We regularly hear from dealers about revised terms in indirect finance agreements (sometimes called master dealer agreements) governing assignment of retail installment sale contracts. These agreements often change. Some customers look for new and better ways to avoid their obligations. Creditors who learn of those new methods try to plug the loopholes.
Unfortunately, creditors’ attempts to plug those loopholes often involve demands that the dealer be responsible for a customer’s actions. While we can’t provide a checklist of every problem a dealer may encounter in indirect finance agreements, there are some common issues.
Don’t just sign a new indirect financing agreement. Review it. Understand it. Most agreements are constructed similarly. The agreements generally provide that:
-
the creditor will purchase retail installment sale contracts at its discretion;
-
the dealer will follow the requirements of the creditor’s programs;
-
the dealer makes “representations and warranties” that accompany every assignment of a retail installment sale contract that, when breached, justify the creditor’s remedies against the dealer;
-
the dealer covenants to do things such as filing the security interest, verifying insurance, and so forth;
-
the products and services that may be included with sale of the vehicle are detailed and sometimes limited; and
-
If the creditor suffers a loss as a result of breach of the indirect finance agreement by the dealer, the creditor has specific remedies against the dealer.
The details of the lender’s rights and remedies are critical to a dealer if a customer defaults and the creditor wants the dealer to buy the RISC back. Here is a checklist of general issues to watch out for.
-
Warranty of Customer Information. Some agreements require dealers to warrant not only what they know and represent to the lender about the customer, but also that everything the customer has represented is true. While it is reasonable for the lender to require the dealer to represent that it has told the lender what it knows, it is overreaching for the lender to require a dealer to guarantee the truth of all representations made by the consumer. Any such warranty or representation should contain a “knowledge” of the dealer qualifier.
-
Insurance. Does the agreement require the dealer to verify insurance? Or does the agreement require the dealer to guarantee that fully paid insurance covers the vehicle for an extended duration? A lender requirement that the dealer verify insurance is appropriate. A lender requirement that the dealer guarantee the existence of insurance for an extended period is overreaching.
-
Vehicle Service. Does the agreement provide that the dealer will provide manufacturer-required maintenance and service? Clearly, the dealer has no control whether the buyer will return to it for service, and a guarantee that the vehicle will be serviced according to manufacturer requirements often cannot be met.
-
Delivery Prior to Assignment. Does the agreement include a representation by the dealer that the vehicle was not delivered to the customer prior to assignment of the contract to the lender? In spot delivery situations, vehicles are always delivered to the customer prior to assignment of the contract to the lender. This is an obsolete representation that should be deleted.
-
Time to perfect a security lien. What period is given to the dealer to perfect a security lien? U. S. bankruptcy law was changed a few years ago to extend the period for perfection from twenty to thirty days. However, some agreements still require that liens be perfected within twenty days.
-
Sale of other products. Does the agreement limit the sale of other products such as extended service agreements? If so, is there a process for approval of the products the dealer sells? Or does the lender reserve to itself the right to determine what products may be sold? Quite clearly, the dealer should have an opportunity to sell its products in connection with a RISC assigned to a lender.
-
Scope of indemnification. For what does the dealer indemnify the creditor? The creditor is entitled to ask for indemnification for breaches of the indirect finance agreement or for improper actions by the dealer. However, the creditor should not require a dealer to indemnify a creditor against problems caused by the creditor, including actions as a result of the form retail installment sale contract or other documents that the creditor prepares and requires.
-
Complaints. Does the creditor have the right to demand that the dealer repurchase a RISC if the customer makes a complaint against the dealer? Or does that right accrue only after there has been some determination of the customer’s rights that affects the rights of the creditor under the retail installment sale contract? Never agree that a RISC can be tendered simply because there is a complaint raised by the customer or because there is a dispute between the customer and dealer before there is a decision about that dispute.
-
Remedies of the creditor. Be careful of the remedies of the creditor if there is a breach of the agreement. The creditor is entitled to demand that it may tender the RISC for repurchase. However, some indirect finance agreements provide that upon a breach, the creditor can re-tender the entire portfolio. That is never acceptable.
-
Dealer/lender disputes. Where are dealer/lender disputes required to be determined. Where the lender does business? Or where the dealer does business? The lender comes to the dealer at the dealer’s location to have the dealer enter the indirect finance agreement. If there is a dispute it should be decided where the dealer is located.
Do not simply accept the representation of lender representatives that the lender will not negotiate the terms of the standard agreement. As in all agreements, the flexibility of the creditor depends upon the perceived market power of the parties. If the lender wishes to enter the dealer’s market or wants to establish a business relationship with the dealer, it is likely to have flexibility. If the dealer is chasing the lender to establish the relationship, there is likely to be less flexibility in the lender’s position. In any event, a dealer will not know what can be achieved until it engages the lender to discuss provisions of the agreement that the dealer finds onerous or oppressive.
We regularly hear from dealers about revised terms in indirect finance agreements (sometimes called master dealer agreements) governing assignment of retail installment sale contracts. These agreements often change. Some customers look for new and better ways to avoid their obligations. Creditors who learn of those new methods try to plug the loopholes.
Unfortunately, creditors’ attempts to plug those loopholes often involve demands that the dealer be responsible for a customer’s actions. While we can’t provide a checklist of every problem a dealer may encounter in indirect finance agreements, there are some common issues.
Don’t just sign a new indirect financing agreement. Review it. Understand it. Most agreements are constructed similarly. The agreements generally provide that:
-
the creditor will purchase retail installment sale contracts at its discretion;
-
the dealer will follow the requirements of the creditor’s programs;
-
the dealer makes “representations and warranties” that accompany every assignment of a retail installment sale contract that, when breached, justify the creditor’s remedies against the dealer;
-
the dealer covenants to do things such as filing the security interest, verifying insurance, and so forth;
-
the products and services that may be included with sale of the vehicle are detailed and sometimes limited; and
-
If the creditor suffers a loss as a result of breach of the indirect finance agreement by the dealer, the creditor has specific remedies against the dealer.
The details of the lender’s rights and remedies are critical to a dealer if a customer defaults and the creditor wants the dealer to buy the RISC back. Here is a checklist of general issues to watch out for.
-
Warranty of Customer Information. Some agreements require dealers to warrant not only what they know and represent to the lender about the customer, but also that everything the customer has represented is true. While it is reasonable for the lender to require the dealer to represent that it has told the lender what it knows, it is overreaching for the lender to require a dealer to guarantee the truth of all representations made by the consumer. Any such warranty or representation should contain a “knowledge” of the dealer qualifier.
-
Insurance. Does the agreement require the dealer to verify insurance? Or does the agreement require the dealer to guarantee that fully paid insurance covers the vehicle for an extended duration? A lender requirement that the dealer verify insurance is appropriate. A lender requirement that the dealer guarantee the existence of insurance for an extended period is overreaching.
-
Vehicle Service. Does the agreement provide that the dealer will provide manufacturer-required maintenance and service? Clearly, the dealer has no control whether the buyer will return to it for service, and a guarantee that the vehicle will be serviced according to manufacturer requirements often cannot be met.
-
Delivery Prior to Assignment. Does the agreement include a representation by the dealer that the vehicle was not delivered to the customer prior to assignment of the contract to the lender? In spot delivery situations, vehicles are always delivered to the customer prior to assignment of the contract to the lender. This is an obsolete representation that should be deleted.
-
Time to perfect a security lien. What period is given to the dealer to perfect a security lien? U. S. bankruptcy law was changed a few years ago to extend the period for perfection from twenty to thirty days. However, some agreements still require that liens be perfected within twenty days.
-
Sale of other products. Does the agreement limit the sale of other products such as extended service agreements? If so, is there a process for approval of the products the dealer sells? Or does the lender reserve to itself the right to determine what products may be sold? Quite clearly, the dealer should have an opportunity to sell its products in connection with a RISC assigned to a lender.
-
Scope of indemnification. For what does the dealer indemnify the creditor? The creditor is entitled to ask for indemnification for breaches of the indirect finance agreement or for improper actions by the dealer. However, the creditor should not require a dealer to indemnify a creditor against problems caused by the creditor, including actions as a result of the form retail installment sale contract or other documents that the creditor prepares and requires.
-
Complaints. Does the creditor have the right to demand that the dealer repurchase a RISC if the customer makes a complaint against the dealer? Or does that right accrue only after there has been some determination of the customer’s rights that affects the rights of the creditor under the retail installment sale contract? Never agree that a RISC can be tendered simply because there is a complaint raised by the customer or because there is a dispute between the customer and dealer before there is a decision about that dispute.
-
Remedies of the creditor. Be careful of the remedies of the creditor if there is a breach of the agreement. The creditor is entitled to demand that it may tender the RISC for repurchase. However, some indirect finance agreements provide that upon a breach, the creditor can re-tender the entire portfolio. That is never acceptable.
-
Dealer/lender disputes. Where are dealer/lender disputes required to be determined. Where the lender does business? Or where the dealer does business? The lender comes to the dealer at the dealer’s location to have the dealer enter the indirect finance agreement. If there is a dispute it should be decided where the dealer is located.
Do not simply accept the representation of lender representatives that the lender will not negotiate the terms of the standard agreement. As in all agreements, the flexibility of the creditor depends upon the perceived market power of the parties. If the lender wishes to enter the dealer’s market or wants to establish a business relationship with the dealer, it is likely to have flexibility. If the dealer is chasing the lender to establish the relationship, there is likely to be less flexibility in the lender’s position. In any event, a dealer will not know what can be achieved until it engages the lender to discuss provisions of the agreement that the dealer finds onerous or oppressive.