Dealers operate in an “indirect” system. When a customer signs a retail installment sale contract or a lease, the dealer is the initial creditor or lessor. The dealer then assigns the obligation to a finance source or lessor. The initial transaction is not between the consumer and the party ultimately holding the paper. That makes it indirect.
Dealers don’t just choose assignees without prearrangement. A dealer must sign a master indirect finance or indirect lease agreement before it can do business with the source. While they may be subject to some negotiations, the basic forms for indirect arrangements are developed by the finance and lease sources. Do you have any prediction who that paperwork protects?
The forms that dealers sign provide nearly complete indemnification by the dealer for lawsuits that may affect the finance or lease source. Typically, the agreement is loaded with dozens of dealer covenants, representations, and warranties. Here are three typical finance source agreement provisions relating to dealer compliance with the law:
- All disclosures required by applicable Law were properly made to the Buyer prior to the Buyer signing the Contract and in accordance with applicable Law;
- The Contract’s negotiation and execution complied with applicable Law; and
- The Contract is enforceable according to its terms, and all fees, charges, and other amounts provided for in the Contract comply with applicable Law.
The indemnification, however, is not limited to those. Indemnification provisions generally go much farther to include anything that might make the contract unenforceable or open the source to liability. Here is a typical indemnification provision from a major finance source.
Indemnification. Dealer shall indemnify [finance source] for all Losses that [finance source] incurs due to (i) breach of any representation or warranty above, (ii) breach of any term or covenant contained in the Agreement, (iii) any Contract being rescinded, declared unenforceable, or voided by a court or an arbitrator, and (iv) any claim or defense asserted against [finance source] because of any act or omission by Dealer. Furthermore, Dealer shall indemnify [finance source] for all Losses arising from, any action, claim, suit, order, fine, judgment, or settlement relating to any express or implied warranties to the vehicle sold under a Contract.
Here is another example:
Dealer hereby agrees to defend, indemnify, save and hold [finance source] harmless to the full extent of any and all liabilities, settlements, fines, penalties, judgments, attorney’s fees and/or costs which may be incurred or expended by [finance source] in connection with any regulatory investigation, administrative proceeding or lawsuit which may be directed to [finance source] or to which [finance source] may be made a party arising directly or indirectly (i) out of any breach by Dealer of any provision of this Agreement, (ii) from any claim related to the sale or lease of the Vehicle, or (iii) from any claim related to the nature, quality, condition or performance of the Vehicle. [finance source] shall have the right to independent attorneys of its choice to defend [finance source], without approval of Dealer, and Dealer shall be responsible for the payment of such costs and fees of such attorneys.
In other words, if we as the finance source or lessor are sued, you as the dealer will be responsible to defend us and pay us anything we lose.
Dealers already see that from time to time when a lawsuit is filed naming the source along with the dealer. The source will demand that the dealer take over the defense and indemnify it.
Today, those are isolated instances for some simple reasons. Besides improved compliance practices, predispute arbitration provisions with class action waivers have eliminated the incentive for plaintiffs’ lawyers to take advantage of gray areas to shoot for the moon. Customers with concerns are incentivized to seek early resolutions of their concerns through alternative dispute resolution processes often fully or mostly paid for by the creditor, lessor, or the dealer.
Unfortunately, the Consumer Financial Protection Bureau wants to do away with that system that has successfully led to quick and inexpensive resolution of customer problems. It wants to ban class action waivers in predispute arbitration provisions used by finance and lease sources under its jurisdiction. Regardless of what the parties agree, a finance source or lessor subject to CFPB jurisdiction (and almost all of them are) cannot prevent class action lawsuits. The CFPB has no hidden goal. It admits the reason for its proposal is that class action lawyers must be rewarded if they will bring the small balance claims for consumers. Unfortunately, disputes among car buyers and dealers, creditors or lessors are never small balance. They are large disputes, and a lawsuit for all the deals done by a dealer for a three, four, or five year period can lead to crushing and ruinous liability for a dealer.
The CFPB is accepting comments until August 22, 2016 on its proposal. After that, it will announce some sort of windfall program for class action lawyers.
Franchised motor vehicle dealers and many independent dealers are exempt from the jurisdiction of the CFPB. That has meant little to the CFPB in its attack on dealer reserve through finance sources. The proposal of the CFPB suggests it means little to the Bureau on arbitration. Its proposed gift to class action lawyers will destroy the system of dispute resolution developed and successfully used for years, and it will incentivize class action lawyers to shoot for the moon on gray area allegations of violations. Dealers will face increased threats because of the indemnification of the creditors and lessors who will be the target of those class action lawsuits under the CFPB’s proposal.
We will keep you advised of the CFPB’s actions.