I’m sure many of us in the auto industry have heard these famous words from a lender before: “I’ll be able to fund you with an extra $1,000 down from the customer.” As all dealers who do business in California know, spot deliveries (delivering vehicles to customers before financing is secured) can inevitably lead to the need to rewrite some contracts. Candidly, proper procedures for rewriting contracts is one of those topics that come up constantly during Hotline calls. And so, let’s dive in and revisit some of the more important aspects of the rewrite process.
Written Acknowledgment Requirement
One of the biggest mistakes that we find concerning rewritten contracts is when a dealer prints out a second contract and has the customer sign it without any sort of written acknowledgment. Civil Code section 2982(h) requires the dealer to provide written acknowledgment in the event a customer agrees to rewrite a retail installment sale contract (RISC). Specifically, the law requires a RISC state:
“After this contract is signed, the seller may not change the financing or payment terms unless you agree in writing to the change. You do not have to agree to any change, and it is an unfair or deceptive practice for the seller to make a unilateral change.”
On a LAWCA-553 contract, this language must be acknowledged by the buyer:
Furthermore, the LAWCA-553 has the following additional acknowledgment:
If a contract is to be rewritten, the customer should always acknowledge, in writing, that s/he has elected to enter into a revised RISC. Such an acknowledgment should confirm the customer understands and agrees that (i) the original contract has been canceled, (ii) the rewritten contract was entered into freely, and (iii) the dealer did not exert undue pressure or duress on the customer in securing execution of the new contract. We recommend using the Reynolds and Reynolds Acknowledgment of Canceled Contract form (LAWCA 745-EX). Such an acknowledgment can help combat any claims that the customer was coerced or pressured into the rewrite.
Regarding leases, there is no law that requires such an acknowledgment. Nonetheless, we still strongly recommend as a best practice using an acknowledgment form to prevent such coercion claims when rewriting lease agreements.
No Backdating
By now, hopefully, you are all fully aware that a rewritten RISC should never be backdated (i.e., use the same date on the rewritten RISC as the date on the original RISC). Dealers should enter the actual date of execution on the rewritten RISC. The reason is because backdating causes the annual percentage rate (APR) to be incorrect. Although Regulation Z provides that the APR must only be accurate to within 1/8% of the properly calculated APR, backdating even by a day or two can generally exceed the 1/8% tolerance limit. [12 CFR § 226.22(a)(2)].
Regarding lease agreements, there is currently no California law directly on the matter. However, many plaintiffs’ attorneys’ websites advertise that they assist consumers in rescinding backdated leases. Accordingly, with the goal of avoiding consumer complaints, we conservatively recommend against backdating leases. Should your dealership want to consider this practice, we strongly advise consulting with competent counsel before doing so.
Additional Documents that Should Be Rewritten
When discussing rewrites with dealers, a frequent mistake made is that dealers think the term “rewrite” only pertains to rewriting the RISC. On the contrary, we recommend that dealers rewrite, re-date, and re-odometer everything aside from DMV documentation (with some exceptions discussed below). Specifically, dealers must be sure to rewrite the following deal file documents:
- Service/Maintenance Contracts: Service and maintenance contracts tend to be limited by mileage and/or time (i.e., 3 years/30,000 miles). Because of this limitation, it is important to rewrite service contracts along with the RISC. Otherwise, dealers may be faced with the situation where the service contract will expire earlier (perhaps a few weeks or more) than what is indicated on the face of the rewritten RISC (or lease agreement). There have been times where a mechanical failure arises in that window of time after the service contract has expired but before the time/mileage expiration reflected on the face of the sale or lease contract. This discrepancy unfortunately can lead to a dispute with the customer.
- GAP Contracts: The term and commencement date on a GAP contract must match the term and commencement date shown on a RISC (or lease agreement). The reasoning behind this is the same as for service contracts—we do not want the term/commencement date on the lease or RISC to differ from the term/commencement date reflected on the GAP contract.
- Optional Product Contracts: These would include contracts for products that need to be activated and/or registered, or that come with service agreements or limited term warranties (think theft deterrent devices and surface protection products). Again, these optional product contracts should be rewritten for the same reasons as mentioned above when discussing GAP and service contracts.
- Contract Cancellation Option Agreements: Per Vehicle Code section 11713.21, subject to certain exceptions, a dealer must offer a contract cancellation option agreement on a used vehicle with a selling price of less than $40,000. You can review the section yourself, or you can take my word for it that there is no exception for a rewritten contract. In other words, a customer entering into a rewritten contract to purchase a used vehicle under $40,000 must generally be offered another contract cancellation option period (unless the customer had previously exercised the cancellation option to cancel a purchase of a vehicle from the dealer within the past 30 days [Vehicle Code section 11713.21(e)]).
- Pre-Contract Disclosures: The terms of the Pre-Contract Disclosure must always match the terms of the RISC. Accordingly, if the RISC is rewritten, so too must the Pre-Contract Disclosure. When rewriting the Pre-Contract Disclosure, it is essential that all entries on the rewritten contract match the corresponding entries on the Pre-Contract Disclosure form and that the rewritten Pre-Contract Disclosure is signed prior to signing the rewritten contract. Dealers must ensure they are not simply reprinting the original Pre-Contract Disclosure.
What if A Party is Added or Removed?
Although not a novel concept, we have received quite a few questions on the Hotline about adding or removing a party to a contract. Generally, a rewrite does not require any new DMV documentation. Similarly, a rewrite does not convert a new vehicle into a used vehicle so long as the rewritten contract has the same customer or customers (if the original contract had a buyer and co-buyer). Accordingly, a rewritten contract that applies to the same vehicle and the same buyer(s) can still show the vehicle as “new.”
If a party is added
However, when the second contract involves different parties (i.e., a co-buyer is added or the vehicle is sold to another person altogether), the DMV has made it clear that the dealership must report the vehicle as a new vehicle rollback. [VIN Memo 2007-4]. You can read more about the rollback process in section 11.150 of the DMV Vehicle Industry Registration Procedures Manual as well as in our article “Unwinds and Rollbacks…What’s the Difference?” The second contract must also disclose the vehicle as “used.” The reasoning behind this is that when the second customer was added to the deal, the vehicle had already been delivered and driven on public roads by the first customer, which converted the vehicle’s status from new to used. [Vehicle Code §§ 430 and 665]. These same rules should generally apply to lease agreement as well.
If a party is removed
If the original contract has two parties, and one is removed, there does not appear to be justification for or the need to treat this as a rollback. In this situation, we recommend also taking the following steps:
- On the report of sale, line through the party being removed and initial the change;
- Have the party being removed complete a statement of facts instructing the dealership to remove him/her from the registration of the vehicle; and
- Have the buyer who is remaining on the deal complete a new REG 262.
Questions?
If you have any questions regarding this, or any other situation that may arise in your sales or service departments, hotline clients are invited to contact us at (800) 785-2880 (then press “4” for hotline) or hotline@autoadvisory.com.