Beware of this indirect lending pitfall

Credit unions understandably look at indirect lending as an attractive means of beefing up their lending portfolios, but NCUA has consistently, and in my ever so humble opinion correctly, emphasized to the industry that these relationships are trickier than they appear.

A recent case out of Arizona demonstrates why it is so important to exercise ongoing oversight over dealerships with which a credit union has an indirect lending relationship and also why it is so important to have an attorney review third party lending contracts.

Since 1975, the FTC’s “ Holder Rule”( 16 C.F.R. § 433.2) has mandated that all consumer credit contracts include provisions making any party assigned such a contract subject to all of the defenses and claims that a debtor could raise against the creditor with whom she contracted. This means that if your credit union purchases car loans from an auto dealership, it is subject to whatever claims the buyer of the car could have against the dealer. Even though the federal regulation already applies to NY lenders, the state has a similar provision N.Y. Pers. Prop. Law § 301 (McKinney).

In Hayward v. Arizona Cent. Credit Union, 241 Ariz. 350, 387 P.3d 1279 (Ct. App. 2017), a woman sued a car dealership over a car purchase gone bad. She traded in her old vehicle and financed a new purchase with a retail installment contract. The agreement obligated the dealership to pay off the balance of the trade, but the dealership neglected to do so. She successfully sued the dealership claiming that it damaged her credit and she was entitled to be reimbursed for the balance of the trade. She won a judgement for both compensatory damages for slightly less than $17,000 and $ 50,000 in punitive damages.


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