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“Contract Cancellation Option”, “Certification” Label Among New Provisions of Controversial Measure

The so-called “Car Buyer’s Bill of Rights” was enacted this summer, effective July 1, 2006. The bill started out with what some industry advocates said were draconian measures, but ended up being significantly amended. Among the key provisions of the new law are requirements for a “contract cancellation provision,” limitations on the use of the phrase “certified” in the sale of used vehicles, and limitations on the amount of finance reserve a dealer can make.

The contract cancellation provision only applies to consumer sales involving used vehicles (not including motorcycles or RV) with a purchase price of less than $40,000. Retail installment sales contracts will have new disclosure language added that informs customers of their rights to have the contract cancellation option.

The law will require the dealer to offer a 2 day/250 miles contract cancellation option. It will also permit dealers to charge for the Option, and then charge a restocking fee (less the cost of the Option) if the consumer actually cancels the contract. (See sidebar.)

The bill also imposed some limitations on a dealer’s ability to advertise a used vehicle as “certified”. A dealer cannot advertise a vehicle if any of the following apply:

(1) The dealer knows or should have known that the odometer on the vehicle does not indicate actual mileage, has been rolled back or otherwise altered to show fewer miles, or replaced with an odometer showing fewer miles than actually driven.

(2) The dealer knows or should have known that the vehicle was reacquired by the vehicle's manufacturer or a dealer pursuant to state or federal warranty laws.

(3) The title to the vehicle has been inscribed with the notation "Lemon Law Buyback," "manufacturer repurchase," "salvage," "junk," "nonrepairable," "flood," or similar title designation required by this state or another state.

(4) The vehicle has sustained damage in an impact, fire, or flood, that after repair prior to sale substantially impairs the use or safety of the vehicle.

(5) The dealer knows or should have known that the vehicle has sustained frame damage.

(6) Prior to sale, the dealer fails to provide the buyer with a completed inspection report indicating all the components inspected.

Although most dealers already itemize theft deterrent, surface protection, or GAP products on the sales contract, the new law will require both a disclosure on the sales contract and an additional disclosure signed prior to execution of the sales contract. The new form will have to disclose, “Installment Payment EXCLUDING Listed Items,” and then set forth the disclosed items:

The form will then have to state the installment payment INCLUDING the items listed.

Dealers who obtain a consumer credit score (which is basically every dealer) will also have to provide a new form, “Notice to Vehicle Credit Applicant”. The form informs consumers about the use of consumer credit scores in the extension of credit.

Dealers should not wait till the last minute to train employees regarding these new legal requirements.

Contract Cancellation Option Charges

As part of the new “Car Buyer Bill of Rights,” a dealer can require the following charges for a Contract Cancellation Option:

Option Charges

* $75 for vehicles of $5,000 or less;

* $150 for vehicles from $5001-$10,000;

* $250 from $10,001 to $30,000; and

* 1% of the purchase price for any vehicle over $30K to the $40K ceiling.

Restocking Fee

In addition, the dealer can charge a restocking fee, less the option charge, if the consumer exercises the option as follows:

* $175 for purchase price of $5K or less;

* $350 for price of less than $10K;

* $500 for price of more than $10K.