December 20, 2024
By Barrie Charapp Beaty
Charapp & Weiss, LLP
bbeaty@cwattorneys.com
In an economy where inventory is high, vehicles are sitting on floorplan, and customer credit is not as easily accessible, Dealers need to know where they stand with their creditors just as much. Dealers may not view indirect finance and lease agreements, the contracts that govern the assignment of RISCs and leases to finance and lease sources, as supplier contracts, but they are. Under these agreements, finance and lease sources agree to “buy” these consumer obligations by providing funding and accepting assignment of the paper.
These agreements are the supplier agreements dealers enter most frequently. Yet, too many dealers simply sign the agreements presented to them. Besides the general supplier contract issues about which a dealer should be careful, a dealer should consider the below outlined issues specific to indirect finance and lease agreements. If there are issues that will lead to buybacks improperly, attempt to negotiate terms that you can live with. However it is noteworthy to mention that some creditors are not so willing to negotiate their form agreements these days.
- Dealer Reserve. What agreement on dealer reserve was negotiated? Will the reserve be funded subject to future chargeback, or have the parties agreed on a split reserve eliminating future reserve chargebacks? Do the terms reflect expectations on reserve?
- Customer Insurance. There is surely a representation and warranty in the agreement about the customer’s insurance. Must the dealer agree to confirm that the customer has in place insurance for a specific term? Or must it agree to verify there is insurance when the customer took delivery of the vehicle? Never guarantee the customer’s insurance for a term.
- Spot Delivery. A representation and warranty that the RISC or lease was assigned before delivery of the vehicle is common. It is simply a trap to create a buy back demand when a deal goes bad. Today, a substantial portion of vehicles retailed are spot delivered, meaning it is common to deliver possession of the vehicle before the contract is assigned. Make sure you are following the spot delivery language mandated by statute in states that have such language (such as Virginia and Maryland).
- Perfection of Liens. Many years ago, the U.S. bankruptcy code was amended to provide that a transaction could not be disregarded in bankruptcy if the creditor perfected its lien within 30 days, an increase from the prior requirement of 20 days. There are still agreements that require perfection of the lien within 20 days. Make sure the requirement in the agreement meets current law.
- Voluntary Protection Products. Are there limits placed on the voluntary protection products the dealership may sell to a customer? Make sure the requirements are not so limited that the dealership cannot offer and sell its standard voluntary protection products. This is especially important when dealing with captive (affiliated with manufacturers) finance sources who may be pushing the manufacturers’ voluntary protection products. There are some states that have language in the state franchise act preventing captives from doing that such as in Virginia.
- Recourse for Complaints. Some indirect finance and lease agreements provide that if a customer makes a complaint about the dealer’s sales practices or the vehicle purchased, the finance or lease source may require the customer obligation be repurchased by the dealer. Buyback rights should only come into play if the customer’s dispute is determined for the customer in litigation or arbitration.
- Remedies for Breach. Be careful of the remedies of the finance or lease source if it contends the dealer breached the indirect finance or lease agreement. Does the source have the right to require the dealer to buy back only those obligations affected by the alleged breach, or does it have the right to require the dealer to buy back the whole portfolio? Clearly, the latter is unacceptable.
- Credit Card Downpayments. What does the agreement say about accepting credit cards for downpayments? Some indirect finance and lease agreements may prohibit that. If it is a practice in your dealership to accept credit card downpayments, make sure the indirect finance or lease agreement under which the dealership assigns retail paper permits that. Personnel should know the downpayment requirements by the indirect finance and lease sources to prevent claims of breach of the agreement.