" The 'Perfect Storm' of Litigation, Regulation May Require
New Contracts "
By: Thomas Hudson
GMAC has settled its class action race discrimination case in Tennessee. The settlement agreement generally tracks the settlement agreement in the Nissan Motors Acceptance case that settled a year ago or so, with some differences here and there that lawyers might quibble over, but with many more similarities than differences. One part of the settlement will have industry-wide ripples, however. GMAC has agreed to put a disclosure in all retail installment sales contract forms it produces and distributes to dealerships. The disclosure is to be substantially like the following:
The Annual Percentage Rate may be negotiable with the Seller. The Seller may assign this contract and retain its right to receive a part of the Finance Charge.
The disclosure has to be in bold, 10-point italics, on the front of the contract and near the customer's signature lines.
The disclosure is required only for GMAC's own contracts and not for contracts produced by forms companies and others that are used in retail installment sales transactions that GMAC might buy from dealers – even GM dealers.
The earlier NMAC settlement had a similar disclosure that NMAC agreed to put in its own contracts. NMAC's disclosure was:
The Annual Percentage Rate May Be Negotiable With The Dealer.
The NMAC disclosure was required to be in at least 12-point bold type and had to appear on the front of the contract, as close to the customer's signature line as state-mandated notices and acknowledgements would permit. As with the GMAC settlement, the NMAC disclosure applies only to NMAC's own contracts and not to contracts supplied by others.
Industry Consensus
At more or less the same time as the GMAC settlement, another important development occurred. The American Financial Services Association, the National Automobile Dealers Association and the Consumer Bankers Association have all endorsed a so-called "Voluntary Standard on Motor Vehicle Financing Agreements." The Voluntary Standard recommends that motor vehicle retail installment sale contract forms should include statements similar to these:
The Annual Percentage Rate may be negotiated with the Seller [or Dealer].
The Seller [or Dealer] may assign this contract and retain its right to receive a part of the Finance Charge.
Sound familiar? These statements can appear together or separately, and there is no requirement that they appear on the front of the contract or in any particular proximity to the customer's signature, or that they appear in any particular font or type size.
Are you following this so far? Have your eyes glazed over yet? Hold on, there's more!
Proposed Regulation Change
That's right – as if all this contract redrafting wasn't enough, the Federal Reserve Board has proposed to change the Regulation Z rules that govern when
disclosures are "conspicuous." Certain Truth in Lending/Regulation Z disclosures have to appear in a conspicuous manner, and the feds aren't happy with the rule that has served us so well for the last four decades or so and are proposing to change it (note to the Fed Staff – if it ain't broke, don't fix it). So what, you ask, if they do change the conspicuousness standard?
Here's what. It is virtually impossible for the feds to monkey around with the "conspicuous" rule to a significant degree without requiring a reprinting of every single retail installment sales agreement in existence. It is almost equally impossible for them to tinker with the rules in a way that preserves present data-entry points on the contracts – in other words, every single contract may require reprogramming.
The Board will do what they're going to do by the end of March. Compliance with the new rule will be permissive immediately, but will be mandatory by October 1, 2004, unless the Board sets a later effective date (unlikely). There is a chance that the Board will heed the many industry calls to withdraw its proposal, but history tells us that's a long shot.
Put all this together and you have 2004 as The Year of the New Contract! So batten down the hatches and get ready for a flurry of new paper.
Copyright © 2004 CounselorLibrary.com, LLC. All rights reserved.
This publication is designed to provide accurate and authoritative
information regarding the subject matter covered. It is provided with
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rendering legal counsel. If legal advice is required, the service of
a competent professional should be sought.
For more information about Thomas Hudson and Spot Delivery® go to www.spotdelivery.com or contact: tbhudson@hudco.com
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