Dealerships Need to Carefully Consider How to Deal with Lender’s Rejection or Rescission of Assignment of Retail Installment Sales Contracts: Avoid Violation of Wisconsin Consumer Act
From time to time, we hear from dealers that they have received back a retail installment sales contract (“RISC”) from a bank, manufacturer’s captive finance company, or other lender (“lender”). The return may involve either rejection of an assignment tendered by the dealership to the lender, or even rescission of an assignment the lender already accepted. Circumstances leading to rejection or rescission of a RISC assignment can vary; however, in all instances when a RISC is returned to the dealership, dealers must resist initial urges to rashly act to unwind the deal or recover the vehicle, and carefully consider their rights and obligations under applicable law, including the Wisconsin Consumer Act (“WCA”) or other potentially applicable state laws. Failure to heed these obligations precisely can result in remedies that are costly to a dealer, especially if the transaction is subject to the WCA. Potential penalties include forfeiture of the vehicle to the customer, repayment of all customer-paid installments, and payment of the customer’s legal fees.
In Wisconsin, dealerships who execute RISCs in the process of completing a vehicle finance transaction are considered the originators of such credit, and thus the “creditor” unless and until such RISC is assigned to a succeeding lender. Moreover, even after an assignment is initially accepted, an assignee lender may try to rescind or revoke acceptance, in which case the assigning dealership may be placed back into the position of creditor. Therefore, once a RISC is executed by the dealer and the borrower, dealers should treat the RISC as binding. Assume the contract is binding on the dealership, and that the dealership must honor the terms of the RISC, until you are advised otherwise by competent legal counsel.
With these concepts in mind, here are several points to consider in addressing return of a RISC assignment to the dealership:
- The RISC remains binding on dealership, and dealership must honor its terms.
- Promptly contact upper level management and consult competent legal counsel to determine appropriate course of action. DO NOT contact the customer to ask them to bring the vehicle back or otherwise suggest that the contract is terminated.
- Management should promptly contact the lender to which RISC was tendered and request prompt written assignment of lien rights back to the dealership unless the lender is willing to reverse its decision to reject or rescind the assignment. Stress that the lender should not issue a lien release. (Legal counsel can assist with this effort.)
- If the RISC was previously assigned to a lender and returned to the dealership (or if a notice of assignment was sent to the customer in anticipation of such assignment and the assignment was subsequently rejected) written notice should be sent to the customer, advising the customer that the contract has been reassigned to the dealership, including lien rights. Notice should include instructions as to where all payments should be sent. For RISCs governed by the WCA, the form and content of this notice must comply with Wis. Stat. § 422.209(2) https://docs.legis.wisconsin.gov/statutes/statutes/422/II/209. The form of notice must also comply with any notice provisions provided in the RISC, itself. The dealership should consult legal counsel if there is any uncertainty about complying with these requirements.
- Default by customer: Under the WCA, default means having more than one payment outstanding by more than 10 days or other material breach of the contract. The WCA provides that a material false statement made by the customer on his or her credit application may be considered an incurable default. Upon a customer default, if governed by the WCA, the customer is entitled to written notice of such default and any right to cure prior to the dealership taking any other action. The content of this notice is specified by statute, and notice should be reviewed by legal counsel before sending. The dealership must also comply with all obligations stated in the RISC relating to a default or attempts to replevin or repossess the vehicle.
- Repossession/Replevin: As previously noted, repossession and replevin rights and procedures are governed by statutes (including the WCA, when applicable) and likely the RISC, itself. These provisions need to be reviewed and followed in the event the customer fails to cure default. Repossession requires statutory notice and/or court order, depending on the circumstances and review of applicable statutes and the RISC, itself. Competent legal counsel is strongly recommended.
Note: The WCA governs credit transactions offered or extended to natural persons primarily for personal, family, or household purposes. The WCA does not itself extend to transactions where the amount financed exceeds $25,000; however, RISCs formatted to comply with Wisconsin law may include provisions that expressly or by reference incorporate consumer protections or lender obligations provided under the WCA, which may then be enforceable by contract law. Consult competent legal counsel to determine applicable laws governing each circumstance.
The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.