Car Loan Legal Terms
ANNUAL PERCENTAGE RATE (APR)
Interest rate which is charged on the outstanding declining balance and is an average of the principal available over the term of the contract divided by the total finance charges. APR is the only legal way that interest rates can be presented to a customer.
BILL OF SALE
A formal instrument used to transfer title to a vehicle from one party to another party.
The Federal Trade Commission’s Used Car Rule that must be posted in the window of each used car offered by a dealer for sale. The Buyer’s Guide tells a prospective buyer: 1) whether the vehicle comes with a warranty, and if so, what specific protection is provided; 2) whether the vehicle is being sold “AS IS” or with implied warranties only; 3) that the customer has the right to have vehicle inspected by his/her own mechanic before buying; 4) that all promises should be in writing; and 5) will list some of the major problems that might occur in any vehicle.
While not a legally binding document, the Buyer’s Order provides a full written description of the vehicle, including base price, option costs, fees, and taxes. The customer’s signature on the Buyer’s Order signifies his/her intentions to purchase a specific vehicle.
CERTIFICATE OF ORIGIN (CO)
A certified instrument designating a vehicle (import) enters the USA and is used to verify that the vehicle has never been titled. In certain states the CO is used to transfer the ownership of a vehicle from the manufacturer to a dealer.
CERTIFICATE OF TITLE
A document issued by most States to evidence ownership of a vehicle. In most States the lienholder’s interest is recorded on the title.
CONDITIONAL SALES CONTRACT
A legal document evidencing the sale of a vehicle on time that provides for retention of the title to the vehicle by a lender until the customer has paid for the vehicle.
CONSUMER LEASING ACT. (REGULATION M)
Specifies information to be provided to the consumer before completing a lease, and the information to be disclosed when advertising a lease. Dealers who advertise a lease monthly payment or lease down payment must disclose: 1) that the advertised deal is lease; 2) the total amount due at lease signing; 3) number of payments; and 4) whether a security deposit is required.
Written disclosure to a customer of the total transaction as required by local, state or Federal regulations.
EQUAL CREDIT OPPORTUNITY ACT
Prohibits creditors from denying credit to an applicant because of race, religion, national origin, sex, marital status, age, or because a person receives part of their income through a public assistance program. The law specifics certain things that a creditor may not do when making a loan judgment, including some specific questions that the lender may ask when making a decision as to whether or not to extend credit to a prospective borrower.
FAIR CREDIT REPORTING ACT
Dealers are restricted in the use of credit reports by this act. Credit reports can be obtained only if customers have initiated a buying transaction. Dealers must also inform job applicants with a separate document if they plan to “pull” a credit report. If dealers deny credit or employment based on the report, customers and job applicants must be notified in writing of this adverse action.
FEDERAL BANKRUPTCY ACT
A dealer has twenty (20) days from the date a customer takes possession of a vehicle for the security interest to be perfected. This holds true regardless of state law. If the dealer fails to perfect within this time limit and the customer files for bankruptcy within ninety (90) days of the sale, the bankruptcy trustee then is entitled to a superior lien on the vehicle.
FEDERAL TRUTH-IN-MILEAGE ACT
Requires all odometer disclosures to be made on all states’ title documents. Also, the act imposes record-keeping to create a “paper trail” of odometer readings for previous owners.
IRS form for reporting cash transactions of $10,000 or more, or a combination of cash with either of the following – cashier’s check, bank draft, travelers check, and money order.
FTC CREDIT PRACTICES RULE
Before a cosigner signs an installment sales contract, the dealer must provide a written disclosure statement for the cosigner’s signature.
In most states the purchase of an automobile is covered by an implied warranty unless the dealer specifically states in writing that implied warranties do not apply (as found on the face of the Buyer’s Order). There are two common types of implied warranties:
a) Warranty of Merchantability means the seller of a product promises that a product will do what it is supposed to do. In other words, a car will fun.
b) Warranty of Fitness means that if a customer buys a sports-utility vehicle to pull a boat trailer, it should be able to do exactly that.
IRS POLICY: SALES INCENTIVES
The IRS treats factory incentives paid directly to salespeople as incentives, not wages, for tax purposes.
The law that protects consumers against the continuing mechanical problems of a bad vehicle (lemon). Most State Lemon Laws are patterned after Rule 703 of the Federal Trade Commission, which defines a lemon as a new vehicle that has been taken back to the service department at least four (4) times by the same repair or is out of service for a total of 30 days in one year.
MAGNUSON-MOSS WARRANTY ACT
Act that relates to the promises that the nature of workmanship of the vehicle will perform the function for which it was sold. Also, prohibits any disclaimer or modification of any implied warranties which must be conspicuously displayed (normally on the buyer’s order) prior to consummating the deal.
A Motor Vehicle Report on file at a State Motor Vehicle Agency which normally shows a driver’s violations, accidents and/or license suspensions.
The legal ability, capacity or authority of a second party to sign a legal document on behalf of a first party; used normally when a customer is not available to sign a document.
A model of a particular make that either the manufacturer of that vehicle or the National Highway Traffic Safety Administration (NHTSA), have concluded possesses a component that is potentially susceptible to failure or presents a hazardous situation for a customer, if the customer owns that particular model.
Vehicle ownership that is filed with the State Government where a customer lives.
Implements the Equal Credit Opportunity Act.
Implements the Truth-in-Lending Law and was issued by the Federal Reserve Board to outline compliance guidelines and direction.
TAX REFORM ACT (of 1986)
The Act that phased out consumer interest expenses and sales tax deductions on the purchase of automobiles; increased the cost of buying a personal use vehicle by 11% for the average consumer.
The legal document that registers a vehicle with the State licensing agency. It includes the customer’s name and address, the VIN, a description of the vehicle, and a complete breakdown of the vehicle’s purchase price.
The legal procedure followed to terminate an owner’s interest in a repossessed vehicle.
TRANSFER OF EQUITY
Transfer of an obligation and/or property from one individual to another.
This Act requires full disclosure of all lease terms and conditions in clear, understandable language. It also requires the lessor to give all details of lease terms and the lessee’s liability if the lease ad advertises the price, number of payments, or the statement that no down payment is required.
This Act requires all sellers and lenders to make clear and conspicuous disclosure of all costs in a credit transaction, as well as any advertisement that includes credit terms.