Recently some auto dealers I know informed me that lenders are becoming more aggressive with exercising repurchase provisions of indirect finance master agreements. These demands are usually triggered when a consumer defaults on a loan and the lender, citing a breach of a warranty or representation in the indirect finance master agreement proceeds to compel the dealer to repurchase the contract. What’s troublesome is that many of these agreements do not obligate the lender to return the collateral to the dealer, thereby leaving the dealer with a bad loan and no vehicle. Of course, the lender’s interpretation of the indirect finance master agreement is not dispositive of whether your dealership indeed caused a breach. You should carefully review the demand for repurchase and the facts surrounding the deal to determine your rights and your best method to respond. Be prepared to challenge demands that you believe are inappropriate and do not let such demands from lenders go unanswered. Here are some common claims a financial institution will make and what you can do about them.
- The dealership accepted an impermissible form of down payment: Indirect finance master agreements typically contain provisions that relate to the forms of down payments that are impermissible. For example, while some lenders allow consumers to use credit cards to make down payments, others do not. Just because a lender has accepted credit card payments in the past does not mean your dealership is off the hook. Your processes should include what forms of down payment are acceptable and what your staff should do if they inadvertently accept an impermissible form of down payment.
- The deal contains a promissory note or a hold check for the down payment: Read the indirect finance master agreement. Depending on the language of your agreement, the hold check or promissory note should not be an issue if you collected the balance due before you assigned the retail installment sale contract to the finance company.
- The signature or signatures on the retail installment sale contract are forgeries: Don’t blindly accept the financial institutions assertion that the contract contains forged signatures, even if the financial institution claims it has an affidavit of forgery. Consumers may state that their signatures were forged if they are unhappy about the agreement to make the purchase. If you think you can prove otherwise, challenge the assertion.
- The business did not perfect the lien in time before the consumer declared bankruptcy: Under federal law, a dealer has 30 days from the time the consumer takes possession of the vehicle or vessel to perfect the lien and protect the financial institution’s security in case the consumer declares bankruptcy. Under many state laws, the business perfects the lien when the paperwork is processed and filed, not when the state’s DMV finally notes the lien. Check your state’s laws to see which interpretation applies.
- The trade-in allowance greatly exceeds the trade-in’s actual cash value: While adjusting trade values to mask negative equity has been impermissible for nearly a decade, many dealers still use trade-in allowances as a means to discount the sale price of the vehicle. Lenders may challenge dealers when situations occur where the trade-in allowance greatly exceeds the actual cash value of the vehicle as reflected in the dealership’s accounting records. If there are reasons why the actual cash value changed after taking the vehicle on trade, you should document the adjustments and reasons for them in your records. You should consider other means by which to modify the sale price of the vehicle being sold instead of relying upon trade-in allowances to close deals.
Financial institutions may try to compel your business to repurchase the loan of a consumer that defaults on his or her obligation. If the financial institution has placed a demand to repurchase a loan, you should understand your rights under the law before agreeing to the demands.