Legislature(2005 - 2006)BUTROVICH 205
02/23/2006 01:30 PM Senate TRANSPORTATION
| Audio | Topic |
|---|---|
| Start | |
| SB300 | |
| SB273 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 300 | TELECONFERENCED | |
| *+ | SB 273 | TELECONFERENCED | |
SB 300-MOTOR VEHICLE NEGATIVE EQUITY
CHAIR HUGGINS announced SB 300 to be up for discussion.
SENATOR RALPH SEEKINS, Alaska State Legislature, sponsor,
explained that SB 300 updates the definition of "principal
balance" in the Alaska Retail Installment Sales Act to
accommodate the proper disclosure of negative equity. It also
clarifies how negative equity within a lease arrangement is
handled. At one time, lending institutions required borrowers
to monetarily participate in purchase transactions. Down
payments of 25 percent were common, and term loans were held to
a maximum of 36 months. Over the last several years, however,
these guidelines have gone by the wayside. The strength and
stability of the national economy have spurred consumers to
demand lower-payment loans along with greater value.
He noted that banks, credit unions and acceptance companies have
accommodated the marketplace by offering low-down or no-down
payment options, as well as lengthening the allowable repayment
period; this is particularly evident in retail auto sales, where
qualified buyers may opt for 100 percent financing over the
longest possible term. As a result, the point in time at which
the vehicle's market value exceeds the outstanding balance on
the loan occurs much later than it otherwise would.
SENATOR KOOKESH arrived at 1:40:04 PM.
SENATOR SEEKINS continued, explaining that until this point is
reached, the owner's equity position is "upside down" or
"negative" - the auto's value is less than the remaining loan.
When the owner wants to trade for a different vehicle, a dealer
must figure out how to accommodate the loan payoff in the trade-
in. At one time, it was common practice in some states to
simply inflate the price of the car enough so the trade-in
covered the amount owed; the negative equity then disappeared.
However, it failed to describe the transaction mathematically,
and this practice fell into disfavor over time.
He noted that today new vehicles may be sold at non-negotiable
prices, such as when there is a factory incentive program.
Furthermore, the Federal Reserve Board has provided guidance on
this issue through revisions to Regulations M and Z, which
control the manner in which lease and credit transactions,
respectively, are disclosed. Regulation M was revised to
provide a dedicated disclosure line on the lease agreement in
cases where a prior loan or lease balance - negative equity - is
rolled in to the new lease transaction. Regulation Z was
revised to alter the definition of "down payment," thereby
solving the negative-equity issue as it pertains to a loan
transaction, Senator Seekins reported.
He said the vast majority of banks and credit unions are
federally regulated and follow federal disclosure laws; state
laws don't come into play. However, acceptance companies like
GMAC or Ford Motor Credit must follow both federal and state
laws. The dual-adherence requirement has created a disparity in
the manner in which loan and lease transactions are disclosed
when there is negative equity in Alaska. While federal law has
been revised to accommodate this situation, Senator Seekins
said, state law hasn't been.
He concluded, saying SB 300 resolves this disparity by updating
the definition of "principal balance" as it pertains to the
state's disclosure requirements for retail sales contracts found
in Title 45, Chapter 10. It also adds corresponding language to
Chapter 25 pertaining to the handling of negative equity with
respect to lease agreements. These modifications bring state
and federal law into alignment and resolve the concern for
acceptance companies that do business in Alaska.
1:43:03 PM
SENATOR COWDERY asked how dealers and car financing companies
currently address this situation.
SENATOR SEEKINS answered that they generally try to get
additional cash down payments, for example. In his own
dealership the previous week, a customer had $19,000 in negative
equity on a vehicle; it was eight-year financing, and the
dealership could do nothing to help. "If we sell the contract
to a bank, we're OK," he added. "We can't sell it to an
acceptance company." He pointed out that dealerships would
rather do business with acceptance companies, through which they
get preferable interest rates and additional cash bonuses from
the manufacturer.
1:45:11 PM
SENATOR COWDERY asked whether a loan would be made to an
individual if there was negative equity.
SENATOR SEEKINS replied that an outside loan could be obtained,
but it's something most dealerships don't like to do.
SENATOR COWDERY asked whether the change [proposed in the bill]
is for convenience or is cost-driven.
SENATOR THERRIAULT arrived at 1:46:13 PM.
SENATOR SEEKINS answered that it is more to bring acceptance
companies under the same types of regulations and disclosures
that the federal government has, thereby allowing acceptance
companies to compete with banks on an equal footing.
SENATOR COWDERY asked if the Department of Law (DOL) supports
this bill.
SENATOR SEEKINS said he didn't believe [DOL] had been asked.
However, states commonly try to bring their laws into compliance
[with federal laws], and most states' laws are now in compliance
with Regulations M and Z. He added that [the bill] was
requested by the acceptance companies.
SENATOR COWDERY offered his belief that the attorney general
wanted to testify on the bill, but wasn't available.
CHAIR HUGGINS suggested hearing from him at a later date.
SENATOR SEEKINS indicated the attorney general hadn't expressed
an opinion to his office. In response to Chair Huggins, Senator
Seekins said he hadn't heard negative feedback from any of the
finance institutions.
CHAIR HUGGINS asked about pros and cons for the customers.
SENATOR SEEKINS answered that the loan would still be made based
on the customer's ability to pay. Generally, a loan for a car
is an accommodation, trying to help the customer buy the car
that he or she wants. He said most dealers can handle contracts
through banks, and this brings it down to a matter of equity.
There may be $1,000 additional cash for people working through
Ford Motor Credit, for example, but if there is negative equity,
the dealership cannot help the customer take advantage of that
under state law now.
CHAIR HUGGINS posed a situation in which a customer has $5,000
in negative equity. He asked what allows a dealership to
leverage that to a customer's advantage.
1:50:24 PM
SENATOR SEEKINS noted that in the past, negative equity was
adjusted in the paperwork. Now the situation is disclosed and
yet it's financed anyhow, because the customer's
creditworthiness allows making those [larger] payments. In
response to Chair Huggins and Senator French, he affirmed that
currently it can be rolled over into new financing - but through
banks or credit unions, not acceptance corporations.
SENATOR FRENCH voiced concern about people living beyond their
means, and reported reading in Forbes that the savings rate in
the U.S. just went negative for the first time since 1933. He
said, however, this bill is more a symptom than a cause, and he
sees no reason to harm institutions doing business in Alaska.
He expressed interest in seeing Regulations M and Z. He also
requested a handout that shows how the paperwork could be done
under the federal system, but not the state system.
1:52:50 PM
SENATOR SEEKINS indicated he'd provide the requested
information.
SENATOR COWDERY asked whether [a dealer] can make a cash loan to
an individual.
SENATOR SEEKINS answered that he could, but doesn't. He
explained, "Part of our agreement with most finance institutions
is, we don't loan money as part of their down payment. ... We
disclose it as what it is." He said on a lease transaction, if
not properly disclosed, the negative equity could be termed -
without the definition in Regulation M - as a personal loan and
then not be properly disclosed. Therefore, the federal
government changed its process of disclosure in a lease
transaction so that it is not a personal loan.
He pointed out that for every loan on a vehicle, there's a
decision that the finance institution makes: Does the person
have enough disposable income to make those monthly payments?
If so, and if the person has a good credit history, there is a
willingness to finance an "upside down" or negative-equity
situation. It isn't considered a personal loan, and is still a
transaction on the car.
1:54:33 PM
SENATOR COWDERY observed that it seems like a personal loan.
SENATOR SEEKINS said many cars have negative equity for the
first two or three years after purchase. He noted that so-
called gap insurance is sold in the marketplace today: if the
vehicle is totaled, the loan is paid off, even though the car's
value doesn't equal what is owed.
1:55:53 PM
CHAIR HUGGINS asked what a dealer could do for someone with
$5,000 in negative equity.
SENATOR SEEKINS explained that there are three ways to help a
customer "get out of that car": cash, having enough margin in
the new vehicle to make up most or all of it, or financing the
negative equity. First, as the dealer he'd determine the car's
actual cash value - wholesale value - to him; he'd also
determine what is owed. If there's a $5,000 gap, but a $3,000
"markup in the car," he may allow $1,500 of that markup "to go
back into the vehicle." This leaves only a $1,500 gap. At that
point, if the customer is creditworthy, the dealer might not
request more of a down payment, or else the customer might pay a
$1,500 down payment. That would put the customer at 100 percent
financing on the new vehicle.
He noted that if the dealer can find a finance institution
willing to finance $1,500 more than it otherwise would, because
of the customer's creditworthiness, then the dealer - if he
properly discloses it - can have that negative equity financed,
provided it's through a bank or credit union, under federal law.
1:57:36 PM
SENATOR SEEKINS, in response to Chair Huggins, said all the
options are available to a dealer. All he's doing [with SB 300]
is bringing the acceptance corporations under the same
regulations as the federal banks and credit unions. However, a
customer may end up paying more in interest, or might not be
able to get a bonus incentive from the acceptance corporation.
In some cases, incentives from acceptance corporations provide
an additional $1,000 that the customer could apply to the down
payment, he noted. Having it equal in terms of disclosure can
sometimes be a benefit for the buyer, he suggested.
1:59:47 PM
BRIAN HOVE, Staff to Senator Ralph Seekins, Alaska State
Legislature, offered to answer questions during Senator Seekins'
brief absence.
SENATOR COWDERY asked, in essence, whether the interest for
financing a $5,000 equity gap would be the same as the financing
for a new car.
MR. HOVE answered that it's the same contract. The customer
would be paying off the old contract and rolling it into a new
one - a single contract with one set of terms and conditions,
including interest.
2:00:47 PM
CHAIR HUGGINS recalled there are variables, however, and the
institution could change the interest rate, for example.
MR. HOVE answered that it comes down to expanding options for
the buyer with regard to financing sources. He suggested this
offers the buyer an opportunity to get a better deal, since
acceptance corporations aren't included currently.
2:02:05 PM
SENATOR SEEKINS added that this came as a request from "the
legal department." He said several acceptance corporations want
this clarified so that they're clearly on an equal footing [with
banks and credit unions].
CHAIR HUGGINS advised that he'd see about the availability of
the attorney general [to testify at the next hearing], and would
determine whether banking institutions want to offer their
perspective as well.
SENATOR FRENCH indicated when the attorney general is present
he'd like to hear whether this is a good idea and perhaps should
be done for home sales as well.
2:02:43 PM
CHAIR HUGGINS pointed out that homes normally appreciate over
time, whereas automobiles depreciate rapidly.
SENATOR SEEKINS reiterated his intent to put all those finance
institutions on an equal footing in terms of full disclosure.
[SB 300 was held over.]
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