Applying the 60-Percent Rule to Strict Foreclosures

Dealer question: I’m a Buy-Here-Pay-Here dealer and I’ve been told that I’m subject to something called the “60-percent rule.” What is the 60-percent rule and how does it affect me?

Answer: There are two primary methods used by car creditors to notify debtors of the repossession of vehicles and to dispose of repossessed collateral. These methods are (1) private sale; and (2) strict foreclosure (sometimes called acceptance of collateral in satisfaction). (For a more detailed discussion of the differences between private sale and strict foreclosure, see “Repossession Basics for Car Dealers” in the October, 2022 issue of Texas Dealer.)

If you use the strict foreclosure method of disposing of repossessed collateral, as do most BHPH dealers, the 60-percent rule will apply to you. If you use the private sale method, it doesn’t.

One of the characteristics of strict foreclosure that is attractive to BHPH dealers is the fact that, in most cases, no post-repossession accounting has to be made. Under strict foreclosure, any deficiency that the debtor might owe the creditor is eliminated, and the creditor doesn’t have to account to the debtor for the disposition of the collateral. The process is initiated by the creditor, who sends the debtor after repossession a notice stating that the creditor intends to accept the repossessed collateral in satisfaction of any further indebtedness. If no written objection to the strict foreclosure is received within 20 days of sending of the notice, then the strict foreclosure is complete, and ownership of the collateral reverts to the creditor.

If, on the other hand, written objection is received in the 20-day-period, then the creditor must use the private sale method of disposal and account to the debtor upon resale of the collateral. If the resale results in a sales price that exceeds the amount of the indebtedness, then the creditor must pay the surplus to the debtor as the debtor’s equity in the collateral.

The creditor also has the option of requesting that the debtor, after repossession, sign a statement that gives up the right to notice and relinquishes any interest in the vehicle. A voluntary signing of a waiver agreement by the debtor eliminates the 20-day waiting period.

by Michael W. Dunagan TIADA COUNSEL

The so-called 60-percent rule forbids the use of strict foreclosure (unless the strict foreclosure comes from a signed agreement) if more than 60-percent of the cash price has already been paid by the debtor. If the 60-percent rule applies, the creditor must dispose of the property by private sale within 90 days after he takes possession. Failure to properly dispose of the property within the 90-day period subjects the creditor to liability for actual damages or statutory damages set out in the Texas Business and Commerce Code (the Texas version of the Uniform Commercial Code).

Unfortunately, the statute does not offer any specifics of how the 60-percent of the cash price threshold is calculated. No cases have been found where this issue has been litigated.

The purpose of the provision is to protect the debtor who has paid a significant portion of the cash price and is most likely to have a positive equity position in the collateral. Involuntary acceptance of the collateral would thus thwart the debtor’s right to receive any surplus generated by resale. The formula below is a common-sense method of calculating whether the 60-percent threshold has been met.

First, calculate 40 percent of the original cash price listed on the contract. If the pay-off (the figure calculated after deducting unearned interest from the balance) is less than the 40 percent figure, it would appear that the transaction does not qualify for involuntary strict foreclosure since more than 60-percent of the original cash price has been paid. For instance, if the original cash price of a vehicle was $5,000, and the pay-off is $1,000, involuntary strict foreclosure would not be available (the pay-off is less than 40 percent of $5,000 or $2,000, and thus, more than 60-percent has been paid). TIADA has a 60-percent rule calculator available for members on the Knowledge Base page of the website (txiada.org/knowledge_base), which will do the math automatically.

As mentioned above, a debtor’s right to have the repossessed collateral disposed of by private sale when 60-percent of the cash price has been paid can be waived in writing. By voluntarily signing a waiver of rights statement after repossession, the debtor can give up the right to require a private sale and the 20-day holding period.

Creditors should remember that a strict foreclosure also waives the creditor’s rights to seek a deficiency from the debtor. As such, car creditors who use strict foreclosure should make sure that no demand is made for payment of a balance and that no balance is reported to credit bureaus.

Michael W. Dunagan is an attorney in Dallas, Texas who has represented the Texas Independent Automobile Dealers Association for over 45 years. He has written a number of books and hundreds of articles for trade journals and law reviews. His clientele includes dealers, banks, finance companies, auto auctions and credit unions.