We have recently received several wrongful repossession inquiries as a result of the misapplication by lenders of their late fees and other associated fees on vehicle loans. As we analyzed the inquiries, the first analysis is whether the vehicle loan complied with Federal law. The second level of inquiry requires a deeper review because there is a variation between state lending laws.

Because most vehicle loan lenders lend money across several states, their customer service representatives often fail to appreciate the Illinois vehicle loan distinctions, and then unknowingly misrepresent Illinois law and misapply the state law of the lending institution’s headquarters or home office.

This misapplication of Illinois law may have resulted in a wrongful repossession of the vehicle, as well as a claim that the vehicle loan agreement or the application of late fees or other associated fees violated Illinois law.

State laws vary significantly in how they regulate late fees, payment allocation, and consumer protections related to auto loan servicing. The following examples highlight how misapplied payments may result in statutory violations under specific state laws, with Illinois first.

Illinois

The Illinois Motor Vehicle Retail Installment Sales Act requires that lenders can only charge a “delinquency and collection charge” on each installment that is at least ten days late, “in an amount not exceeding 5% of the installment on installments in excess of $200 or $10 on installments of $200 or less.” Additionally, the Act further states that “Only one delinquency and collection charge may be collected on any installment regardless of the period during which it remains in default.” The Act further also allows attorney fees to enforce collection but if the lender enforces contrary to Illinois law, “the court in its discretion may award attorney’s fees to either party as the interests of justice may require.” Improper assessments of late fees or failure to apply payments to principal and interest first may also constitute a violation of Illinois consumer protection laws.

California

Under California Civil Code § 2982, late charges on motor vehicle retail installment contracts are limited to 5% of the delinquent installment and may not be assessed until a payment is at least 10 days late. California law prohibits compounding of late fees and requires transparency in payment allocation. Improper assessment of multiple late fees or failure to apply payments to principal and interest first may also constitute a violation of California’s consumer protection laws.

Florida

Florida Statutes § 520.08 regulates motor vehicle installment sales. Late charges cannot exceed 5% of the overdue payment and may not be collected more than once per delinquency. Additionally, improper payment allocation that results in inflated balances or triggers repossession may also be challenged under Florida’s Unfair and Deceptive Trade Practices Act (FDUTPA).

Georgia

The Georgia Motor Vehicle Sales Finance Act (§ 10-1-31) allows lenders to charge a late fee only if the payment is more than 10 days overdue, and the fee must not exceed 5% of the installment. Georgia courts have held that the misapplication of payments leading to excessive fees or wrongful default notices may also give rise to consumer claims under both the Act and Georgia’s Fair Business Practices Act.

Ohio

Ohio Revised Code § 1317.06 governs motor vehicle retail installment contracts. Late charges may not exceed 5% of the unpaid portion and can only be assessed once per default. The Ohio Consumer Sales Practices Act prohibits deceptive or unconscionable acts, including misapplication of payments or compounding late fees beyond the contract’s terms.

Michigan

Under Michigan Compiled Laws § 492.114a, late charges must be disclosed in writing and may not exceed 5% of the unpaid amount. Michigan law also requires vehicle loan financing companies to maintain accurate records of payments, and failure to apply payments correctly may also be deemed an unfair trade practice.

New York

Under New York Personal Property Law § 302, lenders may not assess a late fee greater than $10 or 5% of the late payment, whichever is less. New York also requires a written contract provision for late charges. Applying payments to fees before principal or interest, without disclosure, may also be deemed deceptive under the General Business Law § 349.

New Jersey

New Jersey limits late charges under the Retail Installment Sales Act (N.J. Stat. § 17:16C-42) to 5% of the unpaid amount. Only one late fee may be charged per missed installment. The state also provides strong consumer protections against repossession without notice and allows challenges to any fees or practices that violate the New Jersey Consumer Fraud Act.

North Carolina

North Carolina General Statutes § 25A-29 allows creditors to charge a late fee only if the payment is 10 days past due and limits the fee to $15 or 5% of the payment. The state’s Unfair and Deceptive Trade Practices Act (UDTPA) can be applied when misapplication of payments results in inflated fees or unjustified delinquency reporting.

Pennsylvania

The Pennsylvania Motor Vehicle Sales Finance Act (69 P.S. § 612) caps late charges at $10 or 5% of the installment, whichever is less. Payment application practices must be explicitly disclosed. Any attempt to charge compound late fees or to repossess a vehicle based on misapplied payments may also be actionable under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law.

Texas

Texas law limits late charges under the Credit Code (Tex. Fin. Code § 348.114) to 5% of the unpaid installment and prohibits pyramiding or charging multiple late fees on a single missed payment. Misapplying payments or accelerating the loan without proper notice may also violate Texas consumer finance regulations and result in civil liability for lenders.

In general, the misapplication of payments is a servicing violation that occurs when a lender or loan servicer applies borrower payments to late fees, collateral insurance charges, or other add-on items instead of allocating them toward principal and interest as statutorily required. The misapplication payment practice increases loan balances, generates unlawful interest, and places borrowers at risk of delinquency, default, and/or repossession even when they have made subsequent “timely payments.”

In 2024, the Consumer Financial Protection Bureau (CFPB) brought enforcement action against USASF Servicing, LLC, identified over 8,700 misapplied payments across a five-year period. The complaint detailed how this practice resulted in over $1.2 million in additional interest and fees that borrowers were not legally obligated to pay. The violations cited in the complaint reflected systemic misconduct in servicing operations and highlighted failures to comply with established loan terms and applicable consumer protection laws.

Vehicle loan financing companies have a legal and contractual duty to apply payments in accordance with Federal and applicable state law and must also comport with the terms of the loan agreement. When Vehicle loan financing companies fail, the result is not a servicing irregularity, but a material failure with legal consequences that exposes consumers to financial harm and creates grounds for regulatory enforcement, and importantly, a lawsuit especially if a repossession has occurred.

What Is Payment Misapplication in Auto Loans?

In a properly serviced loan, each payment must be credited to outstanding interest and principal in accordance with the agreed amortization schedule. However, in cases of misapplication, vehicle loan financing companies divert those funds—often without disclosure—to unrelated charges such as late fees, collateral protection insurance (CPI), or other add-on costs.

This deviation results in understated principal reduction, continued accrual of interest, and inflated loan balances. Borrowers may appear delinquent or behind on payments, even when they have paid the full amount due. Over time, these errors can escalate into default status, negative credit reporting, and in some cases, wrongful repossession.

Truth in Lending Act Claims

We have begun to witness a rise in Truth in Lending Act (TILA) claims against vehicle loan financing companies. Vehicle finance transactions and servicing must comply with Federal and State law as well as the loan agreement terms contained in the promissory note or retail installment contract. Several loan agreements do not authorize loan financing companies to override standard allocation sequences or prioritize ancillary fees. When loan financing companies do so, they are subject to enforcement under consumer protection statutes, including the Truth in Lending Act (TILA).

Unlike occasional mistakes, widespread or repeated misapplication of payments reflects systemic deficiencies in loan servicing practices. It violates borrower expectations and erodes the integrity of the loan servicing process, resulting in avoidable costs that were neither disclosed nor contractually agreed to.

How the Practice Impacts Borrowers

When loan financing companies misapply payments, the financial impact on borrowers is immediate and compounding. Funds intended to reduce principal or satisfy monthly obligations are diverted to fees or charges that should not take priority. As a result, interest continues to accrue on an inflated balance, causing the loan to amortize improperly. Borrowers are often unaware of the misapplication until they receive delinquency notices, late fees, or demands for payment that conflict with their own records.

The financial consequences are compounded by impacts on borrower credit, loan eligibility, and account accuracy. Misapplication of payments may result in erroneous negative credit reporting, reduced credit scores, and restricted access to future credit opportunities. In some cases, consumers become subject to repossession proceedings even after making consistent, timely payments.

Critically, the appearance of delinquency in a loan financing company’s internal system may trigger an automated repossession activity or deny the borrower eligibility for loan modifications and/or hardship relief.

These issues are especially damaging for borrowers already navigating financial difficulty. The misapplied funds not only create additional repayment obligations but also erode trust in the loan servicing process. Borrowers may struggle to contest these errors without access to accurate transaction records or legal support, while Vehicle loan financing companies often rely on internal systems that lack transparency or consumer-facing resolution mechanisms.

The CFPB’s enforcement action against USASF highlights that payment misapplication is not a minor servicing issue but a widespread violation with measurable financial consequences. When these failures occur repeatedly, they point to broader deficiencies in loan servicing practices and a lack of compliance with consumer protection standards.

Legal Framework and Servicing Violations

Vehicle loan financing companies are legally required to apply borrower payments in accordance with the terms of the loan agreement and in compliance with federal and state consumer protection laws. Chief among these is the Truth in Lending Act (TILA), which mandates clear disclosures and accurate application of payments to ensure transparency and fairness in lending transactions. When vehicle loan financing companies deviate from these obligations—by redirecting payments toward fees or ancillary charges not authorized by the contract—they may violate both TILA and applicable state consumer protection laws.

TILA, codified at 15 U.S.C. § 1601 et seq., was enacted to promote informed use of consumer credit and prevent deceptive practices. Under Regulation Z, Vehicle loan financing companies must:

• Provide accurate and timely periodic statements reflecting how payments are applied.
• Credit payments as of the date received, unless otherwise permitted by law.
• Avoid applying payments in a manner that increases consumer obligations unlawfully.
• Disclose fees, charges, and interest accrual clearly and in accordance with the original loan terms.

Misapplication of payments may result in incorrect loan balances, failure to properly credit accounts, and misleading disclosures—all of which may constitute statutory violations subject to regulatory enforcement and civil liability.

In addition to federal statutes, many states impose separate obligations on Vehicle loan financing companies, including:

• Duties of good faith and fair dealing in the administration of loan terms.
• Requirements to provide detailed payment histories upon request.
• Consumer rights to dispute misapplied payments or reallocation of funds.
• Statutory penalties for failure to provide accurate account statements.

The CFPB’s enforcement action against USASF Servicing, LLC reflects a pattern of unlawful payment servicing practices. Over a five-year period, USASF diverted borrower payments to late and other fees and collateral insurance charges instead of applying them to principal and interest, without the necessary disclosures or contractual authority.

When such servicing violations occur across multiple accounts and persist over time, they may also fall within the scope of the Consumer Financial Protection Act of 2010, which prohibits unfair, deceptive, or abusive acts or practices (UDAAPs). Regulatory agencies may respond with enforcement actions seeking consumer restitution, impose civil penalties, mandate operational changes, and place Vehicle loan financing companies under supervisory monitoring to ensure future compliance.

Case Study: CFPB’s $42M Penalty Against USASF for Misapplied Payments

In August 2024, the Consumer Financial Protection Bureau (CFPB) filed a complaint in the U.S. District Court for the Southern District of Florida against USASF Servicing, LLC, a subprime auto loan servicer based in Fort Lauderdale. The complaint detailed multiple violations of federal consumer financial law, including the improper allocation of borrower payments over a five-year period.

According to the CFPB, between January 2016 and August 2021, USASF misapplied consumer payments at least 8,738 times by diverting excess funds to late fees and collateral protection insurance (CPI) charges rather than applying them to interest as required. These practices inflated loan balances, disrupted amortization schedules, and led to over $1.2 million in additional interest and fees that were not authorized under the borrowers’ loan agreements.

The CFPB also found that USASF failed to maintain adequate internal controls, policies, and procedures to ensure compliance with federal servicing standards. The company’s practices resulted in misleading account statements, inaccurate reporting, and a pattern of violations that conflicted with both the Truth in Lending Act (TILA) and the Consumer Financial Protection Act.

Under the terms of a stipulated judgment, USASF was ordered to pay $36 million in consumer compensation and a $6 million civil penalty, totaling $42 million. The judgment also imposed injunctive relief requiring servicing reforms, compliance monitoring, and ongoing federal oversight.

The USASF lawsuit reinforces the legal and regulatory consequences that may follow when vehicle loan financing companies fail to apply payments as required under loan agreements. Inadequate compliance infrastructure, combined with persistent servicing violations, can expose institutions to significant enforcement actions, monetary penalties, and long-term supervisory scrutiny.

Policy Recommendations for Consumer Right Protections

Borrowers have a legal right to accurate application of their payments under the terms of their loan agreement. When this does not occur, the result is not only a breach of contract but also a violation of consumer protection laws. In such cases, borrowers may pursue formal resolution through both regulatory channels and legal action.

Under the Truth in Lending Act (TILA), loan Vehicle loan financing companies must apply payments correctly, disclose all charges, and provide clear and timely account statements. If payments are misallocated—such as being directed to late fees or insurance charges before interest and principal—borrowers may challenge the servicer’s actions, request a correction, and seek to recover any resulting losses.

Consumers should begin by reviewing their payment history and account statements. If discrepancies are identified, a Qualified Written Request (QWR) under RESPA can be submitted to require a formal response and documentation from the loan financing company. If issues remain unresolved, consumers may escalate the matter to the CFPB or their state attorney general. Legal options may include recovering fees, correcting credit reporting, or pursuing statutory damages.

The USASF lawsuit shows that many of these issues persist due to weak oversight. Stronger preventative policies are essential to address servicing misconduct and protect consumer rights. The following reforms should be implemented to reduce risk and promote long-term accountability:

• Clear Payment Breakdowns: Vehicle loan financing companies should provide real-time, itemized disclosures of how payments are applied—across principal, interest, fees, and add-ons.
• Audit-Ready Internal Controls: Systems should be in place to flag duplicate charges, improper payment allocations, or inconsistencies in account records, and must be subject to regular audits.
• Uniform Application Rules: Federal and state regulators should enforce consistent payment application order—prioritizing principal and interest unless the loan explicitly states otherwise.
• Fair Dispute Procedures: Borrowers should have access to published and enforceable procedures to contest errors, with response deadlines and appeal mechanisms.
• Heightened Oversight for High-Risk Vehicle loan financing companies: Subprime and repeat-violation Vehicle loan financing companies should be subject to enhanced supervision, including periodic reviews, compliance reporting, and public accountability.

These policy recommendations are intended to strengthen consumer protections, enforce accountability within the loan servicing industry, and ensure borrowers are treated fairly under the terms of their loan agreements. By addressing systemic issues such as misapplied payments, inadequate compliance systems, and limited dispute resolution mechanisms, these reforms aim to reduce servicing failures, minimize borrower harm, and establish clearer pathways for legal remedy when violations occur.

Conclusion

Misapplication of payments is a material servicing failure with significant legal and financial consequences for borrowers. As the CFPB’s $42 million action against USASF Servicing, LLC shows, these practices can persist across thousands of accounts when oversight is weak, and compliance systems fail.

Vehicle loan financing companies are legally obligated to apply payments in accordance with loan terms, federal and state law. When they do not, borrowers have a right to challenge those errors, seek compensation, and demand accountability. At the same time, regulators must act to close oversight gaps and adopt stronger safeguards to prevent servicing misconduct before it causes lasting financial harm.

If you are dealing with misapplied payments, wrongful repossession, or improper auto loan servicing, contact FS CORPS immediately. Our experienced legal team is committed to protecting your rights, ensuring lenders are accountable for their actions, and securing the compensation you deserve.

In a recent federal lawsuit, a lienholder challenged New York City’s “scofflaw” program when the city seized a vehicle that Mercedes-Benz Financial Services had a lien.

In Mercedes-Benz Financial Services USA, LLC v. City of New York, New York City was found to have violated fundamental constitutional protections by auctioning a seized vehicle without first providing a hearing to the secured creditor. Mercedes-Benz Financial Services (MBFS), which held a perfected lien on the vehicle, argued that the city’s conduct amounted to a denial of procedural due process under the Fourteenth Amendment. Although the City notified MBFS of the seizure and offered an opportunity to pay the fines, it failed to provide a “neutral” forum for challenging the seizure, imposed fines, tolls and violations and any resulting sale.

The United States District Court agreed and concluded that the absence of a “pre-auction hearing” deprived MBFS of its protected property interest without a meaningful opportunity to be heard. The ruling reinforces a core constitutional requirement: when the government takes action that may permanently affect property rights, it must do more than issue a notice—it must provide a “neutral hearing.” This case highlights the ongoing need for owners, lessors and lienholders to promptly address and timely contest any seizure by a governmental agency for unpaid fines, tolls or unpaid citations.

Understanding the NYC Scofflaw Program

New York City’s “Scofflaw program” targets vehicles with over $350 in unpaid parking tickets. Once that threshold is reached, the city is authorized to immobilize, tow, and eventually sell the vehicle at public auction. While this system is intended to encourage compliance and recover outstanding fines, its execution has violated the third-party interests—such as those of owners, lenders or lessors—without any meaningful hearing to challenge the seizure and potential forfeiture.

In this lawsuit, the City impounded Melende Chery’s vehicle that she financed through Mercedes-Benz Financial Services. After Chery accumulated more than $350 in unpaid parking ticket violations, the City acted and seized the vehicle. Although the City notified MBFS, the lienholder, and offered the option to reclaim the vehicle by settling the charges with MBFS, it then proceeded to sell the vehicle without holding any judicial or administrative hearing. The vehicle was auctioned for $14,000, subject to Mercedes’ lien, with the net proceeds—after costs and judgments—returned to Chery—and not to MBFS.

Due Process and the Fourteenth Amendment

The Fourteenth Amendment of the U.S. Constitution states that no state shall “deprive any person of life, liberty, or property, without due process of law.” This foundational principle ensures that government actions affecting individual or corporate rights must be accompanied by procedural fairness. In the context of property seizures—such as vehicle impoundments, seizures and forfeitures—due process requires more than just formal notice; it demands an opportunity to contest the government’s actions at a hearing before permanent deprivation occurs.

In this lawsuit, the court found that New York City failed to meet constitutional requirements when it auctioned a vehicle without providing a “Neutral hearing” to MBFS. Although the City sent notification of the impoundment, it did not afford MBFS any chance to appear before a neutral authority to challenge the seizure, the associated fines, parking citations, or the City’s decision to sell the car. This omission violated the core elements of procedural due process.

To comply with the Fourteenth Amendment, courts have long held that the following minimum safeguards must be present when property rights are at stake:

• Notice: Clear, timely, and specific information must be given to affected parties about the impending government action.
• Opportunity to Be Heard: A meaningful chance to contest the action must be offered before a final decision is made.
• Neutral Decision-Maker: The hearing must be conducted by an impartial party, separate from the enforcement body.
• Timing: The hearing must occur before the government permanently deprives someone of their interest in the property.
• Ability to Present Evidence: Parties must be allowed to challenge the legal and factual basis for the action (e.g., fines, seizure, auction).

The court emphasized that MBFS, as a secured creditor with a perfected financial interest, had a constitutional right to invoke these protections. Ignoring those rights not only violated the company’s due process guarantees—it exposed the City to legal liability and signaled to the City, as well as other municipalities, the need to reform its municipal seizures for enforcement of unpaid parking tickets, unpaid red light camera violations, as well as unpaid toll citations.

Why the Fifth and Fourth Amendments Did Not Apply

In addition to the due process violation under the Fourteenth Amendment, Mercedes-Benz Financial Services raised claims under the Fifth and Fourth Amendments. However, the court dismissed both arguments, finding that the city’s actions did not violate those constitutional protections.

Fifth Amendment – Takings Clause

The Fifth Amendment’s Takings Clause prohibits the government from taking private property for public use without just compensation. However, this case did not meet the legal criteria for a “taking.” The court discussed that a compensable taking typically occurs when the government either physically occupies property or enacts regulations that deprive the property owner of all economically beneficial uses.

In this case, the court found that the temporary impoundment of the vehicle did not qualify as a permanent taking. MBFS retained its lien on the proceeds from the auction, meaning it was not deprived of all value. The court reasoned that because the lienholder still had an interest in the sale proceeds, the impoundment was not considered a “taking” that required compensation under the Fifth Amendment.

Fourth Amendment – Unreasonable Seizures

The Fourth Amendment protects individuals against unreasonable searches and seizures by the government. In this case, MBFS argued that the vehicle’s seizure violated this protection. However, the court ruled that the seizure was lawful, as it was based on valid, adjudicated parking ticket “judgments.” Because the City of New York had a legal right to seize the vehicle due to unpaid fines, the court found that the seizure was reasonable and not in violation of the Fourth Amendment.

The court further clarified that government actions following judicial determinations, such as those resulting from unpaid tickets, are generally deemed reasonable. The fact that the city followed established procedures for enforcement meant that the seizure did not violate constitutional protections against unreasonable searches or seizures.

Risks for Secured Creditors

Secured creditors, like lenders with a perfected security interest in property, as well as lessors, face significant risks when municipal enforcement programs intervene. The “Scofflaw program,” which allows cities to seize and auction vehicles for unpaid fines, often bypasses key constitutional protections for creditors. When the government interferes with a secured party’s property without due process, the impact can be far-reaching.

For creditors, such as Mercedes-Benz Financial Services, this ruling underscores the importance of early intervention. Lenders must stay vigilant to avoid being caught off guard by the seizure of vehicles that serve as collateral. In this context, it’s crucial that creditors are granted an opportunity to challenge the seizure and auction process. Secured creditors need access to hearings that respect their property rights, especially when their financial interest is at risk.

This decision is a reminder that creditors must take proactive steps in safeguarding their interests, ensuring that the enforcement process adheres to constitutional protections. By doing so, they can avoid costly and lengthy legal battles over property that may be wrongfully seized or sold.

Legal Precedents and Municipal Enforcement

The court’s decision in the Mercedes-Benz Financial Services lawsuit aligns with growing legal precedent emphasizing the need for due process in municipal enforcement actions. Courts have consistently ruled that when the government seizes property—whether for unpaid fines, violations and citations—it must provide an opportunity for the property owner to contest the action before a neutral authority. This principle is particularly critical in vehicle impoundment and auction systems, like the “Scofflaw program.”

Numerous rulings have reinforced that due process under the Fourteenth Amendment requires a hearing before the final deprivation of property. When municipalities fail to provide these protections property owners, lessors and secured creditors must be given a meaningful chance to contest the seizure.

Implications for Municipalities and Lenders

The broader implications of this ruling extend beyond New York City’s Scofflaw program. Several American municipalities use similar enforcement models as New York City has. Municipalities should recognize that the enforcement of unpaid fines, violations and citations through impoundment and sale cannot ignore the constitutional protections afforded to property owners, lessors and secured creditors.

To comply with due process requirements, municipalities must ensure they incorporate safeguards that protect constitutional rights before taking any action that affects a person’s or institution’s property. This includes:

• Pre-Deprivation Hearings: Cities should establish formal hearing processes that allow property owners and lienholders to contest the seizure before the property is permanently taken. This ensures that a neutral third party, rather than an administrative official, makes the final decision about whether the seizure is justified.
• Clear Notification Procedures: Municipalities should improve their communication methods to ensure that all affected parties, especially creditors, are notified of potential seizures early enough to take legal action if necessary. Notice should include the opportunity for affected parties to provide evidence of their legal interests in the property before the sale.
• Independent Review: Municipalities should guarantee that any decision to impound or auction property is reviewed by a neutral decision-maker, not someone directly involved in the enforcement or collection process. This safeguard helps ensure the process is fair and objective.

For registered owners, lessors and lienholders, this lawsuit highlights the need for proactive measures when municipal enforcement programs are involved. These pro-active measures include:

• Contractual Protections: Registered owners, lessors and lienholders should include provisions in their contracts that require notice and a hearing to allow them to protect their secured interests in the event of vehicle seizure. The clause should also require the lessee or registered operator an additional requirement when the vehicle has been impounded or seized and treat the seizure as a breach of the finance or lease agreement and require municipalities to immediately notify the registered owner, lessor or lienholder of any seizure due to unpaid fines, violations and citations and give provide an opportunity to contest the seizure.
• Monitoring Municipal Actions: Registered owners, lessors and lienholders should monitor municipal impoundment programs and stay informed of any enforcement actions that might affect their vehicles. This helps lenders act quickly if their property is at risk of being seized.
• Partnerships with Municipalities: Registered owners, lessors and lienholders should also consider establishing formal agreements with municipalities to ensure that their property interests are recognized and protected during any enforcement action. By maintaining open lines of communication with local governments, registered owners, lessors and lienholders can stay ahead of potential issues and ensure their property rights are respected.

Conclusion

The ruling in Mercedes-Benz Financial Services USA, LLC v. City of New York sets a precedent for registered owners, lessors and lienholders as well as municipalities alike. It underscores the constitutional mandate that due process protections cannot be bypassed in the enforcement of municipal fines, especially when third-party interests are involved. The case highlights the need for municipalities to adopt procedural safeguards, ensuring that creditors have a fair opportunity to challenge property seizures and auctions before their interests are permanently affected.

For registered owners, lessors and lienholders, the opinion is a stark reminder of the importance of proactive legal action and staying informed about enforcement actions in municipalities with aggressive impoundment programs. The ruling emphasizes that registered owners, lessors and lienholders should take steps to protect their secured interests, whether through timely intervention, clear contractual provisions or agreements with municipalities that safeguard against governmental interference.

As enforcement programs evolve, this opinion serves as a critical call to action for municipalities to ensure that their practices comply with constitutional rights.

If you are dealing with issues related to municipal enforcement programs, wrongful vehicle seizures, or violations of your due process rights, contact FS CORPS immediately. Our experienced legal team is dedicated to protecting your rights, holding municipalities accountable, and ensuring that secured creditors are fairly represented in the enforcement process.

Further, this Wisconsin lender came across the Illinois state line and knowingly violated Illinois’ APR statutory cap of 36%. The Wisconsin lender required bi-monthly payments, filed a lien against the vehicle as lienholder with the Illinois Secretary of State, and then “wrongfully repossessed” her Honda. We have filed a lawsuit against the Wisconsin lender and asked the court to void the loan agreement ab initio—meaning it has no legal effect in Illinois because it violated the Illinois APR statutory cap of 36%.

Across the United States, predatory vehicle lending, particularly those involving high-interest, short-term vehicle title loans—has increased and exposed consumers and borrowers to “usurious loans.” The “usurious loans” target borrowers who face financial hardship, have poor or no credit history, and promise quick cash while concealing excessive interest rates and exploitative terms.

In Illinois, where many borrowers already struggle with limited access to affordable credit, the impact of these lending schemes is especially severe. Lenders frequently operate through legal loopholes or out-of-state structures, offering loans that can exceed statutory interest rate caps and lead to “wrongful repossession.”

Key Takeaways

In this article, we explore the structure and consequences of high-interest and predatory vehicle title loans in Illinois, outlines recent legal actions taken to curb these practices, and outlines the remedies and protections available to affected consumers.

Understanding Usurious and Predatory Lending

The Illinois statutory framework clearly defines the limits of lawful vehicle loan interest rates. Under the Illinois Predatory Loan Prevention Act (PLPA), which came into effect in March 2021, interest rates for vehicle loans are capped at 36% APR, inclusive of all fees and charges. In our opinion, 36% is too high. Perhaps the Illinois legislature did not consider that most vehicle loans in Illinois often have interest rates between 24% and 36% APR which appear to be “legal”; however, when the APR plus the various miscellaneous terms and charges are factored in, those “legal” vehicle loans become “usurious” and exceed 36%.

We advocate for amendment to the Illinois PLPA to bring that rate at or below 25% as a growing majority of states have legislated. [See below.] Illinois needs to better combat “usurious loans”—which have historically plagued low-income, disabled veterans, and minority communities.

“Usurious loans,” by definition, exceed the legal interest rate ceiling. In Illinois, any loan agreement charging more than 36% APR is not only illegal but also exposes the lender to legal action. Borrowers can seek damages amounting to twice the total of all interest, discounts, and fees paid under the unlawful loan, along with court costs and reasonable attorney’s fees.

Predatory lending, while often involving high interest rates, encompasses a broader range of abusive practices—including vehicle title loans that put borrowers at risk of losing their only means of transportation under exploitative terms. According to the Illinois Attorney General, predatory loans are those made without regard for the borrower’s ability to repay, often through manipulation, deception, or aggressive sales tactics. The hallmarks of predatory lending include misleading promises, excessive fees, inflated loan amounts, and deceptive loan structures such as balloon payments and teaser rates.

Lawsuit Study: Pennsylvania v. Community Loans of America

A recent enforcement action in Pennsylvania highlights how predatory vehicle lending extends beyond state lines. In October 2023, Attorney General Michelle Henry announced a $2.2 million restitution settlement with Community Loans of America, Inc. (CLA), a national auto title lending company that issued thousands of unlawful loans to Pennsylvanians. Additionally, CLA agreed to cancel $3.7 million in outstanding consumer debt.

CLA, headquartered out of state and in Georgia, exploited Pennsylvanians by offering title loans with interest rates exceeding 300%. These loans were marketed to consumers facing personal financial crises, for example, high medical expenses or even recent job loss. Under Pennsylvania law, which caps interest rates at 25%, these loans were “usurious,” and illegal.

What made CLA’s actions particularly egregious was the use of deceptive tactics. Although CLA lacked any physical presence in Pennsylvania, it marketed loans through lead generators that falsely claimed to operate local offices. Consumers who searched Google for “Car Title Loan Philadelphia” were directed to phony locations but ultimately had to drive to Delaware to finalize the loan agreements. Regardless of location, Pennsylvania’s usury laws applied because CLA collected payments and repossessed vehicles within Philadelphia County and throughout Pennsylvania.

This lawsuit illustrates a growing trend: lenders seeking to bypass consumer protection laws by exploiting cross-border operations. The Pennsylvania Attorney General’s settlement not only secured restitution and debt cancellation but also signaled a warning to out-of-state lenders: unlawful lending practices will not go unpunished, regardless of jurisdiction.

The Illinois Vehicle Loan Crisis

In Illinois, similar concerns persist. Vehicle loans that exceed the 36% APR cap are targeted at low-income, elderly, and minority borrowers—those who have limited access to traditional credit.

The Illinois Attorney General has repeatedly cautioned consumers about common red flags associated with predatory vehicle loans. These include:

• False Promises and Guaranteed Approval: Marketing phrases such as “easy credit,” “we say yes to everybody,” or “no payment for 90 days” are often used to lure in borrowers without adequate disclosure.
• Excessive and Hidden Fees: Lenders may tack on undisclosed origination fees, credit insurance charges, or other unnecessary add-ons that inflate the overall cost of the loan.
• Adjustable and Balloon Interest Structures: Some loans start with low “teaser” rates that later spike or include balloon payments that make the loan unaffordable in the long term.
• Loan Flipping: Repeated refinancing without legitimate benefit, often referred to as “churning,” increases the borrower’s indebtedness while profiting the lender.

Legal Remedies and Enforcement in Illinois

Illinois law provides robust remedies for borrowers affected by usurious and predatory vehicle loans. In addition to the PLPA’s 36% APR cap, consumers can bring private lawsuits to recover damages and penalties. Legal recourse includes restitution, cancellation of unlawful debt, and compensation for emotional distress and lost property due to wrongful repossession.

Under the Illinois Consumer Fraud and Deceptive Business Practices Act, borrowers can also challenge deceptive advertising and misrepresentations related to loan terms. For example, if a lender promises fixed payments but applies an adjustable rate, the borrower may have grounds for a fraud claim.

The Illinois Attorney General’s office continues to pursue enforcement actions against violators. Collaborating with consumer advocacy organizations, the state actively investigates companies that exploit vulnerable borrowers through unfair vehicle loan terms.

The Role of Technology and Lending Practices

FS CORPS believes that with current technology, such as remote vehicle ignition starters or disablers—consumers should not be entering into vehicle loans with interest rates that exceed 12% APR and coupled with reasonable notice provisions for lateness or a failure to pay within a specified grace period, and the consequences would be vehicle immobilization and then repossession.

With technology and insight, Illinois could provide a path for a much lower vehicle loan ceiling of less than 36%.  Frankly, with technology and a far more reasonable vehicle loan ceiling, there are few reasons for vehicle loans to exceed 25% APR and, we would argue, there is no justification for any APR in excess of 12%.

Interest rates greater than 12% are unnecessarily punitive, especially for consumers who rely on their vehicles for work, medical appointments, and essential daily activities. The use of disabler technology strengthens a lender’s position, and this added control calls for fairer, more responsible lending standards.

Comparative Legal Responses to Predatory Vehicle Lending Across States

Predatory vehicle lending is not limited to Illinois. Across the United States, several states have implemented aggressive reforms, regulatory actions, or outright prohibitions to combat high-interest loans and exploitative practices. While legal frameworks vary, the underlying objective remains consistent: to protect economically vulnerable consumers from unjust lending terms.

Here’s how several states are addressing usurious and predatory vehicle lending:

• In California, the state imposes a 36% APR cap on consumer loans under $2,500. However, there is no cap on loans above that threshold, allowing interest rates to climb significantly for larger amounts. The California Department of Financial Protection and Innovation (DFPI) plays an active role in enforcing transparency and reporting requirements, demanding annual disclosures from lenders to monitor default trends and borrower outcomes.
• In Connecticut, interest rates for vehicle loans vary by vehicle age: 15% APR for new vehicles, 17% APR for used vehicles up to two years old, and 19% APR for older used vehicles. These statutory caps aim to protect consumers from excessive loan costs depending on the vehicle’s condition.
• In Florida, auto title lending is permitted, but the state enforces tiered interest rate caps: 30% on the first $2,000, 24% on amounts between $2,000 and $3,000, and 18% on amounts exceeding $3,000. While these limits exist on paper, consumer advocates warn that some lenders restructure loans or apply excessive fees to inflate the effective interest rate. Oversight is handled by the Florida Office of Financial Regulation.
• In Iowa, loans secured by a vehicle title for personal or household use are capped at 21% APR. For regulated loans, a tiered structure allows 36% APR on balances up to $3,000, 24% APR from $3,000 to $8,400, and 18% APR up to $30,000. These laws provide protection against excessive finance charges.
• In Kansas, the Uniform Consumer Credit Code (UCCC) sets a maximum rate of 15% APR for most consumer loans unless otherwise permitted by law. If no rate is specified in writing, the default statutory rate is 10% APR. These rules offer borrowers clarity and protection.
• In Kentucky, the general legal interest rate is 8% APR, but parties may agree in writing to a higher rate. For loans under $15,000, the cap is the lesser of 19% or 4% above the 90-day commercial paper rate. Loans above $15,000 are not subject to an interest cap, allowing for contract-based flexibility.
• In Michigan, lenders operating under the Michigan Credit Reform Act may charge up to 25% APR on vehicle loans. Licensed dealers must also comply with the Michigan Motor Vehicle Sales Finance Act and federal disclosure requirements under the Truth in Lending Act.
• In Minnesota, maximum APRs depend on the vehicle’s model year: 18% for newer vehicles, 19.75% for mid-aged vehicles, and 23.25% for older models. These statutory limits apply to retail installment contracts and override the state’s general usury laws in this context.
• In Missouri, parties can agree to an APR up to 10%, or higher if the “market rate” allows. The market rate is based on U.S. bond yields plus three percent. Loans exceeding permitted rates are considered usurious and subject to penalties.
• In Nebraska, vehicle loans under the Nebraska Installment Loan Act are capped at 24% APR on the first $1,000 of principal and 21% APR on any balance above that. Advance collection of interest is prohibited, and violations may result in mandatory refunds and penalties.
• In New Jersey, the legal interest rate is capped at 30% for individuals and 50% for corporations under the state’s criminal usury law. For unlicensed lenders, the civil usury cap is set at 16%. The New Jersey Department of Banking and Insurance strictly monitors and regulates loan practices, making it difficult for out-of-state predatory lenders to operate without facing enforcement actions.
• In New York, the state maintains some of the most stringent usury laws in the country. Interest rates above 16% are considered civil usury, while loans exceeding 25% APR are classified as criminal usury. Title loans are illegal in New York, and state regulators have pursued legal action against out-of-state and online lenders attempting to operate within the state. These firm restrictions offer some of the strongest consumer protections in the nation.
• In Ohio, vehicle lenders may charge up to 25% APR under various lending statutes. A tiered structure also permits 28% APR on the first $1,000 of the unpaid balance and 22% on amounts above that. Banks and credit unions may set rates up to 25% with certain fee exclusions.

These state-level efforts reflect a patchwork of protections—some robust, others less so. States like New York and California have prioritized strict enforcement and regulatory oversight. Collectively, these approaches highlight the urgent need for comprehensive and stronger state enforcement to close gaps and prevent exploitation across jurisdictions.

Consumer Protections and Advocacy

For Illinois residents, recognizing the signs of an abusive vehicle loan is the first step in safeguarding financial wellbeing. Borrowers who suspect unfair or predatory loan terms should take the following actions:

1. Know Their Rights

Understand that under the Illinois Predatory Loan Prevention Act (PLPA), the maximum allowable interest rate for most vehicle loans is capped at 36% APR, including all associated fees. If you have a vehicle loan between 24% to 36% APR, closely review the miscellaneous charges. Collectively, a vehicle loan that appears “legal” may not be. Borrowers should also be aware of their right to challenge abusive loan terms and pursue legal remedies if a lender violates state lending laws.

2. Review All Loan Documents

Before signing any loan agreement, take time to thoroughly examine all loan terms, including interest rates, repayment schedules, added fees, insurance charges, and prepayment penalties. Look for hidden clauses or ambiguous language. If something is unclear, request clarification or seek assistance before proceeding—once signed, the contract will be asserted by the lender as “binding.”

3. Avoid Verbal Promises

Do not rely on verbal assurances made by loan officers, brokers, or sales representatives. All promises related to payment schedules, interest rates, grace periods, or refinancing options should be clearly stated in writing. If an important term is not included in the contract, it likely will not be enforced in your favor later.

4. Seek Legal Help and Report Violations

If you believe you’re a victim of usurious or predatory vehicle lending, contact FS CORPS immediately. We are dedicated to protecting consumer rights from predatory auto lenders and ensuring that justice is served for those who have been exploited.

In addition to seeking legal counsel, it’s also important to report any suspected violations to the Illinois Attorney General’s Office or the Consumer Financial Protection Bureau (CFPB). These agencies can investigate misconduct, enforce penalties, and assist in recovering financial losses. Acting not only protects your own interests but also helps prevent future abuse of other consumers.

Policy Reform Recommendations

While Illinois has taken meaningful steps to address usurious and predatory vehicle lending through the Predatory Loan Prevention Act, further action is needed to close regulatory gaps, strengthen enforcement, and improve borrower protections. The following recommendations are aimed at policymakers, regulators, and consumer advocates committed to ensuring fair lending practices across the state:

• Mandatory Rate Disclosures in Large Print: Require lenders to display the full annual percentage rate (APR), total repayment amount, and all applicable fees in a large, easy-to-read format on the first page of every loan agreement. Clear and conspicuous disclosure empowers borrowers to make informed decisions and reduces the likelihood of hidden or misunderstood costs.
• Prohibit Prepayment Penalties: Legislation should ban prepayment penalties that discourage borrowers from paying off loans early. These penalties can trap borrowers in long-term debt and unfairly penalize those attempting to regain financial stability. Removing such provisions incentivizes responsible repayment and limits lender overreach.
• Enhance Licensing and Oversight: Illinois should consider more rigorous licensing standards for auto lenders and third-party brokers. This includes mandatory audits, regular reporting of loan performance data, and specific regulatory oversight of technologies like remote vehicle disablers. Strengthening regulatory compliance frameworks would deter misconduct and enable faster intervention when abuses occur.
• Public Awareness Campaigns: Invest in statewide public education campaigns to raise awareness about predatory lending tactics, borrowers’ legal rights, and available consumer protections. Outreach should focus on vulnerable populations—such as low-income, elderly, and minority communities—and include multilingual resources, digital materials, and collaborations with community organizations.
• Statewide Consumer Lending Registry: Establish a public, searchable database of licensed vehicle lenders, including information on filed complaints, resolved disputes, and regulatory actions. Transparency builds accountability and allows borrowers to verify the legitimacy and track record of lenders before entering into agreements.

These policy measures would help reinforce the progress already made under Illinois law and establish a stronger foundation for protecting consumers in the vehicle lending market. As predatory practices evolve, so too must the tools used to detect, prevent, and penalize them.

Conclusion

The threat of high interest and predatory vehicle lending in Illinois is not hypothetical—it is a growing crisis with real consequences for working families and the vulnerable. As illustrated by legal actions in Pennsylvania and beyond, states have the power to fight back. Illinois’ laws provide a foundation, but continued vigilance, enforcement, and public education are necessary to combat usurious practices.

Consumers who have entered into vehicle loan agreements with interest rates exceeding 36% APR should seek legal counsel immediately. Borrowers facing loan terms that are deceptive, confusing, or unaffordable also have rights and legal avenues to pursue meaningful relief. Ensuring accountability and protecting consumer rights must remain central in the effort to end predatory vehicle lending practices.

This article examines the facts of the case, the legal analysis presented in court, and the broader implications of title jumping/skipping for both consumers and dealerships. It also provides guidance for individuals navigating similar situations, emphasizing the need for vigilance and legal recourse when faced with unethical business practices.

Background of the Case

This matter began a while ago in April 2019 when Bradley purchased a six-year-old 2013 Volkswagen Passat from B & Z Auto Enterprises. The VW was financed through a retail installment contract, a common arrangement for consumers unable to pay the full purchase price upfront. However, the VW’s reliability was immediately questioned. Bradley encountered severe mechanical issues shortly after the purchase, including backfiring, stalling, and frequent breakdowns. These issues rendered the VW practically “unusable.”

Over the next several months, Bradley returned the VW to the dealership multiple times in an attempt to resolve the mechanical problems. Between April and December 2019, the dealership undertook repairs, but the issues persisted. Despite Bradley’s repeated efforts, the VW remained inoperable, leaving Bradley with no viable transportation and significant frustration.

In March 2020, after exhausting her financial resources on attempted repairs, Bradley sought resolution from the dealership. Initially, the dealership promised to trade the faulty VW for a functional one. However, the dealership’s finance manager later reneged on this agreement. Bradley subsequently left the VW with the dealership, believing the matter would be resolved. Later when she asked about the VW’s current status, Bradley discovered that the dealership could not locate the VW.

Testimony from a dealership representative revealed that the VW had remained in the dealership’s possession until May 2020, when the dealership sold it at auction. A Carfax report introduced into evidence confirmed the auction date and indicated that the VW was listed as a “dealer vehicle.” This revelation raised questions about whether the dealership had engaged in title jumping/skipping, a deceptive practice that leaves buyers without proper ownership documentation as well as violating New York consumer protection laws.

Legal Analysis and Court Ruling

The court’s decision in Bradley v. B & Z Auto Enterprises centered on the dealership’s failure to adhere to its legal obligations, particularly concerning title transfer and disclosure. Title jumping/skipping occurs when a dealership fails to properly transfer ownership of a vehicle to the buyer, often leaving the title in the name of a previous owner or listing the vehicle as a dealer asset. This practice violated New York consumer protection laws and also exposed buyers to financial and legal risks, such as unpaid taxes and disputes over ownership.

In this case, the court relied heavily on the Carfax report, which provided a clear timeline of events. The report indicated that the VW was sold at auction on May 25, 2020, while still listed as a dealer vehicle. The court determined that this action constituted a breach of the dealership’s obligations under New York law. By failing to ensure a proper title transfer and selling the vehicle at auction without resolving Bradley’s claims, the dealership had engaged in deceptive practices.

The court ruled in Bradley’s favor, awarding her $7,438 in damages. It cited the auction date as the “earliest ascertainable date the cause of action existed” and granted prejudgment interest from that date. This decision underscored the dealership’s accountability for its actions and provided a measure of financial relief to Bradley, who had suffered significant losses due to the dealership’s misconduct.

Understanding Title Jumping/Skipping

Title jumping/skipping is a pervasive issue in the automotive industry and is a “practice” often driven by smaller used car dealerships seeking to avoid taxes or fees associated with proper title transfers. However, this practice comes at a significant cost to consumers. When a dealership fails to transfer ownership properly, buyers are left in a precarious position. Without a clear title, they may be unable to register the vehicle, obtain insurance, or sell it in the future. Additionally, unresolved liens or unpaid taxes associated with the vehicle can become the buyer’s responsibility, leading to further financial hardship.

In Bradley v. B & Z Auto Enterprises, the dealership’s actions exemplify the detrimental impact of title jumping/skipping. By listing the vehicle as a dealer asset and selling it at auction, the dealership effectively denied Bradley her rights as a buyer, leaving her without a functional vehicle or legal recourse to address the mechanical issues.

Broader Implications: Protecting Consumer Rights

The judgment in Bradley v. B & Z Auto Enterprises serves as a stark reminder of the importance of consumer protections in vehicle transactions. It highlights the need for dealerships to adhere to legal requirements and act in good faith when resolving disputes with buyers. For consumers, the case underscores the importance of vigilance and awareness of their rights under the law.

Legal Obligations of Dealerships

Under New York law, the court held that dealerships are required to:

• Ensure Proper Title Transfer: Dealerships must transfer ownership of the vehicle to the buyer promptly and accurately, ensuring that the title reflects the buyer’s name.
• Disclose Vehicle History: Any known issues with the vehicle, including previous accidents, repairs, or liens, must be disclosed to the buyer.
• Resolve Disputes Transparently: When disputes arise, dealerships are obligated to engage in good-faith negotiations and seek equitable resolutions.

Failure to meet these obligations can result in legal consequences, as demonstrated in Bradley’s case.

Lessons for Consumers

For consumers, the case provides valuable insights into navigating vehicle purchases and addressing disputes with dealerships. Key takeaways include:

• Document Everything: Maintain detailed records of all transactions, agreements, and communications with the dealership. This documentation can serve as critical evidence in the event of a legal dispute.
• Verify Title Transfer: Ensure that the title is transferred into your name promptly after the purchase. Request a copy of the title to confirm that it accurately reflects your ownership.
• Seek Legal Advice: If you encounter issues such as title jumping/skipping or other deceptive practices, contact FS CORPS immediately. At FS CORPS, we are dedicated to protecting consumer rights and will explore legal options to ensure the best possible resolution for you.

Legal Framework: Consumer Protection Laws

The outcome of Bradley v. B & Z Auto Enterprises is rooted in the broader framework of consumer protection laws, which are designed to safeguard buyers from unethical practices in the marketplace. In New York, the Court found that the dealership committed the following violations:

• General Business Law § 349: This statute prohibits deceptive acts or practices in the conduct of any business, trade, or commerce. Violations can result in significant penalties, including damages and attorney’s fees.
• Uniform Commercial Code (UCC): The UCC governs sales transactions and imposes obligations on sellers to deliver goods that conform to the terms of the contract. In the context of vehicle sales, this includes ensuring that the vehicle is free from defects and that the title is properly transferred.

By holding the dealership accountable under these laws, the court reinforced the principle that businesses must operate with integrity and respect for consumer rights.

Conclusion: Ensuring Accountability and Fairness

The decision in Bradley v. B & Z Auto Enterprises is a victory for consumer protection, affirming that dealerships cannot evade their legal responsibilities without facing consequences. It highlights the critical role of the legal system in upholding fairness and accountability in the marketplace.

For consumers, the lawsuit serves as a reminder to remain vigilant when purchasing vehicles and to take proactive steps to protect their interests. By understanding their rights and seeking legal recourse when necessary, buyers can hold dealerships accountable and ensure that justice is served.

It is the second type of SIDs that are controversial and utilized by several financial institutions on auto loans. These SIDs allow lenders to remotely disable a vehicle’s starter if the borrower is delinquent on loan payments. Worse, most states allow SIDs as a transaction between borrower and lender.

Several states have not yet weighed in on the legality of their use within that state. Illinois has attempted to do so twice recently. But both efforts failed.

California put into place a model for the use of SIDs, but California’s measures fall short of protecting the borrower who needs their vehicle to get to work or for an emergency that can only be recognized by the lender after contact with the lender and making the case of an emergency. However, that contact needs to be done during working hours and not on the weekend when a borrower needs the vehicle.

The use of SIDs raise serious questions about consumer rights, privacy, and the appropriate limits of power that several sub-prime lenders wield over their borrowers.

This article explores the regulatory landscape of SIDs, the regulations that Illinois and other states should consider for SID use, and why consumer protection should take precedence for all SID use. Furthermore, we have witnessed instances of SID use that amount to a wrongful repossession, highlighting the urgent need for strict regulations and greater oversight.

What Are Starter Interruption Devices?

SIDs are electronic devices installed in vehicles that allow lenders to remotely disable the car’s ignition system. These devices are typically used as a condition for loan approval, particularly for subprime borrowers with lower credit scores. In many instances, SIDs are paired with GPS trackers, enabling lenders to disable the vehicle as well as to locate the vehicle for repossession if necessary.

When a borrower misses a payment, the lender activates the SID, preventing the vehicle from starting until the account is brought current. Some SID devices provide audible warnings, such as beeping, to alert the driver that their loan also overdue.

Illinois Has Neither Prohibited Nor Adopted a Standard

The legality of SIDs varies across the United States, and one would expect that their use would be governed by state laws, federal regulations, and contractual agreements. That is not the case.

In Illinois, there have been at least two attempts to regulate the use of an SID. The first attempt to regulate SIDs was in January, 2021, with HB 4166. HB 4166 sought to prohibit any “starter interrupt device” to be “…installed or activated in any vehicle solely as a means to secure payment on the vehicle.” HB4166 died when the State legislature failed to enact it.

The second time the issue of the use of an SID came before the Illinois legislature was in HB 3216 in January 2023. In HB3216, the legislature discussed SID use in greater detail. HB3216 would have allowed SID installation and allow for “…the remote inactivation of the vehicle by law enforcement at the request of the vehicle owner.” HB3216 sought to reintroduce the prohibition from 2021 HB4166, “that no starter interrupt device shall be activated in any vehicle solely as a means to secure payment on the vehicle.” Again, however, the SID regulation contained in HB3216 died when the State legislature again failed to enact it.

While Illinois has not yet specifically prohibited SIDs, be aware that several financial institutions have been advised by their lawyers that they can, and those lenders do. It is a common practice in Illinois for the sub-prime lenders, that they will only lend on a car loan on the condition of the installation of a SID.

A survey of other states reflects a varied approach to the application of a SID:

1. State-Specific Laws

California

California law imposes strict conditions on the use of Starter Interruption Devices. Lenders must provide borrowers with a series of advance warnings before disabling any vehicle, including a five-day notice for weekly payment contracts and a ten-day notice for other contracts. Moreover, a final warning must be issued at least 48 hours before activation of the SID that disables the vehicle.

Additionally, borrowers must have the ability to restart the vehicle for at least 24 hours in emergencies. However, the ability to restart the vehicle appears to be at the lender’s discretion. California requires that the lender must outline the “emergent” conditions, and notification methods must comply with California Civil Code § 2983.37.

New York

New York requires “creditors” to obtain explicit borrower consent before installing a Starter Interruption Device and then only if they have given written notice of the possible remote disabling of the vehicle in the method and timetable agreed upon by the consumer and the creditor in the initial contract for services. The notice must be mailed by registered or certified mail to the address at which the debtor will be residing on the expected date of the remote disabling of the vehicle. That could take three to five days depending on when and where it 3 is mailed and delivered.

Interestingly, New York calls the use of an SID an alternative name, a “payment assurance device.” New York has proposed further legislation, such as AB 7855, that may outline more detail but that has not yet been enacted.

Florida

In Florida, financial institutions may face restrictions when installing and using starter interruption devices to disable a vehicle due to late payments. Florida case law suggests that financial institutions must adhere to fair practices when dealing with late payments. For example, in Ford Motor Credit Co. v. Waters, 273 So. 2d 96, the court emphasized the importance of notifying the buyer of any changes in the pattern of accepting late payments before repossessing a car. This principle could extend to the use of starter interruption devices, requiring financial institutions to provide adequate notice and follow due process. Further, Borrowers must be informed about the device’s presence and its potential activation pursuant to Florida’s Deceptive and Unfair Trade Practices (FDUTPA).

Texas

The use of starter interruption devices by financial institutions to disable a vehicle when the monthly payment is late is not explicitly addressed by a specific Texas statute. Texas statutes provide guidelines on the penalties and charges for late payments, but do NOT explicitly authorize or prohibit the use of a SID in Texas. However, any gross use, or shocking consequence of use by a lender of a SID might require that Borrowers receive reasonable advance notice before activation or the lender will have caused a violation under Texas’ Deceptive Trade Practices Act (DTPA).

New Jersey

New Jersey, like New York, identifies SIDs as a “payment assurance device.” New Jersey allows a “creditor” to install a “payment assurance device” on if the borrower acknowledges in writing about the device at the time of purchase or lease. The lender must also inform the borrower of notification that the vehicle is equipped with a device that can remotely disable the vehicle, information about the grace period, and a warning provided before the vehicle is disabled. New Jersey appears to also discuss notice and operation of a SID in greater detail than other states.

New Jersey mandates that the borrower must not be charged for the installation of the device. Importantly, New Jersey prohibits a lender from remotely disabling the vehicle until the Borrower is in default for at least five days on a weekly payment loan or ten days for all other loans. The Borrower must also receive a warning at least 72 hours before the vehicle is disabled and be transmitted through at least two modes of communication. And the lender cannot disable the vehicle while it is being operated. These measures aim to safeguard consumer rights while allowing lenders to manage delinquent payments responsibly. The New Jersey Consumer Fraud Act (CFA) further protects borrowers against deceptive practices.

2. Federal Regulations

While no federal law currently regulates SIDs, the Federal Trade Commission (FTC) has the authority to investigate unfair or deceptive practices related to their use. For example, lenders could face penalties for failing to disclose SID installation or for improperly using the device. We have not found any FTC or CPFB report or guideline that authorizes or prohibits the use of an SID.

3. Contractual Agreements

It has been sub-prime borrowers who will only lend money to borrowers and also demand the installation of SIDs as part of a loan contract. However, courts have occasionally invalidated such agreements if they are deemed unconscionable or if the lender’s actions violate state or federal laws.

Example of Lawsuit Involving SIDs

CFPB v. USASF Servicing, LLC (2024)

In a recent lawsuit, the Consumer Financial Protection Bureau (CFPB) fined USASF Servicing, LLC $42 million for violations related to auto loans, including improper use of SIDs. The company was accused of failing to provide adequate disclosures and misusing the devices to harass borrowers. This lawsuit highlights the potential for abuse when lenders use SIDs without sufficient oversight or compliance with regulations.

Arguments for and Against the Use of an SID

Arguments in Favor of the Use of an SID

• Risk Mitigation for Lenders: Lenders argue that use of an SID helps to mitigate the risk of loan defaults, particularly for subprime borrowers. By providing a means to enforce payment compliance, lenders can offer financing to individuals who might otherwise be unable to obtain a loan.
• Lower Interest Rates: Some proponents claim that the use of an SID allows lenders to offer lower interest rates to borrowers, as the devices reduce the likelihood of default.

Arguments Against the Use of an SID

• Consumer Privacy and Autonomy: Critics argue that use of an SID infringe on consumer privacy by enabling constant monitoring and control of their vehicles. Additionally, the ability to disable a vehicle undermines a borrower’s autonomy and can lead to disproportionate consequences for minor payment delinquencies.
• Safety Concerns: The use of an SID can pose safety risks, particularly if a vehicle is disabled in an unsafe location or during an emergency. For example, disabling a car in heavy traffic or during severe weather could endanger the driver and other road users.
• Predatory Practices: Consumer advocates have raised concerns about predatory practices, such as using SIDs to intimidate or harass borrowers. In some lawsuits, 4 lenders have been accused of disabling vehicles without sufficient notice or cause.

The Lawsuit for Limiting SID Use

While SIDs may provide benefits to lenders, their potential for abuse necessitates stronger consumer protection. Here are several arguments for limiting the use of SIDs:

1. Proportional Response to Loan Delinquency

Disabling a vehicle is an extreme response to a missed payment, particularly when
alternative remedies are available. Lenders should prioritize less invasive methods, such
as renegotiating payment terms or providing temporary payment relief.

2. Balancing Interests

The use of SIDs creates an imbalance of power between lenders and borrowers. While lenders have legitimate interests in recovering loan payments, these interests must be balanced against the borrower’s need for transportation to work, school, or medical appointments.

3. Strengthening Regulatory Oversight

Existing regulations do not go far enough to protect consumers from the potential harms of SIDs. States should adopt stricter laws governing their use, including:

• Mandatory advance notice before disabling a vehicle.
• Prohibitions on disabling vehicles in emergencies or unsafe conditions.
• Clear disclosure requirements for borrowers.

Proposed Reforms

To further protect consumers, lawmakers and regulators should consider the following reforms:

• Uniform National Standards: The federal government should establish uniform standards for the use of SIDs, ensuring consistent protections for borrowers across all states.
• Enhanced Disclosure Requirements: Lenders should be required to provide clear, detailed information about the installation and use of SIDs, including potential risks and borrower rights.
• Penalties for Misuse: Strict penalties should be imposed on lenders who misuse SIDs, such as disabling vehicles without proper cause or failing to provide adequate notice.
• Alternative Solutions: Policymakers should encourage lenders to explore alternative solutions for managing loan delinquencies, such as financial counseling or flexible payment plans.

Conclusion

The use of Starter Interruption Devices highlights a critical tension between lender interests and consumer rights. While the use of an SID may offer benefits to lenders, their potential for abuse and the disproportionate impact on borrowers necessitate stricter regulations. By prioritizing consumer protection and limiting the use of an SID, policymakers can ensure that borrowers are treated fairly and that their safety and autonomy are respected. Clearly, if an SID is installed, two modes of communication and notice is paramount.

Ultimately, the law should come down on the side of the consumer, recognizing that access to reliable transportation is a necessity, not a privilege. Borrowers deserve fair treatment and reasonable protections, even when they face financial difficulties.

If you feel that you have been affected by the improper use of Starter Interruption Devices, such as having your vehicle wrongfully disabled without notice or being subjected to predatory lending practices, contact FS CORPS immediately. Our experienced legal team is dedicated to holding financial institutions accountable and securing compensation for consumers who have been harmed by unfair auto loan practices. Let us help you protect your rights and seek the justice you deserve.

Background: Seizure of the 2020 GMC Sierra

The lawsuit arose when a Connecticut car dealership sold a 2020 GMC Sierra to a customer through a retail installment contract. TD Auto, the financial services company, secured and  perfected a valid lien on the vehicle. However, the customer was arrested by the Putnam County Sheriff’s Department on serious felony charges, including criminal possession of a controlled substance. In connection with the arrest, the sheriff’s department seized the vehicle, holding it as evidence and presumably with the intent to pursue forfeiture once the evidentiary hold was removed.

The vehicle was towed to a secured lot controlled by Putnam County. Despite the serious legal and financial interests TD Auto held in the vehicle, no hearing was conducted to assess the propriety of the seizure, nor was TD Auto ever notified of the impoundment at that time. This failure to provide notice set the stage for a protracted legal battle between TD Auto and the county.

No Notice to the Lienholder: A Breach of Rights

Following the vehicle’s seizure, the county argued and later asserted a de facto possessory lien over the GMC Sierra. While the County impounded the vehicle, the customer defaulted on the retail installment contract, as of November 16, 2020. The situation became further complicated by the fact that TD Auto learned of  the seizure three months later, on February 25, 2021, when the customer personally contacted the financier. [It is critical for lienholders to take swift action when it learns that a vehicle has been seized by a governmental agency to protect against any argument of laches.]

The county’s failure to provide notice to TD Auto violated the lienholder’s rights under due process principles. Despite the customer being notified that the vehicle could be subject to civil forfeiture, TD Auto received no such notice and had no opportunity to participate in a Krimstock hearing (a hearing process designed to review vehicle seizures by law enforcement) or any other proceedings regarding the vehicle’s seizure or potential forfeiture. This lack of communication deprived TD Auto of the opportunity to act in its own interest, either by repossessing the vehicle or by participating in the legal proceedings that followed.

TD Auto’s Claim for Damages

When TD Auto finally learned of the seizure, the company sought three distinct forms of damages:

1. Return of the Vehicle: First, TD Auto requested the immediate return of the 2020 GMC Sierra. As the lienholder, TD Auto was entitled to repossess the vehicle under the terms of the retail installment contract, especially since the customer was in default. The seizure and impoundment by the county prevented TD Auto from exercising this right.
2. Depreciation Damages: TD Auto also sought compensatory damages for the depreciation of the vehicle while it was held in the county’s possession. Vehicles naturally lose value over time, and the extended period during which the Sierra was impounded without TD Auto’s knowledge contributed to a significant loss in the vehicle’s market value.
3. Hypothetical Reinvestment Losses: Additionally, TD Auto argued that, had it been properly notified and allowed to repossess the vehicle, it could have auctioned the 2020 GMC Sierra and reinvested the proceeds into another retail installment contract. The financial services company claimed that the failure to repossess the vehicle in a timely manner resulted in a lost opportunity for reinvestment, and sought damages based on this hypothetical financial scenario.

The court ultimately returned the vehicle to TD Auto but left the issue of damages unresolved. The lawsuit was returned for further discovery and discussion regarding the amount of damages TD Auto was entitled to for the vehicle’s depreciation and the lost opportunity for reinvestment.

The Court’s Ruling: Protection of Lienholder Rights

The court’s decision to send the matter back for further discovery on the issue of damages reflects the importance of preserving the argument when there is such a willfull failure of notice of the seizure and the potential of forfeiture. Although the vehicle was eventually returned to TD Auto, the court recognized that the return of the vehicle did not fully compensate the financial services company for the losses it incurred due to the county’s failure to provide timely notice and allow TD Auto to participate in any potential forfeiture proceedings.

This lawsuit highlights the critical importance of lienholders being provided with proper notice when a vehicle in which they have a financial interest is seized by law enforcement. Under due process principles, lienholders must be given an opportunity to protect their rights and participate in legal proceedings related to the vehicle. In the absence of such notice, as demonstrated in this lawsuit, lienholders may seek consequential damages to recover their financial losses.

Implications of the Lawsuit

The TD Auto lawsuit has several broader implications for lienholders, vehicle financing companies, and law enforcement agencies:

1. Notice Requirements: Law enforcement agencies have a duty to notify all interested parties, including lienholders, when a vehicle is seized. The failure to provide notice, as in this lawsuit, can lead to significant legal and financial repercussions. It is essential for governmental agencies to establish clear protocols for notifying lienholders in a timely and effective manner to avoid disputes and potential claims for damages.
2. Lienholder Rights in Civil Forfeiture: The lawsuit underscores the need for lienholders to be involved in civil forfeiture proceedings. In this situation, TD Auto was not given an opportunity to participate in a Krimstock hearing or any forfeiture action, despite its substantial financial interest in the vehicle. Lienholders have the right to protect their interests and must be included in legal proceedings that may affect those interests.
3. Consequential Damages: The lawsuit raises important questions about the types of damages lienholders can recover when their rights are violated. TD Auto’s claims for depreciation and lost reinvestment opportunities reflect the complex financial losses that can result from a failure to provide proper notice. The court’s decision to allow further discovery on the issue of damages signals that lienholders may be entitled to recover consequential damages beyond the mere return of the seized vehicle.

Conclusion

The TD Auto Fin. LLC v. County of Putnam lawsuit serves as a clear reminder that lienholders are entitled to proper notice and participation in legal proceedings involving seized vehicles. When these rights are violated, as they were in this lawsuit, lienholders have the right to seek damages for their financial losses. The court’s decision emphasizes the importance of protecting lienholder rights and ensuring that all parties are included in the legal process. For law enforcement and lienholders alike, this lawsuit is a critical example of the consequences that can arise from failing to adhere to due process and notice requirements.

Case Overview: Toyota’s Action

In In re Special Proceeding Toyota Lease Trust, 2023 N. Y. Misc. Lexis 29703 (Nassau County, 2023), Toyota filed a hybrid proceeding and action by filing a Verified Petition/Complaint. The company sought an order declaring that a garage’s lien on the Lexus was invalid. Toyota argued that the garage had failed to follow the necessary steps to establish a valid lien under New York Lien Law and that the garage’s attempt to enforce the lien violated Toyota’s rights as a secured lienholder.

Specifically, Toyota asked the court for the following:

• A declaration that the garage’s lien claim was void.
• An order directing the immediate release of the Lexus.
• A ruling that the amount payable by Toyota to redeem the vehicle was $0.00.
• An acknowledgment that the garage’s attempt to subordinate Toyota’s lien interest was done without due process.

The case raised important questions about compliance with New York’s Lien Law §184, the authority necessary to authorize vehicle repairs, and the timing of notices to a lien holder when a shop asserts a repair shop or garage lien.

The Court’s Reasoning: Failure to Establish a Valid Lien

The court ruled in favor of Toyota, agreeing that the garage had failed to establish a valid lien under New York’s Lien Law §184. The court rested upon two fundamental reasons:

• Lack of Apparent Authority: The garage was unable to prove that the individual who authorized the repairs and storage had the apparent authority to do so. In this case, the person acting on behalf of the vehicle lessee did not have sufficient authority to bind the lessee or the vehicle owner [Toyota Finance] to the repair and storage agreement. This meant that the lien was improperly claimed from the outset because the garage failed to meet the legal requirements necessary to assert a lien.
• Failure to Provide Timely Notice: Even if the garage had established a valid garage lien, that lien would have still been voided under the doctrine of laches due to an unreasonable delay in serving the Notice of Lien. The court found that the garage had delayed more than a year after the storage began before providing the lienholder with notice. By the time the lien holder learned about the lien, nearly two years had passed. This unreasonable delay was found to prejudice the lien holder’s rights, as it was unaware of the accruing charges for repairs and storage, thus preventing the company from addressing the matter in a timely fashion.

The Doctrine of Laches in Action

The doctrine of laches is a legal principle that prevents a party from asserting a claim if they have unreasonably delayed in doing so, and this delay has prejudiced the opposing party. In this case, the garage’s failure to serve a timely Notice of Lien on the lien holder directly invoked the doctrine of laches, which ultimately voided the lien.

The court emphasized that in garage lien law disputes, strict compliance with statutory requirements for notice is critical. Lien holders must also act with reasonable diligence to protect their interests, and any unreasonable delay can lead to the dismissal of their claim. Here, the court found that the garage’s delay in providing notice prejudiced the lien holder because the company was left in the dark regarding the ongoing storage and repair costs for an extended period.

The Outcome: Partial Relief for the Garage

While the court voided the garage’s lien, it did grant partial relief by awarding $28,923 for the repair invoices. This amount covered the cost of the work performed on the Lexus, which the court deemed reasonable. However, the court denied the garage’s claim for $36,000 in storage fees, citing the unreasonable delay in notifying the lien holder about their garage lien. The court’s ruling underscored the importance of utilizing the defense of laches when there has been a lengthy delay in notifying the lien holder.

Defense of Laches Takeaways

This case highlights several critical issues that a lien holder or registered owner should consider when confronted with invoices for repair and storage of vehicles, particularly when a repair, garage, or tow shop asserts a lien:

• Apparent Authority is Key: Before performing repairs or storage services, shops must ensure that the person authorizing the work has the legal authority to do so. This is especially important when dealing with leased or financed vehicles, as the lessee or person in possession may not always have the authority to bind the vehicle’s owner or lienholder for the costs of the repairs.
• Timely Notice is Essential: Shops must serve notice to the appropriate parties, including the owner and lienholder, without unreasonable delay. Failing to do so can result in the lien being subject to attack under the doctrine of laches, even if the underlying services were performed properly.
• Diligence Protects Rights: The doctrine of laches serves to protect parties from being unfairly prejudiced by unreasonable delays. This lawsuit underscores the importance that the shop acted diligently and complied with all procedural requirements to ensure that their lien claims are proper.

Conclusion

The In re Special Proceeding Toyota Lease Trust lawsuit provides a potential defense of the doctrine of laches and highlights that there must be strict compliance with repair and garage lien laws. This case serves as a reminder of the complexities involved in hybrid recovery and underscores the importance of properly asserting defenses to protect both lien holders and vehicle owners.

The settlement amount is roughly 54% of the alleged compensatory damages plus pre-judgment interest. It applies to New York drivers who filed claims since July 28, 2015. After deducting attorneys’ fees and administrative costs, about $31.3 million will be distributed, averaging around $335 per policyholder.

The plaintiffs argue that Progressive used third-party software — Mitchell International, Inc.’s WorkCenter Total Loss — which improperly applies a “projected sold adjustment” (PSA) to undervalue claims, potentially affecting payouts in total loss vehicle claims. This practice may hinder market value recoveries, resulting in an average underpayment of 6.5%, breaching New York auto insurance policies and violating the state’s General Business Law.

Mitchell’s reports state the PSA adjustment reflects consumer purchasing behavior, adjusting the price to account for typical negotiations.

While agreeing to settle, Progressive denies any wrongdoing and insists it has followed all relevant insurance policies and laws, noting that the Mitchell software had state approval.

Lead plaintiffs Dominick Volino and John Plotts initiated the class action in July 2021. In March 2023, U.S. District Judge Lorna Schofield certified two litigation classes for breach of contract and General Business Law violations. Mediation began on June 11, 2024, and a proposed settlement was filed on July 1.

Plaintiff attorney Hank Bates urged the court to approve the settlement, calling it “an excellent result” for the classes. Judge Schofield has scheduled a preliminary approval hearing for August 14.