Automobile Floor Plan Loan Industry Standards and Practices Important in Litigation
The author, renowned nationwide banking expert witness Don Coker, explains nationwide industry standard practices and procedures for automobile floor plan lending.
Did you ever wonder how is it that a car dealer can have a huge car lot with hundreds of new cars for sale, and how they could afford to pay for all of those cars?
The answer is fairly simple. The nationwide industry standard process is called Floor Plan Lending, and it works like this:
● Based upon what the car dealer thinks will sell the best, the new car dealer places its new car orders with the manufacturer. As each individual new car is shipped to the dealer, it is an industry standard practice that the manufacturer drafts the dealer’s bank (through a process set up by the bank, car dealer, and manufacturer) for the full amount of the factory invoice, which is 100% of the dealer’s cost.
● Through the draft, the manufacturer is paid 100% of the dealer’s cost on new cars.
● The floor plan lender is secured on each advance by a specific vehicle specified by VIN number.
● The typical advance for used cars is 80% to 95% of the lower of actual cost or blue book value.
● Used car floor plans are often only made by a lender if the lender also has a new car floor plan loan for the same car dealer.
● When a dealer sells a car, the dealer repays the floor plan lender within one to five days of the sale; and the floor plan lender releases their lien on the specific vehicle that was sold so that the title may be either placed in the name of the purchaser and used to secure their car loan, or in the case of a cash sale, simply placed in the name of the purchaser. The one to five day period allows the dealer to complete the paperwork and to receive funds from the purchaser’s lender.
● Floor plan loans are usually made with a one-year term, and it is a fairly standard practice for the floor plan lender to renew performing floor plan loans year by year.
● Floor plan loans typically require that interest on the outstanding balance be paid monthly. Lenders vary on whether they require a separate payment for interest up to date when each specific vehicle is sold and paid off, or whether they simply include that interest into the monthly interest payment due on the entire floor plan loan balance.
● Floor plan loans typically require that all collateral vehicles on the floor plan loan must be paid off at the end of the one year term of the floor plan loan. This is in keeping with the common banking practice that all credit lines are required to be completely cleared at least once a year. In reality, it is common for a floor plan lender to carry forward existing collateral cars forward to serve as collateral on the new floor plan loan.
● Inspections of collateral inventory should be carried out periodically by the floor plan lender. Since dealers may send cars off the lot for demonstration purposes or possibly for minor maintenance items, it is a good idea for the floor plan lender to notify the dealer in advance as to when the collateral inspection will take place so that it can be completed by checking all of the floor plan loan’s collateral cars. The record of the collateral inspection should be maintained by the floor plan lender in the car dealer borrower’s floor plan loan file.
● If an inspection reveals that a vehicle that is covered by the floor plan loan is not at the dealership since it has been sold without the floor plan lender being notified, then it is referred to as having been “sold out of trust” or simply “out of trust.” This is a serious situation since it is possible that a fraudulent certificate of title may have been generated. In any event, the floor plan lender still has legal title to the car even if the car is not at the dealership.
● In a commercial bank, the commercial loan department usually handles floor plan loans, and the consumer loan department handles the individual loans to the car purchasers,
● Car loans made to purchasers are typically made using a standard retail installment sales contract form. This is a form that is fairly uniform from state to state but often has tweaks to it in order to meet the requirements of each individual state’s laws.
Floor plan loans require a great deal of oversight by the lender, but they are necessary for the operation of a car dealership, and they can be a profitable source of additional loan and deposit business for a bank.
ABOUT THE AUTHOR: Don Coker
Expert witness and consulting services. Over 500 cases for plaintiffs & defendants nationwide, 120 testimonies, 12 courthouse settlements, all areas of banking and finance. Listed in the databases of recommended expert witnesses of both DRI and AAJ. Clients have included numerous individuals, 75 banks, and governmental clients such as the IRS, FDIC.
Employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, BofA, Regions Financial, and a two-year term as a high-level governmental banking regulator. B.A. degree from the University of Alabama. Completed postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School.
Called on by clients in 31 countries for work involving 61 countries. Widely published, often called on by the media. Don Coker serves clients worldwide from his Atlanta metro area office.
Copyright Don Coker
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.