FNI’s David Bafumo dissected a class action complaint involving Santander Consumer USA filed in the U.S. District Court for the Northern District of Illinois (Eastern Division) and uncovered three important questions that might impact other auto finance companies.

To recap, the matter that reached the court system on Aug. 31 is associated with allegations that a dealership’s failure to properly disclose the terms and conditions of a GAP debt-cancellation agreement resulted in federal Truth in Lending and Illinois State Retail Installment Sales Act violations, for which SCUSA — the holder of the retail installment contract — should be liable.

Before going into his trio of potential implications, Bafumo spelled out that the plaintiff's case is based on the following key factual allegations about the vehicle finance transaction that originated at Al Piemonte Super Car Outlet in Northlake, Ill. Those allegations included:

• Before consummation of the credit transaction, plaintiff was not delivered a copy of the required TILA disclosures "in a form she could keep."

• Plaintiff was not given any information regarding the GAP debt cancellation addendum, and specifically the amount charged ($895).

• Instead of being advised of required TILA disclosures, plaintiff, “was presented with a stack of documents (including the GAP addendum) containing signature lines marked by the letter ‘X.’”

• Plaintiff alleges she was told the entire stack of documents constituted her retail installment contract and were required to complete the vehicle purchase and finance transaction.

• The GAP addendum’s program limits include a maximum APR of 24 percent and the plaintiff's APR was 27 percent.

• The GAP addendum did not state the payment of the GAP charge was voluntary, but rather stated, “(a)lthough not required to do so, you elect to purchase this addendum.”

“The plaintiff’s core argument is that the plaintiff was sold a product that had no value in their particular situation — a GAP policy with program limits that are exceeded by the customer's actual loan APR,” said Bafumo, an expert in F&I products with more than 15 years of experience who now runs his own firm.

“Essentially, a TILA violation for inaccurately disclosing amount financed and finance charges because the GAP charge was not paid for coverage with any value, it must be excluded from the ‘amount financed and cannot be excluded from the calculation of the ‘finance charge,’” he continued.

“The complaint seems to also lift language from recent consumer rights lobbying efforts, alleging, almost as an aside, without any factual allegations in support, that GAP generally is a ‘deceptive product primarily used to pad loan transactions and improperly increase the amount financed with what is really profit, and part of the finance charge,” Bafumo went on to say.

“Interestingly, that statement is also posed as a ‘question of law and fact’ in the complaint’s justification for class action status,” he added.

In light of that backdrop, Bafumo elaborated about the three questions auto finance companies should ask if they are offering or underwriting GAP products similar to what SCUSA does.

What specifically makes this GAP contract allegedly worthless to this customer?

Bafumo indicated the GAP “program limits” set out on the front page of the contract states a maximum loan APR of 24 percent, and in the contractual list of exclusions, part “K” states that the GAP addendum does not provide coverage if the finance contract APR exceeds that maximum APR. Court paperwork showed plaintiff Joyce Pettye’s loan included a 27-percent APR.

“From a GAP product perspective, the limitation found in the contract at issue is fairly unusual,” Bafumo said. “Most GAP contracts do not specify such a limitation on the face of the contract.

“More typically, GAP benefits are contractually limited by loan-to-value percentages and vehicle type, value, or use classifications,” he continued.

Is the GAP contract at issue Santander's own private labeled program?

Bafumo noted the GAP contract at issue does not appear to be Santander's private branded S-Guard GAP program. Instead he said it appears to be a dealer selected product administered by a California company, Partners Alliance.

“That may raise some problems for the plaintiff’s class certification,” Bafumo said. “Their argument for class certification contends that a large percentage of Santander’s loans include this particular APR-limited GAP policy, which seems unlikely if it is indeed a dealer selected program rather than Santander's preferred program.

How is Santander supposed to prevent these kinds of alleged errors or improper disclosures that occur at dealerships?

Bafumo emphasize an indirect auto finance provider cannot monitor product disclosures and F&I practices inside every dealership that originates loan transactions.

“But the instant case is avoidable,” he said. “With established product funding approval policies and processes that include minimum product contractual requirements and benefits (amongst other product and administrator due diligence) and internal funding verification and audit, the GAP contract in this case would have been rejected and the deal returned to the dealership.

“Santander presumably has such policies and processes in effect for their own S-Guard suite of products but apparently none — or perhaps a failed policy — for dealer-selected products,” Bafumo added.

Bafumo also mentioned that less than 20 years ago, setting basic approval guidelines for add-on products like GAP and vehicle service contracts was a common practice among indirect auto finance providers. If a product contract form number and/or product administrator was not on the “approved” list, he indicated the product simply would not be financed.

“Mysteriously, this smart business practice has diminished and largely disappeared at many financial institutions — over the same time period that consumer protection litigation and regulatory interest has substantially increased —and remains consistently implemented only by auto manufacturer’s captives and some experienced operations, mostly in the subprime market,” Bafumo said.