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New Year, New You (Part 2)

Hao Nguyen /
KPA F&I

By Hao Nguyen and Robert Ebin 

In our second installment for 2020, we’re continuing where we left off and covering the other top three issues we received on the legal hotline in 2019. If you missed the first three topics, check them out here.

Here, we will discuss the topics of Contract Cancellation Option Agreements, credit applications, and the Notice of Intent to Dispose of Repossessed Collateral in repossessions.

Contract Cancellation Option Agreements (CCOA)

Another popular topic on our legal hotline was about CCOAs and when they were required. We will quickly explain what a CCOA is, determine how much a dealer can charge for the CCOA and any restocking fees, and identify some situations where the dealer must offer the CCOA to the buyer.

What is a CCOA?

Generally, a CCOA is a two-day cancellation option that allows the buyer to cancel the contract at least two days after the date of delivery. It is required to be offered on all used vehicle purchases where the purchase price of the used vehicle is less than $40,000. It is identified on Line 1.L. on the front of a LAW 553-CA-ARB contract and spoken of in the “No Cooling-Off Period” box on the reverse side of the LAW 553-CA-ARB contract.

How Much Can the Dealer Charge for the CCOA and Restocking Fees?

Section 11713.21 of the Vehicle Code identifies when a CCOA must be offered to the buyer and maximum amount a dealer can charge for the CCOA based on the purchase price of the used vehicle. The purchase price of a CCOA cannot exceed the following:

  • $75 for a vehicle with the cash price of $5,000 or less;
  • $150 for a vehicle with a cash price of more than $5,000 but less than $10,000;
  • $250 for a vehicle with a cash price of more than $10,000 but less than $30,000; and
  • 1% of the purchase price for a vehicle with a cash price of more than $30,000 but less than $40,000.

The Vehicle Code has also limited how much a dealer can charge a buyer for the restocking fee based on the purchase price of the vehicle if the buyer exercises their right under the CCOA. Specifically, the restocking fee cannot exceed the following:

  • $175 if the vehicle cash price is $5,000 or less;
  • $350 if the vehicle cash price is less than $10,000; and
  • $500 if the vehicle cash price is $10,000 or more.

Notes:

  • The “cash price” of a vehicle excludes registration, transfer, titling, license fees, the California Tire Fee, and any charge to electronically register or transfer the vehicle.
  • The dealer must apply the price paid by the buyer for the contract cancellation option toward the restocking fee.
  • A CCOA does not have to be offered to a buyer who is purchasing a used vehicle with a purchase price of over $40,000. [Vehicle Code 11713.21(b)(3)]
  • The dealer must specify the date by which the option may be exercised (not less than 2 days after that date of delivery) and the maximum allowable accumulated mileage (not less than 250 miles). [Vehicle Code 11713.21(b)(6)]

When Does a Dealer Have to Offer a CCOA?

Per the Vehicle Code section noted above, the dealer is obligated to offer a CCOA to any customer who purchases a used vehicle for less than $40,000. Alternatively, dealers do not need to offer a CCOA where vehicles are sold for $40,000 or more or where vehicles are sold for commercial or business purposes. Additionally, dealers do not have to offer CCOAs on motorcycles, off-highway vehicles, recreational vehicles, or any vehicles not subject to registration (vehicles exported out of state).

Other situations that may not be so straightforward are lease buyouts, demonstrators/brass hats, and rewrites.

Lease Buyouts

The Car Buyer’s Bill of Rights requires that the dealer selling a used vehicle priced under $40,000 must offer the buyer a CCOA, and lease buyouts are not exempt. Even though you are required to offer the CCOA for these lease buyouts, the mere consideration of the buyer purchasing CCOA on a lease buyout presents its own risks. In most lease buyout situations, the lessee merely shows up to your dealership and wishes to complete the paperwork. Generally, the agreement of a lessee to buy out his or her lease waives the excess mileage, wear and tear, and other associated penalties/fees. In the past, customers would significantly run over the permitted mileage or damage the vehicle in a manner that is far beyond “regular wear and tear,” and would purchase a CCOA on the lease buyout. This would provide the customer a quick “out.” Buying out the lease allowed the customer to forego any incurred fees/penalties on the lease contract, and by exercising the contract cancellation option on the buyout, the customer only had to pay the CCOA restocking fee, which was only a fraction of the incurred fees/penalties, leaving the dealer holding the bag. This issue was raised and subsequently answered in Vehicle Code §11713.21(b)(5), which allows the dealer to increase the restocking fee by the amount of the lessee’s lease-end liabilities for excess mileage, unrepaired damage, and excess wear and tear in the event the buying-out lessee exercises the option to cancel.

Even with this safety net, dealers should still proceed with caution to properly calculate this increased restocking fee. Generally, at the time of the lease buyout, the dealer likely will not know the total amount due to the leasing company (excess mileage charge, excessive wear and tear, etc.), and the amount stated in the CCOA may not be sufficient to cover those costs. Also, remember that if the customer exercises the option to cancel, the vehicle will be returned to the dealer’s inventory, which may not be an outcome the dealer wants at the end of the day. Dealers are recommended to go slowly when handling lease buyouts and become especially vigilant if the lessee-buyer wishes to purchase a CCOA.

Demonstrators/Brass Hats

The definition of a “used vehicle” includes “unregistered vehicles regularly used or operated as demonstrators in the sales work of a dealer or unregistered vehicles regularly used or operated by a manufacturer in the sales or distribution work of such manufacturer.” [Vehicle Code § 665]. Additionally, any vehicle used by a dealer, manufacturer, or distributor as a demonstrator, executive vehicle, service vehicle, rental, loaner, or leased vehicle may not be described or advertised as “new” regardless of whether or not it was registered. [Vehicle Code § 11713(t)]. Therefore, a CCOA must be offered with the purchase of these vehicles if the vehicle falls below a cash price of $40,000.

Contract Rewrites

The CCOA can be confusing in situations of voluntary rewrites involving a used vehicle contract. A customer purchases a used vehicle under $40,000 and, when offered, declines to purchase the CCOA. A few days later, the customer finds that his monthly payment not as manageable as he once thought and wants to rewrite the deal to try to get a lower payment. The dealer agrees, and now the question is posed: does the dealer have to offer the CCOA again? I would argue “yes” because once a deal is unwound, it is as if the initial contract did not exist. Regardless of whether or not the CCOA was accepted or declined on the initial contract, the dealer must offer the CCOA on the rewritten contract. The dealer should consider this fact when deciding whether or not to voluntarily unwind and then rewrite the deal. A customer could potentially purchase the CCOA the second time around and execute his rights to cancel the contract.

Credit Applications

Another hot button topic that we wanted to put on your radar for 2020 involves credit applications. While this is again by no means a novel topic, believe it or not, we constantly receive calls about credit applications, and for a good reason. As you may recall, back in 2018, the FTC charged a group of four auto dealers in Arizona and New Mexico with, among other things, falsifying consumer credit application information and inflating income. You can read more about this FTC action here. Not only have dealers been targets of the federal government, but consumer attorneys have also been lining dealers up over credit applications as well.

Now admittedly, we could probably write a tome on credit applications, so this may seem like trying to fit ten pounds of car parts into a five-pound bag. However, this is meant to provide a 30,000-foot perspective on the topic in order to hopefully get you thinking about credit applications and their complicated parts and nuances for all of 2020.

Pertinent Laws for Credit Applications

The two laws that you really should focus on when thinking about credit applications are the Federal Credit Reporting Act (FCRA) and the Equal Credit Opportunity Act (ECOA).

Federal Credit Reporting Act (FCRA)

The FCRA regulates the activities of consumer reporting agencies, users of credit reports, and furnishers of information to reporting agencies, and provides rights to consumers affected by credit reports. As it specifically pertains to dealers, the FCRA only allows dealers to view credit reports if there is a “permissible purpose,” such as pursuant to a consumer’s written request or in connection with a credit transaction involving the consumer. Remember that running credit prior to a test drive or to keep tabs on a consumer (yes, we have had more than one call about this) are not permissible purposes.

Equal Credit Opportunity Act (ECOA)

The ECOA generally prohibits creditors from discriminating against applicants based on race, color, religion, national origin, sex, marital status, age, and public assistance income. In other words, a dealer must not discriminate and must be objective when screening applicants.

List of Common Topics

Here are a few of the most common topics that come up when discussing credit applications:

  • Running credit without authorization. You should never run a consumer’s credit without having a fully completed and signed credit application for that consumer. You must also accurately and truthfully transcribe that consumer’s information from the application to the credit reporting service you use to run credit so as not to inadvertently run someone else’s credit. We have had more than a few calls about a situation where the dealer obtains a completed credit application for a customer, but that customer later needs a co-buyer for approval. Because it was not originally a deal involving a co-buyer, the dealer never obtains a credit application for the co-buyer before running their credit. Be sure you obtain a credit application for every person involved in a deal before running their credit.
  • Proper handling of dead deals. Remember, even if there is no sale, credit applications, Credit Score Disclosures, Privacy Notices, and Adverse Action Notices (if applicable) should still be retained. Even though the mandatory retention period is 25 months, we recommend retaining dead deal files for at least 5 years due to the FCRA statute of limitations.
  • Telephonic credit applications. Although we do not recommend taking telephonic credit applications, if your store does allow for them, remember to never share and credit report information with the customer until they arrive at the dealership and present acceptable identification. If the customer ends up deciding to purchase or lease a vehicle, you should also have them complete and sign a hardcopy credit application as well.
  • Incomplete/inaccurate credit applications. As seen in the 2018 FTC case above, the government and consumer attorneys are constantly on the lookout for the submission of incomplete or inaccurate credit applications. Read and follow the best practices below to ensure your dealer does not run into this pitfall in the future.

Best Practices

  • Only use credit applications from reputable forms providers.
  • Have a customer complete a credit application in his or her own handwriting and always get the customer to initial next to the income statement. You must never ask a customer to sign a blank or incomplete credit application, and dealership personnel must not add information to a credit application. Remember to always have a customer sign the credit application as well.
  • Dealership personnel must never submit knowingly false information to the finance company, even if the customer provides such information (this is a federal offense that equals jail time). Note that you must never coach consumers into providing false information either.
  • All credit applications should be accompanied with proper identification, and the dealer should retain a copy of the identification along with the application.
  • The consumer should always be provided with a copy of the completed credit application.
  • The customer should always complete a new credit application where significant changes need to be made, such as ones that will result in cross-outs or other ambiguities.
  • Remember, if the customer is paying cash for the vehicle, creditworthiness is not an issue, so the dealer does not have a permissible purpose for pulling the customer’s credit. Dealers sometimes have customers fill out credit applications on all-cash deals to obtain customer information, which can be used to run OFAC or fill out the IRS Form 8300. However, the better practice would be to have the customer fill out an information sheet (or similar document) rather than a credit application. Using a credit application creates the possibility for confusion, such as an unknowing dealer employee running the customer’s credit.
  • Also, it bears reminding to provide a Credit Score Disclosure (or No Score Disclosure) to all credit applicants [16 Code of Federal Regulations §§ 640.5(e)(f)Vehicle Code § 11713.20], as well as a Privacy Notice to all customers who obtain financial products or services primarily for personal, family, or household purposes. [16 Code of Federal Regulations Part 313].

Notice of Intent to Dispose of Repossessed Collateral (aka “NOI”)

Repossessions. As many of you already know, they’re not easy. The emotions possibly involved in a repossession add to the already stressful nature of a long and difficult process that involves the DMV and other parties. Generally, there are two phases to a repossession. The first is the process of getting the vehicle back and the second is the process of selling it to make yourself whole on the deal. We’re going to assume that you have navigated through the murky waters of the first phase (and legally repossessed the vehicle) and focus on a specific element of the second phase: NOIs.

Calls we have received regarding 10-day notices, repossessions, and defaults have all usually ended with a conversation about sending the customer a notice of intent to dispose of repossessed collateral, or more commonly known as the “NOI.” Most dealers who have called into our hotline service are unfamiliar with this document, or incorrectly conflate it with a pre-repossession notice. Rather, the NOI is a post-repossession notice that must be given to all parties liable on the contract that provides fifteen days to redeem or reinstate the contract. Unsurprisingly, this step to notify the customer that you intend to sell the vehicle to recoup any outstanding debts is seemingly straightforward, but, it is wrought with required disclosures, notices, party notifications, and deadlines. Failure to meet any of these requirements could exhaust (or at the very least significantly reduce) your rights as a legal party to the contract. For a quick glance at what the NOI requires, look no further than Section 2983.2 of the Civil Code, which is a section within the Automobile Sales Finance Act.

With the convoluted nature of the NOI and the potential for multiple parties being involved, it has always been our recommendation to have competent legal counsel (that is well-versed in motor vehicle repossessions) draft your NOI and fulfill all of the legally required obligations until you are made whole. This will ensure that your dealership 1) preserves its right to pursue a deficiency balance against the consumer in the event that a lien sale does not completely satisfy any outstanding debts, and 2) is not the subject to a counter-claim by the consumer for conversion (and possible exposure to punitive damages) if the dealer fails to provide the proper NOI in a timely manner.

Questions?

If you have any questions regarding this issue, or any other situation that may arise in your sales or service departments, hotline clients are invited to contact us at (800) 785-2880 (then press “4” for hotline) or hotline@autoadvisory.com.

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