PART 5. OFFICE OF CONSUMER CREDIT COMMISSIONER
CHAPTER 84. MOTOR VEHICLE INSTALLMENT SALES
SUBCHAPTER A. GENERAL PROVISIONS
The Finance Commission of Texas (commission) proposes new §84.108, concerning Nominal Additional Consideration for Bailment or Lease, with regard to motor vehicle sales finance dealers licensed by the Office of Consumer Credit Commissioner.
The purpose of proposed new §84.108 is to clarify the term "nominal additional consideration" as it is used in Texas Finance Code, §348.002. This section of the Finance Code provides the criteria for determining whether a particular bailment or lease agreement should be classified as a retail installment transaction or whether it is a true bailment or lease. One factor for determining if a bailment or lease agreement is a retail installment transaction is whether the consumer pays nominal consideration at the end of the lease term.
There is currently no definition for the term "nominal" in Chapter 348 of the Texas Finance Code. Chapter 348, however, does contain a definition for "retail installment contract." Section 348.001(6) states in pertinent part: "The term includes a chattel mortgage, a conditional sale contract, a security agreement, and a document that evidences a bailment or lease described by Section 348.002." (emphasis added). Thus, Chapter 348 clearly applies to bailment or lease agreements that meet the statutory criteria.
Section 348.002 sets out the requirements whereby certain bailment or lease agreements are classified as retail installment transactions. Section 348.002 requires that: (1) the contract price for use of the vehicle must be "substantially equal to or exceed [] the value of the vehicle; and" (2) upon full completion of the bailment or lease, the consumer becomes the owner of the vehicle, "or, for no or nominal additional consideration, has the option to become the owner of the vehicle." (emphasis added).
From the agency's experience with the motor vehicle sales finance industry, the determination of what is "nominal additional consideration" in the context of §348.002 has been difficult. The term "nominal consideration" appears in several legal frameworks. The most similar context to Chapter 348 is found in the Texas Business and Commerce Code, which has a provision dealing with the difference between a lease and a security interest. This provision establishes that "nominal consideration" is one factor to use when determining whether the transaction is a lease or a security interest. The factor and its use are parallel to how "nominal" is used in §348.002 (determination of whether an agreement is a retail installment contract or a lease).
Under the Texas Business and Commerce Code, the primary test for ascertaining whether consideration is nominal is the economic realities test (also known as the sensible person test), which states that if, at the end of the lease term, the lessee has no reasonable alternative but to exercise the option, the transaction is a secured installment sale. This test is also expressed as follows: if at the end of the lease, the only sensible course economically for the lessee would be to exercise the lessee's option, the lease is actually a secured transaction.
The effect of proposed §84.108 will be to provide clarity as to the use of "nominal additional consideration" in a bailment or lease described by §348.002, thereby enabling licensees to more easily determine if their agreements must comply with the provisions of Chapter 348. Proposed §84.108 interprets "nominal" only for purposes of §348.002.
Leslie L. Pettijohn, Consumer Credit Commissioner, has determined that for the first five-year period the rule is in effect there will be no fiscal implications for state or local government as a result of administering the rule. Commissioner Pettijohn has also determined that for each year of the first five years the new rule is in effect the public benefit anticipated will be that the commission's rule will clarify the statute.
There will be no cost for persons who are required to comply with the rule as proposed. In order to utilize the rule's interpretation of nominal consideration, fair market value must be determined. Although the cost of purchasing the Kelley Blue Book, the National Automobile Dealers Association price guide, or a similar publication providing fair market values is about $65 per year, it is also possible to get a limited number of free online quotes per day. Many public library collections have copies of the Kelley Blue Book available as well. Also associated with establishing fair market value is the time and labor cost for employees to determine fair market value of vehicles in inventory. It is the agency's experience that persons who are required to comply with the rule are already regularly determining fair market value of vehicles, and it follows that the rule will not impose an additional burden. Thus, there is no anticipated cost to persons who are required to comply with the rule as proposed. There will be no adverse economic effect on small or micro-businesses. There will be no effect on individuals required to comply with the rule as proposed.
It is anticipated that the rule will rarely apply to acceptance companies. The rule would apply to an acceptance company's transaction only if the transaction fell within the scope of Texas Finance Code, §348.002. A transaction falls within §348.002 when the amount the consumer pays for use of the vehicle is equal to or greater than the cash price of the vehicle, and the consideration at the end of the lease for becoming the owner of the vehicle is nominal. It is the agency's experience that acceptance companies rarely enter into transactions where the consumer has agreed to pay an amount equal to or greater than the cash price of the vehicle, and hence, the rule is expected to rarely apply to acceptance companies.
Comments on the proposed new rule may be submitted in writing to Laurie Hobbs, Assistant General Counsel, Office of Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207 or by email to laurie.hobbs@occc.state.tx.us. To be considered, a written comment must be received on or before the 31st day after the date the proposed rule is published in the Texas Register . At the conclusion of the 31st day after the proposed rule is published in the Texas Register, no further written comments will be considered or accepted by the commission.
This new section is proposed under Texas Finance Code, §11.304, which authorizes the Finance Commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code, §348.513 grants the Finance Commission the authority to adopt rules to enforce the motor vehicle installment sales chapter.
This rule affects Texas Finance Code, Chapter 348.
§84.108.Nominal Additional Consideration for Bailment or Lease.
(a) Economically reasonable course of action test. The determination of whether additional consideration is nominal under §348.002 should consider whether the consumer's economically reasonable course of action is to exercise the option to purchase the vehicle at the end of the bailment or lease.
(b) Fair market value. For purposes of this section, if the lessor or bailor fails to set a contemplated residual value for the vehicle in the lease, the fair market value of the motor vehicle is measured at the time the option to purchase may be exercised. Fair market value may be determined by the wholesale price in the Kelley Blue Book, National Automobile Dealers Association price guide, Kelley Blue Book Official Residual Value Guide or a similar publication.
(c) Variance between purchase price and fair market value. When the parties enter the lease or bailment, the contemplated value of the vehicle at the end of the lease or bailment must exceed the option price to be considered nominal additional consideration. Nominality must be determined by considering the parties' objective understanding of whether the consumer will exercise the option to purchase at the end of the lease. The economically reasonable course of action is based on the relationship of the projected value of the vehicle at the end of the lease and the option price in the lease. The greater the projected value of the vehicle exceeds the option price, the greater the likelihood that the parties' objective understanding would be that the consumer would exercise the option to purchase at the end of the lease or bailment and therefore that the lease or bailment would meet the economically reasonable course of action test.
(d) This section only applies to transactions in which the property is used for personal, family, or household purpose. If the property is typically used for personal, family or household purposes, a rebuttable presumption exists that the property was used for personal, family or household purposes.
This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.
Filed with the Office of the Secretary of State on December 19, 2008.
TRD-200806638
Leslie L. Pettijohn
Consumer Credit Commissioner
Office of Consumer Credit Commissioner
Earliest possible date of adoption: February 1, 2009
For further information, please call: (512) 936-7621