CONSIDERING USING AN ELECTRONIC
PAYMENT DEVICE?
BE SURE TO CHECK YOUR PAPERWORK FIRST!
By: Keith E. Whann
As I have traveled across the Country speaking
at Dealer Association meetings and conventions over the past
two years, I have frequently
been asked about the use of electronic starter interrupt devices
in connection with a motor vehicle transaction, and the 2002
NIADA Convention was no exception. Electronic starter interrupt
devices
and other similar products are frequently referred to by those
within the industry as “electronic payment devices.” Some dealerships
and finance companies are insisting that an electronic payment
device be installed on the vehicle as a condition of extending
credit to high credit risk consumers. While a device such as
this has the potential to assist dealerships by increasing the
likelihood
of payment from credit impaired consumers and, thus, decreasing
defaults and charge-offs, use of these devices also raises a
number of legal and regulatory issues which the dealership must
consider
prior to installing or using the devices.
The first issue to consider is whether the appropriate disclosures
are being made to the customer. In many instances the manufacturer
of the device provides the dealership with pre-printed forms to
use in connection with the installation and use of the device.
Like many other products presented to the dealership, the use of
electronic payment devices and the related paperwork may appear
on their face to comply with applicable federal and state laws,
but the dealership should have them reviewed by legal counsel knowledgeable
about the motor vehicle industry. There are a number of federal
statutes and regulations that could have an impact on the installation
and use of these type of devices, such as the Uniform Commercial
Code (“UCC”), the Truth in Lending and Leasing Acts and their implementing
Regulations Z and M, and the Fair Debt Collection Practices Act,
to name a few. There are also a number of specific state statutes
and regulations that will affect the installation and use of an
electronic payment device. In particular, dealerships must consider
the applicable State Unfair and Deceptive Acts and Practices (“UDAP”)
Statute and Retail Installment Sales Acts.
It is also impossible to determine whether the forms presented
to the dealership for use in connection with the device are appropriate
without conducting an analysis of all of the dealership’s paperwork
and related sales procedures. Dealers often select forms for use
in the dealership without making sure the forms comply with their
state laws or considering how all of the forms work together or
whether they accurately reflect the dealership’s business practices.
Remember, an individual form in a motor vehicle transaction is
not meant to stand alone, but rather is an integral part of the
entire transaction. Moreover, what is disclosed in one form can
have a significant impact on another form. One of the most difficult
challenges for dealerships is complying with the large number of
overlapping disclosure requirements and maintaining consistency
throughout the forms. For a product such as an electronic payment
device, the documents of primary importance will include the Disclosure
Statement to the Consumer, the Retail Buyers Order, the Retail
Installment Sales Contract and the Dealership’s Privacy Policy.
The Disclosure Statement is an integral component of the dealership’s
system to assure that the customer completely understands and consents
to the installation of the device in connection with the transaction.
For instance, the Disclosure Statement should explain who will
be responsible for installing, maintaining and removing the device,
the manner in which the device operates and the effect of not making
a payment, how items such as emergency codes will be administered,
and the steps a customer must take to continue to operate the vehicle.
Since the Disclosure Statement contains material terms of the
transaction, it should be signed by the customer and the dealership’s
authorized representative and integrated by reference into the
Retail Buyers Order. State UDAP Statutes generally require that
all material statements be reduced to writing and incorporated
into the Retail Buyers Order. While State UDAP Statutes generally
require that all material statements be reduced to writing and
integrated into the Retail Buyers Order, State Retail Installment
Sales Acts require all terms and conditions that are material to
the financing transaction be contained in the Retail Installment
Sales Contract itself. The integration of a Disclosure Statement
by reference into the Retail Installment Sales Contract is most
likely not appropriate. Thus, a Retail Installment Sales Contract
being used in a transaction involving an electronic payment device
would not only vary from state to state, but would have to be amended
to both include appropriate language and delete contradictory language
to accommodate the use of the device.
Keep in mind that the required disclosures will vary depending
upon the type of financing arrangement utilized in a given transaction.
Spot delivery agreements serve as a good example of how the content
of a disclosure can vary depending upon the type of financing.
In a traditional financing arrangement, the finance contract is
a two-party paper between the entity financing the transaction
and the customer. In a subprime lending arrangement, it is a three-party
paper or a contract between the dealership and the customer that
is subsequently assigned to a third party. Lastly, in a buy here-pay
here financed transaction, the contract is between the dealership
and the customer for financing. As you can readily see, in each
of the three scenarios, the party making the disclosure, the subject
matter of the disclosure and the laws that apply will vary.
Another issue to consider is who owns the device after it is installed
on the vehicle. At first blush, this issue appears to be very simple,
but it has presented considerable challenges for dealerships utilizing
electronic payment devices. Revised UCC Article 9, which governs
secured transactions, is of particular importance with respect
to installing and using electronic payment devices, as these devices
meet the definition of an accession. Section 9-102 of the UCC defines
accessions as goods that are physically united with other goods
in such a manner that the identity of the original goods is not
lost. If the accession is commingled with the property to which
it is attached so that it can no longer be identified and is not
easily detachable, the title or ownership interest in the device
passes from the dealership to the customer who, as the owner of
the device, is free to alter, disconnect or remove the device.
On the other hand, if the goods are easily identifiable and detachable
without causing damage to the property, and the intention of the
parties has been made clear from the outset that the goods were
not meant to be a permanent accession, the doctrine of accessions
should not apply and the dealership may maintain ownership and
control over the device. It is imperative, however, that the dealership’s
Retail Buyers Order and Retail Installment Sales Contract, as well
as the Disclosure Statement and advertising materials, reflect
the dealership’s intention to remain the owner of the device, if
such is the dealership’s desire.
Dealers often overlook the various
privacy related issues raised by use of an electronic payment
device as well. To begin with,
dealers should take steps to ensure that their dealer agreements
contain language that complies with the new service provider/joint
marketer provisions of the Gramm-Leach-Bliley Privacy Act.
The deadline for complying with the contractual requirements was
July 1, 2002. If a dealer agreement was signed in the past
that
did not contain the appropriate language, an addendum to the
agreement that contains the required privacy disclosures should
be executed immediately. As with any contractual relationship,
dealers should also make sure that they consider and understand
the obligations of both the dealership and the company as set
forth in the dealer agreement. Both parties should be obligated
to comply with applicable federal and state laws, rules and
regulations and, in the event one of the parties fails to comply
with applicable
laws or breaches a term of the agreement, it should be required
to indemnify the other party from any and all claims that arise
as a result. Additionally, devices that make use of any “tracking”
technology that allows one to track or determine the location
of a motor vehicle raise a whole host of additional legal and
privacy issues with respect to disclosures that should be made
to the customer. As a result, the Disclosure Statement, the
Retail Buyers Order, the Retail Installment Sales Contract and
the dealership’s
Privacy Policy should clearly define how the device will be
used and address privacy related issues in accordance with both
federal
and state laws.
The legal, regulatory and business issues that affect the use
of electronic payment devices can be quite complex. If this weren’t
enough, consumer attorneys continue to scrutinize the dealership’s
paperwork and the underlying transaction looking for violations
of applicable laws. When a consumer alleges a problem and retains
an attorney, all of the dealership’s paperwork will be put under
the microscope. This is true in all transactions, and especially
when an electronic payment device is used. These devices are typically
used in transactions involving purchasers with impaired credit
and it is likely that some of them will not pay, resulting in activation
of the starter interrupt device, repossession and possible litigation.
As a result, dealers would be well advised to conduct a thorough
analysis of all of the related issues and dealership forms prior
to using any such device and to consult with legal counsel knowledgeable
about these types of industry issues in order to ensure compliance. |
