Article

Apples and Pomegranates

Consumers will suffer from the CFPB’s use of the word ‘loan’ in place of ‘auto finance contracts.’

October 2014, Auto Dealer Today - Feature

by Tom Hudson

“Apple” is a 5-letter word. “Pomegranate” has 11 letters. If you want your reader to understand you, would you use “apple” to refer to a pomegranate?

Of course not. Because pomegranates are not apples, right?

The Consumer Financial Protection Bureau (CFPB) makes just this sort of mistake, however, by using “loan” in many instances when it is referring to a retail installment contract. Staffers I have talked to justify the mistake on the grounds of writing simply.
Now, I support any effort the government makes to write readable text. But the bureau’s plain writing efforts have gone too far in this instance. Misusing these terms hurts consumers.

A “loan” involves borrowing money. A consumer borrowing money signs something titled a “note,” or a “promissory note.” If the loan is secured (the security might be a vehicle), the consumer signs a “promissory note and security agreement.” The parties to these instruments are called the “lender” and the “borrower.” A borrower receives money from a lender and agrees in a note to repay it.

A retail installment sale contract (RISC) is used to evidence the sale of goods on credit. The parties to a RISC are the “buyer” and the “seller” of the goods. A buyer receives goods from a seller and agrees in a RISC to pay for those goods over time.

RISCs are commonly used for dealer financing of vehicles. Many dealers sell the RISCs they create to finance companies. The sale of a RISC by a dealer to a finance company is a commercial transaction between two businesses. The buyer of a RISC is not a lender, but is, rather, a purchaser of the RISC.

Semantics? Pointy-headed lawyer distinctions? Hardly.

Federal disclosure laws and other federal laws, such as the ECOA and the FTC’s Credit Practices Rule, treat loans and RISCs differently. Indeed, after a recent action by the federal banking regulators, there is no Credit Practices Rule for “loans” made by depository institutions — but there is for RISCs.

Many state laws also treat the transactions differently. In some states, a “lender” must have a license, while a credit seller need not. State laws frequently treat the transactions differently, with different maximum finance charge rates, late charges, grace periods, bounced check fees, limits on events of default, consumer rights upon repossession, and in other ways.

So when the bureau calls a RISC a “loan,” it points the consumer in the wrong direction in determining her rights and consumer protections. A consumer who buys a car by signing a RISC and who follows the bureau’s releases may believe that she has a car loan when in fact she is a credit buyer. She may decide to look at state laws and state regulatory guidance for consumers to determine what her rights are and might consult the loan law instead of the law regulating retail installment sales. More likely, perhaps, she might seek help from consumer protection agencies and mischaracterize the transaction as a loan rather than a RISC, resulting in incorrect advice from the agency — or even advice from the wrong agency.

Isn’t an accurately informed consumer worth a little extra text?

Misuse of the term “loan” also misleads car dealers, especially smaller independent dealers and buy-here, pay-here dealers who struggle with legal compliance. This dealer confusion can result in consumer harm. Many dealers use industry jargon already, referring to RISCs as “loans” or “notes.” The bureau’s mistake perpetuates this mistake.

I know of many dealers who have applied to the state for a loan license when they either did not need a license at all or they should have applied for the license required for credit sale transactions. I have seen instances of dealers going to office supply stores and buying pads of promissory notes to use in selling cars on credit because they erroneously believed that their transactions were loans. That mistake can result in significant harm to consumers when the document the dealer uses does not conform to a state’s retail installment sales act, which typically contains many consumer protections. The same mistake will result in erroneous Truth-in-Lending disclosures, presumably bad for consumers. Again, the bureau’s mistake perpetuates this mistake. A little more text — three words instead of one — would help educate dealers about their obligations to consumers.

I understand why press releases need to be written in simple language. But the CFPB’s oversimplification misleads consumers and the businesses that deal with them. If a business used language in its ads that misled consumers and tried to justify its actions by claiming the misleading words were easier to understand than words that were not misleading, what would the bureau’s response be? In a market where 80% of all financing is made through RISCs, it should not be hard to use an accurate term like “auto finance contracts” instead of the misleading and inaccurate term “loan.”

Now, pass me one of those pomegranates, will you?

Thomas B. Hudson is a partner in the firm of Hudson Cook LLP and the author of several widely read compliance manuals. ©CounselorLibrary.com 2014, all rights reserved. Based on an article from Spot Delivery. Single print publication rights only, to Auto Dealer Monthly. HC# 4823-8510-8764 (8/14). [email protected]

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