| STATE OF MICHIGAN
DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES
FINANCIAL INSTITUTIONS BUREAU
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
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."
If a dealer may finance negative equity, Mr. Rojc asks whether such
financing under Michigan law constitutes lending for which the dealer
would be required to be licensed.
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."
Section 2.17 of the Motor Vehicle Sales Finance Act (MVSFA), MCL 492.102.2,
defines "administrator" as follows:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . .
" . . . . means the commissioner of the financial institutions
bureau, department of commerce."
As the administrator assigned enforcement responsibility under the MVSFA,
the Commissioner of the Financial Institutions Bureau is authorized
to issue a declaratory ruling pursuant to section 63 of the APA.
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
III. DISCUSSION OF LAW
"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:
- 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.
- 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.
- 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.
Patrick M. McQueen, Commissioner
Financial Institutions Bureau
Department of Consumer and Industry Services
Date: April 23, 1999