COURT FINDS STATE LAW PREEMPTED AS TO OPERATING SUBSIDIARY OF AN FSB TAKING ASSIGNMENT OF SALES FINANCE CONTRACT
The California Court of Appeals held that Section 2983.2 of the Rees-Levering Automobiles Sales Finance Act, Cal. Civ. Code § 2983.2, imposing notice requirements prior to disposition of a motor vehicle after default is preempted by OTS regulation Section 560.2. WFS Financial, Inc v. De La Cruz, Case No. C051414 (Ca. Ct. Apps. June 15, 2006). The court concluded that Section 2983.2 falls within the kind of state laws preempted by Section 560.2(b)(4), regarding terms of credit, and 560.2(b)(9), regarding disclosures. See 12 C.F.R. § 560.2.
The case involved WFS Financial, Inc., an operating subsidiary of Western Financial Bank, a federal savings association, and a purchaser of a motor vehicle, whose automobile financing contract was assigned to WFS by the automobile dealer. When the consumer defaulted on his retail installment contract, WFS repossessed the vehicle, gave notice of its intent to dispose of the vehicle by private sale, sold the vehicle and filed suit for the deficiency.
The consumer alleged that he was not liable for the deficiency because the notice of intent to dispose of the motor vehicle sent by WFS did not contain all the disclosures required by Section 2983.2 of the Rees-Levering Automobile Sales Finance Act.
WFS responded that it operated exclusively under federal law, which preempts Section 2983.2.
The court found that federal savings associations are authorized to engage in indirect vehicle financing and there is nothing in federal law or the OTS regulations indicating any intention to limit the broad express preemption of state laws “affecting the operations of federal savings associations” to specific forms of lending or to only home loans. The court found that Section 2983.2 adds terms to a vehicle conditional sale contract for the event of a default, limiting the lender’s right to enforce its security interest in the vehicle and obtain a deficiency judgment. The court found that these imposed terms of credit clearly impact the federal savings association’s ability to collect on its delinquent contracts. Thus, the court concluded that Section 2983.2 impermissibly regulates and affects the lending or credit activities of federal savings associations and is preempted.
The court rejected the claim that Section 560.2 does not apply to post-repossession documents. The court noted that Section 2983.2 is expressly directed at “vehicle financing lenders” and that it more than incidentally affects their lending operations so as not to
come within subdivision (c) of Section 560.2 regarding state laws that are not preempted.
The court also noted that the contract incorporated state law in Section 2983.2. The court did not discuss why the assignee of a valid contract, that incorporates Section 2983.2, is not bound by the terms of the original contract or why the act of assignment removes the Section 2983.2 terms from the contract purchased by the federal savings association. Section 560.2(c)(1) expressly provides that federal savings association are generally bound by contract law. In the same way that a federal savings association can agree to rates and contract terms more restrictive than required by state and federal law and is then bound by the contract, an assignee of a contract should be bound by the original contract terms, even if that assignee is a federal savings association. The consumer is likely to appeal the decision based on Section 560.2(c)(1) and contract law. We would recommend that clients not rely on this decision.
Elizabeth Anstaett and Darrell Dreher