Friday, August 01, 2008

Negative Equity


I read in a recent e-mail that a lender bounced a contract because the contract showed negative equity. The F&I manager was beside himself. A bounced contract hurts cash flow and, more than likely, the customer needed to be called and asked to resign a contract. While this occurred in Pennsylvania, I wonder how many of you run into this situation.

I understand that the federal government and many states want negative equity to be disclosed on a separate line in the itemization portion of the retail installment contract. While it still affects the amount financed, it does not affect the sales tax or the license plate fees.

I am continually amazed when I hear that some lenders refuse to recognize negative equity. My question to them is, why? It simply makes sense. We have been writing retail installment contracts for years without any cash investment from customers. Customers desire to trade in vehicles prior to being in any equity status. In fact, most customers acknowledge they are in a negative equity position. They simply want to know how much negative equity they are refinancing.

Equity takes cash - either at the beginning, during, or at the end of the ownership. I do not know of any other way to reap the rewards of a positive equity position when it comes to vehicles.

For those few states that do not recognize negative equity, I recommend dealer principles and state associations to work together toward getting lenders and state legislation in sync with federal regulations and opinions.

As we all know, I am not a lawyer and is this article is not meant as legal advice. It is an educational piece and a plead for consistency in dealing with the negative equity plague.

Dealers Solutions, August 2008, P. 10