Today's Trends in Credit Regulation

Should You be Sending Strict Compliance Notices Before Repossession?
By Charles F. Dodge

Some state statutes require creditors to send a notice to customers who are in default long enough that the creditor is contemplating repossessing the customer’s vehicle. In those states, the law gives consumers a right to “cure” the default and catch up on late payments before the creditor may repossess the vehicle. If the consumer receives the notice from the creditor and does not make up the late payments before the date shown on the notice, the creditor may repossess the vehicle. Creditors in states that give consumers statutory “cure” rights likely already know about those requirements.

The fact that a state does not have a statutory right to cure requirement, though, does not mean that the state does not require a creditor to send a notice to the consumer before repossessing collateral or otherwise enforcing a consumer credit contract. Instead, courts in a number of states have created a common law right for consumers to receive notice of a creditor’s intention to enforce the terms of a retail installment sale contract or other credit agreement, if the creditor has previously accepted late payments without declaring the contract to be in default and enforcing the terms of the contract. A creditor who does not send this type of “strict compliance” notice advising the consumer of the creditor’s intention to enforce the contract, and who does not have a retail installment contract or other credit agreement with the right kind of language in it (see below), could face wrongful repossession claims from consumers who were allowed to make late payments in the past without the consequence of repossession.

Retail installment sale contracts and other consumer credit agreements are written by and for the creditor. They contain required consumer disclosures, but they are written to favor the creditor’s position if something goes wrong in the consumer’s performance under the contract. That makes logical sense – the creditor has typically performed its part of the contract by parting with a vehicle or other goods on credit, or money, and needs to have some means available to ensure that the consumer is making payments as agreed. If the consumer misses payments or stops paying altogether, the contract gives the creditor rights in the collateral to help the creditor with recovery.

It is the language of the creditor’s contract that sometimes gives creditors these “strict compliance” issues. For example, a typical motor vehicle retail installment sale contract will say (state law permitting) that if the customer fails to make a payment when due, the contract is in default. In reality, though, while the contract gives the creditor that right to declare default if the consumer does not make a payment on the day it is due, creditors will almost always let the missed payment go, not declaring default or enforcing the contract as written. Instead, creditors send late payment notices and other written reminders, and they make servicing and collection phone calls, all with an eye toward trying to get the consumer to make up that missed payment before too long after the due date. Absent other information about why the consumer missed her payment, the creditor will not assume that the deal is “lost” after a missed payment and will try to get the customer to start making payments again. If the customer makes the payment, things go on as they had been.

In a number of states, this “waiver” by the creditor of the creditor’s right to declare default and enforce the contract after a missed payment effectively changes the terms of the contract. In these states, the creditor has to send a special notice to the consumer before deciding, some time after an initial default, to repossess the vehicle. According to the cases, the notice must advise the consumer of the intent to repossess and that the creditor expects “strict compliance” with the terms of the retail installment sale contract going forward.

The theory in the cases giving rise to this common law right to “strict compliance” is that the creditor has given the consumer reason to believe that, notwithstanding the language of the credit agreement, it is OK to make payments late. In allowing these events of non-compliance, the case law says that the creditor waives the right to enforce the contract according to its terms. A “strict compliance” letter lets a customer know that the more lenient course of dealing is over with – that the creditor intends to enforce the credit contract as written and that the creditor will no longer accept late payments. It also operates as an alert to the consumer that, unlike prior instances of late payment, the creditor now intends to repossess the vehicle for non-payment. After sending a “strict compliance” letter, the creditor can enforce the contract if the consumer does not catch up on the late payments. If the consumer makes up the late payments soon enough, the creditor allows the consumer to continue making regular scheduled payments. But if the consumer misses another payment after making the late payments, then as long as the creditor does not accept a payment made late the creditor can repossess the vehicle without another notice.

A handful of states have cases that effectively adopted this “strict compliance” requirement in the courts, including Florida, Kansas, Minnesota, Nevada, Ohio and Oregon. The cases all turn on the same theme: if the creditor has accepted late payments in the past, the creditor has waived the right to demand strict compliance from the debtor in the future. The waiver remains in effect until the creditor notifies the consumer that the creditor will no longer accept late payments, and that instead the creditor will require strict compliance with the contract.

As noted earlier in this article, though, contract language can overcome the perceived “waiver” of rights. Arkansas has case law on the books effectively requiring a “strict compliance” letter, but the highest appellate court in Arkansas held last year that certain other contract terms make the creditor’s “waiver” ineffective so that the creditor may repossess without notice even if the creditor accepted late payments in the past. In Mose v. Chase Auto Finance Corporation, 2010 Ark. 246 (May 20, 2010), the Supreme Court of Arkansas found that provisions in Chase’s retail installment sale contract stating that acceptance of late payments was not a waiver of the right to enforce the contract as written, and that modifications of the retail installment sale contract were not effective unless they were in writing, were enough to overcome the “strict compliance” argument by the consumer. The court did confirm prior decisions holding that, without these other clauses in the contract, Chase would have committed a wrongful repossession when it made a repossession without notice after having accepted late payments in the past. But with this case now reported in Arkansas, creditors who have the right kind of “non-waiver” and “no-unwritten-modification” clauses in their credit agreements can accept late payments and work with consumers until it becomes clear that repossession is the only alternative left. Those creditors may repossess without sending the “strict compliance” letter. Creditors doing business in Minnesota, Nevada and some of the other states may need to still send the “strict compliance” letter, depending on case law in that state and the language of their credit agreements.

States other than Arkansas, like Alabama and Indiana, have similar reported cases that allow a creditor who has the right “non-waiver” and “no-unwritten-modification” language in its credit agreement to do business without the use of a pre-repossession “strict compliance” letter – even if that creditor has previously accepted late payments.

If you have not heard of the “strict compliance” letter requirement but you do business in one of the states that requires this pre-repossession notice, you should consider getting a “strict compliance” letter together for customers whose late payments you have accepted in the past. One of these days a consumer (whose car you just repossessed without notice) who is upset about a perceived change in the course of dealing with you is going to talk to a lawyer, and you could receive a letter citing to one of these “strict compliance” cases from your state. If you are not in one of those states with reported “strict compliance” cases and your state does not give consumers a pre-repossession right to cure defaults, you might consider adding this letter to your collection letters anyway - as a precaution. There was a time when these cases did not exist in those other states either.

Chuck Dodge is a partner in the Maryland office of Hudson Cook, LLP. Chuck can be reached at (410) 865-5427 or by email at

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