For banks that make consumer automobile loans, dealing with defaulting borrowers is an inevitability. The usual course of events when this occurs is that following a default, the bank repossesses the vehicle from the debtor. After providing the debtor with a “pre-sale notice” as required by the Uniform Commercial Code (UCC), the bank disposes of the automobile either through a public or private sale. When the vehicle does not sell for more than the amount the debtor owes, the bank typically institutes a deficiency collection action against the debtor.
What could happen next, however, could be an unwelcome surprise for the bank. Instead of obtaining a judgment against the debtor, a bank could find itself forced to defend against a class action counterclaim filed by the debtor if the bank’s pre-sale notice is defective under the UCC.
The rate at which consumer automobile loan debtors are filing class action counterclaims or complaints against banks for alleged deficiencies in the pre-sale notices under the UCC appears to be on the rise. Under the UCC, a bank is required to provide the debtor with a pre-sale notice after it repossesses a vehicle and before the bank disposes of the collateral. The pre-sale notice gives the debtor an opportunity to exercise redemption rights before the sale by providing the debtor with all the information necessary to do so. The UCC and state statutes require specific information to be included in the pre-sale notice to the debtors. Under the UCC, a pre-sale notice must:
- describe the debtor and the secured party;
- describe the collateral that is the subject of the intended disposition;
- state the method of intended disposition by the bank (i.e. will the sale be a public sale or a private sale)?
- state that the debtor is entitled to an accounting of the unpaid indebtedness and state any accounting charge; and
- state the time and place of a public sale, or the time after which a private sale is to occur.
Even unintentional violations or omissions of required information can lead to a potential class action lawsuit against a bank. If a bank’s pre-sale notice fails to comply with the UCC and any applicable state statutes, then the bank’s risk of facing a class action is quite high. An error or omission in a bank’s repossession process or pre-sale notice likely will be uniformly made in every consumer vehicle repossession that occurs. A single mistake in the repossession process that is repeated countlessly over a specified period of time and across a class of affected consumer borrowers can enable a named plaintiff or counterclaim defendant to allege claims in a lawsuit or counterclaim brought on behalf of himself or herself “and all others similarly situated.”
After a class action is filed, the bank can spend considerable time, resources, and expenses defending the lawsuit. The potential number of debtors that can be included in a class action could be in the thousands if a bank has an active consumer vehicle repossession practice. Depending on the length of time associated with the applicable statute of limitations, a class action could include all the debtors from which the bank repossessed consumer vehicles dating back several years.
The number of debtors included in the class will also determine the potential amount in damages the bank may be facing. Damages under the UCC and state statutes can include an award for an amount not less than the credit service charge plus 10% of the principal amount of the loan, or the time-price differential plus 10% of the cash price. In addition, debtors can recover damages for loss resulting from the debtors’ inability to obtain, or the increased costs of, alternative financing. The bank may also be prevented from collecting the deficiency amounts owed by the debtors on the consumer vehicle loans at issue. Finally, an award of attorneys’ fees to the debtors’ attorneys is common and can be a substantial amount in certain circumstances. The cumulative effect of the damages provisions under the UCC and state statutes for defective pre-sale notices can cause the total damages awarded in these types of class actions to climb potentially into the millions of dollars.
To avoid the possibility of defending against a class action, a bank’s repossession process must conform to all applicable state and local laws. The bank must insure that the correct repossession process is rigorously followed every time it is utilized. Repeating a mistake or cutting a corner could lead to a class action lawsuit being filed against the bank, resulting in significant costs and expenses incurred by the bank.
The UCC and the statute governing a pre-sale notice in your state may require that the notice contains more than the information set forth above. The list included in this article is information that the UCC commonly requires in a pre-sale notice for consumer automobile loans. A good place to start to make sure your pre-sale notice is not defective is with your applicable state statute. Many pre-sale notice statutes contain model forms of a pre-sale notice that can be used as a template to insure that your notice complies with the law. Be aware that certain UCC and statutory provisions can vary among states. To insure compliance with the UCC and all applicable state statutes, make sure to have your legal counsel review and approve all of your repossession documents, including the pre-sale notice.
Adam Cornett is a Senior Attorney with ABA Insurance Services and has extensive experience in handling financial institution class action claims. For questions regarding this article, please contact Adam at firstname.lastname@example.org.