Page 16 - GIADA-Sept-2018-Final

DEALER INSIGHT

Requiring Buyers to Buy Service

Contracts? Read This.

Requiring the purchase of a VSC to finance a sale is not a TILA or Reg Z violation

unto itself, but dealers must take two key steps to avoid costly violations of federal
and state guidelines.

By Thomas B. Hudson, Esq.

I frequently speak at industry conferences. financing contracts, but not in similar cash charge such as the fee for a service contract
When my presentation is over, there are transactions, the charge for the service won’t meet that test.
always a few folks from the audience who contract must be treated as a finance
have questions or who just want to talk charge, added to other finance charges and One conference dealer attendee kept
about the legal side of the car business. included in the APR calculation. That’s arguing that requiring a service contract
pretty basic. couldn’t create the difficulties I described
When there are questions, it sometimes to him. Finally, he said, “My DMS provider
seems that there’s something of a “flavor A little more esoteric is just how the charge says that by simply including the cost of
of the month” thing going on — I’ll get must appear in the federal disclosure the service contract in the itemization
several questions that are either identical part of the retail installment contract. It of amount financed, I’m disclosing
or that have small variations on a central should be shown as a “prepaid finance everything correctly!”
theme. charge.” That means that most generic
retail installment contracts cannot be used In response, I asked, “But have you told
At this year’s National Independent Auto because they do not incorporate a prepaid the DMS provider that you are requiring
Dealers Association in Orlando, that finance charge disclosure. the buyer to purchase the service contract,
theme seemed to be service contracts or does the DMS provider believe that the
in general, and in particular, whether a And then there’s state law. In states that have purchase is voluntary? Go ask the DMS
dealer may require a credit buyer to buy definitions of “finance charge” that mirror provider that question.” The dealer left to
one. Like most legal questions, the answer or operate like the federal disclosure laws, wander over to the DMS provider’s booth
to this one is easy, except when it isn’t. several problems arise. First, there may be in the exhibit hall, and I didn’t hear from
a state law that simply prohibits requiring him again.
TILA and Reg Z Implications the purchase of a service contract. Then
The easy part of the question is whether there’s the disclosure issue which, in a From several recent AG actions, I can
the practice of requiring a service lot of states, will require the same sort of tell you that this one is a front-burner
contract in connection with the credit analysis required at the federal level. problem. If you’re requiring buyers to buy
sale of a vehicle violates the federal Truth service contracts, pull down the shades,
in Lending Act and Regulation Z. The Are we done? Nope. flip the sign on the door from “OPEN”
answer to that question is a simple “No,” to “CLOSED,” lock the doors, and go visit
because, as you might guess, the federal Authority Exceeded your lawyer. n
disclosure requirements tend to deal with Most states impose a rate cap for finance
disclosure rather than the substance of the charges. In such states, the cost of the Thomas B. Hudson is a partner in the firm
transaction. It isn’t far from the truth to service contract, when added to other of Hudson Cook LLP, publisher of Spot
say, “The feds don’t care what you do, as finance charges in the deal, may produce Delivery, and the author of several widely read
long as you disclose it correctly.” a rate so high that it exceeds the state’s compliance manuals. Contact him at tom.
maximum permitted rate. hudson@bobit.com. ©CounselorLibrary.
But the fact that federal disclosure laws com 2018, all rights reserved. Single print
don’t prohibit the practice doesn’t mean Finally, there is the issue of how finance publication rights only, to Auto Dealer Today
that the practice is not affected by them. charges must be computed at the state (7/18). HC No. 4820-5588-3116
In this case, the key to the application of level. Some states require that finance
federal law is the word “required.” When charges be computed only by applying
a dealer requires a service contract in a rate to a declining balance. An upfront

14 | GIADA Independent Auto Dealer SEPTEMBER 2018