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Truth in Lending: 2.2.2.6 Obligations to Pay That Are Conditional, for Indeterminate Amounts, or Are Repaid Only Through an Assignment or Security Can Still Be Debts

A related argument to the claim that a “non-recourse” transaction is not credit is the claim that there is no obligation to repay and thus no debt because repayment is to be taken solely from an assignment of, or a security in, the consumer’s money or assets, with no independent or contractual obligation to repay if that security is insufficient. Similarly, lenders may claim that there is no debt if the obligation to repay is contingent on an event that may not happen or the amount of repayment is uncertain. None of these arguments stands up.

Consumer Credit Regulation: 11.4.3.4.2 Use of a discount to purchase the car paper

Another approach to proving the actual price of goods is to determine during discovery the discount at which a car finance note was sold to a third party. For example, if a credit contract for $2,500 with a stated interest rate of 0.0% is resold immediately for $2,100, it is arguable that the true value of the car is not $2,500, but only $2,100.237

Consumer Credit Regulation: 11.4.4 Limits on Document Fees

Car dealers often charge a document preparation fee, or “doc fee,” in connection with car sales and financing. Generally these fees are entirely profit for the dealer. Almost all relevant documents are computer generated, so that there is minimal cost to prepare the documents. Moreover, no other transaction separately charges the consumer for creating documents that enable the retailer to sell to the consumer.

Consumer Credit Regulation: 11.4.5 Yo-Yo Sales, a.k.a. Spot Delivery

A yo-yo sale involves a car dealer letting the consumer drive a vehicle off the lot after having signed a purchase agreement and a fully completed retail installment contract, but then telling the consumer later that the deal has fallen through. Typically the dealer’s stated justification for this action is that the dealer is unable to sell the credit contract to a financing entity. Yo-yo sales are examined in detail in NCLC’s Automobile Fraud273 and will only be summarized here.

Consumer Credit Regulation: 11.4.6.1 Described

It is not at all unusual for the outstanding financed balance on a car to exceed the car’s value. When that car is traded in as part of a new purchase transaction, the deficit—the “negative equity”—is likely to be refinanced as part of the financing on the new car.

Consumer Credit Regulation: 11.4.6.2 Consumer Harm from Dealer’s Hiding Negative Equity

Hiding negative equity can hurt consumers in that the consumers might opt not to purchase the vehicle (or might purchase a less expensive one) if they knew their monthly payments were also going to pay off the obligation on their old vehicle. Consumers also are deceived as to the amount they are being given for their trade-in and also that the cash price of the vehicle has been inflated. In addition, in some states, hiding the negative equity increases the amount of sales tax the consumer owes when purchasing the new car.

Consumer Credit Regulation: 11.4.6.3.1 Truth in Lending Act

The Regulation Z’s Official Interpretations provide specific instructions as to how to make disclosures relating to the down payment when there is negative equity.290 TILA disclosures include the down payment, the amount financed, and the components of the amount financed, including the total sale price and the cash price, which often is only one component of the total sale price.

Consumer Credit Regulation: 11.4.6.3.2 RISA and MVRISA disclosure requirements

A dealer’s improper disclosure of the trade-in vehicle’s negative equity may violate a state RISA or MVRISA disclosure requirement.298 For example, courts have found it to be a RISA violation to hide the negative equity in the cash price instead of disclosing it only in the amount financed or total sale price.299 New Hampshire’s RISA explicitly provides that negative equity should be disclosed as part of the amount financed, but should not be disclosed as part of the cash price.

Consumer Credit Regulation: 11.5.1 How Add-Ons Work

Padding a car sale with add-ons gives the dealer considerably more income from a transaction. The assignee receives more in finance charges from a higher principal balance and if the dealer receives an interest rate markup it will receive more of the increased finance charges. An almost infinite number of products may be added on at the back end to car financing. Insurance of various sorts and service contracts or extended warranties are very common.

Consumer Credit Regulation: 11.5.4.2 Vehicle Protection Products

Dealers market “vehicle protection products” such as window etching as deterring theft or making it easier to identify and recover a stolen vehicle. Dealers’ markups of vehicle protection products can be enormous. An NCLC study showed markups for this product as high as 1000% or even more.350

Consumer Credit Regulation: 11.5.4.3 Credit Insurance

The sale of credit insurance is common in retail installment sales and offers significant opportunities for abuse. Credit insurance is usually grossly overpriced, with a large portion of the premium going to the dealer in the form of a commission and very little being paid in benefits to consumers.359

Consumer Credit Regulation: 11.5.4.5.1 General

Vendor’s single interest (VSI) insurance as used in this subsection refers to insurance sold at the origination of the financing and commonly costs under $500. This must be distinguished from force-placed vendor’s single interest insurance. When a consumer does not retain physical damage insurance, the creditor has the option to purchase and charge the consumer what is called force-placed insurance.

Consumer Credit Regulation: 11.5.4.5.2 Application of the Truth in Lending Act

Vehicle dealers typically include the VSI premium assessed at origination in the disclosed amount financed. If TILA requires this instead to be included in the finance charge, there will be a TILA violation for mis-disclosure of the finance charge and APR, leading to statutory and actual damages and attorney fees. Whether it should be included in the finance charge is a complicated question.

Consumer Credit Regulation: 11.5.4.5.3 State RISA application

Many RISAs and other consumer finance laws provide an exclusive list of the charges that are permissible in a consumer credit transaction. If VSI insurance sold at origination does not fall within one of the definitions of permissible charges, it may violate the statute to charge the consumer for the insurance, even if it is properly disclosed.383 If the VSI insurance is in fact “credit loss insurance,” it is particularly unlikely that the state consumer finance law will allow the creditor to impose the charge separately on borrowers.