For the Use of Starter Interrupt Devices & "dos" and "don’ts"
By Thomas B. Hudson

Like many of you, I am a member of several "listserv" groups. One of the groups consists of dealership lawyers who, lately, have been chattering about the bankruptcy of this or that manufacturer or the discontinuance of this or that brand. I tend not to have much to contribute on those subjects, but occasionally I’ll see a question asking about something that I actually know something about. That happened a few days ago when one of the listserv participants asked whether anyone had a "best practices" guide for buy-here, pay-here dealers and finance companies using starter interrupt devices. That request sparked a distant memory – I thought I had written something like that years ago. I dug out my old article and read through it. Most of it looked current and useful, so I used it as the basis for this article.

First, a little history. Starter interrupt devices are gizmos that dealers and finance companies – primarily those operating in the subprime part of the market and frequently those doing buy-here, pay-here financing – attach to financed and leased vehicles to encourage the drivers of the vehicles to make their payments on time. The devices first came to the attention of most of us in the late ’90s when consumers sued a Detroit-area dealer, claiming that the devices stopped their cars while they were running. The suit was quickly settled.

Other suits (fewer than 10 reported cases nationwide) have been filed since then, with most dealing with how a creditor using the devices must act when the car buyer goes into bankruptcy and the "automatic stay" goes into effect. There have been no reported cases dealing with whether the devices are legal under state law ("reported cases" are federal trial court cases, some state trial court cases, and appellate cases) dealing with the devices. If cases have been filed, they have been settled, or at least have not percolated up to a court that publishes its opinions.

Meanwhile, there are signs that the use of the devices is becoming more widespread. Several companies now sell them, and their use is a frequent topic at dealer meetings and on website chat rooms. A few state authorities have issued favorable or semi-favorable opinions dealing with the devices. Does the fact that most states have been silent concerning the devices mean that there’s now a "green light" for the use of the devices as far as their legality goes? Hardly.

The devices are still very controversial. Some state authorities really dislike the devices and have issued letters saying that they are illegal to use in their states. Consumer advocates denounce the use of the devices, darkly hinting that they may be used in dangerous, illegal, or discriminatory ways. Authorities in other states, some of whom initially opposed the use of the devices, have determined that dealers can use the devices legally if certain safeguards are met.

Our view of the devices hasn’t changed a lot since we initially wrote about them years ago. We’ve always said, for most states, "no red light, no green light, but, instead, a flashing yellow light" should be the proper signal as far as the use of the devices is concerned. The following are a few "dos" and "don’ts" that we think are worth considering:

Copyright © 2009 CounselorLibrary.com LLC. All rights reserved. This article appeared in Spot Delivery®. Reprinted with express permission from CounselorLibrary.com.


Do

Do determine before you start to use the devices what your state consumer protection authorities and/or your state attorney general have to say about the devices.

Do your "due diligence" on the company selling the devices. See if the company has done its legal homework. Some of the companies have gotten themselves pretty far up the curve on legal issues, especially disclosure requirements, while others are just beginning to grapple with these topics.

Do alert your insurance carrier that you intend to use the devices, and get confirmation in writing that risks arising from the use of the devices are covered by your policy.

Do have the personnel who will install the devices properly trained, or use properly trained third-party installers.

Do have the use of the devices and all paperwork dealing with the devices reviewed by your lawyer. Have him or her check that the use of the devices complies with both state and federal law.

Do consider using an arbitration agreement in connection with your financed sales and leases. It will go a long way toward keeping you out of class actions and will reduce your exposure to runaway jury verdicts.

Do fully disclose to the customer that the device is on the vehicle, how the device works, emergency procedures, if any, and anything else your lawyer tells you to disclose.

Do contact your state legislators and consumer protection authorities, and educate them on how the devices work, how you intend to use them, and how they benefit you and your customers – if you let the consumer advocates tell the story, you won’t like the result. If at all possible, get the device manufacturer to assist in this process. Tell the authorities that you want to be alerted if any regulations or bills are introduced dealing with the devices.

Do contact the folks at your state auto dealers association, and tell them that the devices are an important issue for you. Tell them that you expect them to watch for any state legislative or regulatory activity concerning the devices.

Don't

Don’t try to pass the cost of the devices along to the customers whose cars are to be equipped with the devices. Treat the cost as a general item of overhead, like the dealership’s electricity bill. And on a related issue, the legal problems that arise when you require the installation of the device and then try to market it as an anti-theft system give us heartburn.

Don’t make claims about the supposed advantages of the device to the customer – this is a payment collection device, pure and simple. Tell the customer exactly what the device does. Be especially careful in those states that have so-called "credit repair" statutes – courts in some states have held that car dealers that find financing for their customers or who offer to help the customers improve their credit ratings fall within such statutes, triggering disclosure, licensing, and other requirements. Don’t tell the customer that installing the device will improve the customer’s credit rating.

Don’t discriminate in requiring the devices in a manner that violates federal or state anti-discrimination laws. If you discriminate on a "neutral" basis, such as credit scores, be alert to the possibility that, at least under the federal Equal Credit Opportunity Act, discrimination on a neutral basis can violate the ECOA if such discrimination has the "effect" of discriminating on a protected basis.


References

Copyright © 2009 CounselorLibrary.com LLC. All rights reserved. This article appeared in Spot Delivery®. Reprinted with express permission from CounselorLibrary.com. More "dos" and "don’ts" will no doubt emerge as the use of the devices spreads. As far as the future of the devices is concerned, a lot is riding on how they are used. If dealers and finance companies use the devices with care and in connection with finance and lease programs that are fair in every sense, including the price of the car and the cost of financing, then the devices may well become more "mainstream" and acceptable by those who currently criticize them. If, though, sharp operators (or careless ones) use the devices in ways that are overreaching or are perceived to be overreaching, look for courts and regulatory authorities to seek to curb or prohibit their use.

*Thomas B. Hudson, Esq. ( tbhudson@hudco.com ) is the Publisher of Spot Delivery®, a monthly legal newsletter for auto dealers, and the Editor in Chief of CARLAW®, a monthly report of legal developments in all states for the auto finance and leasing industry. He is also a partner in the Maryland office of Hudson Cook, LLP. Spot Delivery and CARLAW are produced by CounselorLibrary.com LLC, 7250 Parkway Drive, 5th Floor, Hanover, MD 21076-1343. For information, call 410-865-5411 or visit www.counselorlibrary.com.

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