Negative Equity Second Verse
Q. Have you heard about the RV dealer in California and the negative equity situation?
A. Yes, that is old news that highlights the long-term industry practice of burying negative equity in the selling price of the unit and working off a difference figure. As this dealer and many others are learning, it is a strategy that does not pass muster in the legal community. I addressed Negative Equity in my September column. However, your question suggests that the topic warrants further discussion.
The issue is how to deal with negative equity. While the answer is simply to disclose the amount of negative equity in the designated area of the installment contract, the whys and wherefores are not so easy.
Page 129 of the Commentary for Regulation Z / Truth in Lending reviews the effects of an existing lien. In all three examples cited, the selling price remains the same. Cash receipted initially can be: (1) applied to the new purchase, (2) applied to the trade pay off, or (3) applied to a combination of the new purchase and the trade pay off. The amount financed will reflect the amount of the negative equity. The negative equity should not be added to the sales price of the vehicle. (If you cannot locate your copy of the Regulation Z, call my office. We’ll send you one.)
Some dealerships in California have resorted to having the customer sign a separate declination identifying the negative equity and why the deal is structured the way it is. Many dealers have asked if this declination will save them from the fate of the RV dealership referenced in your opening question. The answer is: No one knows. The tipping point appears to be proof of disclosure. Thus, the customer’s written acknowledgement of the figures and the deal structure would appear to be a plus.
Here is a sample Trade-in Allowance Disclosure document. Note: The sample document is not intended as legal advice nor does not it constitute a legal document. It is important that you consult with your own attorney and seek your own legal counsel regarding disclosure matters.
Life would be much easier if all the lenders would accept negative equity on the contract they receive for funding. Since that is not the case, every dealer must take positive steps to deal with negative equity.
Sample Document for
Trade-in Allowance Disclosure
I understand that the value of my trade is inflated and that I am paying additional sales tax and licensing on the inflated valuation. If the vehicle is financed, I realize that I will be paying finance charges (Interest) on the inflated amount for the term of the loan. The reason for the inflated valuation is:
• Requested by myself that the trade value show as stated.
• Requirement by the finance institution that either prohibits negative trade equity or a minimum percentage of down payment or both.
I understand that if the excessive trade valuation is due to financing requirements that I have the opportunity to:
• Cancel this sale prior to signing the final sale contract and taking my vehicle, or
• Provide additional down payment of $____________, or
• Accept the current terms knowing that the amounts charged and forwarded to the
State of California or other governing body are inflated and I realize that interest will be charged for the inflated amount.
Buyer Signature
Date
Co-Buyer Signature
Date
The information contained in this sample form is not intended as legal advice. Dealers should seek their own legal counsel concerning these matters.
“Kelly’s Korner” Column, Oregon IADA Squeaky Wheel Newsletter, November 2005, p. 24