North Carolina Car Dealers Settle with Department of Justice Regarding Predatory Lending Complaint

In a settlement still subject to court approval, the Department of Justice and the State of North Carolina have settled a predatory lending lawsuit with two North Carolina "buy here, pay here" car dealerships.  “Buy here, pay here” dealerships typically provide the financing in house, allowing the purchaser to defer payment for a set time and to make periodic payments often on a more frequent basis than a traditional financing arrangement.  “

In United States v. Auto Fare, Inc., the government alleged that the dealerships violated the Equal Credit Opportunity Act (“ECOA”) and the North Carolina Unfair and Deceptive Trade Practices Act by targeting African American consumers for inflationary pricing and interest rates without meaningfully assessing their credit worthiness. The government contended that the pricing increased the likelihood of defaults.  The government further alleged that the dealerships engaged in repossession and remarketing practices that violated Article 9 of the North Carolina Commercial Code, and that the dealers installed GPS devices on cars without the consumer's knowledge to assist the dealerships in their repossession efforts.   See United States v. Auto Fare, Inc., C.A. No. 3:14-cv-00008-RJC-DSC (W.D.N.C.). 

The proposed consent order, among other things:

·         Requires the dealerships to develop and implement written policies and procedure for collection applications and financial documents for all credit applicants sufficient to allow the dealerships to assess meaningfully the applicants’ income and ability to meet the payments on any vehicle purchased;

·         Prohibits the dealerships from entering into credit transactions where the total monthly payments (excluding any pick up payments, tax, tags or title fees) exceed 25% of the total documented monthly net income of the customer;

·         Requires the dealerships to develop retention policies and computerized systems for maintaining documentation of all transactions, insuring proper application of payments and correctly determining instances of a customer’s default;

·         Requires disclosures to customers of GPS systems affixed to vehicles to inform the dealership of the location, disclosures of price, etc. on the windshield of each car, and disclosures that the dealership will provide Carfax or similar reports to each customer at the customer’s expense;

·         Requires the dealership to allow test drives and seek independent inspection of vehicles selected for purchase;

·         Establishes the maximum interest rate to be charged customers;

·         Establishes that guidelines for the sales price of vehicles (in general, the sales price may not exceed the published NADA by more than 15% of vehicles in similar condition, body type, year and model);

·         Provides conditions and procedures for repossession of vehicles where the loan is in default;

·         Provides strict reporting requirements for the duration of the decree (at least four years);

·         Requires annual training of employees regarding ECOA and the North Carolina Commercial Code procedures for consumer installment contracts and secured transactions; and

·         Requires the dealerships to establish a $225,000.00 fund to compensate aggrieved consumers.

Key take aways for those in the “Buy Here, Pay Here” business:

1.       Document the credit worthiness assessment of each applicant;

2.       Make sure car pricing is in line with the NADA pricing and/or other similar dealerships in the area;

3.      Make sure interest rates are applied consistently, do not exceed the maximum rates established by North Carolina law, and bear a reasonable relationship to the credit worthiness of the applicant;

4.      Engage in proper accounting of loan payments and defaults;

5.      Insure that periodic payments are in line with the total documented monthly net income of the customer; and

6.      Insure the exercise of any rights upon default are in accordance with North Carolina law.