California’s Automobile Sales Finance Act requires in relevant part that dealers disclose deferred down-payments on the line identified in the standard-form retail installment sales contract. A customer will often ask, “Can I bring the other $500 in next Monday,” and dealers typically think nothing of it. However, a recent Appellate decision demonstrates that dealers who fail to disclose deferred down-payments on their retail installment sales contracts are easy targets for lawsuits.
In Rojas v. Platinum Auto Group, Inc., 212 Cal. App. 4th 997, 151 Cal. Rptr. 3d 562 (2d Dist. 2013), the Court held that California law requires strict compliance with this aspect of the state’s Automobile Sales Finance Act (“ASFA”), rejecting the dealer’s argument that “substantial compliance” was sufficient to avoid liability. In Rojas, the dealer listed four payments totaling $2,000 as a “down payment”, instead of as a “deferred down-payment”,notwithstanding that the payments were spread over three months. The dealer argued that he had made the important or “material” disclosures required by the ASFA and that listing the payments on the “down payment” line instead of the “deferred down payment” line was a technical violation that did not harm the consumer. In short, the dealer argued that his “substantial compliance” with the critical disclosures required by the statute, such as the actual purchase price, interest rate, payments, and other key terms, was adequate.
In rejecting the dealer’s argument, the Court observed that the ASFA is a consumer protection statute which is strictly enforced to achieve the consumer benefit which the Legislature intended. It noted that the failure to properly disclose the deferred down payment harms consumers because lenders are misled into believing that the consumer has sufficient financial strength to make the down payment, as opposed to the reality of having to“defer” the down payment over a period of time. Thus, consumers are induced to enter into contracts for the purchase of a vehicle which they cannot afford.
The Rojas decision will disappoint dealers who were hoping for a “no harm, no foul” decision from the Court. Dealers have long chafed at the deferred down payment disclosure requirement precisely because some lenders do push back on buying such contracts. However, dealers should review this issue with their lenders and not assume that lenders will reject deals with deferred down payments. Most lenders today will accept contracts that disclose deferred down payments so long as the deferred down payments are properly disclosed and collected prior to assignment of the contract.
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The penalty for violating the ASFA is typically rescission of the contract, even if the contract has run its course several years later and you are suing to collect a deficiency judgment. Dealers who have failed to disclose deferred down payments but have “Hold Check Agreements” and copies of several “down payment” checks in their deal jackets are providing the necessary evidence of culpability.
Worse, dealers are an easy target for a class action lawsuit if they fail to disclose deferred down payments. In a class action lawsuit Plaintiffs seek to review three or four years of your deals for evidence of a systematic violation of the ASFA and the liability escalates exponentially, including the prospect of paying enormous attorney fees to plaintiff’s class counsel, not to mention your own defense costs.
Just remember: there is nothing wrong with a deferred down payment that proper disclosure won’t cure.