| STATE OF MICHIGAN
DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES
FINANCIAL INSTITUTIONS BUREAU
IN THE MATTER OF: REQUEST BY RODNEY D. MARTIN ON BEHALF OF NATIONAL
CITY BANK FOR A DECLARATORY RULING ON THE APPLICABILITY OF THE MOTOR
VEHICLE SALES FINANCE ACT TO CERTAIN TRANSACTIONS
You have requested on behalf of National City Bank ("National City"),
a national banking association, a declaratory ruling regarding the
applicability of the Motor Vehicle Sales Finance Act ("Act")1
to National City's proposed "direct lending program."
Section 632 of the Administrative Procedures Act of 1969
allows an agency to issue a declaratory ruling, upon request by an
interested person, as to how a statute administered by the agency
would be applied to an actual state of facts. Section 2(17)3
of the Act defines the administrator of the Act as the "commissioner
of the financial institutions bureau." Thus, the Commissioner has
authority to issue a declaratory ruling regarding the applicability
of the Act to an actual state of facts. Your request letter of July
27, 1999, coupled with your letters of February 17, 1999, and March
8, 1999, set forth a statement of facts sufficient to enable the Bureau
to issue a declaratory ruling regarding the applicability of the Act
to the stated facts.
National City is a national banking association with its principal
office in Cleveland, Ohio. National City proposes to lend money to
Michigan consumers for the purchase of motor vehicles. According to
your request letter, National City "would enter into an agreement
with a motor vehicle dealer in Michigan under which the dealer would
serve as National City's limited agent for the purpose of soliciting
loans to finance motor vehicles, taking applications for the vehicle
loans, preparing the loan documentation, and closing the loans by
obtaining the buyers' signatures on all required documents."
Your request letter stated that "National City would prescribe the
terms of the loan, including the minimum interest rate. The dealer
would be given no authority to bind National City regarding the terms
of loans, except that the dealer could, within a range established
by National City, negotiate a higher interest rate. National City
would pay a commission to the dealer on each loan closed, which would
include any yield-spread differential." The yield-spread differential
may range from zero to six percentage points over the minimum interest
rate (par rate) of the contract.
Finally, your request clarified that the proposed transaction would
be non-recourse, meaning that National City would not have express
recourse against a dealer under which National City could require
the dealer to "buy back" previously executed installment sale contracts.
Your request letter indicates that National City would only have recourse
against the dealer in the form of a cause of action "for breach of
its agency responsibilities."
The Act is Michigan's regulatory pronouncement regarding the financing of motor
vehicles sold through installment sale contracts. The Act states in
section 3 that:
". . . a person shall not engage in this
state as a principal, employee, agent, or broker in either of the
following unless that person is licensed as provided in this act:
Section 2 of the Act states, in pertinent parts, that:
(a) The business of an installment seller
of motor vehicles under installment sale contracts.
(b) The business of a sales finance
"4. 'Installment seller' or 'seller' means
a person engaged in the business of selling, offering for sale, hiring,
or leasing motor vehicles under installment sale contracts
or a legal successor in interest to that person. As used in this subdivision,
"business" does not include an isolated sale." * * * "6. 'Sales finance
company' means a person engaged as principal, agent, or broker in
the business of financing or soliciting the financing of installment
sale contracts made between other parties, and includes
the business of acquiring, investing in, or lending money or credit
on the security of the retail seller's interest in such contracts
whether by discount, purchase, or assignment of those contracts, or
otherwise. . ."5
Essential to the licensure requirement is the meaning of the phrases
"installment sale contract" and "contract." Section 2 of the Act states,
in pertinent part, that:
"9. 'Installment sale contract' or 'contract'
means a contract for the retail sale of a motor vehicle, or
which has a similar purpose or effect, under which part
or all of the price is payable in 2 or more scheduled payments subsequent
to the making of the contract, or as to which the obligor undertakes
to make 2 or more scheduled payments or deposits that can be used
to pay part or all of the purchase price, whether or not
the seller has retained a security interest in the motor vehicle
or has taken collateral security for the buyer's obligation, and includes
a loan, mortgage, conditional sale contract, purchase-money chattel
mortgage, hire-purchase agreement, or contract for the bailment or
leasing of a motor vehicle under which the hire-purchaser, the bailee,
or the lessee contracts to pay as compensation a sum substantially
equivalent to or in excess of the value of the motor vehicle, and
any other form of contract that has a similar purpose or effect.
The terms do not include a sale or contract for sale upon an open
book account in which the seller has not retained or taken a security
interest in the motor vehicle sold or collateral security for the
buyer's obligation, the buyer is not required to pay any sum other
than the cash price of the motor vehicle sold in connection with the
sale or extension of credit, and the buyer is obligated to pay for
the motor vehicle in full within 90 days after the time the sale or
contract for sale was made. These terms also mean and apply to any
extension, deferment, renewal, or other revision of an installment
Generally, dealers that provide financing options at the dealership
for the purchase of motor vehicles do so through the installment sale
contract process. This process involves the dealer establishing relationships
with banks and finance companies to prearrange various financing options
that combine the sale of a motor vehicle with the installment financing
of the sale. The process used to establish the relationships are contracts
commonly referred to as dealer reserve, dealer participation, or dealer
agency agreements. The contracts outline the rights and duties of
the dealer and the bank or finance company and the method of calculating
fees paid by the bank or finance company to the dealer. The contracts
establishing the relationships do not cover any duty or obligation
of the installment buyer owed pursuant to an installment sale contract
- they simply structure a relationship between the dealer and the
bank or finance company.
Consumers that arrange their own financing outside of the dealership
negotiate loans with banks and other finance companies directly. In
such direct lending arrangements the sale and the financing activity
are entirely separate and openly negotiated. Direct lending transactions
are not predicated on the dealer having a preexisting contractual
relationship with the lender. It is this distinct separation of the
contract of sale from the financing of the sale that validates the
long held position that the Act does not govern direct loan transactions
that provide funds to consumers for the purchase motor vehicles. However,
this position may have been misinterpreted by some to mean that any
transaction financing the sale of a motor vehicle and labeled by the
lender to be a "direct loan" is not an installment sale contract subject
to the Act.
Pursuant to section 2 of the Act, in order for a particular document
to be an "installment sale contract," it must be a contract for the
retail sale of a motor vehicle in which part or all of the price is
payable in 2 or more scheduled payments, or be any other form of contract
that has a similar purpose or effect. Whether the seller (dealer)
has taken a security or collateral interest in the motor vehicle is
irrelevant to the finding of an installment sale contract.
Under section 2 of the Act, if the sale or contract was an open
book account and the seller did not take or retain a security interest
in the motor vehicle, and the buyer paid for the motor vehicle in
full within 90 days, no installment sale contract will be found to
exist for purposes of the Act. This is the only express exemption
from the Act's definition of an installment sale contract.
It is my conclusion that the National City "direct lending program"
does not involve an "open book account" and therefore is not excluded
under section 2 of the Act.
Because the National City transaction does not qualify for the Act's
sole express exemption, I must determine whether the transaction is
a contract that has a purpose or effect similar to a contract for
the retail sale of a motor vehicle. In short, is the National City
transaction a direct loan and not within the meaning of the Act's
definition of "installment sale contract," or is the transaction an
"installment sale contract" subject to the Act?
The Bureau must "look through a transaction so as to avoid the betrayal
of justice"7 and "look squarely at the real nature of the
transaction, thus avoiding . . . the contrivances of form, or the
paper tigers of the crafty."8 The label given to the agreement
by itself is not determinative of the agreement's provisions and "all
circumstances accompanying the transaction must be taken into consideration."9
This is important not only for uniform administration of the Act,
but to further Michigan's public policy of encouraging the sale of
retail goods on credit while placing strict usury limits on outright
loans of money. The technical distinctions between credit sales (installment
sale contracts) and loans of money must be maintained.10
Where the substance of a loan, labeled to be direct or otherwise,
does not differ in any significant aspect from a transaction subject
to the Act, the transaction will be found to be an installment sale
contract subject to the Act.11
While few cases have addressed the issue of whether a loan is direct
and not subject to the Act, the Michigan Court of Appeals opinion
in the Barnes v. Michigan National Bank12 is illustrative
of the analysis that should be conducted in deciding whether a particular
transaction is a direct loan not subject to the Act or an installment
sale contract subject to the Act.
The Barnes case involved a financing agreement between the
purchaser of a motor vehicle and a national bank. The court found
that the bank was not a regulated party under the Act because the
agreement ". . . was a direct loan from the bank to the consumer plaintiffs."
The court explained that:
"The overriding consideration in this case
is the true relationship between the bank and the plaintiffs, and
the lack of any relationship between the dealer and the bank. The
crux of the transaction was that of a personal loan by the bank to
the plaintiffs, not dealer- or bank-induced financing of the sale
of the motor vehicle. As the trial court correctly recognized, even
if the bank was found to be within the scope of the MVSFA and subject
to the defenses plaintiffs had against the dealer, the bank is without
recourse against the dealer. Where, as here, the bank is an unrelated
third party which has made a separate transaction with plaintiffs
to extend them credit, we cannot conclude that the Legislature intended
the bank to be left 'holding the empty bag.'"13
While the Court's opinion in Barnes did not give much detail
about the specifics of the transaction, Appellee's brief on appeal indicates
that: (1) the consumer did not use the financing available at the dealership,
(2) no credit application was taken at or by the dealership, (3) the
dealership was not party to the financing arrangement, (4) the consumer
was a long term customer of the bank, (5) all loan documents were prepared
at the bank, (6) all loan documents were executed by the consumer at
the bank, and (7) the bank issued a two-party check in the name of the
consumer and dealer for the balance of the vehicle's purchase price.14
Because the Court in Barnes stated that the subject transaction
was not an installment sale contract subject to the Act, it is helpful
to compare that transaction to a transaction executed under National
City's "direct lending program." In order to represent efficiently
such a comparison, I have developed a matrix (Appendix A) which is
based upon the declaratory ruling request letter of July 27, 1999,
your letters of February 17, 1999, and March 8, 1999, and our previous
discussions regarding the features of a Barnes-style "direct loan",
the National City transaction, and a typical installment sale contract.
The comparisons made in Appendix A clearly indicate that what the
Court of Appeals found to be a direct loan not subject to the Act
is not what is contemplated in National City's "direct lending program."
In fact, the substance of National City's transaction is much more
similar to the typical installment sale contract than the Barnes transaction.
The consumer in both the National City transaction and the typical
installment sale contract chooses to finance the purchase at the dealership
by utilizing one of the installment sale financing options offered
at the dealership. As is the common practice of banks and finance
companies that finance installment sale contracts at dealerships,
National City will require that dealers have a preexisting contractual
relationship with the bank before it will finance any installment
In both the National City transaction and the typical installment
sale contract transaction the dealer supplies and forwards the credit
application to the bank or finance company. In the National City transaction,
the dealer negotiates the interest rate term of the contract directly
with the consumer, which may result in an increase in the interest
rate of up to six percentage points over and above National City's
par rate15. Dealers in installment sale transactions have
similar authority to increase the interest rate term of the installment
sale contract. The dealer prepares all contract documents, obtains
the necessary consumer acknowledgments, transmits the executed loan
documents to the lender, and is paid the proceeds of the loan for
the purchase price and a yield-spread differential in each transaction.
The main difference between the National City transaction and other
installment sale contract transactions is that in the typical latter
transaction the dealer assigns its interests in the contract to the
lender, while National City's transaction does not require an assignment.
In the typical installment sale contract transaction, the dealer assigns
its interests in an installment sale contract to the predetermined
lender for a fee (yield-spread differential).16 In effect,
the lender compensates the dealer for participating in the lender's
contract-making process. In the National City "direct lending program,"
the dealer is compensated in a similar fashion for its involvement
in National City's transaction. For each installment sale processed
by the dealer on National City's behalf, National City pays the dealer
a fee (yield-spread differential). This fee is a payment that in no
significant aspect differs from the fee received by the dealer in
the assignment of an installment sale contract. In fact, National
City's "Auto Rates" sheet (yield-spread pricing schedule) does not
differ from those customarily used in the installment sale market.
Therefore, the outcome of assigning an installment sale contract -
dealer receipt of a payment from the lender of assignment - is effectively
no different from the dealer receiving a "dealer commission fee" from
National City. Thus, the true relationship between National City and
the dealer is one based on an installment sale transaction, underpinned
by an elaborate fiduciary relationship created by the preexisting
"Dealer Documentation Agreement." It is a preexisting contractually
based relationship that allows Dealers to selectively induce consumers
to finance their installment purchases through the National City.
It is a transaction that is much more complex and comprised of a great
many more duties and obligations than any direct loan program.
Review of the proposed transaction and potential relationship between
National City and installment sellers licensed under the Act reinforces
the conclusion that the National City "direct lending program" does
not differ materially from a transaction subject to the Act. In order
to participate in the "direct lending program," a dealer must enter
into a "Dealer Documentation Agreement" with National City. This agreement
in elaborate detail outlines the rights and duties of National City
and the dealer.
As stated in your request letter of July 27, 1999, National City
has modified its "Dealer Documentation Agreement" to remove the express
contractual recourse provisions that would have required dealers to
repurchase contracts from National City for breach of the Dealer Documentation
Agreement. Nonetheless, your request letter indicates that National
City would have an agency agreement with the dealer. The agency agreement
protects National City in a manner that no true direct lender would
ever be protected.
If the dealer in any respect breaches its duties owed to National
City under the agency agreement in completing any installment sale
transaction and that breach causes National City to incur a loss or
any other liability, National City may take recourse against the dealer
by bringing an action against "the dealer for breach of its agency
responsibilities." In short, National City will not be left "holding
an empty bag,"17 it will have recourse against the dealer
in the form of an action based in the law of agency.
Further, as you correctly note in your request letter, the Act "was
enacted to limit the rate and terms under which a motor vehicle dealer
could sell an automobile…" In the National City transaction, the dealer
is permitted to increase the interest rate term by as much as six
percentage points. Arguably, if the National City transaction was
found not to be subject to the Act, the dealer and National City could
agree to allow the dealer to set all of the terms of the installment
sale regardless of the Act. Clearly, this is not what the legislature
intended, and perhaps the very reason section 2(9) was enacted to
broadly define "installment sale contract" to include "any other form
of contract that has a similar purpose or effect."
Therefore, I must conclude that the proposed transaction of National
City, as outlined and described in your request letter of July 27,
1999, your letters of February 17, 1999, and March 8, 1999, and during
our previous conversations regarding this matter, to be an "installment
sale contract" as defined in section 2 of the Act.
National City's standing as a national bank does not mean that all
entities entering into an agency engagement with the bank to facilitate
the making of installment sale contracts may do so with impunity towards
the licensure provisions of the MVSFA.
Section 15(a) of the Act states, in pertinent part, that:
"No installment sales contract shall be
sold to any person doing business in this state who is not licensed
under the provisions of this act."18
Under the Act, it is unlawful for any person to transfer an installment
sale contract to any other business entity not licensed under the Act.
Likewise, it is unlawful for an installment seller or sales finance
company to be engaged as the agent of an unlicensed entity for the purpose
of executing installment sale contracts. In other words, it is unlawful
for any person subject to the Act to transfer an installment sale contract
to any entity, including a national bank, which has not come under the
Act's licensure provisions.19 Because of this prohibition
on the transfer of installment sale contracts to unlicensed entities,
I conclude that it is unlawful for a licensee under the Act to be engaged
as the agent of any unlicensed entity for the purpose of transferring
installment sale contracts to that unlicensed entity.20
Where a bank licensed under the Act has engaged a licensed installment
seller as an agent to facilitate the making of installment sale contracts,
the agent must not only maintain licensure under the Act, but must
ensure that the installment sale transaction that it is facilitating
is conducted in full compliance with the Act.21 Where such
agent has facilitated the making of an installment sale contract and
that transaction does not comply with the Act, that agent may be subject
to an administrative enforcement action as well as any applicable
Lenders and their licensed dealer agents are not allowed to evade
or circumvent the Act by artificially labeling installment sale contracts
as direct loans. Where the substance of a transaction is clearly within
the purview of the Act, consumers should be able to rely on the consumer
protection provisions of the Act. If transactions that in substance
are installment sale contracts are not made subject to the Act, the
public interest of consumer protection embodied in the Act is defeated.
To allow otherwise is to exalt the form of the transaction over its
substance and diminish the important public policy of preserving the
distinction between installment sale contracts and contracts for the
lending of money.
IT IS MY RULING, based upon the facts presented, that the
proposed transaction of National City, as outlined and described in
your request letter of July 27, 1999, your letters of February 17,
1999, and March 8, 1999, is an "installment sale contract" as defined
in section 2 of the Act, and is therefore subject to the Act.
IT IS ALSO MY RULING that where an entity has engaged an
agent to facilitate the making of an installment sale contract, the
agent must not only be licensed under the Act, but must ensure that
the transaction is conducted in full compliance with all terms of
the Act.23 Where such agent has either facilitated the
making of an installment sale contract on behalf of an unlicensed
entity, or, regardless of whether the entity is licensed, if the transaction
does not comply with the Act, that agent will be subject to an administrative
enforcement action as well as any applicable criminal sanction.24
Gary K. Mielock, Acting Commissioner
Financial Institutions Bureau
Department of Consumer and Industry Services
Dated January 1, 2000
1. Act No. 27 of the Public Acts of the Extra Session of 1950, MCL
492.101 et seq; MSA 23.628(1) et seq.
2. MCL 24.263; MSA 3.560(163).
3. MCL 492.102(17); MSA 23.628(2)(17).
4. MCL 492.103(a) and (b); MSA 23.628(3)(a) and (b) (emphasis supplied).
5. MCL 492.102; MSA 23.628(2) (emphasis supplied).
6. MCL 492.102(9); MSA 23.628(2)(9) (emphasis supplied).
7. People v Lee, 447 Mich 552, 561, 526 NW2d 882 (1994).
8. Wilcox v Moore, 354 Mich 499, 504, 93 NW2d 288 (1958). Cf., McQueen
v Williams, 177 F3d 523 (1999).
9. Seaboard Surety Co. v Bachinger, 313 Mich 174, 178 and 179 - 180,
20 NW2d 854 (1945) (cited with approval in, Kimmel v Hammond, 352
Mich 625, 630, 90 NW2d 681 (1958)). See also, Foster v Ypsilanti Savings
Bank, 299 Mich 258, 268 - 269, 300 NW 78 (1941) (quoting Hess v Haas,
230 Mich 646, 652, 203 NW 471 (1925)).
10. See, Griggs v Robinson Furniture Company, 78 Mich App 712, 724-725,
260 NW2d 898 (1977).
11. OAG 1956, No 2,784, p 768, 770 (Dec 19, 1956).
12. 159 Mich App 433, 439, 407 NW 2d 23 (1987).
13. 159 Mich App at 439 (emphasis supplied).
14. Brief for Appellee at 2 - 5, 159 Mich App 433, (1987) (No 90650).
15. For instance, according to the National City Bank Auto Rates sheet
(effective February 16, 1999), a "Tier A3" purchaser buying a vehicle
priced between $5,000.00 and $12,499.00 would be charged an interest
rate of 13.50% by National City. However, because of the three-party
(installment sale) nature of the National City Transaction, the dealer
may negotiate with the purchaser and increase the contract term by
6% to the rate of 19.50%.
16. Lenders normally refer to such payments as "dealer participation
17. See, 159 Mich App at 439.
18. MCL 492.115(a); MSA 23.628(15)(a).
19. MCL 492.115(a); MSA 23.628(15)(a).
20. MCL 492.115(b); MSA 23.628(15)(b) and MCL 492.137; MSA 23.628(37).
See, OAG 1956, No 2784, p 768 (Dec 19, 1956). See also, Restatement
(Second), Agency, Section 19 comt d (1958) ("An act may be criminal
or tortious if performed by the agent although not if performed by
the principal.") and Dodge v Blood, 299 Mich 364, 376, 300 NW 121
21. MCL 492.112 - 492.134; MSA 23.628(12) - MSA 23.628(34).
22. MCL 492.109; MSA 23.628(9) and MCL 492.137; MSA 23.628(37).
23. MCL 492.112 - 492.134; MSA 23.628(12) - 23.628(34).
24. MCL 492.109; MSA 23.628(9) and MCL 492.137; MSA 23.628(37).
I. Transaction Comparison: Barnes, National City, and Installment
|Barnes "Direct Loan"
||National City Transaction
||Installment Sale Contract
|Customer goes to dealer to look for vehicle
||Customer goes to dealer to look for vehicle
||Customer goes to dealer to look for vehicle
|Customer decides on vehicle to purchase
||Customer decides on vehicle to purchase
||Customer decides on vehicle to purchas
|Customer obtains direct financing
||Customer decides to obtain financing for vehicle through those
available at dealer
||Customer decides to obtain financing for vehicle through those
available at dealer
|No contract between the Dealer and Bank
||Dealer and Bank must have a preexisting relationship before
engaging in the transaction
||Dealer and Lender must have a preexisting relationship before
engaging in the transaction
|Dealer does not take the credit application
||Dealer takes credit application on behalf of Bank
||Dealer takes credit application on behalf of dealer, for assignment
|Dealer does not impact loan rate or terms
||Dealer negotiates an interest rate above National City's par
rate to create a yield-spread differential
||Dealer negotiates an interest rate above National City's par
rate to create a yield-spread differential
|Dealer does not transmit application
||Dealer faxes or otherwise transmits application to Bank
||Dealer faxes or otherwise transmits application to Lender
|Bank approves or denies the application
||Bank approves or denies the application
||Lender approves or denies the application
|Bank prepared its own loan documents, all of which were signed
at the Bank
||On behalf of Bank, Dealer completes Bank's contract in Bank's
name with transaction specifics and obtains Borrower's signature
- document is a combined promissory note, disclosure statement
and security agreement that requires only the Borrower's signature
||Dealer prepares the installment sale contract in Dealer's name
with specifics of the transaction, and Dealer and customer execute
the installment sale contract, which is a combination installment
sale contract, disclosure statement and security agreement
|Assignment not required - true direct loan
||Assignment not needed since the contract is a direct promissory
note from the Borrower to the Bank
||Dealer assigns the installment contract
|No fee paid; loan did not involve dealer
||Dealer receives a fee Dealer Commission Fee (yield-spread differential)
for processing the contract
||Dealer receives a dealer participation fee (yield-spread differential)
for processing and assigning the contract
|Check payable to consumer and dealer
||Bank pays dealer for the sale by permitting the dealer to draw
a draft on the Bank or paying proceeds to a "dealer commission
||Assignee pays dealer for the contract by sending dealer a check,
dealer coming to Assignee to pick up a check, dealer drawing a
draft on the Assignee, or paying proceeds to a "dealer reserve
|No loan documents are sent
||Dealer sends contract documents to the Bank
||Dealer sends contract documents to the Assignee
|Dealer owes no duty to Bank *
||Dealer owes various duties associated with being engaged as
the Bank's agent
||Dealer owes various duties associated with the dealer participation
|Bank is not liable for UCC or FTC claims
||Bank is liable to consumers for warranty claims under the UCC
and FTC "Holder Rule"
||Assignee is liable to consumers for warranty claims under the
UCC and FTC "Holder Rule"
* The only duty owed by the dealer to the bank in this transaction
is the titling requirement under the Motor Vehicle Code, MCL 257.217(2),
(4), and (5); MSA 9.1917(2), (4), and (5), and certain provisions
of the Uniform Commercial Code.