “loan documents.” The lawyers then contend that the “lender” and the dealer violated a variety of laws that govern loans — laws that were never intended to govern retail installment sales.

We call these lawsuits “recharacterization” suits. The suits are seldom successful, but they can be very costly to the defending sales finance company and dealer. The case I drew my examples from for my 2008 article involve car buyers Todd and Martha Hunt. They bought a 2001 Dodge Caravan from Pierce’s Lincoln Mercury Inc. in Montana. In the process of buying the car, they signed a retail installment sales contract with a rate of 20.99 percent per annum. The contract was assigned by Pierce’s to TranSouth Financial Corp., which was later acquired by CitiFinancial Auto Inc.

When the Hunts failed to make the payments required by the retail installment contract, Citi repossessed the Dodge and sold it at auction. Citi then sought a deficiency.

The Hunts responded by filing an answer and counterclaim, with the counterclaim taking the form of a class action. The Hunts ended up amending their answer and counterclaim several times, but the gist of their claim was that the retail installment sales transaction was a disguised loan.

The Montana trial court wasn’t buying it and threw out the Hunts’ usury claim, flatly stating that “[a] retail installment contract is not a loan ...” It then bounced the remaining claims because they were not filed within the time period of the applicable statute of limitations.

The original article served as a cautionary tale about the costs — both in time and money — to defend against such lawsuits. And the message is still relevant, as the dangers of misidentifying these transactions haven’t changed.

That’s why we in the industry need to correctly describe our business. When we and the media who follow our industry are sloppy with these descriptions, we contribute to misunderstandings that lead to suits like the one I described. When we correctly describe the business, we educate consumers, regulators, legislators, and, yes, even plaintiffs’ lawyers, and perhaps we deter them from actions that harm the industry.

And that’s why I’m getting on my soapbox for the ninth time in 10 years, because the Consumer Financial Protection Bureau (CFPB) seems intent on ignoring the differences between loans and retail installment transactions whenever it advances its regulatory agenda to do so, as in its recent antidiscrimination “Guidance” to buyers of retail installment contracts. The bureau apparently believes that erroneously calling the transactions “loans” and ignoring the legal role of the dealer as the originating credit seller strengthens its enforcement case.

When I complained to a CFPB staffer that the bureau’s own materials ought to accurately reflect the nature of the transactions it describes, at least in part to help educate consumers, the reply was that the bureau “tries to write to a fifth-grade level.”

I guess I didn’t realize that “simple but wrong” was an acceptable standard for government agencies.

About the author
Tom Hudson

Tom Hudson


Thomas B. Hudson Esq. was a founding partner of Hudson Cook LLP and is now of counsel in the firm’s Maryland office. He is the CEO of LLC and a frequent speaker and writer on a variety of consumer credit topics.

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