|
 |
|
| You Auto Know ® - Newsletter |
 |
|
February, 2006: Negative Equity Revisited |
Occasionally, it is important to revisit certain topics that have been discussed in the past but has not been a current one. Recently, there have been several questions regarding negative equity. Although there are no new cases that have changed the law, some sales personnel and managers are confused regarding the proper application of negative equity and its legality in the State of Ohio. As you are aware, negative equity is a situation where a consumer, trading in a vehicle, owes more money on the vehicle than the vehicle is worth. In some situations, in order to obtain equity to pay off the vehicle, the amount that is owed is added on to the purchase price of the subject vehicle or to the unpaid balance. Negative equity needs to be disclosed anytime the purchase price and/or total unpaid balance is increased to cover the difference between the payoff and ACV of a trade. O.A.C. §109:4-3-16 (A)(12) defines “Negative equity adjustment” as “an equal amount which is added to both the purchase price of a vehicle and the trade in allowance for the trade in vehicle in a transmission.”
In 1990 and 2001, You Auto Know® addressed the negative equity question. At that time, the Supreme Court of Ohio, in reviewing two (2) cases that were appealed from the Appellate Court, broke down the argument in two (2) specific areas. The first step dealt with the question of where is the starting or negotiated price of the vehicle and the second question is whether the selling price can be greater than MSRP. The Appellate Court stated that the beginning price of the negotiation is the MSRP of the vehicle not the final price negotiated. However, the Supreme Court stated that “the test is not what the seller’s price for the goods for all buyers or even the retail price suggested by the manufacturer, but whether the price to a particular buyer was agreed upon in good faith negotiation”. Johns v. Ford Motor Credit Company, (1990) 49 Ohio St.3d 84, 87. Further, this price does not include finance or service charges. Having overcome the beginning or negotiating price, the Court stated that since most car sales involve negative equity trades, the inclusion of the negative equity in the purchase price is a means of accommodating the buyer who is trading in a depreciated vehicle. Further, it is an easy method for consumers to release the outstanding debt so the trade can be used as an allowance as contemplated by the parties. Therefore, the bottom line is that the court stated that negative equity can be added to the purchase price of a vehicle even if it causes the price to exceed the MSRP.
In order for the dealership to add negative equity to the purchase price or total unpaid balance, the dealership and the consumer must negotiate in good faith to derive a negotiated selling price and then include the negative equity in the selling price. It is important that the negotiated price including the negative equity is in writing and that the consumer fully understands the nature of the transaction and the fact that negative equity has been included to the selling price or unpaid balance. This is why it is important to have a negative equity disclosure section on your buyers order. The consumer cannot plead ignorance once they have acknowledged the negative equity disclosure.
In the past, financial institutions did not want to see a negative trade-in value and therefore it compelled the dealerships to increase the purchase price and price of the trade-in to cover the negative equity. However, as you are aware, many financial institutions are now reversing course and indicating that they want the documents to show the negative trade-in balance. This is significant in that the dealership does not have to play number games in order to help the customer overcome the negative equity aspect. However, merely because you are not inflating the purchase price of the vehicle, you are still increasing the total unpaid balance of the vehicle by the amount of the negative equity. In most instances, the customer is financing the balance of the negative equity that is included in the unpaid balance. Therefore, even though the negative balance shows on the buyer’s order as negative trade-in amount, this amount still has to be clearly disclosed in your negative equity disclosure box on your buyer’s order. Further, the negative equity disclosure box should have a place for the customer to sign in order to acknowledge that the negative equity has been fully disclosed and the/she accepts same. A recent case in the Court of Common Pleas, Summit County, specifically stated that it is a Consumer Sales Practices Act violation if the deposit and negative equity boxes are not filled in. It must be made clear to the consumer that the finance total includes a negative equity. Therefore, it is imperative that your finance and insurance managers not only properly show the negative trade-in value and add it to the unpaid balance of the vehicle, it must also be disclosed in the negative equity box on your buyer’s order . This must be executed by the consumer. Full disclosure is mandatory under the Consumer Sales Practices Act and this will protect the dealership.
I suggest that you review your buyer’s order and make sure a negative equity disclosure section is present.
As always, these are highlights of the law and are not to be construed as containing the entire law. This is not a legal opinion. If you need a legal opinion, please contact your legal counsel regarding this topic.
|
Copyright © 2005 Robert A. Poklar
Having been a Chevrolet dealer, Robert A. Poklar's business background and experience in the automotive industry aid him in his representation of numerous Ohio automotive dealerships. He also represents after-market service companies, trade organizations, dealers advertising associations and corporations. Pursuant to certain ethical standards, this may be construed as advertising. |
|
|
|
