I hang out, literally and online, with lawyers who represent car dealers and auto finance companies. Most of these car lawyers deal with parts of the dealer regulatory scheme – issues involving environmental law, estate planning, franchise relationships, labor regulations, taxes and other parts of the law that I’ve either forgotten or know very little about. When I’m asked questions about their areas of expertise, I usually strike out.
So, I don’t know why I’m startled when I realize that most of these lawyers whiff when they get into my particular bailiwick – federal and state laws and regulations governing financing and leasing. And, sometimes those whiffs involve some pretty basic finance and leasing concepts. Tom Hudson and I were talking about these whiffs at a conference last week and we thought an article about some of these basic concepts would make a great refresher. Here are a few of those very basic concepts that lawyers and compliance types ought to squirrel away.
TILA thresholds: The federal lease and financing laws do not apply to transactions in which the consumer’s obligation exceeds a certain dollar amount. For example, the Truth in Lending Act/Regulation Z (TILA/Reg Z) doesn’t apply if the amount financed (threshold amount) is more than $55,800. High-line dealerships may find that a significant number of their transactions are simply not subject to the federal disclosure laws. That can be a handy little thing to know if you are buying paper from a BMW dealer and the buyer who turns her complaint into a class action lawsuit against the dealership (and you as the holder of the paper) has no case because the amount financed is too high.
TILA/CLA applicability: Likewise, these federal financing and lease laws don’t apply to financing and lease transactions when the buyer or lessee is a corporation, partnership, association or any entity that isn’t a human being, and that’s the case even if the vehicle is to be used for personal purposes by an individual. So, dealers who do a lot of financing and leasing transactions with businesses and professionals (and those companies buying that paper) will find that a significant part of their deals are exempt from these laws. Even transactions with human beings are not subject to these laws when the primary purpose of the transaction is for other than personal, family or household purposes. A seller/creditor must determine in each case if the transaction is primarily for an exempt purpose. Reg Z has some factors a seller/creditor may consider in determining whether the credit is primarily for business or commercial purposes (as opposed to a consumer purpose).
TILA/Reg Z disclosures and electronic transactions: Speaking of disclosures, you must give the required disclosures to the consumer: (a) clearly and conspicuously in writing; (b) in a form the consumer may keep; and (c) before consummation (a term defined by state law). The requirement to provide the disclosures to the consumer in a form he/she can keep is problematic for electronic contracting. You can’t just have the consumer sign the Retail Installment Contract electronically first, without providing the TILA/Reg Z required disclosures to the consumer first in a form she consumer can keep (i.e., on hard copy paper).
Scope of advertising regulations: For the purposes of the federal disclosure laws, an “advertisement” is a commercial message in any medium that promotes, directly or indirectly, a credit transaction. However, an advertisement doesn’t include direct personal contacts, such as follow-up letters, cost estimates for individual consumers (e.g., “first pencil”), or oral or written communication relating to the negotiation of a specific transaction. So, those face-to-face negotiations with the buyer are not considered an “advertisement” under TILA/Reg Z or the Consumer Leasing Act/Reg M that would require certain disclosures be provided.
Advertising triggering terms: If you use any certain terms in an advertisement, Reg Z requires that you disclose some additional terms. For example, if you advertise the: (a) amount or percentage of any downpayment; (b) number of payments or period of repayment; (c) amount of any payment; or (d) amount of any finance charge, then you must also disclose: (i) the amount or percentage of the downpayment; (ii) the terms of repayment, which reflect the repayment obligations over the full term of the contract, including any balloon payment; and (iii) the APR, and, if the rate may be increased after consummation, that fact. So, watch out for those traveling advertisements on your fleet vehicles, those front-line cars with the big monthly payments plastered on the sides, company shirts and hats that simply say “$99 down!” and any other situations in which triggering terms appear without the other required disclosures.
Finance charge definition: Under the federal disclosure laws, the finance charge is the cost of consumer credit as a dollar amount and it includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. However, it doesn’t include any charge of a type payable in a comparable cash transaction. Many lawyers and compliance types seem to forget the last part of the definition – if it’s a charge of a type payable in a comparable cash transaction, then it isn’t a finance charge. It’s surprising how often this exemption can apply, and how often lawyers overlook it.
Loans/RISCs (refinancing): Under federal law, a refinancing occurs when an existing obligation is satisfied and replaced by a new obligation by the same consumer. Certain transactions are not considered refinancings even if they are accomplished by cancellation of the old obligation and substitution of a new one, such as a reduction in the APR with a corresponding change in the payment schedule; agreements involving a court proceeding; a change in the payment schedule or change in collateral requirement as a result of the buyer’s default or delinquency, with certain exceptions; and a renewal of optional insurance purchased by the consumer. A refinancing is a new transaction that requires a complete new set of disclosures be given to the consumer.
These are just a few of those very basic concepts that lawyers and compliance types ought to squirrel away. Again, these are basic federal law concepts and you still need to take state law into consideration as some of the state definitions don’t always track the federal definitions. Make sure you check to see whether your state financial services laws apply to the transaction as they could still impact your rates, terms, disclosures, permitted fees, etc. Some of these basic concepts could save you time, effort and money in responding to plaintiffs’ and/or attorney general claims.
The NAF Legal Committee will continue to keep you informed about legal and regulatory changes of interest to the sub-prime auto finance industry.