Are you a dealer with negative equity? Learn why and how to disclose to comply with MVAB, Truth-in-Lending law and general consumer fraud laws.
NHADA was warned recently by the New Hampshire Motor Vehicle Arbitration Board (Lemon Law) that a number of dealers are failing to disclose negative equity on their retail installment contracts.
This can be a problem during lemon law settlements, and under banking laws, the Truth-in-Lending law, and general consumer fraud laws.
It has been crystal clear since 1999 that a dealer must clearly disclose negative equity.
Under the NH lemon law, a consumer can choose a refund of the full purchase price. If the purchase price has been inflated to cover negative equity, they may receive a refund larger than that to which they are entitled. This can create a huge issue between the consumer, the Lemon Law board, and the manufacturer, and may open your dealership up to unnecessary risk.
According to the staff commentary to Regulation Z, if the amount owed by a customer exceeds the value of the customer’s trade, a dealership is required to separately disclose the negative equity in the itemization of the amount financed, unless the negative equity amount is netted out against cash down payment. You are not permitted to put a negative number on the down payment line.
Don’t buy the line that a bank, credit union, or financing company won’t accept the contract if the negative equity is disclosed. Plenty of dealers have pushed back and gotten them to back down. If they refuse to buy your paper unless you violate the law, then you need to find another business partner.
How to properly disclose
According to NADA, if the customer provides a cash-down payment, you have two options for disclosing negative equity. These alternatives are referred to as “netting” and “non-netting.” With the netting approach, you use the cash down to offset the negative equity. Any remaining negative equity must be disclosed in the itemization of the amount financed. If the cash down exceeds the negative equity, the remaining cash goes to the down payment line. With the non-netting approach, the full cash amount is included in the down payment disclosure, rather than using it to offset negative equity. As a result, the full negative equity amount must be disclosed in the itemization of the amount financed. Regulation M, which governs lease disclosures, also has a similar disclosure requirement for negative equity in leases.
If the negative equity amount is not netted out against a cash down payment and is being financed, you must separately divulge it in the itemization of the amount financed. You will open your dealership up to potential liability if you choose to increase the cash price of the purchased vehicle and the trade allowance to cover the negative equity. Again, the liability can range from Regulation Z violations, to Lemon Law settlement problems, to potential allegations of bank fraud, to consumer fraud complaints.
You may obtain more detailed information and examples of the authorized disclosure methods, download “Federal Reserve Board: Regulation Z – Staff Commentary Revisions Regarding Negative Equity (1999)” on www.nhada.com from the links section (under National Automobile Dealers Association).
The letter from the NH Banking Department is available for download here.
Please note that the above information is not intended to be legal advice.