Compliance Challenge.

Things are slow at Anthrax Research Federal Credit Union, so the CEO, Hugo Bostonian, decides to start an indirect lending program.  He enters into an agreement with Ray Slick, owner of Crazy Ray’s Used Cars in Anthrax County.  Ray agrees that he will write the loans on credit union paper and do all the member identification checks at his dealership (which is on the lot of an old 24 hour photo building).  Ray takes pride in being a master of add-ons.  That is, he makes money on getting car purchasers to pay more for extra items on cars and other products.

One afternoon, Stanley Sewer, happens into Ray’s dealership and sees a used Buick that really appeals to him.  “It’s a classic!” Ray says to Stanley as he sees him admiring the car.  “This ’78 Buick was owned by a little old lady here in town who almost never drove it!”  Sewer is so taken with the car that Ray soon has him signing loan documents.  Ray asks Stanley if he would like to add a special plastic spray-on coating to protect the car against rust.  “It’s a must have,” Ray says, “for these terrible Anthrax County winters!”  Sewer signs up for the coating and then Ray says:  “And here’s some paperwork for some optional Credit Life Insurance, you want to protect your family, don’t you?  In case something happens to you?”  Sewer, who happens to be single, signs the paperwork for the insurance too.  As Sewer putters away in the Buick, Ray sends the loan paperwork to the credit union.

Six months later, Sewer defaults on his payments and the credit union places the account for collection and ultimately sues Stanley.  As luck would have it, Sewer knows a lawyer and she files a counterclaim against the credit union and also makes Crazy Ray’s a party to the action.  Sewer alleges that the credit union violated Truth-in-Lending because neither the plastic coating nor the credit life insurance is included in the APR on the note.

Does Sewer have a case?  Are there any other issues?  How would a strong indirect lending agreement help here?

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