Regulation Z Equals Disclosures
Regulation Z / Truth in Lending is part of the Consumer Credit Protection Act, circa 1968. The purpose of this regulation…
…is to promote the informed use of consumer credit by requiring disclosures about its terms and cost. There has been much discussion about exactly when disclosures are required. Most regulatory agencies want full disclosure to occur when any payments are quoted.
What does this regulation govern?
Reg Z governs advertisements of credit, disclosure of terms and conditions of installment transactions. It also governs much of the installment contract form itself.
Many of you might say, “Oh I am a small dealership flying below the federal radar screen so this regulation really does not apply to me. “ Well let’s review the litmus test shall we?
• Is credit extended to your customer through your dealership?
•Does an extension of credit occur regularly?
•Do the terms of the credit extend longer than 4 months?
•Is the credit subject to finance charges?
•Is the credit primarily for personal, family or household use?
If the answer is “Yes” to the questions above then Regulation Z applies to your organization.
In Kelly seminars we distribute the actual booklet from the federal board of governors. Typically, dealerships deal with closed-end credit, as our contracts have a definite beginning and have a definite ending.
Timing of Disclosures:
Typically sales managers like quoting a range of payments. This practice is not adhering to the spirit or the letter of this regulation. I think we can all agree that every sales manager knows the unpaid balance, and they know the terms entered into the computer to produce a payment. The regulation wants this information shared with the consumer. Quality information means that the retailer has provided accurate information on the amount financed, the term of the note, the percentage rate, and the dollar amount of the obligation. This information combined with the total finance changes and total payments will allow the consumer to make an informed choice about where to secure financing.
When a sales manager or F&I manager quotes a payment with additional products or services included and does not disclose this activity to the customer they are packing payments. The customer is entitled to know what the base payment is without additional items.
Disclosures mean the customer is fully aware of the fact that extra products and extra services cost extra dollars and they are identified as such.
Reviewing the contract: The customer has the right to take a copy of the installment contract home for review prior to signing. This action would obviously not qualify as a spot delivery.
Should the customer wish to read the contract in its entirety prior to signing they have the right to do so.
Advertising Credit:
Regulation Z also governs advertising of credit terms. So whatever terms the dealership is promoting need to be the terms that are actually available. Beware of triggering terms in advertising. I can hear you asking, “What is a triggering term?” A triggering term is any thing that causes the customer to ask additional questions, such as – $425 per month. The questions would be: How much down? How many months is the obligation? How much down payment is required? What is the APR?
Advertising rules apply to all forms of ads, placards in the vehicles, newspapers, flyers, direct mail pieces, voice promotions on a public announcement system, and television — both network and cable.
While Regulation Z does not set the usury limits in the nation, it does outline how interest rates are shown and displayed. Appendix J outlines how to calculate the APR. Usury is determined by each state.
Failure to comply with the disclosure regulation can create legal difficulties. For willful and knowing violations the person(s) can be fined not more than $5,000 or imprisoned not more than one year or both. Willful and knowing violations can be, but are not limited to: Giving false or inaccurate information, failure to provide information requiring disclosures, using any chart to consistently understate the APR, or otherwise failing to comply with any requirement imposed under the title (12CFR226).
Civil Liability:
Any person is liable to such person in an amount equal to sum of any actual damage sustained by such person as a result of the failure to disclose, or in the case of an individual action, twice the amount of any finance charge.
Class-action status: Civil liability is $500,000 or 1 percent of the net worth of the creditor. At the point the customer signs the loan documents at the dealership, the dealership is viewed as being the creditor at that time.
Best Business Practices:
Have the sales managers identify the APR and the terms of the financing when quoting any payments, and of course all payments are dependant upon final lender approval.
Review the entire installment contract with the customer prior to obtaining signatures. Separate the customer’s copy of the installment contract and obtain original signatures(s) in addition to the normal signature(s) on the loan documentation. Have the customer initial each and every additional purchase in the margins of the itemized cost list so there is acknowledgement that the extra items do in fact cost extra dollars.
This ruling also governs negative equity. Simply put, the feds want the negative equity to be disclosed. The installment contracts have a line for it.
The commentary to the Regulation Z on page 129 reveals how the feds want the negative equity to be accounted for.
Many dealerships are currently having the customers sign an acknowledgement form referencing the negative equity and the reason for the inflation of the sales price. This acknowledgement should also include any effects on items such as sales tax, license plate fees, and additional finance charges. Again the operative word is disclosures, so that the customer has all the information to make an informed choice about the purchase and finance terms.
RV Executive Today, April 2005, p. 21-23.