Legislature(2005 - 2006)BELTZ 211
03/16/2006 01:30 PM Senate LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| SB273 | |
| SB300 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 273 | TELECONFERENCED | |
| + | SB 300 | TELECONFERENCED | |
| += | SB 272 | TELECONFERENCED | |
| += | SB 307 | TELECONFERENCED | |
SB 300-MOTOR VEHICLE NEGATIVE EQUITY
CHAIR BUNDE announced SB 300 to be up for consideration.
BRIAN HOVE, staff to Senator Seekins, sponsor of SB 300, said it
updates the definition of "principal balance" found in the
Alaska retail installment sales contract to accommodate the
proper disclosure of negative equity. It clarifies how an
incident of negative equity is handled within a lease
arrangement and a contract.
He explained that previously, lending institutions required
borrowers to participate financially in purchase transactions.
Down payments of 25 percent were quite common and term loans
were held for 36 months. But these guidelines have gone by the
wayside. Consumers have demanded lower payment loans with
greater value. Now no and low down payment options are offered
and the payment period has been lengthened. This phenomenon is
particularly evident in retail auto sales where qualified buyers
often opt for 100 percent financing over the longest possible
term.
The mathematical effect of this strategy is simple.
The point in time at which the vehicle's market value
exceeds the outstanding balance on the underlying loan
occurs much later than it otherwise would. Until this
point is reached, the owner's equity position is
commonly known as upside down or negative. In other
words, the value of the vehicle is not yet sufficient
to completely repay the outstanding balance on the
loan.
As a result, when the owner wants to trade for a
different vehicle, the dealer has to figure out some
way 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 to be purchased
enough to permit an allowance for the trade-in that
would cover the amount owed. The negative equity
disappears. This method solved the equity problem, but
failed to adequately describe the transaction
mathematically. So, over time this practice fell into
disfavor and today it is more common that new vehicles
are sold at non-negotiable prices - such as factory
incentive programs.
Furthermore, the Federal Reserve Board provided
guidance on this issue through revisions made to
Regulations M and Z. These regs 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 into the new lease transaction.
Revisions made to reg Z altered the definition of
"down payment" thereby solving the negative equity
issue as it pertains to a loan transaction.
MR. HOVE said that the vast majority of banks and credit unions
are federally regulated. He continued to explain:
Therefore they follow federal disclosure laws. State
laws do not come into play. However, acceptance
companies, like GMAC, Ford Motor Credit and others are
required to follow both state and federal laws. The
dual adherence requirement has effectively created a
disparity in the manner in which loan and lease
transactions are disclosed in cases involving negative
equity here in Alaska. So, the bottom line is that
while federal law has been revised to accommodate this
situation, our state law has not. 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
Chapter 10, Title 45. Furthermore the bill 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 back into alignment.
CHAIR BUNDE asked if this language is based on federal
regulations.
MR. HOVE replied that the banks, credit unions and acceptance
companies are the typical financial options - for purchasing new
vehicles, for instance. Banks and credit unions are required to
follow federal law. Acceptance companies like GMAC and Fort
Motor Credit and other are required to follow not only federal,
but also state, law. The feds have accommodated this situation
through Regulations M and Z for the banks and credit unions. The
acceptance companies have not been accommodated. This is what SB
300 does.
SENATOR SEEKINS expanded that the state's law has a grey area as
to whether or not disclosures that are required under federal
law meet our own statutes. SB 300 brings state law into
alignment with federal law for acceptance companies.
1:52:36 PM
CHAIR BUNDE asked how the process would work.
SENATOR SEEKINS explained with an example of a person who wants
to trade in his car and owes more than it's worth - a situation
that is called upside down. It's not an uncommon occurrence.
CHAIR BUNDE asked how he would start his new loan.
SENATOR SEEKINS explained that it is included on the financing
on the new vehicle. The credit decision is made based on the
customer's ability to pay, not necessarily the purchase price of
the car they are buying. If this is done, it has to be fully
disclosed in the deal.
CHAIR BUNDE asked if a vehicle was, in fact, being financed
twice.
SENATOR SEEKINS replied, "In effect - part of it, yes they do."
CHAIR BUNDE asked if the full costs have to be disclosed as with
consumer loans.
SENATOR SEEKINS replied, "Yes, absolutely."
1:58:26 PM
SENATOR SEEKINS said that finance companies really frown on
inflating the purchase price of a vehicle (MSRP) to cover what
is still owing on the trade-in.
1:58:54 PM
ED SNIFFEN, Assistant Attorney General, Division of Consumer
Protection, Department of Law (DOL), said he views this as a
consumer protection issue in terms of a consumer knowing how
much money it is costing him to borrow money to finance these
transactions.
Currently, he explained, two things happen. One is the dealer
loans money to pay off the car and that transaction separately
requires all kinds of disclosures under the Regulation V, the
federal Truth In Lending Act. If a dealer wants to sell that
customer another vehicle and loan him money to do that, he makes
him a second loan. The disclosures for that may be under the
state's Retail Installment Sales Act, the Consumer Leasing Act
or the Truth In Lending Act, depending on how the financing
happened. This bill allows the dealerships to follow the federal
model, which says you can take the first loan and wrap it into
the loan for the new vehicle and do one disclosure that explains
the finance charge, cost of credit, etc. This language is
consistent with federal law; it won't have any adverse impacts
on consumers.
CHAIR BUNDE quipped that there is no regulation to put on the
forms saying that a fool and their money are soon parted.
2:01:45 PM
SENATOR SEEKINS said someone suggested a modification saying
that AS 45.10.030 needs a clarification to make its language
consistent with this bill. That statute says the retail
installment contract must contain the names of the seller, the
buyer, etc. etc. It also must contain the following items - and
it was suggested to add any other charges including: "the
amount, if any, that the seller agrees to pay to discharge an
outstanding obligation of the buyer on an existing motor vehicle
agreement loan installment or sales contract or lease." That
would be compatible with the intent of SB 300.
CHAIR BUNDE said he would hold bill for the amendment to be
added to a CS. He thought that would be easier for the
committee.
SENATOR SEEKINS agreed.
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