Question of the Week
Friday, March 9, 2018 8:30 AM

Question:  What is the Rapson Rule?

Answer:  The Rapson Rule refers to a section of the Uniform Commercial Code (9-615(f)), which states that if a lender is to sell a vehicle to an insider at a post-repossession sale, it must do so at retail value.  This section is nicknamed after a UCC Permanent Editorial Board Member that helped draft the 2001 amendments to the UCC, adopted in all of Cornerstone’s states.  The intent of this section is to prevent insiders from creating high deficiency balances following sale that borrowers would still be responsible for.  Such practices are considered unfair to borrowers, whose obligation is reduced by any value a vehicle brings at a post-repossession sale.

Insiders include both persons related to an organization, and persons related to those persons.  To cite 9-102(62) and (63) of the UCC:

“Person related to", with respect to an individual, means:

(A) the spouse of the individual;
(B) a brother, brother-in-law, sister, or sister-in-law of the individual;
(C) an ancestor or lineal descendant of the individual or the individual's spouse; or
(D) any other relative, by blood or marriage, of the individual or the individual's spouse who shares the same home with the individual.

"Person related to", with respect to an organization, means:

(A) a person directly or indirectly controlling, controlled by, or under common control with the organization;
(B) an officer or director of, or a person performing similar functions with respect to, the organization;
(C) an officer or director of, or a person performing similar functions with respect to, a person described in subparagraph (A);
(D) the spouse of an individual described in subparagraph (A), (B), or (C); or
(E) an individual who is related by blood or marriage to an individual described in subparagraph (A), (B), (C), or (D) and shares the same home with the individual.

So if your credit union intends to sell to an insider, it must get full retail value for that vehicle.