A California appeals court ruled that surety bond premium finance agreements are consumer credit agreements for which co-signers must receive a legally required notice that warns of the potential consequences of ‘act as a co-signer.
In BBBB Bonding Corporation v. Caldwell, Kiara Caldwell, to free a friend from jail, signed an “Unpaid Premium Agreement” (Premium Agreement) in which she became legally responsible for the $ 5,000 bond premium, representing 10% of the bond. his friend. Pursuant to the agreement, Ms. Caldwell agreed to make a down payment of $ 500 and to pay the balance of $ 4,500 in monthly installments of $ 450 until payment in full. After she was unable to make any of the monthly payments, BBBB Bonding Corporation, the bail officer, began making phone calls to collect the balance and then filed a collection suit against Ms Caldwell. .
Ms Caldwell then filed a class action counterclaim against BBBB, alleging violations of the California Unfair Competition Act (UCL). She alleged that BBBB engaged in an unfair trade practice in violation of UCL by failing to provide her with the co-signer notice. Her counterclaim sought restitution of the money she and other putative group members had paid for bond premiums, a declaratory judgment that the premium agreements are unenforceable, and an injunction prohibiting BBBB from enforcing the agreements. and requiring it to provide a notice to the co-signer. She also filed for a preliminary injunction to bar BBBB from enforcing or attempting to collect bonus agreements signed by co-signers who did not receive the required notice.
The trial court granted the preliminary injunction request, ruling that the bonus contracts were consumer credit contracts subject to the co-signer notice requirement. BBBB sought an overlay order from the Court of Appeal, which stayed the trial court’s decision and ordered an expedited briefing.
The California co-signer notice requirement applies to any “consumer credit agreement,” which is defined as an “obligation[] pay money on a deferred payment basis, where the money, goods or services or any other consideration contracted for is primarily intended for personal, family or household purposes ”and the obligation falls under one of the following categories: retail installment contracts; retail installment accounts; conditional sales contracts; loans or credit extensions unsecured or secured by property other than real estate; loans or credit extensions subject to certain provisions of the Business and Professional Code relating to real estate loans; and rental contracts. If the required co-signer notice is not given, a creditor or assignee cannot perform the underlying consumer credit agreement against the person who was entitled to receive the notice.
While noting that “we appreciate that this decision may upset the expectations of companies for bonding agents”, the Court of Appeal nevertheless confirmed the issuance of the preliminary injunction. He concluded that the bonus agreement was considered a consumer credit agreement for the purposes of the co-signer notice requirement because Ms. Caldwell signed an agreement (1) “to pay money on a deferred basis “, (2) the object of the contract was” primarily for personal, family or household purposes “, (3) the obligation involved an” extension[] credit ”because Ms. Caldwell could meet her obligation by making a series of monthly payments, and (4) her obligation was“ unsecured ”. Accordingly, he concluded that the bonus contract was subject to the co-signer notice requirement.
Among BBBB’s arguments rejected by the appeals court was its argument that consumer protection laws did not apply to surety bond transactions because the surety industry is governed by a separate statutory regime: the surety regulations and their implementing regulations. According to BBBB, because the legislature created a comprehensive scheme to regulate the conduct of surety licensees, it intended to exclude these transactions from consumer protections applicable to other types of contracts.
It should be noted that while the ruling deals only with the co-signer notification requirement, the conclusion that the premium agreements are consumer credit contracts has other potential consequences. More importantly, this means that other consumer protection requirements applicable to consumer credit are potentially applicable to premium agreements, such as state usury laws and federal and state disclosure and disclosure laws. fair loans.
Bail agreements are also the subject of a CFPB enforcement action filed in February 2021. In this lawsuit, the Bureau alleges that Libre by Nexus, Inc. (Libre) and its owners operated a program in which Libre obtains immigration bonds to secure the release of immigrants held in federal detention centers in exchange for a large upfront fee and monthly payments. Specifically, the Bureau alleges that Libre and its owners engaged in deceptive and abusive acts or practices in violation of the LPFC, including behaving by taking advantage of immigrants’ limited fluency in English and uttering false threats about the consequences of non-payment.
The complaint alleges that Libre is a “covered person” under the CFPA because its transactions with consumers are “consumer financial products or services”. According to the complaint, the transactions are “consumer financial products or services” because Libre leads consumers to believe “that Libre has paid obligations in cash, that consumers owe a debt to Libre to the extent of the obligations in cash, and that monthly payments pay off this debt. A motion to dismiss filed by the defendants is currently pending in which the defendants argue that Libre is not a “covered person” because it does not offer financial products or services to consumers, nor does it offer or grant. credit and does not make loans.
We see the California ruling and the CFPB lawsuit as part of a general trend to treat transactions that are not credit extensions as covered by consumer financial protection laws. Companies with similar customer agreements, which have been designed to fall outside the scope of consumer credit protection laws, should assess their positions and be prepared to defend them if they are challenged by a body. regulatory or private litigation.
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