Starter Interrupt Devices - Truth and Fiction

By Thomas B. Hudson
I’ve been writing about starter interrupt devices for several years now and currently represent two companies that manufacture the devices. In earlier articles, I examined legal issues arising from their use and suggested ways that dealers and finance companies could use the devices without taking on undue legal risks. Writing these articles and tracking legal developments dealing with the use of the devices has convinced me that the devices are relatively safe, from a legal standpoint, when they are used correctly, preferably with an arbitration agreement as part of the deal package.

Because I have gotten comfortable with the devices, I’m always surprised when I discover that there are those whose opinions I respect who wouldn’t touch the devices with a 10-foot pole. When I ask these detractors the reasons for their positions, they usually respond with one or more of the following, some of which are true and some of which aren’t:

Litigation. Detractors of the devices often mention the threat of litigation. That threat is always real in today’s world, but the fact is that I am aware of only one case involving the use of starter interrupt devices in a creditor-debtor context. That was the case involving Mel Farr’s Detroit dealership. The case was filed in late 1999, and quickly settled, with the judge who approved the settlement agreement saying some nice things from the bench about the good work Mr. Farr’s dealership was doing in financing cars in inner-city Detroit.

These devices have become more and more common since that case. You would think that if the devices are litigation magnets, as I once feared they would be, there would be a lot more legal challenges to their use. It just hasn’t happened.

Privacy. Maybe it is because the federal and state governments are each trying to outdo the other by passing all sorts of privacy laws, but mention starter interrupt devices, particularly those that have a GPS component, and people invariably start muttering about privacy.

Those privacy worries are bogus. Even assuming that a person driving a car on a public highway or on private property has any right to privacy concerning the location of his or her car (and I really doubt that any court would so find), that person may certainly consent to giving up that privacy right by consenting to the use of a tracking device.

We give up our right to privacy every day. Invite a plumber into your home and let him peek under the sink, travel by airline and consent to having your bags searched, visit a doctor and take off your clothes - all are instances in which you consent to something that without your consent would be an invasion of privacy. If the car finance customer consents to the installation and use of a starter interrupt device after a disclosure of how the device works, the privacy issue, in my judgment, goes away.

Regulatory Hostility. There is some truth to this one. Ask a typical state consumer credit regulator about starter interrupt devices, and you will likely get a bad reaction (some of them break out in hives). State officials often automatically assume that anything that is good for creditors is bad for consumers.

Because of this typical attitude, I have recommended for the last several years that the purveyors of these devices and the dealers and finance companies that wish to use them take the initiative in achieving an “attitude adjustment” with these state officials. The kind of attitude adjustment I had in mind wasn’t the type that involved a two-by -four (as tempting as that sometimes is).

Instead, I have recommended that proponents of the devices take the initiative in visiting the state officials, armed with a sample device, technical literature regarding the manufacture and reliability of the device, sample consumer disclosures, a legal memorandum outlining the law, if any, applicable to the devices, and portfolio performance figures showing that customers with previously bad credit are now performing in a manner that will result in improved credit ratings for them. When the officials hear such a presentation, they are often surprisingly receptive.

The Devices Aren’t “Mainstream.” Again, there’s some truth to this one. The devices so far have been used primarily for transactions involving buyers in the lowest credit tiers. While I don’t expect that the devices will migrate to the highest credit tiers (the risk-reward ratio just isn’t high enough when buyers have very good credit), I do look for those buy-here, pay-here dealers and sales finance companies that deal in the middle levels of creditworthiness to begin to stick their toes in the water in a serious way.

The use of the devices by these creditors is likely to begin with customers whose cars have beenrepossessed and who want to cure their defaults. In states in which the cure is not a matter of right, these creditors should be able to condition the customer’s right to cure on the customer’s agreement to the installation of a starter interrupt device. It is likely that such limited use will provide favorable experiences that will lead to broader use by these more mainstream creditors.

Conclusion. Starter interrupt devices and GPS tracking devices are becoming a fixture in the auto credit landscape. The devices still must be used with care and with the advice of a lawyer familiar with the law governing the devices. Full disclosure to the customer is absolutely necessary, as is an arbitration agreement. But in the five years since the Mel Farr suit spotlighted the use of these devices, they have gained traction and increasing acceptance by auto creditors. Look for more and more use of the devices.

Best Practices’ for the Use of Starter Interrupt Devices

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 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 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.