Insights

When we, as lawyers, talk to our compliance clients, we frequently tell them, "It doesn't matter what you call it, you still can't do it."

We advise them that a regulator or a court will look at the substance of a transaction and likely ignore the label we use. Well, sometimes a court will look at the label and may use it against us, as happened in a 2010 case on Staten Island in New York City Court. The case highlights the difference between "interest" in a loan transaction and "time-price differential" or "credit service charge" in a retail installment sales contract. Not enough people recognize this distinction.

In many jurisdictions, there is good reason to use words like "credit service charge" and "time-price" rather than "interest" and "loan" in connection with a retail installment sales contract. In many jurisdictions, the difference between what a buyer pays in cash and what a buyer pays over time in a retail installment sale is considered a time-price differential. In many of these jurisdictions, this time-price differential is not considered to be interest and is, therefore, not subject to state usury laws or other laws that may limit how interest may be accrued. New York is one of those "time-price differential" states, at least for now.

In 2010, the judge in Ford Motor Credit Co. LLC v Black "re-characterized" a retail installment sale as a loan and applied the civil usury ceiling to the transaction. This is how the court described the transaction:

This motor vehicle sale is supposed to be exempt from application of [the] usury statute because rather than receiving the entire sale price at the time of the closing of the transaction, the seller is permitting the buyer to spread out the amount due by making payment over a period of time. In fact, on the very day of the sale to defendant, the "financing" was assigned to the plaintiff herein, Ford Motor Credit, a different entity from Island Ford[,] the business that sold the vehicle. Such a simultaneous transaction leads to the conclusion that Ford Motor Credit was an integral part of the entire process and had "approved" the defendant's credit in advance so that the sale could take place. There does not appear to have been any real "time-price equalization" in this transaction. It was from day-one structured as a method for Ford Motor Credit to loan money at a 24% rate, far in excess of New York's usury law. There is no evidence that Island Ford even tried to place the financing with any other lender or why they could not keep the transaction in house if it was truly an installment sale subject to "time-price equalization" and not a subterfuge for Ford Motor Credit to loan money in excess of the usury rate.

Analysis of the document reveals that it is a form produced by "Ford Credit" containing the Ford Motor logo and includes a link to a website for "fordcredit.com." A visit to that website indicates Ford Motor Credit is a wholly owned subsidiary of Ford Motor.

Further in support of the conclusion that this transaction is subject to the usury law is that the document is labeled "New York Simple Interest Retail Instalment Contract." If the "finance charge" is a service charge imposed to achieve "time-price equalization," then why is it called "interest" in the document? The answer is because it is "interest," and as such it is subject to the usury laws. This supports the conclusion that when the statute permits the parties to "agree" on a rate[,] the legislature intended that "agreement" to be at the figure that was within the state usury law so as not to make it "illegal" and unenforceable.

In determining that the transaction was a loan, the judge considered the immediate assignment of the contract to Ford, as well as the pre-printed assignment. But, the judge also pointed to the creditor's use of the word "interest" to support his position that the transaction was a loan, which is subject to New York's civil usury ceiling, and not a retail installment sale, which is not. Simply using the word "interest" in the contract gave the judge more ammunition to target the creditor for making an illegal loan rather than acquiring a legal retail installment sales contract.

If the contract had said "simple credit service charge" or "daily accrual finance charge" rather than "simple interest," would it have made a difference in the judge's perspective? We don't know. But, it would have left the judge with a little less ammunition to target the finance company.

The judge's decision in Black goes against the long-held position of the Court of Appeals - New York's highest court - that time-price differential in a retail installment sales contract is not interest for usury purposes. In the rest of New York, that should continue to be the law, at least for now. But, to be safe, sellers and sales finance companies should avoid using the terms "interest" and "loan" in connection with retail installment sales contracts.

Geoffrey C. Rogers is a partner in the New York office of Hudson Cook, LLP. Geoff can be reached at 518-383-9591 or by email at grogers@hudco.com.