|
Frequently, it is important to revisit certain topics that have been discussed in the past but have not been reviewed in awhile. Recently, there have been several questions regarding negative equity. Although there are no new cases that would change the law, some sales personnel and managers are needlessly 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 on the vehicle than it is worth. Accordingly, 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. Negative equity needs to be disclosed anytime the purchase price 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 transaction.”
In 1990 and 2005, You Auto Know© addressed the negative equity issue. At that time, the Supreme Court of Ohio, in reviewing two cases that were appealed from the Appellate Court, broke down the argument in two specific areas: (1) what is the starting or negotiated price of the vehicle; and (2) whether the selling price can be greater than the 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”. Wackerly 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 court’s bottom line is 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, 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. This is why it is important to have a negative equity disclosure section on your buyer’s order. The consumer cannot plead ignorance once they have acknowledged the negative equity disclosure.
There is a case on point where the consumer stated she did not understand the transaction and thought that only her trade in was going to be increased in value not the price of the new vehicle she was purchasing. In this case, the Court found for the consumer, not on the basis of the negative equity application, but under the Consumer Sales Practices Act (CSPA) in that the Court determined that the consumer believed a specific price advantage existed which did not. This is a violation of the CSPA. However, the negative equity was not disclosed on the buyer’s order. Therefore, make absolutely sure that the consumer understands that negative equity has been added to the selling price of the vehicle.
Unfortunately, the concept of negative equity began when financial institutions did not want to see a negative number on either the buyer’s order and/or their mortgages. Even though the Court’s decision in Wackerly appeared to resolve the issue with Plaintiffs’ attorneys, this did not end the battle with Plaintiffs’ attorneys. Plaintiffs’ attorneys are attempting a new tactic where they believe that it is still a CSPA violation to utilize negative equity in that the increase would, allegedly, illegally cause the consumer to pay more sales tax and registration fees. Further, they are alleging that it can be a Truth-In-Lending Act violation and a violation of Ohio law which states you cannot increase the price of an advertised vehicle. Obviously, we believe that Plaintiffs’ attorneys’ position not tenable; however, they are filing lawsuits regarding these issues. It must be noted that in California, this is a very large problem and the California Defense Counsel and legislature is attempting to reconcile these problems. However, some financial institutions are finally seeing the light of reality. In this author’s opinion, it has always been somewhat of a sham when every financial institution knows that the trade-in value of the vehicle is not necessarily its wholesale value and is turning a blind eye simply because they would not allow a negative number on the mortgage. Now, many financial institutions are permitting the negative equity be placed on the mortgage and buyer’s order which specifically identifies the negative equity. Quite frankly, this finally makes sense and alleviates a myriad of problems, not only for the dealership, but also for the consumer. However, the negative equity amount needs to be identical on the buyer’s order, mortgage or lease. In this situation, the consumer sees the true trade-in value of their vehicle and the actual amount that they owe on the subject vehicle. For example, Credit Union Acceptance Corporation HNB, Huntington, Citizens Automobile Finance, Inc., Ford Motor Credit, and GMAC, to name a few, are showing negative equity. Obviously, this eliminates the notice issue when the negative equity was rolled into the purchase price of the vehicle. It makes it abundantly clear to the consumer that the deficiency balance due will be financed in the purchase of their next automobile.
Obviously, this eliminates a myriad of the legal questions and issues that Plaintiffs’ attorneys have attempted to create since the Wackerly case was decided in 1990.
I suggest that you review your buyer’s order and make sure a negative equity disclosure section is present and the purchaser acknowledges same by their signature.
As always, these are highlights of the law and are not to be construed as containing the entire law. This is not to be construed as a legal opinion. If you have questions, contact your legal counsel.
|
