WASHINGTON - A federal appeals court in Cincinnati agreed last week to reconsider a decision exposing auto lenders to significant financial liability.
The U.S. Court of Appeals for the Sixth Circuit ruled Oct. 25 that lenders may be violating the Racketeer Influenced and Corrupt Organizations Act when they buy car insurance for borrowers who have allowed their personal policies to lapse.
The court said auto lenders may be running afoul of the RICO law when they pocket, rather than pass on to consumers, commissions earned from the policies, known as collateral protection insurance.
However, last week the same three judges who issued that decision said they will rehear oral arguments on Feb. 7 in the dispute between Banc One Corp.'s Columbus, Ohio, subsidiary and 25,000 class-action plaintiffs.
The court did not give a reason for reopening the case.
Michael Crotty, deputy general counsel at the American Bankers Association, applauded the court's action.
"This is a good opportunity to have the court take a careful look at what perhaps was an ill-considered initial decision," he said.
Mr. Crotty said the original ruling didn't make sense.
"Think what they are alleging here: It is a RICO allegation, a gangster allegation, when all the bank did is what the contract signed by the customer said it could do," he said.
"The complaint really boils down to the fact that an insurance agent earned a commission from the sale of an insurance policy. Is there something fundamentally wrong about this?"
The case began in 1993 when Barbara Kenty filed suit on behalf of herself and other Bank One borrowers who failed to maintain insurance on their cars.
The plaintiffs, who are seeking $10 million in damages, said Bank One charged them for more insurance than required under the loan agreement, including policies to cover repossession costs. The bank responded that the loan agreement specifically authorized it to buy the policies.
