Taking The Mystery Out of Lender Dealer Agreements

Keith 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.

This information is provided by Keith Whann of the law firm Whann & Associates, LLC and is for general information purposes only. You should contact legal counsel for specific application. © Keith Whann July, 2006.