The banking industry won an important victory last month when a federal appeals court reversed a ruling that would have held lenders liable for Truth-in-Lending mistakes made by car dealers and other retailers.
On Aug. 6, the U.S. Court of Appeals for the Fifth Circuit in New Orleans overturned a November 1998 decision by a panel of its judges in a case against a car dealership. Last fall's decision directed the plaintiffs to sue General Motors Acceptance Corp. over alleged Truth-in-Lending violations, instead of the car dealer. The plaintiffs appealed.
In the case, Stefanie Riviere and Thomas Sturdevant v. Banner Chevrolet Inc., a couple accused the dealership of not fairly disclosing how it valued the pickup truck they traded in.
Banking lawyers argued that dealers are liable as creditors because they make Truth-in-Lending disclosures when they close sales. The dealer is listed as creditor on the disclosure form, not the finance company or bank that buys the loan. The forms have been that way since the Truth-in-Lending Simplification Act of 1980, which was designed to protect lenders from consumer lawsuits arising from violations committed by retailers, lawyers said.
Last fall's decision was based on a 1981 Supreme Court decision in a case involving a car loan made before the revisions in the law took effect. The panel's ruling contradicted at least three other cases lenders have won in the past two years.
"The credit community in the country went ballistic because the decision was wrong and it exposed creditors to direct liability just like before the simplification of the law,'' said David S. Willenzik, a New Orleans lawyer who argued part of the case.
The appeals court agreed that retailers are liable for Truth-in-Lending disclosures.
(The same court in June had said Hancock Bank of Louisiana was not liable for a dealer's violations.)
"If an obligation is initially payable to one person, that person is the creditor even if the obligation by its terms is assigned to another person," according to the decision.
The appeals court sent the case back to U.S. District Court for the Eastern District of Louisiana, where the dealership will have to continue defending itself.
"There was a collective sigh of relief when the Fifth Circuit came out with their new opinion," said Alan Kaplinsky, head of the banking group at Ballard Spahr Andrews & Ingersoll in Philadelphia. "The new opinion doesn't break any ground; it just reconfirms what was the conventional wisdom in the industry."
Banks and finance companies are liable for Truth-in-Lending violations if they buy loans with obviously flawed disclosures such as, for instance, an incorrectly listed annual percentage rate.
If the appeals court had not reversed last November's decision, "tens of millions" of contracts would have had to be rewritten to list the lender as creditor on the disclosure form, according to Mr. Willenzik, a partner of McGlincher Stafford.
"The bottom line would be massive potential liability for errors you could not control," said Nessa Feddis, senior federal counsel for the American Bankers Association.
But had the earlier ruling in the Riviere case been upheld, lenders would have gone to Congress to get another law underscoring the distance between themselves and dealers, Ms. Feddis said.
"We certainly would have sought a legislative remedy," she said. "Everybody was mystified because it seemed so clearly wrong."