General Motors Acceptance Corporation (GMAC) faces a $125 million hit after losing a class action lawsuit on behalf of over 30,000 California borrowers. The suit charged that GMAC was illegally collecting from borrowers whose vehicles had been repossessed and sold by GMAC.
The ruling is a "stunning wakeup call for lenders who violate California law," said Mark A. Chavez, the attorney for the plaintiffs.
In an 18-page decision, Santa Clara County Court Jack Komar found that GMAC violated California law governing automobile repossessions throughout a seven year period, and was engaging in unlawful collection activities.
The lawsuit, Smith v. GMAC, alleged that between August 20, 1994 and June 30, 2001 GMAC repossessed the automobiles of thousands of its customers and sold them without providing the customers with a legally adequate post-repossession notice. Judge Komar agreed, finding GMAC's post-repossession notices to be "legally defective".
Typically, when a car is repossessed and sold, the borrower will still owe the lender thousands of dollars. This is because the cars are generally sold at auction for prices that do not cover the amounts outstanding on a borrower's loan. The bill for this "deficiency balance" often comes as an unpleasant shock to consumers, who are already in financial trouble, and who mistakenly assume that once the car is gone, so is the debt.
California law, however, provides a measure of protection for consumers whose cars are repossessed. A lender such as GMAC is required to send its borrowers a written notice containing very specific information about their legal rights following a repossession. If the lender does not send such a post-repossession notice containing all of the required disclosures, the law says that the borrower is not liable for any deficiency balance.
Judge Komar ruled that because GMAC's post-repossession notices were "legally defective" class members "are not liable for any deficiency balances assessed to their accounts by GMAC, and never owed those amounts."
Nevertheless, GMAC had collected millions of dollars from class members to whom GMAC had sent legally defective notices.
"The evidence in the case indicates that GMAC assessed approximately $125 million in deficiency balances during the class period" stated Kim E. Card of Chavez & Gertler, counsel for the class. Card estimated that GMAC had collected more than $15 million of the deficiency balances prior to the trial and was trying to collect another $110 million in outstanding deficiency balances from borrowers who did not owe the money to GMAC.
Under the court's ruling, which addresses liability issues and reserves the damages award for later, a notice and questionnaire will be sent to all potential class members. They will have the right to seek refunds of any payments they made to GMAC after a repossession on a deficiency balance, plus interest on those payments.