Stick to the Script

Federal law requires the disclosure of certain credit terms, one of which is the “finance charge.” What is and is not a finance charge requires an examination of the definition of that term and some related provisions of the disclosure regulations. Those regulations say that the cost of a service contract is not part of the finance charge unless the creditor requires the buyer to purchase the service contract. A recent dealer-friendly court decision dealt with this concept.

Brittany Salvate set out to buy a used truck and visited Automotive Restyling Concepts Inc. in Minneapolis, where she worked with Becky Spinler, an independent contractor salesperson, in order to obtain financing for the purchase. United Auto Credit Corp. eventually provided financing.

Salvate also bought GAP protection and a service contract. Salvate claimed she did not want to buy the service contract but that Spinler told her the purchase of the service contract was required in order to obtain financing. Spinler denied that she made such a statement.

Salvate sued Spinler and Automotive Restyling for violating the Truth in Lending Act, alleging that the service contract charge should have been included in the finance charge, rather than in the amount financed disclosure, because it was payable incident to the extension of credit. Salvate also brought a claim for fraud. The defendants moved for summary judgment.

The U.S. District Court for the District of Minnesota noted that TILA defines a finance charge as the sum of all charges payable directly or indirectly by the consumer imposed directly or indirectly by the creditor as incident to the extension of credit. The court considered whether Automotive Restyling required the service contract as a condition of financing.

The court found that even if Spinler stated that the service contract was a condition of financing, the documents Salvate signed in connection with the truck purchase stated otherwise. The service contract itself stated that purchase of the service contract was not required in order to purchase or finance the vehicle. The Product Price and Payment Disclosure for Installment Sales also stated that finance terms and approval were not conditioned on the purchase of the service contract. Therefore, the court concluded that the service contract charge was properly included in the amount financed because it was not payable incident to the extension of credit.

The court rejected Salvate’s argument that the retail installment sale contract — which was silent regarding whether the service contract was required as a condition of financing — created an issue of material fact regarding whether Salvate needed to buy the service contract as a condition of financing. The court found that the RISC incorporated the service contract by reference and that all the documents that Salvate signed in connection with the purchase of the truck should be construed together. Accordingly, the court granted summary judgment for the defendants on the TILA claim.

The court also found for the defendants on the fraud claim. The court again noted that the purchase documents clearly indicated that Salvate did not need to buy the service contract in order to obtain financing.

So, if your salesperson tells a buyer that “We can’t get you financed unless you buy a service contract,” but your sales documents say the service contract isn’t required, you’re in the clear, right?

Maybe you’d be OK, if you end up before a judge as business-friendly as this one, and if the buyer’s claims are limited to disclosure and fraud claims. But what happens if the judge is pro-consumer, or if the buyer’s lawyer claims that misrepresenting to the buyer the terms of the retail installment contract is an unfair or deceptive act or practice, or the buyer turns out to be a “mystery shopper” employed by the Consumer Financial Protection Bureau? What then?

That’s why, boys and girls, the consistent use of a true “menu” sales presentation with a legally approved script is a “best practice.”

Thomas B. Hudson is a partner in the firm of Hudson Cook LLP and the author of several widely read compliance manuals. Email him at [email protected].