• Motor Vehicle Sales Finance Act Amendments to Take Effect
  • August 21, 2003 | Author: Laura H. Williams
  • Law Firm: McNees Wallace & Nurick LLC - Harrisburg Office
  • During the last legislative session, significant amendments were made to the Motor Vehicle Sales Finance Act ("MVSFA") affecting installment sellers and motor vehicle sales finance companies. These changes, which will take effect March 9, represent a first step in modernizing a badly out-of-date system of regulation that has not been systematically reviewed since its adoption in 1947. The amendments provide a careful balancing of revisions to the statute intended to reduce the potential for frivolous class-action litigation with provisions that enhance consumer protections.

    The MVSFA requires all motor vehicle installment sellers and motor vehicle sales finance companies to be licensed by the Pennsylvania Department of Banking. Although the MVSFA generally applies only to non-depository institutions, the amendments reduce the possibility that its provisions will be applied in a manner detrimental to the interests of state and federally chartered depository institutions engaged in the purchase and servicing of securitized loan packages.

    The Contract
    The amendments to the MVSFA make clear that "charges" for items incidental to the sale of a motor vehicle, such as service contracts, warranties, debt cancellation agreements and debt suspension agreements, are permitted to be included in the contract price of a vehicle sold by an installment seller and may be financed by a sales finance company. Consistent with the historic interpretation of the law by the Department of Banking, the term "charges" is defined to mean the good-faith sales price for comparable items in sales transactions rather than the actual acquisition cost of the items to an installment seller or sales finance company. This amendment rejects a strained interpretation of the statute by some class action advocates suggesting that it is unlawful to finance the sale of these items in any amount in excess of their actual acquisition cost.

    To the extent incidental items are financed as part of the sale of a motor vehicle, charges for the items must be separately disclosed to the purchaser and separately itemized in the contract. If any item is not sold at dealer cost, the contract must disclose that the seller may retain a portion of the purchase price. Although it is not necessary to disclose the retained amount (the mark-up), the statute now provides that excessive mark-ups for service contracts, warranties, debt cancellation agreements and debt suspension agreements are prohibited and constitute unfair and deceptive trade practices.

    The Department of Banking is required to adopt a statement of policy setting forth guidelines to determine when mark-ups are excessive, but pending the adoption of the guidelines mark-ups in excess of 100% of the cost of service contracts, warranties and debt cancellation or suspension agreements are prohibited. The amendments preserve provisions of existing law prohibiting the financing of mark-ups of insurance products and governmental fees, such as fees to the Commonwealth for recording or releasing a lien, fees, notary fees, registration fees or drivers' license fees. The statute also now explicitly permits the financing of negative equity.

    Notice to Consumers
    The statute imposes a new notice requirement. Prior to the execution of an installment contract, the seller must provide written and oral disclosure to the buyer that the purchase of specific items, including service contracts, warranties, debt cancellation agreements, debt suspension agreements and optional insurance products are voluntary and are not required as a condition of the buyer's receiving the installment sale contract loan. This disclosure must be complete, without any blank spaces, and a copy must be delivered to the buyer at the time the buyer receives a copy of the contract.

    Collateral and Creditors Rights
    Collateral for the loan (the motor vehicle and any other collateral) must be reasonably identified in the contract. If a holder intends to exercise any right to accelerate maturity of the contract upon default, that must be disclosed in the contract, as must the dollar or percentage charge, which may be imposed on any late payments. The law now makes clear that interest may continue to be charged during the time when a default charge is also imposed. Default charges may be collected on any contract subject to the MVSFA.

    The amendments repeal inflexible provisions of prior law that required vehicles repossessed out-of-state to be either held in the vicinity of the repossession or at the county in Pennsylvania in which a sale originally occurred for 15 days. Instead, repossessed vehicles may be held during the statutory 15-day redemption period at any location, provided that if the right to redemption is exercised, the vehicle must be returned to the buyer in a commercially reasonable manner. A safe-harbor provision further declares that it is commercially reasonable to return a redeemed vehicle either to the county in which repossession occurred, the county in which the vehicle was originally sold or the county in which the buyer resides.

    The redemption provisions have also been changed to require a return of the vehicle to the buyer "as soon as reasonably possible," but not later than 10 days of receipt of a redemption payment.

    In order to facilitate securitization, the Amendments also clarify that a MVSFA license is not required to acquire rights to payment under security or debt instruments, provided that absent default ownership of the underlying security agreements or notes and collection responsibilities remain with the assignor.

    Enforcement Provisions
    The Department of Banking has new enforcement powers under the amendments. Anyone who violates the statute is subject to a maximum civil penalty of $2,000 for each offense. In an effort to curb "predatory" practices, the enforcement extends to any licensee who engages in unfair, deceptive fraudulent or illegal practices. Under the amendments, this includes making excessive mark-ups to service contracts, warranties, debt cancellation agreements and debt suspension agreements.

    The good news for sales finance companies is that they are not liable for excessive mark-ups made by the installment sellers. In other words, merely purchasing a contract that contains a mark-up that the Department deems to be excessive will not subject the purchaser to liability under the statute. Similarly, sales finance companies are not liable for failure to give the consumer notice regarding incidental products and services.

    Application to Depository Institutions
    Although not always recognized by the Pennsylvania Banking Department, under federal law, licensing obligations arising under the MVSFA cannot be applied to national banks and federal savings associations or their operating subsidiaries. Likewise, pursuant to parity provisions of state law, a similar exemption from licensing obligations under the MVSFA should clearly apply to state chartered financial institutions and their operating subsidiaries. To avoid any suggestion that exemptions provided by the Banking Code apply only to financing the purchase of vehicles and not to the purchase of ancillary items, however, the amendments further clarify that the MVSFA does not apply to any extension of credit subject to the Banking Code.

    What's Next?
    More changes may be coming. The amendments to the MVSFA call for the creation of a Joint State Government Commission Task Force to study the MVSFA in light of existing Federal regulations, and to consider merging other state consumer credit laws such as the Goods and Services Installment Sale Act with the MVSFA into a consolidated Consumer Credit Code.