Buy-Here, Pay-Here Legal Issues
By Steele Gudal
Let me start this off by saying that I am not an attorney and I will not pretend to be one (legal disclaimer #1). However, my role in these columns is to present an overview of various areas of concern for a Buy-Here, Pay-Here dealer and there are certainly many legal issues with which to be concerned. This business is a combination of the retail automotive business and the finance business. You need to be familiar with the laws governing two industries, not just one.
I am going to make the assumption that the readers of this magazine have a solid understanding of the laws impacting the retail automotive industry. I will assume that I do not need to cover vehicle title regulations, FTC Buyers Guides, the Magnuson-Moss Act (warranties), dispute resolution agreements and a number of related issues. Therefore, I can focus on the law as it relates to the dealer's role as a lender. The first thing you need to realize is that once you become the lender, you are subject to consumer credit legislation such as the Equal Credit Opportunity Act, Regulation Z (Truth in Lending) and collections laws.
The Equal Credit Opportunity Act was enacted to prohibit red-lining-the practice of denying credit in certain areas or neighborhoods. It requires the dealer to provide a notice of adverse action, or a turndown letter, explaining to the loan applicant the reason his credit request was denied. It also does not allow the dealer to pull unauthorized credit bureau reports. You might think that this is more an issue for traditional lenders than for the Buy-Here, Pay-Here dealer because traditional lenders are more selective in their loan approvals. But this often is not the case. Since Buy-Here, Pay-Here dealers generally are basing a larger proportion of their loan decision on subjective criteria, a dealer can discriminate, whether intentional or unintentional, more easily. For the same reason, it also can be more difficult to disprove red-lining if and when charges are brought.
Truth in Lending legislation requires accurate and consistent presentation and disclosure of key figures such as the amount financed and APR in retail installment contracts. Additional disclosures are required in advertising if you are highlighting these terms. It also does not allow a Buy-Here, Pay-Here dealer to sell a car for cash at a price different from that given to a credit customer. This is because the price difference can be considered a hidden finance charge. It should be noted that the impact of the Equal Credit Opportunity Act and Truth in Lending violations goes well beyond the exposure of a particular sale. Both can involve punitive damages and easily be made into class action suits, so it pays to do things right.
I have addressed what probably are your biggest areas of concern in originating a retail installment sale. You also need to be concerned when collecting an account. Many people think that the Fair Debt Collection Practices Act, which prohibits threatening and harassing behavior, applies to Buy-Here, Pay-Here dealers. Actually, it does not. It applies only to third party collectors, and a dealer is collecting his own accounts. However, I would advise dealers to be reasonable and use the Act as a standard for their own collectors.
When you do need to repossess a vehicle, you must be aware of the laws in your particular state. Obviously, each state is different. Some require you to give notice prior to repossession. Some also require you to offer the right to reinstate (make the loan current), and most require you to offer the right to redeem (full payment). Regardless of the state in which you are operating, you should not "breach the peace" when taking the vehicle. Recently, dealers have started using a form of the electronic ignition interruption device. If you are using this device, you should be aware that it may be considered a form of electronic repossession and its use must be consistent with your state's repossession laws.
This is by no means a complete list of legal issues, and a dealer in this business should have professional legal guidance (legal disclaimer #2). However, I hope I have provided some issues to think about. I have found the bottom line to be that if you pay attention to details and commit to approaching this business in a professional manner, you can reduce the occurrence of any legal problems significantly.
Steele Gudal is president and COO of J.D. Byrider Franchising, a chain of 95 buy-here-pay-here dealerships operating in 32 states and Canada. Byrider and its franchisees own and service approximately $400 million in BHPH receivables. Gudal personally owns three locations in the upper Midwest with $20 million in receivables. sgudal@dealeronline.com
