By now, most everyone has heard of the government’s “Car Allowance Rebate System” Program (“CARS”), more commonly known as “Cash for Clunkers.” For those of you who haven’t, it is a program under which consumers are encouraged to trade in their low MPG vehicles for more fuel efficient new cars in exchange for a credit of up to $4,500 to be applied to their purchase or lease transaction.
Most of the heavy lifting in CARS is the dealer’s responsibility, but a few questions have come up that are of interest to the auto finance community. Everyone wants to know how to characterize the credit for disclosure purposes on a retail installment sale contract (“RISC”) or lease. The statute creating CARS provides no guidance, and the National Highway Traffic Safety Administration (“NHTSA”) is still writing the rules implementing the statute. As I write this article, the NHTSA rules are scheduled to be published tomorrow, but I doubt they will provide much help with respect to contract disclosures. That said, what’s a finance company to do?
First, let me say that I’m skipping a discussion of lease disclosures because any lease eligible for CARS needs to be at least five years. I know some of you do five-year leases, but most don’t.
Starting with required disclosures, I think on RISCs, the credit must be disclosed as part of the downpayment. As your lawyers are aware, Regulation Z requires that the RISC disclose the amount of the “downpayment” (it’s up there in the last of the five boxes on your Truth in Lending Disclosure). For Reg. Z purposes, a downpayment is “an amount, including the value of any property used as a trade-in, paid to a seller to reduce the cash price of the goods or services purchased in a credit sale transaction.” The voucher amount is intended to replace the ordinary trade-in amount (under CARS, the trade-in must be scrapped), and it is required to be used to reduce the cash price of the vehicle being sold. It looks like a downpayment to me, so logic dictates it be included in the downpayment disclosure in the Fed box.
Next is the question of how to disclose the credit in the itemization of the amount financed on the RISC. Reg. Z gives you a lot of flexibility in how you do this, but in general, I think it should be a line item that reduces the cash price (e.g., just like cash and rebates). Given that the intent of the statute is to replace the trade-in with the credit, one could reasonably argue that it should be disclosed as “trade-in amount” in the itemization. Of course it is not technically a trade-in as one may understand (or as state law might define), and that’s where folks have expressed concern, some wondering whether it should be disclosed as cash or a rebate in the itemization.
Well, it doesn’t seem much like a rebate (and few state laws, if any, define “rebate” for disclosure purposes). While it accomplishes the same purpose (reducing the cash price), the same could be said of cash or trade. So we have a conundrum of sorts.
I’m not sure it matters much for federal law purposes whether the credit is disclosed as trade-in, rebate, cash or “other.” As I said, Reg. Z gives you a lot of flexibility with respect to the information that you provide in the itemization, and as long as the amount is separately itemized in a manner that reduces the cash price of the new car, you’re probably okay. Keep in mind, though, that state laws may have more to say about the characterization.
What will really happen? My tea leaves say this: Sales tax calculations will drive the CARS credit disclosure in the itemization. See, some states impose sales tax on the trade allowance, others not. Whether they’ll take consistent positions on the CARS credit is a different story. Our intelligence says some states plan to treat the credit the way they treat a trade allowance for sales tax purposes, others not. So, as a practical matter, the dealer is going to disclose the credit in the itemization however he has to in order for his DMS to correctly calculate the sales tax. No one will reprogram their DMS to specifically address the sales tax treatment of the credit for this temporary program – they’ll simply slot it where it works.
I don’t know that this will be acceptable to the auto finance world, but it’s the practical reality you’re likely to be asked to live with. It would be nice if the law was clear, but this instance is one for judgment calls. Get your counsel’s input on how your company should handle things.
Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. Basis Points readers can reach Michael at 202-327-9705 or mbenoit@hudco.com.