Truth in Lending Revisited

The impacts on car dealers of changes to the country's financial system mandated by the Dodd-Frank Act will likely be regular subjects of alerts and advisories to dealers this year. One section that we already know will have an impact on your business is the expansion of the jurisdiction of the Truth in Lending Act. Since its original passage decades ago, the Truth in Lending Act only applied to transactions

The impacts on car dealers of changes to the country's financial system mandated by the Dodd-Frank Act will likely be regular subjects of alerts and advisories to dealers this year.

One section that we already know will have an impact on your business is the expansion of the jurisdiction of the Truth in Lending Act.

Since its original passage decades ago, the Truth in Lending Act only applied to transactions in which the amount financed was $25,000 or less.

In recent years, with the steadily increasing prices of vehicles, most luxury vehicles and even many midsized vehicles were exempt from the Act for a consumer who wanted to sue over a vehicle financed for more than $25,000.

The Dodd-Frank Act increases TILA's maximum jurisdiction to $50,000 to once again cover most vehicles financed, and this may reinvigorate TILA as a basis for lawsuits against dealers. Here is a quick primer on TILA Dos and Don'ts.

Do give the customer a copy of the Retail Installment Sale Contract once it is signed. Regulations under TILA, known as Regulation Z, make clear the dealer must give the customer a copy of the contract at the time the customer signs the retail installment sale contract.

Do provide a copy of the unsigned RISC if the customer changes his or her mind in F&I, won't sign and requests a copy. The purpose of TILA is to provide complete disclosure of material credit terms so that, among other things, consumers can meaningfully shop for credit. If a customer decides to not complete a transaction and asks for a copy of the unsigned RISC, a copy must be provided.

Do have a process to protect against packing claims. Packing has numerous definitions, but generally it is misleading the customer as to the monthly payment for the vehicle so that the dealership can sell additional products and services without adequate disclosure of their sale. Use a process to avoid such claims.

  • Do have a procedure for clearly reviewing with the customer the terms of the retail installment sale contract.

  • Do allow the customer to hold and review the contract to guard against claims that the dealership's employee intentionally obscured a portion of the disclosures.

Do use a menu that enhances compliance. A properly constructed menu must do some specific things to protect your dealership.

  • Do show the monthly payment for the vehicle alone. This shows the customer understood the payment plan without added products and services.

  • Do show the a la carte price of each product in addition to package prices. This avoids a claim that the customer purchased, say, GAP and roadside-assistance coverage along with the extended service contract because that was the only way the customer thought the service contract was available.

  • Do get the menu signed and the choices initialed.

  • Do disclose prominently in the menu that purchases of additional products and services are not required for finance approval.

Don't Pass Along Finance Source Fees. If a fee is charged by the finance source to accept assignment of the customer's finance contract it may not be passed along either directly or indirectly to the customer unless it is included as part of the finance charge. If a dealership wishes to avoid having a fee treated as additional finance charge that increases the APR, it must avoid the traps that lead to liability.

  • Don't demand customers pay the fee.

  • Don't add the fee to the contract as a fee passed along to the customer.

  • Don't increase the vehicle price to make up for the fee. That may be deemed an added finance charge.

  • Don't tell customers they would have paid less if the dealership did not have to pay fees to the finance source.

  • Don't increase the price of an advertised vehicle or the price displayed o cover the fee at the time of sale.

Attorney Michael Charapp of Charapp & Weiss, LLP specializes in representing dealers. He is at (703) 564-0220 or [email protected].

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