BOSTON – A word to the wise from credit union legal experts: Credit unions considering offering zero percent auto loan financing as prizes to members should be thoroughly familiar with related IRS rules before launching a promotion.
Richard Schulman, Esq. an 11-year NCUA veteran who also served for three years as Associate General Counsel on the regulatory side of the office of General Supervision and who is currently a partner at Roach & Carpenter, Boston representing federal and state-chartered credit unions, told Credit Union Times he has received calls from several credit unions inquiring about the feasibility of offering zero percent financing "either as a raffle drawing or other type of prize" to members who apply for auto loans.
"For safety and soundness reasons, credit unions cannot offer zero percent financing for all members. Any person who gets a loan from a credit union has to qualify by their credit standards," said Schulman. "But promoting the zero percent financing as a prize would be one way for credit unions to compete with the car dealers who are promoting this."
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Schulman stressed that these types of prize offerings by credit unions "are not illegal." However, he said, "they are also not an item of nominal value" and depending on how the offers are structured, "there are tax implications for both the credit union and the member that both need to be aware of."
For credit unions offering 0% auto financing prizes, there is a dual responsibility for themselves and the winning member: the credit union has to report the prize as income on a 1099 form. The member is required to pay taxes on the prize.
CUNA Assistant General Counsel Jeffrey Bloch said he had seen inquiries on listserv from credit unions asking for information on 0% financing car loan prizes. He agreed that there is nothing illegal about credit unions offering these types of prizes, but he also emphasized that any credit union considering such a prize should first read up on the tax implications and IRS rules about lotteries and prizes.
CUNA has this information online on its eGuide. Credit unions can also access pertinent information on the IRS' Web site.
"This is consistent with what we've been saying all along about zero percent financing deals and car dealers burying information. In a situation where you have a credit union offering zero percent financing as a prize, there's nothing to hide. It's like any other prize," said Bloch. [email protected]
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