The U.S. Court of Appeals for the Sixth Circuit recently held that an automobile dealer is a "creditor" under the federal Equal Credit Opportunity Act ("ECOA") that was not excepted from the requirement to provide adverse action notices, as the dealer did not "merely arrange for credit by referring applicants to lenders" as provided under Regulation B.
The Court also reversed the district court's ruling that injunctive relief was not an available remedy under ECOA and also reversed summary judgment in dealer's favor on plaintiff's state-law conversion claim, remanding the case for further proceedings on those claims.
A copy of the opinion is available at: Link to Opinion
The plaintiff bought a used car for $8,525 from a car dealer in August of 2013. The plaintiff made a down payment of $1,248 and financed the balance.
As part of the financing transaction, the car dealer's salesman entered the plaintiff's employment and income information into a computer program provided by the non-party finance company. The data was wrongly entered, resulting in plaintiff's income more than doubling.
The retail installment contract for the purchase of the vehicle was then assigned to the finance company, which would fund the loan by paying the dealer an advance. If the financing agreement was not acceptable to the finance company, it "would not issue an advance and would only collect monthly payments."
Two days after the sale, the salesman called the plaintiff and asked her to return to the dealership. The dealer's employee told the plaintiff that because of the salesman's inputting error, she would have to pay an additional $1,500 as a down payment. Plaintiff refused and the dealer kept the car.
The dealership never gave the plaintiff any written notice explaining why the terms of her retail installment contract were changed.
Two days later, the plaintiff filed suit in federal district court. The complaint sought damages and injunctive relief because: a) the dealer failed to provide an adverse action notice required under ECOA; and b) defendants' actions constituted conversion under Michigan common and statutory law.
After the completion of discovery, the parties file cross-motions for summary judgment. The district court granted plaintiff's motion as to her ECOA claim, holding that the dealer was a "creditor" subject to ECOA's adverse action notice requirement, and the dealer admitted it never issued such notices.
The district court, however, denied plaintiff's claim for an injunction, holding that as a matter of law "equitable relief was not available to private parties under the ECOA." It also partially granted defendant's motion and dismissed plaintiff's claim for conversion because it was barred by Michigan's economic loss doctrine.
The parties resolved the remaining claims by stipulation and all sides appealed.
On appeal, the Sixth Circuit began by explaining that "the ECOA prohibits creditors from discouraging or discriminating against any credit applicant 'with respect to any aspect of a credit transaction … on the basis of color, religion, national origin, sex or marital status, or age.'"
The Court went on to explain that in 1976, the ECOA was amended "to include a provision requiring creditors to provide applicants with written notice of the specific reasons why an adverse action was taken in regards to their credit."
The Sixth Circuit then turned to the statutory text of 15 U.S.C § 1691(d)(2) and (3), which require a "creditor" to provide a written statement explaining the reasons why "adverse action" was taken against an applicant for credit either "as a matter of course" or by giving written notice of the right to a written explanation within 30 days after receiving a request. Subsection 1691(d)(6) defines "adverse action" as "a denial or revocation of credit, a change in terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the terms requested."
The parties did not dispute that plaintiff fit the definition of an applicant who suffered "adverse action" entitled to notice under § 1691(d) and that the dealer did not provide such notice. Instead, the parties' dispute centered on whether the dealer was a "creditor" required to give notice and whether the district court erred as a matter of law in deciding that injunctive relief was not available under the ECOA.
Parsing § 1691's definition of "creditor," the Court looked for guidance to Regulation B promulgated by the Consumer Financial Protection Bureau ("CFPB"), which is the agency with authority to promulgate regulations implementing the ECOA.
The Sixth Circuit pointed out that under Regulation B, "those who merely arrange for credit by referring applicants to lenders are considered 'creditors' solely for the purposes of the ECOA's prohibitions on discrimination and discouragement. … Under Regulation B, in other words, 'creditors' who act as mere middle-men between applicants and lenders have no affirmative obligation to provide applicants with notice stating the reasons for any adverse action."
However, the Court agreed with the district court that the dealer was a "creditor" subject to the ECOA's notice requirement because it was a "person who regularly arranges for the extension, renewal or continuation of credit" and fell within the statutory definition.
In addition, the dealer was a "creditor" because it "regularly participates in [the] credit decision' by 'setting the terms of the credit.'" This is because the dealer's witnesses testified that it structured the terms of the deal using the software provided by the finance company, including the price, interest and payments.
The Sixth Circuit rejected the dealer's argument that it was a mere "middle-man" because the finance company's "only role in the transaction was to determine whether it would pay [the dealer] an 'advance' on Plaintiff's financing agreement, the terms of which were set by [the dealer]." Because it was the dealer that decided to change the terms of financing when the finance company informed it no advance would be paid on plaintiff's deal, and in addition because the dealer regularly participated in credit decisions, this "triggered an obligation to provide Plaintiff with a written statement of its specific reasons for doing so."
The Court also rejected the dealer's remaining argument that it was not a creditor because it used the finance company's software and form contracts when preparing the financing agreement because "[t]he ECOA would be a paper tiger if creditors could insulate themselves from liability simply by using a third party's copyrighted forms or software when preparing a credit application."
The Sixth Circuit accordingly concluded that "the district court did not err by granting Plaintiff's motion for summary judgment on her claim under the ECOA."
Turning to the district court's denial of plaintiff's request for injunctive relief, the Court concluded that because "the ECOA explicitly states that '[u]pon application by an aggrieved applicant, the appropriate United States district court or any other court of competent jurisdiction may grant such equitable and declaratory relief as is necessary to enforce the requirements imposed under [the Act] … the ECOA provides applicants for credit—i.e. private parties—with the right to seek equitable relief."
Because the district court denied injunctive relief based on a misinterpretation of controlling law, the Court concluded remand was necessary in order that the district court could determine whether an injunction was proper.
As to plaintiff's conversion claim, the Court concluded that "the district court erred in applying the economic loss doctrine to bar her statutory conversion claims" because the economic loss doctrine did not apply to facts of the case at bar.
Specifically, the Sixth Circuit held that, because title to the automobile transferred from the dealer to the finance company upon execution of the retail installment contract before the plaintiff returned the car to the dealer, "it cannot be said that her conversion claims are based on Defendants' violation of a duty arising under the contract of sale." Instead, at that point in time, the dealer's "duty to refrain from wrongfully exerting dominion over Plaintiff's vehicle emanated from the policies underlying the tort of conversion."
Thus, the Sixth Circuit concluded that "the district court erred by granting Defendants' motion for summary judgment as to Plaintiff's claims for statutory conversion."
Ralph T. Wutscher
Maurice Wutscher LLP
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