So Call it a Credit Sale - Unless it's a Loan
Time and again, we hear folks call retail installment sales “loans” and sales finance companies “lenders.” Not only do people unfamiliar with the industry use the incorrect terminology, but also dealers, sales finance companies, vendors, and even lawyers and judges get it wrong. Time and again, we correct them. We’ve made more attempts than we can count to discourage this mistake, but people continue to make it.
We’ve explained that a loan is a direct transaction between a “lender” and a “borrower.” The borrower may use the loaned money to purchase a car from a dealer or perhaps use the loan to buy something else. A promissory note evidences the loan. In a loan, the lender charges the borrower interest on the principal balance of the loan. A loan’s Truth in Lending federal box must contain boxes for (1) APR, (2) finance charge, (3) amount financed and (4) total of payments.
In a credit sale, the “buyer” buys a car from a “retail seller.” A retail installment sale contract (as opposed to a promissory note) evidences the buyer’s promise to pay over time for the car purchased. The promise to pay is made to the retail seller and the seller is obligated to perform on the terms of the contract, at least so long as the seller holds the contract. In a retail installment contract, finance charges accrue on the amount financed at the annual percentage rate in the contract. A credit sale’s Truth in Lending federal box must contain boxes for (1) APR, (2) finance charge, (3) amount financed, (4) total of payments and an additional box for (5) total sale price. There is no sale of goods or services in a loan, and thus no reason to include the “total sale price” disclosure.
Like nails on a chalkboard, we cringe every time we hear someone refer to a credit sale as a loan or a buy here pay here dealer or sales finance company as a lender. Why, you ask? It is important to know the difference between a credit sale and a loan simply because different laws apply to each type of transaction. And, if dealers are confused about the terminology and laws that apply to the transaction, how can we possibly expect legislators, the judiciary and AGs to “get” the difference?
Recently, that’s just what happened. By now, many of you have heard about a recent case out of the Civil Court for the City of New York, Ford Motor Credit v. Black. In that case, a judge found that a retail installment sale was a “loan” designed by Ford Motor Credit as a retail installment sale contract to circumvent New York state usury laws. The court wrongly recharacterized a typical retail installment sale assigned by the seller to Ford Motor Credit immediately after the sale as a loan subject to New York’s lending provisions and usury limitation. The judge ordered Ford to restructure the transaction and reduce the interest rate. Cases like these popped up in the late 90s, but had all but disappeared until now.
Dealers should take note of this case, and make every effort to change their way of thinking and speaking with regard to the credit sales they transact on a daily basis. If the dealer treats the retail installment sale as a loan, it may be difficult to convince a judge or AG otherwise.
Dealers should also be aware that while their credit sales can be distinguished from “loans,” sometimes those dealers engage in practices that actually constitute lending. For example, we’ve seen dealers use a side note to account for deferred down payments. The buyer signs a separate document promising to make payments to the dealer, which the dealer applies to the buyer’s down payment. The total of those amounts is listed as the downpayment on the credit sale. Even if the dealer does not impose interest on the downpayment deferral, the side note will still be a loan for Truth in Lending purposes if the amount of the deferred down payment is payable in four or more payments. By taking a side note, not only is the dealer subject to Truth in Lending, but also may be subject to certain state laws—both licensing schemes and substantive laws—that regulate lenders.
Dealers also routinely finance repairs subsequent to the purchase of an automobile, and try to roll those repairs into the amount financed under the original installment sale. While some states allow dealers to finance subsequent sales of repair services as part of the original installment sale transaction—if the dealer is performing the repairs and the original contract allows it—many states prohibit this practice. Some state laws treat the subsequent sale of dealer-provided repairs as a separate retail installment sale of goods and services, which may be regulated differently under state law, requiring a different contract and/or different license. Dealers financing their own repairs should consult their laws, or their attorneys, to see how federal and state laws regulate that practice.
But, if the dealer is financing repairs for services not performed by the dealer, no matter what the dealer calls it, for federal and state law purposes, that’s a loan. The borrower is the car owner. The dealer makes a loan to the car owner when it pays the third party for the services rendered on the vehicle.
So, be aware of the characteristics of your transaction. Is there a buyer and seller or a lender and borrower? In other words, if you’re selling something to the buyer and they promise to pay you for it over time, it’s a credit sale. If you’re paying a third party on behalf of a buyer for something that is not incident to the vehicle sale (like credit or property insurance sold at the time of the vehicle purchase), it’s a loan. If you know what you’re doing, it’s a lot easier to apply the correct federal and state law to it.
Use the correct terminology to describe what you’re doing. For Pete’s sake, get your nails off that chalkboard and stop calling a credit sale a loan. It will be easier to explain to a judge that your transaction is a credit sale if you don’t call it a loan in your deposition.
