Section 6: Motor Vehicle Financing (continued) & Sales and Use Tax
Terms of Financing
Civil Code §2981 et. seq. (Motor Vehicle Sales and Finance Act) and Code of Federal Regulations “Z” (Truth in Lending Regulations) require financing terms be disclosed in every conditional sales contract. These terms include the following:
- Name of Creditor,
- Amount Financed (including itemization breakdown),
- Finance Charge,
- Annual Percentage Rate,
- Payment Schedule,
- Total of Payments,
- Total Sale Price,
- Prepayment and late payment penalties, if applicable,
- Other terms set forth in Code of Federal Regulations §226.18, as applicable,
- See C.F.R. §§226.1 et. seq. for details and form of disclosures.
Computing Interest Rates
There are two permissible methods for computing interest rates, the Simple-Interest Basis, or the Pre-computed Basis method.
- Apply the constant rate to the unpaid balance as it changes from time to time.
- Simple interest basis must be used if the payment schedule is longer than 62 months. [V.C. §2981]
Multiply the original unpaid balance of the contract by a rate and multiply that product by the number of payment periods elapsing between the date of the contract and the date of the last scheduled payment.
The forms company you use can you provide you the software to do your calculations for both types of loans. You can also use online loan calculators.
Pre-Computed Basis Loans, Note:
Pre-Computed Basis loans require the buyer to pay back the principal plus the full amount of interest that will accrue over the entire term of the loan, even if the buyer pays off the vehicle early. Using the “Rule of 78’s” method, the lender applies more of the buyer’s previous payments toward interest and less toward principal. Using “Rule of 78s,” a lender typically collects three-quarters of a loan’s interest in the first half of a loan’s payments. These types of loans are seldom offered to, or accepted by, the average consumer, and are most often used only in deals involving buyers with seriously damaged credit.
Annual Percentage Rate
The interest rate charged must be an annual rate of interest, not something compounded monthly or quarterly, nor in any other way manipulated to result in a higher than annual percentage rate of interest.
Computing Monthly Payments
The APR and unpaid balance due must be combined and then divided by the remaining months left on the conditional sales contract to produce a base monthly payment.
Truth in Lending
Civil Code §2982 and Federal Regulation Z require the following disclosures, as applicable:
“Itemization of amount financed” (must be labeled this way)
- Cash price (of the vehicle only)
- Document Preparation Fees: $70.00 maximum if processing your documents using Fairfax Imaging, or $85.00 if using the Business Partner Automation (“BPA”) system. [V.C. §11713.1(b)]
- Smog Fee: $50.00 maximum for the smog test. The smog state certificate fee is an additional $8.25. [V.C. §11713.1(b) and C.C. §2982(a)(4)]
- High polluter donation (if applicable in the geographical area)
- Sales tax
- Service contract charges
- Total cash price of (i) through (vii) above.
- License fees
- Registration fees
- Title (transfer) fees
- Insurance premiums
- Subtotal of the foregoing items
- Down payment amount
- Agreed value of trade-in
- Deferred down-payment (due before scheduled 2nd payment)
- Manufacturer’s rebate applied to down payment
- Any other down payment amounts
- Prepaid finance charge
- Total amount financed (F – G = “Amount Financed”)
- Finance charge
- Annual Percentage Rate (APR)
- Payment schedule
- Total of payments
- Total sale price
- other disclosures, such as security interests, pre- and late payment penalties, required deposits, etc., as applicable
Contract Not Executed: Deposit Refund Within 5 Days
Any payments made by a buyer before they sign a conditional sales contract must be refunded if the buyer decides to back out of the deal. In other words, a dealer cannot keep a deposit, even if the dealer advised the buyer the deposit was non-refundable at the time the buyer made the deposit. Any such payments must be refunded within five days of demand by the buyer. (C.C. §2982.7(a))
Breach of Conditional Sales Contract
If the dealer breaches the conditional sales contract and does not deliver the car as promised,
- The dealer must refund the total amount paid by buyer
- The dealer must refund any trade-in or the agreed value of the trade in as set forth in the contract, or the fair market value of the vehicle at the time of the contract, whichever is greater. [C.C. §§2983 and 2983.7(b)]
If the buyer fails to make full and timely payments (defaults on the loan), the dealer can repossess the vehicle.
If the buyer fails to make full and timely payments (defaults on the loan), the dealer can repossess the vehicle.
Repossession has five basic steps:
- Sending the buyer a written notice demanding payment off all overdue amounts within 15 days of receipt of the notice. This is commonly called “The 15 Day Notice.” It can be sent by registered mail, certified mail, or a process server so you have proof the day the buyer received the notice.
- Accelerating the remaining balance due. This allows the dealer to collect the entire amount left owing on the loan as soon as the 15 day notice expires and the buyer has not yet paid the overdue amount.
- Repossessing the vehicle.
- Selling the vehicle, and
- Suing the buyer for all related losses.
The deficiency is the amount the buyer is behind in their payments to the dealer/financier. To collect a deficiency, a dealer must provide 15 day right of redemption, a 15 day right to reinstate (or explain why no right exists) and may have to provide other notices set forth in [C.C. §2983.2]. In other words, you have to provide the buyer written notice that you are giving them a 15 day “second chance” to come up with the money they owe you before you repossess the vehicle and sell it to someone else. You must give this notice if you want to keep your right to later sue the buyer for all your losses related to the deal. If the buyer comes up with the money and you have already repossessed the car, you must give it back and reinstate the original contract.
A dealer does not have to provide right to reinstate and may accelerate the amount due upon buyer’s default where any of the following conditions exist:
- Buyer provided false material information on credit application
- Buyer concealing vehicle
- Buyer threatening destruction/abuse of vehicle
- Buyer threatening physical harm to repossessor
- Buyer used vehicle in commission of a crime
- Vehicle has been seized by Federal, State, or local agency pursuant to law. [C.C. §2983.3]
In addition to the foregoing rules, you must:
- Submit a Certificate of Repossession (REG 119) with your transfer application when re-selling the vehicle to the next buyer. You can obtain the REG 119 form here.
- Print “Repossession” on Line 1 of the Title, where the registered owner would normally sign off.
- Any renewal fees must be paid within 60 days of the date of repossession to avoid penalties.
Basic Repossession Rules
- Only the legal owner or licensed repossession company can repossess vehicles. Repossession agencies are licensed by the Dept. of Consumer Affairs. Employees hired by the repossession agency must also be registered with the Department of Consumer Affairs
- Vehicles cannot be repossessed while they are on private property.
- The legal owner is not required to notify the buyer before the vehicle is repossessed. However, the legal owner must notify the buyer in writing within 60 days of the repossession that the buyer has 15 days from the date they got the 15 day notice to arrange to get the car back before it is sold. If the vehicle was repossessed by a licensed repossession agency, the agency must notify the buyer within 48 hours of the repossession that they have repossessed the vehicle and they must furnish the buyer with a list of the personal items in the vehicle at the time it was repossessed.
- Repossession agencies are required to make a list of all personal belongings found in a vehicle at the time of repossession. They are required to send this list to the buyer within 48 hours of the repossession informing them how to recover their personal belongings and the amount of storage fees owed, if any.
Further Repossession Rules & Information
For further rules and information on repossessing vehicles, go to the California Department of Consumer Affairs, Bureau of Security and Investigative Services website here.
Foreign Language Contracts
- Where deals are negotiated in Spanish, Chinese, Korean, Tagalog, or Vietnamese, language contracts must be provided to the buyer. [C.C. §1632]
- You must display a notice in each language that you do contacts in stating that a contract translation is required to be provided to the customer.
- If the customer used an interpreter, the interpreter must be able to fluently speak both English and the language being translated, must be over 18 years old, cannot be an employee of the business offering the contract, and cannot be a person whose service is made available by the business negotiating the contract.
- For deals in Spanish, make sure to also have your Buyer’s Guide in Spanish for the buyer to sign.
Dealer Carrying a Contract
Dealers must comply with C.C. §2981 et. seq. (requirements for conditional sales contracts), Federal Regulation Z, and all other provisions of the Vehicle Code, and Civil Code concerning conditional sales contracts. See Truth in Lending section above.
Some of the significant requirements of conditional contracts have been highlighted above. However, dealers employing conditional sales contracts are strongly encouraged to familiarize themselves with Civil Code Sections 2981-2984.4 here which discuss the requirements for conditional sales contracts in considerable detail.
Sales and Use Tax
Note – Effective January 1, 2021: Vehicle dealers licensed to sell used vehicles are required to send to the Department of Motor Vehicles (DMV) any sales tax due on the sale of a vehicle at the time the dealer submits the vehicle transfer/registration application to DMV.
Dealers will no longer send sales tax to the Department of Tax & Fee Administration as they did in the past.
“Based on proposed regulations, DMV will implement the new sales tax payment method requirement in phases. On January 1, 2021, the requirement will be imposed on used vehicle dealers who:
• Were licensed by DMV in the last 2 years.
• Had a finding of underreporting by the California Department of Tax and Fee Administration (CDTFA) in the last 2 years.
• Reinstated their seller’s permit in the last 2 years.
• Are not in the Business Partner Automation Program.
NOTE: By January 1, 2023, all used vehicle dealers licensed to sell used vehicles will be subject to the new requirement.”
* Don’t pay sales tax to the DMV until they have notified you that your payment method has changed. If DMV has not notified you, continue to pay sales tax to CDTFA. If you are unsure of your status – to verify whether you are required to pay sales tax to the DMV (or to confirm receipt of tax payment to DMV) email DMVTAXINQ@dmv.ca.gov *
January 1, 2023 update from DMV; Used motor vehicle dealers not previously phased in, with 300 or fewer retail vehicle sales in the previous calendar year, should now be phased in.
New legislation authorizes used vehicle dealers that are not currently paying sales tax to DMV and had more than 300 retail vehicle sales in the prior calendar year, to delay changing their tax payment method until January 1, 2026.
The tax rate is determined by the county where the owner resides, not the county where the dealership is located.
What are taxable items?
- The sale price of vehicle (This includes any accessories added and charge for labor to install)
- Document preparation fees ($70 using the Fairfax Imaging system, or $85.00 using the BPA program)
- Smog fee paid to dealer ($50.00 maximum)
(See Revenue and Taxation Code §6011)
What are not taxable items?
- Finance charges
- Insurance charges
- Smog certificate issuing fee. This is the $8.25 fee we pay to the state to electronically issue the smog certificate when you get your vehicle smogged.
Dept. of Tax and Fee Administration Contact Information
If you have tax questions, you can check out the Dept. of Tax and Fee Administration website at: CDTFA
New 2023 FTC Privacy Disclosure Rules
As stated by the FTC (Federal Trade Commission), the 2023 Safeguards Rules apply to auto dealers who:
● Extend credit to someone (for example, through a retail installment contract) in connection with the purchase of a car for personal, family, or household use;
● Arrange for someone to finance or lease a car for personal, family, or household use; or
● Provide financial advice or counseling to individuals.
If you engage in these activities, any personal information that you collect to provide these services is covered by the Privacy Rule. Examples of personal information include someone’s name, address, phone number, or other information that could be used to identify them individually. The Privacy Rule applies if you collect personal information about someone in connection with the potential financing or leasing of a car, even if that person does not fill out a formal application. The Privacy Rule does not apply to you if a person buys a car with cash or arranges financing on their own through another lender.
For more information on the application of the Safeguards to auto dealers, please see FAQ FTC’s Privacy Rule and Auto Dealers.
If you want additional information on the Gramm-Leach-Bliley Act/FTC Safeguards Rules, please use the following links:
“Compliance deadline for certain revised FTC Safeguards Rule provisions extended to June 2023”
“FTC Safeguards Rule: What Your Business Needs to Know”