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Consumer Credit Regulation: 11.4.2.1 General

For a consumer with a particular credit risk and type of automobile purchase, automobile finance companies establish a “buy rate,” which is the minimum interest rate that the assignee finance company will accept to purchase that RISC from the dealer. The dealer is allowed to increase the financing rate beyond the buy rate, up to a maximum amount. The dealer and finance company split the difference, often with the lion’s share going to the dealer.

Consumer Credit Regulation: 11.4.2.2 Discrimination Claims Based on Dealer Markups

At one time, the most successful approach to challenging dealer markups was class-wide Equal Credit Opportunity Act claims against automobile finance companies’ pricing policies that allow dealer discretionary markups. These claims were not directly based upon individual dealer discrimination, but upon the disparate impact of the pricing policies on protected groups, such as African Americans.204

Consumer Credit Regulation: 11.4.3.1 The Practices Described

Hidden interest is the practice of inflating the cash price for credit customers as a way of hiding the real cost of credit. Consider a cash buyer quoted $10,000 for a car and a credit purchaser quoted $12,000 for the same vehicle. If the hidden $2,000 interest were added to the existing finance charge, the credit’s effective interest rate would increase significantly.

Consumer Credit Regulation: 11.4.3.2 Hidden Finance Charges As a Usury Violation

Usury violations can occur if hidden interest is incorrectly allocated as part of the amount financed rather than part of the finance charge. The usury violation occurs where the hidden interest is treated as a finance charge and the resulting interest rate exceeds the state usury cap. The applicable usury statute in a vehicle installment sale typically will be the state’s RISA or MVRISA. Of course if the state statute has no interest rate cap, there can be no usury violation.

Consumer Credit Regulation: 14.6 Litigation Financing

An entire industry has developed around the concept of “litigation finance.”122 These transactions purport to provide a cash payment to a plaintiff in a lawsuit in exchange for a share of the potential judgment or settlement of legal actions. They differ from settlement factoring, described in the preceding section, because the judgment or settlement does not yet exist.

Consumer Credit Regulation: 14.7 Probate Lending

A relatively new practice of inheritance buying or “probate lending” has arisen that follows many of the same patterns as other purchases of income. Companies specializing in this practice advance funds to heirs or beneficiaries whose inheritances are tied up in probate.152 The advance is eventually repaid from the heir’s or beneficiary’s interest in the court-supervised estate.

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.