Falling Sky?

For several decades, I have been warning dealers that they cannot charge higher prices in credit transactions than they do in cash transactions and that doing so can draw private lawsuits and regulatory attention. Some call me Chicken Little for saying the sky is falling when it isn’t. Well, pieces of something just hit me on the head. Here’s what I mean.

Colletta Chesney bought a used BMW from Prestige Motor Sales Inc. The contract Chesney signed disclosed a finance charge of $2,121. Chesney claimed that Prestige overstated the amount financed and understated the finance charge by $536, the amount, Chesney complained, Prestige inflated the fees for the BMW’s licensing, registration and inspection. She claimed that Prestige charged her $787 for these items, when their actual cost was only $251.

Chesney sued Prestige for violating the federal Truth in Lending Act (TILA) and state laws, and for fraud. Prestige didn’t answer the complaint, and Chesney moved for a default judgment. A federal trial court magistrate recommended that the court grant the motion in part and deny it in part and enter judgment for Chesney for $7,238.

The magistrate concluded that Prestige violated TILA by inflating the fees, overstating the amount financed, and understating the APR. The magistrate also found that Prestige violated the UCC’s covenant of good faith and fair dealing by collecting more for the fees than was actually owed.

The magistrate rejected the fraud claim, noting that a claim for common law fraud can’t be maintained if the claim duplicates a breach of contract claim and, in this case, the allegedly false representations arose from the contract between Chesney and Prestige. Finally, the magistrate found that Prestige’s inflation of the fees constituted a deceptive act or practice under state law. The magistrate concluded that Chesney was entitled to the maximum statutory damages of $2,000 under TILA, actual damages of $536 under TILA, the maximum treble damages under Section 349 of $1,000, attorneys’ fees of $3,144, and costs of $558.

Lessons Learned

Dealer Lesson No. 1? Don’t mark up fees and charges you actually pay to public officials.

In another case, Paul Joseph bought a car from Excellence Auto Trade LLC, after seeing it advertised on the dealership’s website and Cars.com. The car’s advertised price was $9,970.

Joseph entered into a retail installment contract with Excellence to finance the purchase. The cash sale price of the car in the contract was $17,775. Joseph sued Excellence for violating TILA, as well as New York statutes prohibiting deceptive acts or practices and prohibiting false advertising. Joseph alleged that the increased sale price in the contract included a hidden finance charge. Joseph moved for a default judgment when Excellence failed to respond.

The federal trial court found for Joseph. The court found that Excellence gave the required TILA disclosures by including them in the contract but did not accurately disclose the finance charge, violating TILA. Accepting Joseph’s allegation as true, the court found that Excellence charged a higher sale price for a credit buyer than a cash buyer, and the increase from the advertised price to the contract price constituted a hidden finance charge.

The court noted that differences in the price paid by a cash buyer and a credit buyer may be attributed to the negotiating skills of the buyer. However, for purposes of deciding a motion for default judgment, the court was required to accept Joseph’s allegation that the additional cost was a hidden finance charge. The court also found that Excellence violated New York law by failing to accurately disclose the finance charge under TILA.

We often see dealers’ websites advertise a car price “for cash buyers” or “for good credit buyers,” the implication being that others will pay a higher cash price. If that’s what the dealer was doing in this instance, that’s a serious no-no.

Dealer Lesson No. 2? Your car price is your car price - no variation based on whether the buyer finances the car or not or whether the buyer has good credit or bad.

Dealer Lesson No. 3? Neither of these dealers answered the lawsuits served on them. It’s hard to win if you don’t show up for the game.

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