DMV Vehicle Financing and Credit Practices 1 — Questions and Answers
Question 1: What federal law requires auto dealers to disclose the Annual Percentage Rate (APR) and total finance charge on a retail installment sale contract?
- The Equal Credit Opportunity Act
- The Truth in Lending Act (TILA / Regulation Z) (Correct answer)
- The Fair Credit Reporting Act
- The Consumer Financial Protection Act
Correct answer: The Truth in Lending Act (TILA / Regulation Z)
The Truth in Lending Act (TILA), implemented through Regulation Z, requires creditors and dealers to clearly disclose the APR, total finance charge, and other credit terms to consumers.
Question 2: Under the Truth in Lending Act, the Annual Percentage Rate (APR) must be disclosed to a buyer before they:
- Take a test drive
- Become legally obligated on the credit transaction (Correct answer)
- Receive the vehicle title
- Make the first monthly payment
Correct answer: Become legally obligated on the credit transaction
TILA requires that all required credit disclosures, including the APR, be provided to the consumer before they become legally obligated on the transaction.
Question 3: A 'spot delivery' or 'conditional delivery' occurs when a dealer delivers a vehicle to a buyer before:
- The sales tax is paid to the DMV
- The buyer completes a test drive
- Final financing approval has been obtained from a lender (Correct answer)
- The vehicle passes smog inspection
Correct answer: Final financing approval has been obtained from a lender
A spot delivery means the dealer allows the customer to take possession of the vehicle before the lender has formally approved and funded the financing.
Question 4: When a dealer assigns a retail installment sale contract to a third-party lender and the lender rejects it, who typically bears financial responsibility under a 'with recourse' agreement?
- The original vehicle manufacturer
- The buyer
- The dealer (Correct answer)
- The California DMV
Correct answer: The dealer
Under a 'with recourse' agreement, if the lender rejects or charges back the contract, the dealer is financially responsible and must repurchase the contract.
Question 5: What is 'dealer reserve' (also called dealer markup or participation) in auto financing?
- Money the dealer sets aside for warranty repairs
- The difference between the buy rate offered by the lender and the higher rate charged to the customer (Correct answer)
- A fee paid by the dealer to the DMV for each vehicle sold
- The minimum down payment required by the lender
Correct answer: The difference between the buy rate offered by the lender and the higher rate charged to the customer
Dealer reserve is the additional profit a dealer earns by marking up the interest rate above the lender's buy rate; the difference is shared between the lender and the dealer.
Question 6: Under federal law, how long is a dealer generally required to retain credit application records and retail installment contracts?
- 6 months
- 1 year
- 2 years (Correct answer)
- 5 years
Correct answer: 2 years
Under the Equal Credit Opportunity Act (ECOA) and Regulation B, creditors must retain records of credit applications and actions taken for a minimum of 25 months for individual applicants (effectively 2 years in most dealer contexts).
Question 7: A retail installment sale contract (RISC) differs from a simple purchase agreement primarily because a RISC:
- Is used only for commercial vehicle sales
- Includes financing terms such as APR, number of payments, and total amount financed (Correct answer)
- Must be signed by the DMV before the sale is complete
- Only applies to new vehicles with manufacturer warranties
Correct answer: Includes financing terms such as APR, number of payments, and total amount financed
A retail installment sale contract governs the credit portion of the transaction and must include all required TILA disclosures such as the APR, finance charge, payment schedule, and total of payments.
DMV Vehicle Financing and Credit Practices 1
What federal law requires auto dealers to disclose the Annual Percentage Rate (APR) and total finance charge on a retail installment sale contract?