Negative Equity: Handle with Care
Q. How are we to handle negative equity?
A. Negative equity is a factor with almost every trade-in vehicle, the result of many years of transactions with little or no down payment and extended finance terms.
The Official Staff Commentary on Regulation Z Truth in Lending stipulates that dealers disclose the amount of negative equity in a transaction on the appropriate line of the contract that begins: ”Prior Credit or Lease Balance paid by Seller to…”
Lenders are in a position to re-evaluate their policies regarding negative equity. I understand that some credit unions now require automobile dealerships to provide proof of negative equity disclosures prior to releasing funding on installment contracts. Since a contract is only as good as the ability to secure funding, there is no reason to doubt that where lender policies lead, dealerships will need to follow.
The media focus on unfair and deceptive business practices is a constant reminder to dealerships to fully disclose the effect of negative equity on deal figures. The operative phrase is full disclosure to the customer — written proof, signed acknowledgement.
Dealers should consult their own attorneys to develop a disclosure process and documentation that will provide the desired level of protection. Sales personnel need to reinstitute the practice of asking for down payment on every deal. The good news here is that when you ask for a down payment, you usually get one.
The path of least resistance has led us down the road to negative equity and into the courtroom where our customers are winning the legal debates. If you need more proof, consult page 129 of the Regulation Z Commentary. Read carefully 18(j), 3. Effect of existing liens. If you do not have the booklet, call us. We’ll send you one to handle with care.
“Kelly’s Korner” Column, OIADA Squeaky Wheel Newsletter, September 2005. p.24