My editor thought it might be fun to look at and weigh in on some questions you readers have sent in. After looking through the questions, I have to agree with him. Keeping in mind that these are just my thoughts and not legal advice — only your own lawyer can best represent your interests — here we go:
Q: If we are able to secure financing for a subprime customer, but the bank discount is high, can we go above the advertised price to cover the fee? If so, do we have to disclose that to the customer?
A: This is a great question and one that comes up often. The Truth in Lending Act (TILA) requires that creditors engaged in retail installment sale transactions disclose certain things to the customer. That includes the annual percentage rate, the amount financed, the finance charge, the total payments and the total sales price. It’s always tricky to determine what is and isn’t a finance charge, but the rule of thumb is that the finance charge includes any amount that would not be paid by a cash customer in the same transaction.
With that said, the actual price of the car, to the extent that a cash customer would pay exactly the same price, is not a finance charge. However, if you raise the price of the car for the credit customer, that additional amount is a finance charge and must be disclosed as a finance charge in the TILA box. So, while you technically can raise the price of the car by disclosing the additional cost as a finance charge (thereby disclosing the actual price a cash customer would have paid for that vehicle), you’re wandering into dangerous territory.
First, your dealer management system probably is not designed to calculate the excess portion of the cash price as a finance charge. That means your contract won’t print out properly. Second, by treating the additional cost as a finance charge, you are raising the annual percentage rate. Given the poor credit quality of your customer, you’ll probably be blowing through the state usury cap. Finally, marking up the price on credit customers is most likely a violation of your dealer agreement with the bank. If the bank rep figures out what’s going on — whether or not you’ve disclosed it properly — he could cut your dealership off.
The best reasons not to raise the price on credit customers without proper disclosure are the penalties. Violations under TILA provide for actual damages plus twice the amount of any finance charge connected with the transaction. You also have to add attorneys’ fees. Plus, the violation is likely to be viewed as an unfair and deceptive practice by the Federal Trade Commission (FTC) and your state’s attorney general.
Q: I have a customer who refuses to pay interest. My sales manager wants to increase the price of the car by the amount of the buy-down to go from 7.75 percent to zero percent (about $5,800). The customer is fine with that plan, as long as the transaction reflects a rate of zero percent. Is that legal?
A: My answer to the first question fits into this situation perfectly, but let’s look at this scenario a little closer. See, it’s difficult for me to fathom a customer caring one way or the other what his interest rate is as long as the monthly payment is the same. My guess is something else is going on here.
First, you could be “being shopped,” and not in a good way. See, the FTC periodically sends folks out to get a sense of how you’re treating your customers and whether you’re breaking any laws. Doing what this customer asks would set off alarms at FTC headquarters.
More likely, you have a customer who intends to default on the obligation. That never happens, right? Even if you could legally do what the customer is requesting, you’re asking for a boatload of trouble because no interest will ever accrue on this transaction. You’ll only be able to recover the purchase price, regardless of how long it takes. So, what’s my view? It’s better to let this one walk than take a chance.
Keep the questions coming and we’ll try to address as many as we can without giving actual legal advice. Remember, don’t be shy about reaching out to your attorneys when you have questions. What you’ll pay them for 30 minutes of their time will be far less than the cost of digging out of a compliance hole.
Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. He is a frequent speaker and writer on a variety of consumer credit topics. E-mail him at michael.benoit@bobit.com. Nothing in this article is intended to be legal advice and should not be taken as such. All legal questions should be addressed to competent counsel.
