The Retail Installment Sale Contract (RISC) incorporates the Federal Truth In Lending (TILA) Law. California law incorporates TILA in its Automobile Sale Finance Act (ASFA). When you make a down payment, it must be categorized. It could be categorized as a trade-in, or a deferred payment (to be made later, but no later than after the second regularly scheduled monthly payment); or anything else of value, such as an autographed baseball, or a credit card, or cash or check.
The RISC has a line to disclose each of these payments in paragraph 6. The bank, when deciding whether to purchase the RISC, wants to know how much value you have given the dealer at the time of sale. So if the dealer does not accurately describe the down payment, you may have the right to cancel the contract under ASFA.
This type of cancellation is a special “penalty” type of cancellation. Under ASFA cancellation, you are entitled to all of your down payment and all payments you made under the RISC. The dealer must take the vehicle back in its present condition, normal wear and tear included. Of course, you are responsible for any major damage that is not normal wear and tear. There is no offset or value given to the dealer for the depreciation of the vehicle since it was in your possession.
Typically, when a dealer takes a down payment that he agrees to hold before cashing, he does not disclose the deferment at line 6D and in the Payments Box. He merely shows it as a cash down payment at line 6G. This is fatal for the dealer.
He probably sold the contract to a bank with all its right, title and interest, meaning he is no longer entitled to the payment, although he is holding your check. If your engine blows up or you experience any other major repair, or merely get buyer’s remorse, you may decide to stop payment on the check.
Since the dealer knows he will have sold the RISC to a bank, he will have no standing to sue you. So, many dealers have you sign a “Hold Check Agreement.” This is automatically fatal for the dealer, because a Hold Check Agreement violates TILA and ASFA, giving you the right to cancel the contract (RISC).
ASFA demands that all material financing terms appear on one document (The Single Document Rule). Any type of check guarantee, hold check agreement, or promissory note, violates this Single Document Rule. Also, check carefully, as most of these documents charge $25 or more for a returned check, but this charge is limited by contract (RISC) and the ASFA to $15.
Under these circumstances, the dealer may take you to small claims court or a collection agency. But these “Hold Check Agreements,” unless accurately disclosed at line 6D, are unenforceable. Most judges are unaware of this law.