Taking the Mystery Out of Lender Dealer Agreements
By: Keith E. Whann
At the recent NIADA Regional Conferences on “How To Sell A Car & Keep
It Sold!”, dealers have raised a number of interesting topics in addition
to dealership paperwork issues. Obviously, to sell a car we need three
things: cars, customers and credit. Dealers tell me that they know how
to find cars and customers, the challenge is often finding lenders willing
to extend credit in our industry and knowing how to review a lender’s
dealer agreement. Since the new Safeguards Rule implemented pursuant
to the Gramm-Leach-Bliley Act will require many lenders to amend their
agreements, this is a timely issue. Not only do dealers and lenders each
have to implement and maintain a comprehensive written information security
plan that describes how they will protect customer information, they
must also have provisions in their service provider agreements mandating
that the service provider do the same. As with many of the legal and
business issues that arise in the motor vehicle industry, reviewing lender
dealer agreements can seem like an overwhelming task. In reality it is
quite simple if you understand a few basic principles.
Most of the standard dealer agreements used by lenders are, on the surface,
non-recourse. While under the traditional concept of a “non-recourse”
deal this may be so, most of these agreements contain other language
which can negate the non-recourse concept and may obligate a dealership
to repurchase various loans in a portfolio, an event which the dealer
thought could not occur. For example, virtually all lender agreements
contain sections where the dealership provides various warranties and
representations to the lender. Within these sections are warranties from
the dealership 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 (when was the last time your dealership reviewed
and updated its paperwork to ensure legal compliance?).
Many of these lender agreements also extend the warranties to the accuracy
of information far beyond the dealership’s knowledge. Therefore, when
the agreement includes a warranty that all statements contained on any
form (such as a credit application) are true, a dealership, even though
misled by a customer, may become obligated to repurchase the loan.
In addition to these legal issues, lender agreements raise a whole host
of business related issues that should be carefully considered by the
dealer. Often times these agreements have one-sided indemnity provisions,
i.e. if something goes wrong due to a dealership error, the dealership
holds the lender harmless for all damages, costs and expenses, including
attorneys’ fees. There may not be, however, a reciprocal provision if
the problem arises because of an error on the part of the lender. Choice
of law and forum (location) selection clauses for dispute resolution
can also cause problems. Many lender agreements seek to apply the law
of and settle any dispute in the lender’s home state, which may be disadvantageous
to the dealership and can be a large economic problem should a dispute
arise under the agreement. In addition, the following types of provisions
can have a significant impact on the business relationship between the
parties:
- The method of payment accepted for the down payment;
- The time period
within which the dealership is required to file a lien and perfect
the security interest;
- Prohibitions or limitations on the dealership’s
ability to accept deferred down payments;
- Overly broad or vague default
provisions;
- The time period within which the dealership has to deliver
the loan documents;
- One-sided attorney fee and damage waiver
provisions; and
- Clauses that purport to hold the dealership liable
for “any claims or defenses”, even those asserted against
third parties
over which
the dealership has no control.
Unfortunately, in some agreements, and in a number of real life examples,
a violation or breach of the representations and warranties by a dealership
in a non-recourse lender dealer agreement has led to the dealership being
required to repurchase some, if not the entire portfolio, of loans with
that particular lender. Experience has shown that if these agreements
are carefully scrutinized prior to signing, the dealership can minimize
its risk of potential liability and increase its profitability by considering
various legal, business, and financial issues raised in the agreement
and taking action to protect its interests. Reviewing lender dealer agreements
will not only help to ensure your dealership’s future financial health
and keep you from experiencing a variety of problems that could have
been easily avoided, but will also form a solid foundation for your business
relationship with the lender. |
