The Texas legislature has recently enacted a number of bills affecting motor vehicle installment sales. We have highlighted some of the important provisions of these bills below.
Debt Cancellation: Effective September 1, 2009, Texas motor vehicle dealers will be permitted to finance optional debt cancellation agreements (GAP waivers). S.B. 1966 makes it clear that a two-party debt cancellation agreement is not an insurance product and requires that a charge for the debt cancellation product be reasonable. The new law requires a dealer to give a notice to the buyer separate from the retail installment sale contract stating that the buyer is not required to accept or provide a debt cancellation agreement in order to purchase and finance the vehicle. The existing law allowed dealers to finance GAP insurance, but not two-party GAP waivers.
The Office of the Consumer Credit Commissioner (OCCC) is expected to publish GAP waiver regulations for comment in late August. The OCCC sent proposed rules to industry members for comment prior to publication. Another comment period will follow publication. The regulations will include required disclosures, establish the “reasonable” cost for GAP waivers, and require a pro-rata refund of the GAP waiver cost upon termination of a GAP contract prior to the scheduled maturity date of a retail installment sales contract.
Documentary Fees and Disclosures: Current law allows Texas motor vehicle dealers to charge a $50 documentary fee on contracts for all vehicles purchased for personal, family or household use. Effective September 1, 2009, Texas motor vehicle dealers will be allowed to charge “reasonable documentary fees.” The new law, H.B. 3621, will require motor vehicle dealers to modify the documentary fee disclosure currently required in retail installment sales contracts and buyer’s orders to eliminate references to the $50 charge and heavy commercial vehicles. A dealer must also post the documentary fee disclosure notice so that it is clearly visible in each place where a sale is finalized. In addition, before a dealer increases its documentary fee over $50, the dealer must give written notice to the OCCC of the maximum amount of the documentary fee the dealer intends to charge. The Commissioner may review the amount of a documentary fee for reasonableness and can disallow the fee if it deems the fee unreasonable. The disclosure and notice requirements do not apply to contracts for the sale of a commercial vehicle. Generally, the term “commercial vehicle” means a motor vehicle that is not used primarily for personal, family, or household use. See 2009 TX S.B. 1965, discussed below.
The OCCC issued a bulletin on June 30, 2009, stating that it will allow a dealership that does not increase its maximum documentary fee to exhaust its existing supply of forms using the old documentary fee notice until August 31, 2010. By September 1, 2010, the dealer must obtain new forms with the updated notice. The OCCC issued another bulletin on July 2, 2009, with the revised English and Spanish disclosures that dealers must include in retail installment sale contracts and buyer’s orders.
Commercial Vehicles: Effective September 1, 2009, S.B. 1965 amended various provisions of the Texas Finance Code to limit application of those provisions to installment sale contracts secured by commercial vehicles. The legislation provides that a “commercial motor vehicle” is a motor vehicle that is not used primarily for personal, family, or household purposes. S.B. 1965 excludes insurance on commercial motor vehicles from the definition of “collateral protection insurance” under Chapter 307 of the Texas Finance Code, and excludes installment sales of commercial vehicles from the plain language law under Texas Finance Code § 341.502.
S.B. 1965 lists the provisions in Chapter 348 that apply to commercial motor vehicle installment sale contracts, thereby limiting the applicability of Chapter 348. In addition, S.B 1965 allows for charges on installment contracts secured by commercial vehicles that are not permitted in connection with vehicles sold primarily for consumer purposes. Charges that are now allowed for commercial vehicle sales include charges for additional goods and services related to the vehicle, for the sale or use of the vehicle, and for the business of the buyer; and charges for debt cancellation waivers for total loss of the vehicle, for death of the buyer, for disability of the buyer, and for other insurance. The bill requires disclosures in order for the dealer to impose those charges. S.B. 1965 adds, as an event of default, the default on other obligations held by the same creditor or its affiliates.
S.B. 1965 creates a presumption that vehicles are used for consumer purposes. However, a dealer may rely on a representation by the buyer that a vehicle is for commercial use unless that dealer has actual knowledge that the representation is false. Although S.B. 1965 includes a section revising the documentary fee disclosure requirements, those provisions are superseded by the changes contained in H.B. 3621, discussed above.
Assignment: In the wake of a very unexpected (and unprecedented) decision by a Texas court in In re Clark Contracting Services, 2008 Bankr. LEXIS 3991 (Bankr. W.D. Tex. November 28, 2008) (which was the subject of an article in last month’s issue), the Texas legislature enacted S.B. 1592. The legislature intended to override the decision in Clark, where the bankruptcy judge disallowed a secured claim against a commercial debtor because the lienholder who took assignment of the lien did not note that assignment on the certificate of title. S.B. 1592 clarifies existing law that a lienholder may assign a recorded lien without making any filing or giving any notice to the debtor. The assigned lien remains valid and perfected and retains its priority. An assignee may, “but need not to retain the validity, perfection, and priority of the lien assigned,” apply for the assignee to be named as the lienholder. The bill also adds language to the Texas title statutes governing boats and manufactured homes to accomplish the same purpose. The bill became effective when signed by the Governor last June.
Conditional Delivery: Effective September 1, 2009, H.B. 2556 limits spot deliveries. A retail installment sale contract may not be conditioned on the subsequent assignment of the contract to a third party. However, a conditional delivery agreement will be permitted provided that conditional delivery agreement is void upon the execution of a retail installment sale contract. To protect consumers, H.B. 2556 prescribes the terms that can be contained in a conditional delivery agreement and prohibits a dealer from selling any trade-in vehicle during the term of a conditional delivery agreement, which is limited to 15 days. The bill details the actions a dealer and buyer must take if they do not enter into a motor vehicle installment sale contract, including the return of the trade-in vehicle or, if the trade-in vehicle cannot be returned in the same or substantially similar condition, the delivery of the agreed value of the trade-in. If a dealer pays the value of the trade-in, the transaction is subject to the review by the Commissioner and an administrative penalty. Although the legislation does not indicate how the review process is begun, presumably, the OCCC can review the transaction as part of a regular audit or upon receipt of a consumer complaint.
Negative Equity: Effective September 1, 2009, dealers who accept trade-in vehicles must complete a disclosure of trade-in equity on a form prescribed by the OCCC. H.B. 2438 establishes the minimum requirements for the form, which must contain a disclosure substantially similar to the following: “If the EQUITY amount is NEGATIVE, the value the retail seller is offering you for your trade-in motor vehicle is less than what you currently owe on your trade-in. The amount of negative equity may be further reduced by the amount of any cash down payment and manufacturer’s rebate and may be included in the amount financed under your retail installment contract as an itemized charge.”
The dealer is responsible for the content of the notice, and the assignee cannot be held responsible for the dealer’s failure to comply. The law clarifies that a dealer may finance the negative equity from a prior installment sale as well as the outstanding obligation under a lease contract, by providing contract disclosures in accordance with the Truth in Lending Act. Dealers are obligated to pay the outstanding balance of a trade-in vehicle no later than the 25th day after the day that: (1) the retail buyer signs the retail installment contract and the retail buyer receives delivery of the motor vehicle; and (2) the retail seller receives delivery of the motor vehicle traded in and the necessary and appropriate documents to transfer title from the buyer.
As with debt cancellation, the OCCC is expected to publish a negative equity disclosure form and accompanying regulations for comment in late August.
The bill includes other provisions, unrelated to negative equity financing. Specifically, the bill also provides that information obtained from licensees in examinations and investigations by the OCCC is confidential. In addition, the bill extends the time that licensees must retain records from the third anniversary of the retail installment sale transaction to the fourth anniversary.
Nicole Frush Munro is a partner in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Nikki at 410-865-5430 or by email at nmunro@hudco.com.