If you have known me for more than five minutes, you have probably been subjected to my sermon about the critical differences between a car loan and a retail installment contract. “Loans” and retail installment contracts, like Golden Retrievers and Yellow Labs, share a number of characteristics, but they are different critters.
People in our business, and people who regulate our business, use the term “loan” sloppily, when they really mean to refer to retail installment contracts. Usually that sloppy usage doesn’t matter. But sometimes it does.
Written Into Law
One of my favorite “sometimes it does” episodes occurred several years ago in Texas. The legislature in the Lone Star State passed a bill they thought would fix a problem in the Texas law regulating retail installment contracts. Instead of using the term “retail installment contract” in the legislation, the drafter got sloppy and used the word “loan.”
As it turns out, “loan” was a defined term under Texas law, and was defined to expressly exclude retail installment contracts. The badly drafted legislation had absolutely no effect on the retail installment sales laws. And, to put a little icing on the cake, the legislature in Texas meets only every other year, so it took two years to correct the drafting error.
We’ve criticized the Consumer Financial Protection Bureau on a number of occasions for the same mistake. Based on their recent press releases regarding enforcement actions, we can add to the list of offenders the attorneys general of Delaware and Massachusetts.
But we aren’t done! Along comes a lawyer who was either blissfully ignorant of the distinction we keep harping on, or who knew the difference between the two terms but decided he might be able to put one over on an inattentive judge. Here’s how that went.
Ambrose Industrial Services Corp. obtained a loan from Advantage Funding Commercial Capital Corporation that was secured by a truck. Jennifer Ambrose, AISA’s owner, personally guaranteed the loan.
AISC eventually defaulted on the loan, and AISA and Ambrose filed for bankruptcy. Advantage Funding repossessed the truck after the bankruptcy court granted it relief from the automatic stay. Advantage Funding filed a claim as part of Ambrose’s bankruptcy case, and Ambrose objected.
Ambrose alleged that Advantage Funding was a sales finance company and had violated the Georgia Motor Vehicle Sales Finance Act when it failed to give notice after repossessing the truck.
A Loan Is a Loan
The U.S. Bankruptcy Court for the Northern District of Georgia ruled for Advantage Funding. The court wasn’t buying what Ambrose’s lawyer was selling, finding that Advantage Funding was not a sales finance company under the MVSFA because it did not purchase a retail installment sale contract from a seller and was not engaged in the business of buying retail installment sale contracts.
Advantage Funding’s security interest in the truck arose under the terms of a note. Because Advantage Funding was not a sales finance company, it was not subject to the notice requirements under the MVSFA. In any event, Ambrose waived any right to notice under the terms of the personal guarantee. The court found that the waiver was valid and enforceable because it did not violate public policy.
Sometimes the distinction matters. So repeat after me: A loan is a loan, and an installment sale is an installment sale. Then say it again. And again.
Thomas B. Hudson is a partner in the firm of Hudson Cook LLP, publisher of Spot Delivery, and the author of several widely read compliance manuals. Contact him at [email protected].