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Gibson vs. LTD, Incorporated

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There is confusion over when consummation of a loan occurs. If a loan is not funded or, in the case of a dealer contract, sold to a lender and subsequently funded, was it ever a consumer loan? Are errors in the disclosure discounted because no loan really existed? Such is the case in Gibson and there are valuable lessons to be learned. One in particular relates to the financing of a product or service which is not delivered. Under TILA, the consumer may be charged only for those things of which they "have use." If the consumer has no use of the item because it was never provided, the disclosures would immediately be in error. Read on.

Timeline:
10-31-02 - Gibson purchases a 2002 truck from LTD
- The contract is for $21,201.39.
- Charges included of $499 are described only as "After MRKT" although Gibson refused after market products such as under-coating.
- The contract included a clause allowing LTD to cancel the sale if a buyer of the loan could not be found.
11-11-02 - Unable to find a buyer, LTD reformulates the transaction and rewrites the contract. LTD deducts the "After MRKT" costs of $499, a $500 GAP insurance fee and collects an additional down payment.
- A new contract for $17,114.17 is executed.
Early 2003 - Gibson has an accident and totals the truck.
02-05-03 - Gibson purchases a new 2003 model truck from LTD.
- The contract is for $22,889.36.
- This amount includes $500 of GAP insurance (properly acknowledged) plus an additional $12.39 based on an error calculating license tax.
02-12-03 - Unable to find a buyer, LTD reformulates the transaction and again rewrites the contract.
- The new contract amount is $21,248.70. The down payment was increased. GAP insurance was provided as it was the week earlier, but it was not properly acknowledged this time.
01-14-03 - Insurance was settled on the accident from the 2002 truck. It did not satisfy the debt and there was no GAP policy. LTD absorbed part of the loss and had Gibson renew his contract to satisfy the remainder
02-18-03 - A third contract is signed for the 2003 truck.
After the contract was signed, LTD learned that Gibson quit his job 12 days earlier. LTD requested a voluntary repossession and Gibson complied.
Gibson took legal action for failure to comply with TILA and the implementing Regulation Z.

Findings:
The $499 charge for "AFTER MRKT" on the first retail installment sales contract was improperly included in the amount financed. The after market products/services were neither requested, nor delivered. There was no explanation for the term "After MRKT," making it meaningless. And since these disclosures are all about informing the consumer of the cost of credit, this abbreviated term and the fact that it was included in a section with other charges and credits described as "dealer's business license tax," "Virginia title tax," "processing fee for consumer services," etc. failed to inform the consumer.

Further, LTD had not promised at any future time to actually provide this product and had not provided it in advance of the sale. 15 U.S.C. § 1638(a)(2)(A) specifies that the amount financed "shall be the amount of credit of which the consumer has actual use" and this was not the case. Therefore, there was no basis for the inclusion of this cost and the amount financed was incorrect because of it.

Next, the first 2003 retail installment sales contract included an overcharge of $12.39 for the dealer's business license tax. If there is any over-charge or markup, it must be clearly disclosed and not incorporated with other sums as it was here.

LTD maintained that because the contracts on which these violations existed were not purchased, and no funds were loaned, that they were not "consummated" as required by federal law. No TILA damages could result if this were the case.

But "consummation" is defined to occur at the "time that a consumer becomes contractually obligated on a credit transaction." The court concluded that because the regulation "expressly refers solely to the consumer's commitment" and because of "TILA's express purpose of protecting consumers from receiving inadequate disclosures prior to their entering into credit transactions," "consummation . . . encompasses unfunded, financing agreement options to which consumers contractually commit, and under which they can be bound at the lender's sole discretion." Even if the dealer has not signed the contract, the consumer has and consummation has occured.

During the court action, Gibson contended that LTD's inclusion of a GAP insurance charge in the amount financed on his second 2003 retail installment sales contract violated TILA because he did not authorize the charge. Without his authorization, he contends, LTD could only include the charge as part of the finance charges, not as part of the amount financed.

LTD maintained that the authorization from the preceding contract still applied and that the two transactions were as one. The second was a modification of the first.

The court concluded that the modifications materially affected the terms in the form of the down payment, the amount financed and the finance charge. The court saw a new agreement in place and ruled that new disclosures, including the GAP authorization, were required.

Two of the lower court's findings were upheld and one (the GAP disclosure) was reversed. Gibson now won on three counts. However, the initial ruling was that Gibson be awarded statutory damages plus attorney fees. The damages were based on the Nign case and provided $63,847.94, twice the sum of the two finance charges. That case was since reversed by the Supreme Court and statutory damages on three violations would pay $3,000. This makes the $53,627.50 in attorney fees disproportional to the TILA fine. The lower court will review the amount of the damages.

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