February 18, 2025
By Barrie Charapp Beaty
Charapp & Weiss, LLP
bbeaty@cwattorneys.com
When was the last time that you actually reviewed your indirect finance and lease agreements? For a majority of you, you are probably scratching your heads because it’s been so long, you honestly can’t remember. Indirect finance and lease agreements, the contracts that govern the assignment of RISCs and leases to finance and lease sources, are some of the most important supplier contracts at your dealerships. Under these agreements, finance and lease sources agree to “buy” these consumer obligations by providing funding and accepting assignment of the paper.
It is not enough for the dealer operator or whoever negotiates and approves lender agreements to review the terms, but for other dealership personnel as well. The store teams need to know that their processes to "close and post a deal" are good enough to ensure no lag time in perfecting liens and that spot delivery processes do not cause a breach of the terms of a lender agreement. It’s past time for a dealers and dealership personnel to know what is in those indirect finance and lease agreements.
Because the agreements are with banks, 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 following issues specific to indirect finance and lease agreements. If there are issues that will lead to buybacks improperly, negotiate those. With higher interest rates with consumers leading to an increase in consumers defaulting, dealers need to understand the terms of these agreements as well as negotiate where they can.
- 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? Make sure you can meet the terms of the reserve.
- Customer Insurance. If there is a representation and warranty in the agreement about the customer’s insurance, what is it asking of you? 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. Dealers should be only providing a rep and warranty for items that they can control, such as verifying insurance at time of delivery.
- 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. A substantial portion of vehicles retailed are spot delivered, meaning it is common to deliver possession of the vehicle before the contract is assigned. Do not provide a rep and warranty that cannot be adhered to.
- 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.
- Recourse for Complaints. Many 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 still 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.
In addition to this article, we have added a checklist to this newsletter to assist with your review of these agreements. The checklist should be utilized by ANY executive or management level personnel to use as a guide/tool when reviewing the terms of a direct finance or lease agreement. The checklist may provide a better understanding of how certain terms and dealer obligations in those agreements compare to actual store processes.