Hidden Problems in Subprime Lender Dealer Agreements
By
Keith E. Whann
With the
recent explosion in the number of subprime lenders, motor vehicle
dealers have found important new sources of financing for some sales
transactions which might not otherwise occur.
It is not unusual to find dealers using a number of these
entities at the same time. However,
with the benefits come some problems which, if not considered, could
result in the dealership having to repurchase an entire loan
portfolio.
Many of
the standard dealer agreements used by subprime lenders appear, on the
surface, to be non-recourse. While
under the traditional concept of a “non-recourse” deal this may be
so, many of these agreements contain other language which negates the
non-recourse concept and may obligate a dealer to repurchase various
loans in a portfolio, an event which the dealer thought could not
occur. For example,
virtually all subprime lender dealer agreements contain sections where
the dealer provides various warranties and representations to the
Lender. Within these
sections are warranties from the dealer for everything ranging from
the purchaser having no claims or defenses against the contract
(whether or not these claims or defenses are valid), to all documents
being used in a transaction complying with all federal and state laws
(even where some of the forms are supplied by the Lender).
Generally speaking, a dealer should never warrant the validity
of someone else’s forms with which they are not familiar.
Most of
these dealer agreements also extend the warranties to information far
beyond the dealer’s knowledge.
Therefore, when the contract requires a warranty that all
statements contained on any form are true, a dealer, even though
misled by a customer, may become obligated to repurchase the loan.
Unfortunately, in some agreements, and in a number of real life
examples, a violation of such warranties by a dealer in a non-recourse
contract has led to the dealer being required to repurchase some, if
not the entire portfolio, of loans with that particular Lender.
Generally
speaking, these agreements also have one-sided indemnity provisions,
i.e. if something goes wrong due to a dealership error, the dealer
holds the Lender harmless including attorneys fees.
But there is no reciprocal provision if the problem arises
because of an error on the part of the subprime lender.
In some instances, language in the agreement also has created
adverse tax consequences for the dealer.
Choice
of law and forum (location) selection clauses for dispute resolution
can cause further problems. Many dealer agreements seek to apply the law of the
Lender’s home state which may be disadvantageous to the dealer. A forum selection clause requiring any dispute to be decided
in the home state of the Lender creates not only a logistical problem,
but a large economic problem should the dealer be forced to litigate a
dispute under the contract.
Experience
has shown that if these agreements are carefully scrutinized prior to
signing and changes are requested, many, if not most, lenders will
change their standard form agreements to language more favorable to
dealership interests. If
you are currently using subprime lenders or are considering doing so,
a review of the agreement documents will not only help to ensure your
company’s future financial health, but may also keep the dealership
from experiencing a variety of problems which could have been easily
avoided. |
