IN RE: REQUEST BY KENNETH J. ROJC OF NISEN & ELLIOTT FOR A DECLARATORY RULING ON WHETHER AN INSTALLMENT SELLER LICENSED UNDER THE MOTOR VEHICLE SALES FINANCE ACT MAY FINANCE NEGATIVE EQUITY UNDER AN INSTALLMENT SALE CONTRACT

FACTS

On December 1, 1998, the Financial Institutions Bureau (Bureau) received a letter from Kenneth J. Rojc of Nisen & Elliott on behalf of several banks and finance companies requesting a declaratory ruling on whether an installment seller (hereinafter, dealer) may finance negative equity in the context of a motor vehicle retail installment sale contract (hereinafter, installment sale contract). Specifically, Mr. Rojc presents the following fact situation:

"A retail buyer purchases a vehicle and finances the purchase of such vehicle through a motor vehicle retail installment contract. The buyer also trades-in his or her current vehicle and pays-off the existing lien on the trade-in vehicle. The existing lien on the trade-in vehicle is greater than the value of the trade-in vehicle. The buyer wishes to finance in the consumer credit sale contract the amount by which the existing lien on the trade-in vehicle is greater than the value of the trade-in vehicle ("Negative Equity"). For example, if the existing lien on a trade-in vehicle is $10,000 and the value of the trade-in vehicle is $8,000, Negative Equity would equal $2,000."

The request for the declaratory ruling was made pursuant to section 63 of the Administrative Procedures Act of 1969 (APA), as amended, MCL § 24.263; MSA § 3.560(163). Section 63 of the APA, in pertinent part, states as follows:

"On request of an interested person, an agency may issue a declaratory ruling as to the applicability to an actual state of facts of a statute administered by the agency or of a rule or order of the agency."
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" . . . . means the commissioner of the financial institutions bureau, department of commerce."

II. STATUTES

At issue in this request is whether a dealer licensed under the Motor Vehicle Sales Finance Act (MVSFA), MCL §§ 492.101 et seq., may include negative equity in the amount financed under an installment sale contract. The sections of the MVSFA to be discussed in this ruling are, in pertinent part, as follows:

"Sec. 2.10 "Cash price" means the price measured in dollars at which the seller would in good faith sell to the buyer or to any other buyer under like circumstances, and the buyer would in good faith buy from the seller, the motor vehicle that is the subject matter of the installment sale contract if the sale were a sale for cash instead of an installment sale." MCL § 492.102.10

"Sec. 12(a) An installment sale contract shall be in writing and shall contain all of the agreements between the buyer and the seller relating to the installment sale of the motor vehicle sold and shall be signed by both the buyer and the seller.

(b) An installment sale contract shall be completed as to all essential provisions prior to the signing of the contract by the buyer and contain such other information as the administrator may require." MCL § 492.112

"Sec. 13(2) An installment sale contract shall set forth all of the following separate items in the following order:

1. Cash price of the motor vehicle. This amount shall include any taxes and costs of agreed upon accessories and installation of the accessories and documentary preparation fees. The documentary preparation fees shall not exceed $40.00.
2. Down payment made by the buyer at the time of or before execution of the contract, indicating whether made in cash, or represented by the agreed value of a "trade-in" motor vehicle, or other goods, or both. The amount of cash and the value of any "trade-in" shall be shown separately. A description of the "trade-in", if any, sufficient for identification shall be shown.
3. Unpaid cash price balance, which shall be the difference between the cash price (item 1) and the down payment (item 2) above." MCL § 492.113(2) 1-3.

Kenneth J. Rojc asks whether a dealer licensed under the MVSFA may extend financing to an installment buyer (hereinafter, buyer) which includes negative equity. If a dealer may finance negative equity, Mr. Rojc asks whether such financing constitutes making a loan for which the dealer would be required to be licensed.

Mr. Rojc states that the Motor Vehicle Retail Installment Sale Act, MCL §§ 566.201 et seq., the MVSFA, and the Credit Reform Act (CRA), MCL 445.1851 et seq. do not specifically address the financing of negative equity. He asserts, therefore, that there appears to be no statutory basis for prohibiting the financing of negative equity as part of an installment sale contract or for characterizing such financing as a loan.

According to the definition in the MVSFA the cash price is the result of good faith bargaining by the dealer and the buyer and not a fixed amount. Most sales of motor vehicles involve negotiation between the buyer and the seller on the price and other terms of sale. The agreed-upon cash price may be under the Manufacturer's Suggested Retail Price (MSRP) or "sticker" price. It is not unusual, however, for the negotiated cash price to be above the MSRP. Such a result may reflect a strong demand for a particular model. It may signify a mutually agreed-upon strategy by the buyer and the seller to enable the contemplated transaction (the installment purchase) to occur. The cash price in a particular sale of a motor vehicle is simply the amount agreed upon in good faith by the buyer and the seller.

Section 13(2) 2 requires, in part, that two of the components of a downpayment, the amount of cash and the value of the trade-in be separately disclosed in the installment sale contract. Significantly, the MVSFA does not require that the value of the motor vehicle traded in after deducting any balance owed on the outstanding installment sale contract or loan which financed its purchase be a positive number. If the value of the trade-in is negative, such negative equity may be part of the agreed-upon cash price.

The consideration of negative equity in negotiating the cash price is simply a means of facilitating the installment sale of a motor vehicle as acknowledged by one court which has ruled on a similar law. "It is a matter of common knowledge that most new car sales are accompanied by trade-ins. Inclusion of the negative equity of a trade-in is nothing more than a convenient means of accommodating a buyer who is offering a depreciated trade-in. It is, in other words, a practical method of facilitating the release of an outstanding security interest in order that the trade-in allowance can be made as contemplated in [Ohio] R.C. 1317.04." Johns v. Ford Motor Credit Company, 551 N.E.2d 183 (Ohio 1990). Ohio R.C. 1317.04 is very similar to section 13(2) 1-3; MCL 492.113(2) 1-3 of the MVSFA.

Therefore, the amount of negative equity on a motor vehicle traded in toward an installment purchase may be included in the cash price if the buyer and seller so agree in good faith. A dealer may finance the negative equity as part of the agreed-upon cash price in connection with an installment sale of a motor vehicle. Financing the negative equity by a dealer in the manner described does not constitute making a loan for which the dealer would be required to be licensed.

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Patrick M. McQueen, Commissioner
Financial Institutions Bureau
Department of Consumer and Industry Services

Date: April 23, 1999