Class action lawsuit issued against dealership for rate markups and document fees

The Arkansas Supreme Court has not been a friend of auto dealers recently and a decision handed down on April 14, 2011 against a dealership group confirmed very clearly that Arkansas is not where you want to be sued.

In reversing parts of a well-reasoned lower court decision, the Arkansas Supreme Court issued its latest rulings in a case that had previously certified a class in relation to document fees charged by dealers.  Prior rulings in the case held that charging a customer a document fee to complete a form RISC constitutes the “unauthorized practice of law”  and this decision held that doing so may give rise to a private Unfair and Deceptive Acts and Practices (“UDAP”) class action.  The certified class in this case covered all persons that paid the dealership group a documentary or administrative fee since December 31, 1997.  After the first unauthorized practice of law ruling, the Arkansas legislature passed a law to allow dealers to charge document fees. But the Supreme Court ruled that licensing attorneys is the sole province of the judiciary under the Arkansas Constitution and invalidated the law as unconstitutional.

In this round, among other things, the plaintiff sought to amend the class action complaint to bring a UDAP claim for the dealership marking up “buy rates” to consumers without disclosing the buy rates to the consumers in advance.  This allegedly constitutes a “kickback” from the lenders and plaintiff sought to certify a new class and seek class action damages for the cumulative difference between the buy rates and the sell rates charged by the dealership group to all Arkansas consumers.

The Arkansas Supreme Court found that the requirements for certifying a class action on rate mark-ups were met because plaintiff alleged that the dealership, “in attempting to sell vehicles, arranged financing by which buyers were approved at one rate, yet a higher rate was inserted into the retail installment contract.  It was further alleged that the actions taken in doing so were without any disclosure to the buyer that he or she had been approved at a lower rate or that the dealership would receive an incentive for doing so from the lender.”  Apparently the Court failed to comprehend even the basics of indirect auto finance in which the costs, duties, and risks in producing and servicing auto credit are allocated between the dealer and lender, both of which are entitled to compensation for their work. The Court’s language in certifying the class makes it questionable whether indirect auto finance is now legal at all in Arkansas unless the “buy rate” is disclosed to the customer.

Finally the Supreme Court once again affirmed summary judgment in favor of the plaintiff on the unauthorized practice of law claim. The Court held that, as with an attorney, the dealer’s relationship with the class members would include having a fiduciary duty which means a higher standard of care and potentially greater damages. 

This decision is full of misunderstandings of the way indirect auto finance works in our country and its benefits to consumers.  It remains to be seen if, as with the first unauthorized-practice-of-law Arkansas decision, it will spawn similar litigation in other states.  We can probably expect class actions in other states claiming that a dealer marking up a “buy rate” is an unfair trade practice. 

Hopefully the Courts in those states will take the time to understand how indirect auto finance works in an efficient manner. Indirect auto finance benefits consumers by having dealers undertake costs of account origination, risks of identity verification, and documentary compliance that would cost the lender a much higher price and thereby substantially increase lender direct finance rates if performed in-house by lender staff. 

It is without question that no one “qualifies” for a buy rate at retail and it reflects only the lender’s return for its activities and not the dealer for the risks and obligations it assumes.  These points were well made to the FTC in a roundtable panel discussion in Detroit but may be fought out in the courts.  Decisions like this have a way of bringing out the plaintiff’s bar and it may be litigious times ahead.

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