Implementing the Negative Equity Initiative for Auto Dealerships

In today's market, many of your customers are upside down or have negative equity in their trade. Negative equity occurs when the customer owes more on the trade in than it is worth. In such a situation, you are extending additional credit to pay off the outstanding lien balance on the trade in.The federal law is clear about how negative equity may, and may not be disclosed on a retail installment sale contract or lease agreement.

If you fail to disclose negative equity properly on a contract, you may be subject to claims that you violated the federal Truth-in-Lending Act and its implementing Regulation Z, as well as the Consumer Leasing Act and its implementing Regulation M. Also, because many state laws affect the treatment of negative equity, failure to follow procedures for disclosing negative equity could result in state law penalties.

The company may be subject to both civil and criminal penalties for violating Regulation Z. For willfully and knowingly violating Regulation Z, it may face criminal penalties of not more than $5,000, up to one year in jail, or both. In addition, both individual and class action civil lawsuits may be brought against the company for any violation of Regulation Z. In civil litigation, it may be liable for the plaintiff's actual damages, statutory damages (capped at $500,000 for a class action), and reasonable attorney's fees and court costs (which can far exceed the $500,000 cap on statutory damages).

Violations of Regulation M may result in the company having to pay the plaintiff's actual damages, statutory damages of 25% of the total amount of monthly payments under the lease (but not less than $100 nor greater than $1,000), and the plaintiff's reasonable attorney's fees and court costs. In a class action, the company may be forced to pay the plaintiffs' actual damages, statutory damages at the court's discretion (with no minimum recovery and the dealer's maximum liability capped at the lesser of $500,000 or 1% of the dealer's net worth), and reasonable attorney's fees and court costs.

Implementation Steps in this Guide

• Edit and Distribute the Negative Equity Policy

• Distribute the Negative Equity Assessment

Edit and Distribute the Negative Equity Policy

Review and edit the policy

1. Click on the Library tab
2. Search for "Negative Equity Policy" and click on it
3. Click on the Edit button to view the list of versions
4. Click Create Draft to the right of the latest published version
5. Click Edit next to the Draft version that you just created
6. Make desired changes to the policy
7. Click Publish to finish editing the policy

Schedule the activity for distribution

1. Click on the Workspaces tab
2. Click on the Consumer Finance workspace
3. Click on the Negative Equity initiative
4. Click on the Negative Equity Policy
5. Click on Groups and assign to the appropriate groups, such as management, controller, sales, finance and insurance, and anyone who participates in the sales process.
6. Click on Schedule and set an annual schedule based on the Hire Date. 
7. Click Save

Distribute the Negative Equity Assessment

1. Click on the Workspaces tab
2. Click on the Consumer Finance workspace
3. Click on the Negative Equity initiative
4. Click on the Negative Equity Assessment
5. Click on Groups and assign to the appropriate groups, such as management, controller, sales, finance and insurance, and anyone who participates in the sales process.
6. Click on Schedule and set an annual schedule based on the Hire Date. We recommend that you set the Immediate Distribution option to Yes. 
7. Click Save