If a customer must stretch to come up with a downpayment by using a credit card or a hold check, does that pose a risk for your dealership? Apparently more than many dealers realize.
A dealer’s master agreement with a finance source contains numerous representations and warranties, including assurances about the downpayment. If a customer defaults, and the finance source wishes to make the loss the dealer’s, the source will often ask for verification of downpayment. If the deal file shows that the reality of the downpayment differed from what was represented to the finance source, that may very well lead to a demand that the dealer buy back the contract. Consequently, compliance with the representations and warranties about the downpayment in a master agreement is essential.
You should have a policy concerning dowpayments. In preparing that policy, you should review each of your indirect finance master agreements to determine what they provide about downpayments. Master agreements can vary widely. Let’s take a look at the various types of language that could affect a dealer’s policy on downpayment.
- Trade value. Master agreements generally permit trade value to be used as a downpayment. The tricky part, however, is the determination of trade value. Dealers have suffered demands for repurchase because the value shown for the trade was so out of bounds from the “book value” of the vehicle that the finance source treated the excess as “dealer provided funds”. Every dealer knows that there is no such thing as a “book value” for a used vehicle. The various used vehicle value resources are known as “guides” for a reason. But if a customer defaults and the bank wishes to make the loss yours, it will ask to see the deal file. If the value shown in the deal for the trade – known as “actual cash value” or “ACV” in most dealerships – is much less that the trade value shown on the retail installment sale contract, you may have a problem. And don’t blame it on overallowance to cover negative equity on the trade since the federal government has prohibited this for more than a decade.
- Loans. Most master agreements prohibit the dealer lending or arranging a loan for the downpayment. So the days of sending a customer to a small loan house for some downpayment cash are over.
- Credit cards. Credit cards are tricky. For years, taking a credit card for a downpayment was clearly a problem under master dealer agreements. However, that changed when some finance sources started encouraging use of their own credit cards for downpayments. A master agreement that requires a downpayment to be in cash or readily available funds may preclude use of a credit card for downpayment. A lender may choose to make an exception to this, but a dealer seeking an exception must clearly disclose that the downpayment is going to be provided by credit card when seeking approval of a deal.
- Dealer provided funds. Almost all master agreements prohibit dealer provided funds from being used as downpayments. Lenders want to know that the customer’s stake in the vehicle through the downpayment is truly the customer’s. No matter how dealer provided funds are disguised, they will be a problem under most master agreements. Dealer rebate or incentive? Clearly dealer provided funds. Substantial overallowance on trade? Potentially a problem as discussed above.
- Manufacturer rebates and incentives. Manufacturer provided funds are not dealer provided funds. They are funds which the customer is legitimately entitled to use as a downpayment. The fact that manufacturer funds are being used, however, should be disclosed both when the application is sent in to the finance source and on the finance contract.
- Personal checks. For years, master agreements generally provided that a check had to be collected or the contract was subject to repurchase. In recent years, dealers have pushed back on this, and some provisions have changed.
o Dealer as guarantor. Many master agreements still provide that a personal check must be honored by the bank on which it is drawn. If it is not, it is a breach of the representation or warranty with respect to the contract, and the finance source can demand that the dealer buy the contract back.
o Verification of good funds. A more lenient version is simply a representation or warranty by the dealer that it has verified that the customer has good funds for a personal check. This is not a guaranty that the dealer has collected or will collect a check. The dealer is obligated to merely verify or have other reason to believe that there are good funds when the dealer takes the check. This does require that a dealer do due diligence to ensure that a customer has funds to make the check good before assigning a contract.
o Guarantee of deposit. The most lenient language in a master agreement is a representation or warranty by the dealer that the dealer will deposit the check before discounting the contract. That may seem to be a no-brainer, but where a customer is stretching to make a downpayment this can become an issue if the dealer takes a “hold check”.
o Check guarantee services. Generally speaking, if a dealer must make a warranty that the check will be honored or it represents good funds, use of a check guarantee service will not be a defense for a dealer
There is likely to be a significant variation in downpayment requirements among the various master agreements that a dealership has with its finance sources. When you assign a RISC to a finance source, the downpayment must be consistent with that finance source’s requirements in its master agreement. Consequently, you should negotiate the downpayment provisions of the master agreements you sign to ensure that those are consistent with the dealership’s practices. If you are unsuccessful in changing terms that are different from your practices, those exceptions must be noted and your downpayment policy must reflect the need to comply with the different standard.