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Lesson 16 of 20 Outline

Dealer education / Selling and financing. Lesson 16 of 20. 11 minutes.

Truth in Lending and the credit disclosures

After this lesson you can

  • Make the Truth in Lending disclosures a financed sale requires.
  • Know when a Spanish contract is required and what happens to a contract no lender buys.
  • State the limits on the documentation fee and the rules on default and repossession.

Why the federal law reaches your contract

Sell a car on a conditional sale contract and you are the lender, for as long as it takes to sign the paper. The Truth in Lending Act, written out as Regulation Z at 12 CFR part 1026, calls a sale in which the seller is the creditor a credit sale, and the creditor is the person the contract is first payable to on its face (1026.2(a)(16), (17)). That is you, whether or not a bank buys the contract an hour after delivery. The federal act reaches a business that extends consumer credit more than 25 times a year (1026.2(a)(17)(v)); Civil Code 2982 drops that threshold and puts the Regulation Z disclosures on every California conditional sale contract.

The disclosure box

The disclosures are clear and conspicuous, in writing, in a form the buyer can keep, grouped together and kept apart from everything else, with the words "finance charge" and "annual percentage rate" more prominent than any other term except your name (1026.17(a)). That is the boxed block on the standard California contract, and 1026.18 fixes its contents:

  • Amount financed, "the amount of credit provided to you or on your behalf" (1026.18(b)), with the written itemization the California contract supplies as its own list (1026.18(c)).
  • Finance charge, "the dollar amount the credit will cost you" (1026.18(d)).
  • Annual percentage rate, "the cost of your credit as a yearly rate" (1026.18(e)).
  • The payment schedule: the number, amount and timing of the payments (1026.18(g)).
  • Total of payments, "the amount you will have paid when you have made all scheduled payments" (1026.18(h)).
  • Total sale price, "the total price of your purchase on credit, including your downpayment of $___": the cash price plus the other amounts financed plus the finance charge. It belongs only in a credit sale (1026.18(j)).

The APR is accurate within one eighth of one percentage point on a regular contract (1026.22(a)(2)), the finance charge within $10 when the amount financed is over $1,000 (1026.18(d)). The test for finance charge is any charge the buyer pays because the sale is on credit (1026.4(a)). A charge of a type payable in a comparable cash transaction, such as the sales tax or the documentation fee, is not one. A fee you add only to financed deals is one, and it moves the APR. A credit insurance or debt cancellation premium stays out only if the coverage is not required, you say so in writing, you disclose the premium, and the buyer signs or initials a request for it (1026.4(d)).

When the disclosures are given

Before consummation, the moment the buyer becomes contractually obligated (1026.17(b); 1026.2(a)(13)). The completed box is on the contract the buyer reads before signing. The whole agreement goes in one signed document, the buyer gets an exact copy before the car leaves, and no form is signed with blanks (Civil Code 2981.9), as the contract lesson said; the contract's own notice to the buyer says the same (2982(g)).

The credit score disclosure

If you pull a credit score, the Car Buyer's Bill of Rights makes you show it. Vehicle Code 11713.20 requires a dealer that obtains a consumer credit score for a personal, family or household purchase to give the buyer, before the sale, a separate document in at least 10-point type: each score obtained and used, the range of the scoring model, where the buyer's score falls among others on that model, its date and source, and the section's plain statements on reports, scores, disputes and the free annual report. The federal model form the section names satisfies it (11713.20(b)). That form is the FTC's credit score disclosure for motor vehicle dealers, 16 CFR 640.5(e), today Model Form A-4 in 16 CFR part 698, which lists the same items and is due at or before consummation, so one form serves both. A dealer that does not routinely assign its contracts is under the CFPB's copy instead, 12 CFR 1022.74(e) with Model Form H-4 (12 USC 5519(b)).

Contracts negotiated in Spanish

Civil Code 1632 looks at the language of the negotiation, not at the buyer's request. A business that negotiates a contract primarily in Spanish, Chinese, Tagalog, Vietnamese or Korean must deliver, before the contract is signed, a translation of every term and condition in that language; conditional sale contracts under Civil Code 2981 are on its list (1632(b)). The English contract still governs; the translation is evidence only to show that no contract formed because a material term differed substantially (1632(j)). The exception is a buyer who brings an interpreter of their own, an adult fluent in both languages whom you did not supply (1632(h)). A buyer who did not get the translation may rescind (1632(k)), and a waiver is void (1632(l)). Since October 1, 2026 the CARS Act adds its own: a deal negotiated in one of those languages gets the three-day cancellation disclosure and the written add-on and payment disclosures in that language too (1784.43(b), 1784.41(b), (c)). If your staff sells in Spanish, stock the translated contract before the first such deal.

A contract no lender buys

Nothing in the Rees-Levering Act, Civil Code 2981 to 2984.6, gives a seller a right to unwind a signed contract because no finance source will take it. If your contract lets you cancel in that case, the right comes from the contract's own clause and runs only on its terms. The Act covers the other direction. If the buyer is to arrange outside financing without your help and cannot get it, the contract is rescinded and each side returns what it received (2982.9); a down payment loan you helped arrange that falls through rescinds the contract the same way (2982.5(b)).

What you owe on a contract not executed is fixed. Money paid before a contract that never gets signed goes back (2982.7(a)). A trade-in you do not return after a breach is worth the greater of its fair market value or the value the contract stated, paid within five business days (2982.7(b)). And you may not fix the problem by changing the deal: the notice the buyer signs under 2982(h) says the seller may not change the financing or payment terms unless the buyer agrees in writing, and a one-sided change is an unfair or deceptive practice. Since October 1, 2026, misstating whether you will keep the down payment or trade-in when a deal does not go through violates the CARS Act (1784.40(g)), and the signed contract is kept two years whether or not a lender took it (1784.44(a)(2)). A contract that violates 2981.9 or 2982(a), (j) or (k) and is not corrected is unenforceable, and the buyer may recover every dollar paid under it (2983, 2983.1). A willful violation of the Act is a misdemeanor (2983.6).

Default and breach

A default is whatever the contract defines: a missed payment, lapsed insurance. Filing bankruptcy is not one, whatever the form says (2983.3(a)). The charges you may add are small and fixed: a late charge on an installment at least 10 days past due, capped at 5 percent of that installment and collected once (2982(k)); up to $15 for a dishonored check (2982(p)); an extension or deferral charge only in a writing both of you sign, within the caps in 2982.3. A cosigner you required gets written notice of the delinquency before any repossession, or you cannot recover the repossession costs from them (2983.35). The prevailing party in any action on the contract recovers attorney's fees (2983.4).

Repossession

After a default the holder may retake the vehicle, with its own regular employees or a licensed repossession agency; anyone else it hires must hold the license (Business and Professions Code 7502, 7500.3(a)(4)). Within 60 days of the repossession or surrender, the holder sends every person liable on the contract a written notice of intent to dispose of the vehicle, at least 15 days before disposing of it, 20 if the notice is mailed to or from an address outside California, by personal service, certified mail or first-class mail (Civil Code 2983.2). The notice states the right to redeem by paying the full balance, itemized with the repossession and collection costs; the conditional right to reinstate, or the reasons there is none; that a written request extends both periods by 10 days, with the form supplied; the right to a written accounting; and, in bold, that the buyer may be sued for any shortfall, with interest. Miss the 60 days or leave out an item and no deficiency can be collected from anyone on the contract.

Reinstatement is the buyer's right to pick the contract back up by curing the default and paying the reasonable repossession and collection costs you actually paid (2983.3(d)). You may refuse only on the good-faith grounds the section lists, such as a false credit application, a hidden vehicle or substantial damage (2983.3(b)), and the buyer may reinstate once in any 12 months and twice over the contract (2983.3(c)). A denial you cannot prove reasonable costs you the deficiency (2983.3(e)). No court enters a deficiency judgment until it finds the disposition complied with the Act and with Commercial Code 9610 to 9615 and 9626 (2983.8(b)).

Carrying your own paper

A dealer that keeps its contracts is creditor and holder at once, so every duty above is its own, and so is the liability. Under the federal act a buyer may sue within one year for actual damages, twice the finance charge inside the floor and cap of 1640(a)(2)(A), $200 and $2,000 today, which Koons Buick Pontiac GMC v. Nigh (2004) held reach car contracts, and attorney's fees (15 USC 1640(a), (e)). Keep each contract and its credit file seven years or the life of the contract, whichever is longer (Civil Code 2984.5).

California names the dealer that holds most of its paper a buy-here-pay-here dealer: one that assigns less than 90 percent of its contracts to unaffiliated finance sources within 45 days, counting a sale paid in full within 30 days as cash (Vehicle Code 241). The financing lesson has its duties: the 30-day or 1,000-mile warranty at 100 percent of parts and labor (Civil Code 1795.51), the reasonable market value label on each vehicle offered (Vehicle Code 11950), and no in-person payment requirement, no tracking without written consent and no starter interrupt without the disclosed warning schedule, each violation a misdemeanor with a fine of up to $2,000 (Civil Code 2983.37).

The documentation fee

Vehicle Code 4456.5 caps the document processing charge at $85 for a dealer with a private industry partner contract with the DMV under Vehicle Code 1685 and $70 for a dealer without one. The figures took effect January 1, 2019 and the section has no inflation adjustment. The charge is yours, not the state's: the DMV neither requires nor collects it, you may not represent it as a governmental fee, and the contract must say it is not one (4456.5(a)(1); Civil Code 2982(n); DMV Vehicle Industry Registration Procedures Manual 3.030). It is a line of the cash price (2982(a)(1)(B)) and is subject to sales tax. No application fee may be charged on a financed sale (2982(o)).

Sources

  • 15 USC 1601 and following, the Truth in Lending Act; 15 USC 1640, civil liability, read 2026-10-22.
  • 12 CFR 1026.2, definitions; 1026.4, finance charge; 1026.17, form and timing; 1026.18, content of the disclosures; 1026.22, accuracy of the APR, read 2026-10-22.
  • 16 CFR 640.1, 640.2 and 640.5(e), the FTC's risk-based pricing rule for motor vehicle dealers, and 16 CFR part 698, appendix A, Model Form A-4; 12 CFR 1022.74(e) and Model Form H-4, the CFPB's copy; 12 USC 5519(b), which dealers each covers, read 2026-10-22.
  • Koons Buick Pontiac GMC, Inc. v. Nigh, No. 03-377 (U.S. 2004), on the statutory damages cap, read 2026-10-22.
  • Civil Code 1632, contracts negotiated in a language other than English, read 2026-10-22.
  • Civil Code 1784.40, 1784.41, 1784.43 and 1784.44, the California Combating Auto Retail Scams Act (SB 766, Stats. 2025, ch. 354), operative October 1, 2026, read 2026-10-22.
  • Civil Code 1795.51, the buy-here-pay-here warranty, read 2026-10-22.
  • Civil Code 2981.9, 2982, 2982.3, 2982.5, 2982.7, 2982.9, 2983, 2983.1, 2983.2, 2983.3, 2983.35, 2983.37, 2983.4, 2983.6, 2983.8 and 2984.5, the Rees-Levering Motor Vehicle Sales and Finance Act, read 2026-10-22 at california.public.law.
  • Vehicle Code 241, the buy-here-pay-here dealer; 4456.5, the document processing charge; 11713.20, the credit score disclosure; 11950, the reasonable market value label, read 2026-10-22.
  • Business and Professions Code 7502 and 7500.3, who needs a repossession agency license, read 2026-10-22.
  • DMV, Vehicle Industry Registration Procedures Manual, section 3.030, dealer's document preparation and electronic filing service fee, read 2026-10-22.
  • DMV, Lesson Plan Guidelines for Used Vehicle Dealer Education Programs, OL 2000 (rev. 12/2007).