Insights

Since 1989, motor vehicle dealers in Nevada who provide financing have used the forms of retail installment contract that the Commissioner of the Department of Financial Institutions has prescribed, in accordance with the requirements of Nevada’s Retail Installment Sales of Goods and Services Provisions. The Provisions require vehicle dealers to use only these forms of contract, and prohibit any sort of modification of or changes to the text of the prescribed contracts. The Commissioner last revised the forms of contract in 2003, and will have occasion to revise them again in the near future pursuant to 2009 Nevada Assembly Bill 274, which became effective on October 1, 2009.

In addition to amending the Provisions in other ways, AB 274 requires the Commissioner to promulgate new forms of retail installment sales contracts that contain certain default language. Specifically, the Commissioner must incorporate language that informs the buyer that the buyer’s creditor may only resort to the enforcement remedies under the retail installment contract following a default where:

(1) the buyer fails to make a payment according to the terms of the agreement; or

(2) the prospect of payment, performance, or realization of collateral is significantly impaired.

The troubling part of AB 274 is not that it changes the form of contract, or the fact that the change imposes a limitation on events of default that did not previously exist under Nevada law. Rather, it is that AB 274 directs the Commissioner to revise the forms for a substantive change in the law that went into effect on October 1, but as of mid-October, the Commissioner has not taken any steps to make the revisions. Accordingly, while the statutory requirement that retail installment sale contracts contain this language became effective October 1, 2009, dealers and sales finance companies are in the precarious position of having to use the existing forms of contract, knowing that the forms of contract do not comply with the newly amended statutory requirements.

Dealers and finance companies do not necessarily have to worry about using the existing forms of contract, however. Both AB 274 and the Provisions make it clear that the Commissioner has the responsibility to revise the forms. The Provisions also make it clear that dealers and finance companies may use only the prescribed forms of contract. Therefore, even though a dealer or finance company is using forms of contract that do not comply with the substance of the new statutory provisions, it is unlikely that dealers and finance companies would incur any penalties for using contracts after October 1, 2009, that do not comply with the requirements of the revised statute. The dealer and finance company’s hands are tied here: Until the Commissioner revises the forms to match the statute, there is nothing for Nevada creditors to do except continue to use the existing forms.

The new statutory language creating a limitation on the events of default that did not previously exist under Nevada law presents a slightly different issue, but the result is the same for Nevada creditors. The new language places limitations on when a creditor can enforce a default, but the Nevada legislature did not write that new limitation directly into the Provisions. Instead, it required only that the Commissioner promulgate forms that contain the new default language. Once the Commissioner adopts the new forms, a Nevada creditor using the form will be bound by that default language because that is the language that will be in the contract that the debtor signs. There are currently no requirements that limit a creditor’s ability to declare a default. Instead, only after the new forms are created by the Commissioner will the substantive limitation on events of default exist.

Dealers and finance companies should be on the lookout for regulations from the Department that implement the new statutory requirements. It is possible that the Commissioner could bypass the traditional rulemaking process and instead issue “emergency” regulations that have an immediate compliance date. Hopefully, the Commissioner will provide enough lead time for dealers and finance companies to transition to the new contracts.

Maya Hill is an associate in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Maya at 410-782-2356 or by email at mhill@hudco.com.