Findings of facts
2. The Division is an agency of the Commonwealth of Massachusetts with jurisdiction over the licensing and regulation of persons and entities engaged in the business of a motor vehicle sales finance company in Massachusetts pursuant to M.G.L. chapter 255B, and its implementing regulation 209 CMR 20.00 et seq.
3. State Road is, and at all relevant times, has been a business entity conducting business in the Commonwealth of Massachusetts with its principal office located at 327 State Road, Westport, Massachusetts.
4. State Road originally incorporated in Massachusetts on May 9, 1988 with the following business purpose:
To buy, sell, lease, trade, deal in and with, store and repair automobiles and motor vehicles of all descriptions, and all parts, of all kinds, models and description, all parts and accessories, and all parts and supplied used in connection therewith.
5. State Road, at all relevant times, has been conducting business at an additional location, with an address of 851 State Road, Westport, Massachusetts.
6. According to the Division’s records, State Road has never applied for a motor vehicle sales finance company license with the Division.
7. Based upon information and belief, State Road has never applied for any type of banking license or charter with any state or federal regulator.
8. M.G.L. chapter 255B, section 2 governing the licensing requirements for entities engaged in the business of motor vehicle sales financing states, in part:
No person, other than a bank as defined in section one of chapter one hundred and sixty-seven, a national banking association, federal savings bank, federal savings and loan association, federal credit union, or any bank, trust company, savings bank, savings and loan association or credit union organized under the laws of any other state of the United States, shall engage in the business of a sales finance company without first obtaining from the commissioner a license to carry on said business in the city or town where the business is to be transacted as provided herein.
9. M.G.L. chapter 255B, section 1 defines a "sales finance company," in part, as follows:
"Sales finance company" ... (3) a retail seller engaged, in whole or in part, in the business of holding retail instalment contracts acquired from retail buyers...
10. Based on information received that indicated that State Road may be engaging in unlicensed activity, on or about February 25, 2010 the Division issued a letter directing State Road to “cease engaging in the business of a motor vehicle sales finance company” until they either demonstrated that they were exempt from the license requirement or were appropriately licensed.
11. State Road responded on or about March 1, 2010 stating that they were not financing motor vehicle sales and provided what appeared to be a true motor vehicle lease as an example of their business.
12. Based on information received that indicated that State Road may be engaging in unlicensed financing activity, on October 25, 2016 the Division issued a letter directing State Road to “cease engaging in the business of a motor vehicle sales finance company” until they either demonstrated that they were exempt from the license requirement or were appropriately licensed.
13. On October, 25, 2016 an officer of State Road, Antonio Almeida, executed an affidavit stating that State Road “ceased operating as a motor vehicle sales finance company as defined by M.G.L. c. 255B, §1. Financing activities were discontinued as of Nov. 2006.”
14. On December 6, 2016 and December 19, 2016, the Division’s examiners conducted visitations at both of State Road’s locations ("Visitations").
15. During the Visitations, the Division’s examiners were provided with 13 contracts between State Road and consumers that were labeled as “lease agreements”. Subsequently, State Road provided the Division one (1) additional consumer contract.
16. M.G.L. c. 255B, section 1 provides that:
The term [retail installment contract] includes a chattel mortgage, a conditional sales contract and a contract for the bailment or leasing of a motor vehicle by which the bailee or lessee contracts to pay as compensation for its use a sum substantially equivalent to or in excess of its value and by which it is agreed that the bailee or lessee is bound to become, or has the option of becoming, the owner of the motor vehicle upon full compliance with the terms of the contract. (Emphasis supplied).
17. In general terms, under a true lease agreement, a consumer makes scheduled payments covering the estimated depreciation of the vehicle during the term of the lease, as well as other fees and costs, which are significantly less than the cost to finance the purchase of the car. The depreciation is calculated by taking the difference between the value of the car at the beginning of the lease (capitalized cost) and the estimated value at the end of the lease (residual value).
18. When a lease agreement is over, consumers have a choice: they have the option to either return the car to the dealer or purchase the car for the residual value (buyout). At no point during the lease does the consumer gain an ownership interest in the car.
19. On December 29, 2011, the Division issued an Industry Letter entitled “Applicability of Licensing Requirements to Motor Vehicle ‘Leasing’ Companies.” (Industry Letter) that explained the circumstances when a “lease agreement” would be deemed to be a retail contract under M.G.L. c. 255B. The Industry Letter clarified that “if the so-called motor vehicle lease agreement: 1. requires payments substantially equivalent to or in excess of the value of the motor vehicle and; 2. provides that the ‘lessee’ ‘is bound to become, or has the option of becoming, the owner of the motor vehicle upon… full compliance with the terms of the contract,’ such contract is, in fact, a retail installment contract.”. The Industry Letter is incorporated herein in its entirety by reference.
20. The Division contends that of the fourteen (14) consumer “lease agreements” provided by State Road, eleven (11) are not true lease agreements and are in fact retail motor vehicle installment sales contracts (finance contracts) and at least one (1) motor vehicle was repossessed.
21. Of the eleven (11) “lease agreements” described above, four (4) of them were on their face finance contracts because the contract was structured so that the consumer would end up paying more than the initial fair market value of the vehicle and/or there was no residual value or the buyout price was a nominal amount (Prima Facie Loans). These Prima Facie Loans were structured so that the consumer would essentially pay the entire value of the car during the course of the “lease.”
22. The other “lease agreements” do not have a stated initial fair market value, making it impossible to determine if the “lease” was structured so that the consumer would end up paying more than the initial fair market value of the vehicle.
23. The remaining seven (7) “lease agreements” were initially structured as true leases, as the buyout prices were more than nominal. However, at the end of the lease, State Road extended the payments either indefinitely, or with no written agreement covering the extension period, or until the buyout price was either a nominal amount or zero. State Road effectively financed the buyout (Financed Buyout Loans). In several instances the company extended the agreements for more than six months.1
24. The repossessed vehicle was a Prima Facie loan, and State Road provided no documentation that the consumer was provided a notice of right to cure and right to redeem under M.G.L. chapter 255B, sections 20A and 20B, or repossession notices required under other applicable statutes and regulations.
25. The “lease agreements” provided by State Road include many terms and provisions that are prohibited for motor vehicle sales retail installment contracts under the General Laws, including, but not limited to:
a. Excessive Late Fees
- M.G.L. chapter 255B, section 11 limits late fees on retail instalment contracts to the lesser of 5% of installment amount or $5.00, assessed not less than 15 days after default. These “lease agreements” provide for a $20.00 late fee assessed on the subsequent weekly payment if the prior payment is unpaid.
b. Excessive Returned Payment Charges
- M.G.L. chapter 255B, section 11 limits returned payment fees on retail instalment contracts to $10.00. These “lease agreements” provide for a $20.00 returned check fee.
c. Prepayment/Early Lease Termination
- Under M.G.L. chapter 255B, section 16 a consumer who entered into a retail instalment contract is entitled to a refund of unearned finance charges in the event of a prepayment; under these “lease agreements,” the consumer is liable for all unpaid lease payments, taxes, fees; the adjusted lease balance; any official fees and taxes resulting from termination; and a $300.00 early termination fee.
d. Default and Repossession
- Right to Cure: M.G.L. chapter 255B, section 20A requires a lender to provide notice to the borrower of their rights and wait for the expiration of a 21 day right to cure period prior to repossessing a vehicle securing a loan; under these “lease agreements,” State Road can repossess a vehicle immediately upon default with no notice to the consumer.
- Right to Redeem: M.G.L. chapter 255B, section 20B requires a lender to provide the borrower with 20 days to redeem the vehicle following repossession before the disposal of the collateral; under these “lease agreements,” the consumer has no right to redeem the vehicle.
- Repossession Related Fees: M.G.L. chapter 255B, section 20B limits the fees that may be charged to the borrower in connection with a repossession to reasonable repossession and storage costs; under the terms of these “lease agreements" the consumer is liable for a minimum $300.00 repossession fee, a $25.00 per day storage fee, a $100.00 duplicate key fee if the original is not returned within 7 days, any towing fees incurred, a $100.00 repossession status cancellation fee, any other fees that could be charged in the event of early termination of the lease.
26. M.G.L. chapter 255B, section 21 states:
Whoever violates any provision of this chapter or any rule or regulation made thereunder by the commissioner shall be punished by a fine of not more than five hundred dollars or by imprisonment for not more than six months, or both.
Unlawful finance charges
27. The Division calculated that at least two (2) of the nine (9) “lease agreements” provided by State Road had finance charges above 21 percent.
28. M.G.L. chapter 255B, section 14 states:
A retail seller may charge, receive and collect for any new or used motor vehicle, a finance charge not in excess of an annual percentage rate of twenty-one per cent.
Unfair and deceptive advertising
29. The State Road website includes a prominent statement that “WE ARE THE BANK”. The website also contains other prominent statements which indicate it is engaged in retail installment financing activity. It states “CONTACT US TODAY, to learn about the latest Auto Finance offers including Lease To Own and Finance Specials, for one of our Amazing Vehicles!” and “HERE AT STATE ROAD AUTO SALES YOU CAN GET AN AMAZING DEAL, WITH INTEREST RATES STARTING AS LOW AS 1.65% AND $0 DOWN PAYMENT!” (Emphasis supplied, capitalization original)
30. M.G.L chapter 93A, section 2(a) states:
Unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful.
31. 940 CMR 5.02(9) states:
It is an unfair or deceptive act or practice for a motor vehicle dealer or manufacturer to make any representation or statement of fact in an advertisement if the dealer or manufacturer knows or should know that the representation or statement is false or misleading or if the dealer or manufacturer does not have sufficient information upon which a reasonable belief in the truth of the representation or statement could be based.
32. M.G.L. chapter 167, section 37 states:
No domestic or foreign corporation or individual, partnership or association shall conduct the business of a savings bank, co-operative bank, savings and loan association, credit union, trust company or banking company unless authorized to do so under the laws of this commonwealth nor shall any such corporation, individual, partnership or association, unless so authorized under said laws, make use of any sign at the place where its business is transacted having thereon any name or other words indicating that such place or office is the place or office of a savings bank, co-operative bank, savings and loan association, credit union, trust company or banking company…
Conclusions of law
Based upon the aforementioned Statement of Facts, State Road has engaged in the business of a motor vehicle sales finance company without a license in violation of M.G.L. chapter 255B, section 2, and is subject to a fine of not more than five hundred dollars per finance contract under M.G.L. chapter 255B, section 21; State Road has charged unlawful finance charges in violation of M.G.L. chapter 255B, section 14; State Road repossessed at least one vehicle without providing the required notice of right to cure and right to redeem, in violation of M.G.L. chapter 255B sections 20A and 20B; and State Road has wrongfully advertised as a motor vehicle sales finance company and as a bank in violation of M.G.L. chapter 93A, section 2(a), 940 CMR 5.02(9), and M.G.L. chapter 167, section 37.
After taking into consideration the FINDINGS OF FACT and CONCLUSIONS OF LAW stated herein, it is hereby:
ORDERED THAT State Road immediately cease engaging in the motor vehicle sales finance business until such time that State Road has demonstrated either that it is exempt from the licensing provisions of M.G.L chapter 255B; or has obtained a license issued by the Commissioner of Banks for the operation of a motor vehicle sales finance company in Massachusetts.
IT IS FURTHER ORDERED that State Road must conduct a file review to identify all Prima Facie Loans and Financed Buyout Loans originated, serviced, repossessed, or paid off in the last three years.
IT IS FURTHER ORDERED that State Road must service all existing Prima Facie Loans and all loans that have been extended into being Financed Buyout Loans as though they were retail installment contracts subject to M.G.L. chapter 255B. This shall necessarily require that State Road adhere to all notice requirements and fee limitations set forth in M.G.L. chapter 255B, including:
- The limitation on late fees and returned payment fees set forth in M.G.L. chapter 255B, section 11.
- The limitation on finance charges set forth in M.G.L. chapter 255B, section 14.
- The requirement to refund unearned finance charges in the event of a prepayment under M.G.L. chapter 255B, section 16.
- The rules governing default and repossession set forth in M.G.L. chapter 255B, sections 20A and 20B, including the right to cure requirements, the right to redeem, the limit on repossession related fees and the rules governing post repossession disposition practices.
IT IS FURTHER ORDERED that State Road must conduct a file review to identify all Prima Facie Loans and Financed Buyout Loans originated, serviced, or paid off in the last three years. State Road must identify all fees assessed and /or collected on these accounts in the last three years, and reimburse any fees not specifically allowed under M.G.L. chapter 255B, including, but not limited to:
- A return of all late fees and/or returned payment fees collected from consumers for accounts that were charged in excess of the limitation set forth in M.G.L. chapter 255B, section 11.
- A return of all finance charges collected from consumers for accounts that were charged in excess of the 21% limit set forth in M.G.L. chapter 255B, section 14.
- Any other fee not specifically provided for in M.G.L. chapter 255B.
IT IS FURTHER ORDERED State Road must conduct a review of all repossessions conducted on Prima Facie Loans and Financed Buyout Loans within the last three years. The Company must make a good faith effort to identify any instances where it repossessed borrower vehicles without providing the proper notice of right to cure and right to redeem under M.G.L. chapter 255B, sections 20A and 20B. State Road must reimburse all repossession fees on any accounts where the required notice and right to cure period and redemption period were not provided and State Road may not collect a deficiency balance on these accounts
IT IS FURTHER ORDERED that within ten days of the effective date of this Order, State Road must submit a response including the following information:
a. A list of all purported lease agreements entered into between State Road and Massachusetts consumers in the three years prior to the effective date of this Order. Such list shall include (as defined by 12 CFR 1013.4(f) where applicable):
- Name or names of the consumers
- The account number
- The Vehicle Identification Number (VIN)
- The gross capitalized cost at the beginning of the agreement
- The capitalized cost reduction
- The adjusted capitalized cost
- The residual value
- The depreciation and any amortized amounts
- Rent charge
- Total of Base periodic payments
- Base periodic payment
- Itemization of other charges
- Total periodic payment
- Lease payments
- Indicate if the account is currently open, paid and car returned, paid and the residual value was paid, charged off/repossessed, or if the lease agreement was extended beyond the original term.
b. Satisfactory evidence that State Road is exempt from the provisions of M.G.L. chapter 255B or an indication as to whether State Road will seek to be licensed as a motor vehicle sales finance company and, if so, approximately when a completed application will be submitted to the Division.
c. A signed copy of the enclosed affidavit, completed by an authorized officer, attesting that State Road will immediately cease from engaging in the motor vehicle financing business until such time as a license may be issued by the Commissioner.
IT IS FURTHER ORDERED that State Road pay a fine of five hundred dollars for each motor vehicle sales contract it entered into within the last three years without having first obtained from the Division a license to carry on said business. Such penalty to be determined after a review of the agreements provided to the Division pursuant to sub-paragraph (a) above.
IT IS FURTHER ORDERED that State Road cease and desist using unfair or deceptive advertisements.
IT IS FURTHER ORDERED that State Road cease and desist from violating M.G.L. chapter 255B by charging consumers finance charges in excess of 21 percent.
IT IS FURTHER ORDERED that State Road shall submit to the Division evidence of all consumer reimbursements issued as a result of this Order, including but not limited to: the consumer’s name, account number, the amount reimbursed, the date of reimbursement, and the check number sixty days of the effective date of this Order. Reimbursements shall be made in the following manner.
a. All reimbursement payments shall be mailed to the consumer’s last known address in the Company’s records. If the address is invalid, the reimbursement payment will be sent to the address set forth for such borrower in the U. S. Postal Service national change of address database (NCOA Database). If joint borrowers have different addresses, the reimbursement payment will be mailed to the address of the primary borrower.
b. In no event shall State Road retain any consumer refund. If consumer refunds cannot be distributed for any reason after three (3) years from the effective date of this Order, then the Company shall turn over the unclaimed refunds to the Commonwealth’s Department of the Treasurer as unclaimed property in the name of the consumers, in accordance with the Division’s instructions.
Notice of a right to a hearing
A hearing on the charges described herein will be held at a date and time to be determined and will be conducted according to General Laws, chapter 30A, sections 10 and 11, and the Standard Adjudicatory Rules of Practice and Procedure, 801 CMR 1.01 and 1.03. State Road or their authorized representative are required to file an Answer or otherwise respond to the Charges contained in this Order and Notice within twenty-one (21) days of its effective date, pursuant to the Standard Adjudicatory Rules of Practices and Procedures, 801 CMR 1.01(6)(d). Failure to do so will result in a default judgment against State Road. The Answer, and any subsequent filings that are made in conjunction with this proceeding, shall be directed to the Administrative Hearings Officer, Division of Banks, with a copy to Prosecuting Counsel. All papers filed in regards to this matter shall be addressed to the attention of:
Administrative Hearings Officer
Division of Banks
1000 Washington Street, 10th Floor
Boston, Massachusetts 02118
Prosecuting Counsel for this matter is:
Amanda B. Loring, Esq.
Division of Banks
1000 Washington Street, 10th Floor
Boston, Massachusetts 02118
You are further advised that State Road has the right to be represented by counsel or another representative, to call and examine witnesses, to introduce exhibits, to cross-examine witnesses who testify against State Road and to present oral arguments.
State Road or its representative may examine any and all Division records relative to this case prior to the date of the hearing, during normal business hours, at the office of the Prosecuting Counsel. If you elect to undertake such an examination, please contact the Prosecuting Counsel, Amanda B. Loring at 617-956-1544 in advance to schedule a time that is mutually convenient.
By order and direction of the Commissioner of Banks
BY ORDER AND DIRECTION OF THE COMMISSIONER OF BANKS.
Dated at Boston, Massachusetts, this 2nd day of October, 2017
By: Cynthia A. Begin
Chief Risk Officer
Commonwealth of Massachusetts