Automobile Retail Installment Sales Contract Details Important in Car Financing Litigation
Renowned nationwide banking expert witness, former high-level banking executive, high-level banking regulator, Ford Motor Credit officer and banking consultant to over 75 banks Don Coker explains some of the important nuances of banking and lending litigation involving nationwide industry standard policies, practices and procedures for the handling of automobile retail installment sales contracts.
In the new and used automobile sales industry, filling out a retail installment sales contract at a car dealership is a customary methodology for obtaining financing to purchase a car. A retail installment sales contract is a conditional contract that requires that a third-party lender – that is, typically a lender that is a separate entity from the car dealer - approve financing for the prospective purchaser / borrower before the sale of the car is official.
In the banking and automobile financing industries, a loan that is originated through a retail installment sales contract is contingent financing, and is a conditional contract. Financing does not exist until the retail installment sales contract is approved and accepted by an actual lender.
The third-party lender makes the credit decision in a retail installment sales contract transaction, not the car dealer. The car dealer reviews the credit information provided by the prospective purchaser / borrower and decides which of the dealership’s potential financing sources would be most likely to provide the best financing for the prospective purchaser / borrower.
The prospective lender may require that the prospective purchaser / borrower provide additional information before the lender will agree to extend financing for the purchase. It is typical for a prospective purchaser / borrower to deal solely with the dealership even though the loan is being considered by and will be extended by a third-party lender not formally affiliated with the dealership.
When a third-party lender is considering offering financing to a prospective purchaser / borrower, the sale is not considered a true finalized sale until the financing has been approved by the third-party purchaser and funds forwarded to the dealership to pay for the car. Accordingly, if a prospective purchaser / borrower fails to follow through on meeting the requirements set out by the third-party lender, then neither the financing nor the car purchase are official.
There are two basic types of dealer financing: (1) Where the dealer contacts prospective lenders, shops for the best deal for the purchaser, and then forwards the retail installment sales contract paperwork to the actual lender that offers the best deal for the prospective purchaser / borrower, and (2) Where the dealer actually closes the financing transaction for the chosen third-party lender and then immediately sells (or assigns) the loan at a discount to the third-party lender.
If a car dealer is in the car financing business, then they would have a portfolio of car loans. Typically, a car dealer having a portfolio of car loans is only found at the lowest end “buy here – pay here” type of used car lots where the profits from the financing often exceed the profits from car sales.
It has been my experience that new car dealerships do not have a portfolio of car loans since they operate on the basis of matching up prospective purchasers / borrowers with a third-party lender that will offer the best financing package.
The terms “indirect lending” or “dealer financing” are sometimes used to describe the arrangements between automobile dealers and financing sources.
When a car dealer seeks financing for a prospective purchaser, there is no guarantee that the dealer will be able to secure acceptable or any financing. Dealers seek financing on a best efforts basis with no guarantees to the prospective purchaser / borrower that any financing will be obtained.
If a dealership’s third-party lenders refuse to offer financing to a prospective purchaser / borrower, the dealership is not required to issue an Adverse Action Notice for the proposed transaction since the prospective purchaser / borrower did not apply for financing that would be provided by the dealership, and the dealership was not ever a prospective creditor.
As an integral part of the process of assisting a purchaser by seeking financing for them, it is typical for a car dealer to obtain a credit report on the prospective purchaser in order to assist the dealership in determining the most appropriate prospective third-party lender for the proposed transaction. In addition, the credit report will be used in the third-party lender’s analysis of the proposed transaction.
It is a basic principle of lending that lenders charge higher interest rates and fees for loan transactions where there is more risk, such as when a borrower has bad, little, or no credit. Alternatively, a prospective third-party lender may choose to not offer any financing at all.
There is no logical reason why a car dealer would offer full or even partial recourse for a loan made by a third-party lender to a prospective purchaser with poor credit. A car dealer could see its profit on the car sale wiped out if the borrower defaulted on the loan and the dealer had to repurchase the loan from the third-party lender. The dealer would be better off to simply sell that car to another purchaser who would be capable of obtaining financing that would not require the car dealer to be a financial backstop for a weak purchaser / borrower.
As a convenience to the prospective purchaser, the dealer often allows the prospective purchaser to take possession of the car the prospective purchaser wants to buy before the financing is approved. This service is sometimes referred to as “spot delivery.” During this interim period, the title to the car stays in the name of the car dealership even though the prospective purchaser has the use of the car while financing is being sought on their behalf. In order to formalize this arrangement, a bailment agreement is typically executed between the dealer and the prospective purchaser. It is important to note that even though some dealerships offer this service as an optional courtesy to prospective purchasers, the prospective purchaser does not have to take early delivery of the car while financing is being sought.
It is my opinion to a reasonable degree of professional certainty that a car dealership that follows the general principles outlined in this article is exhibiting good faith, fair dealing, ordinary care, honesty in fact, and the observance of reasonable commercial standards in its dealings with its customers.
It is my opinion to a reasonable degree of professional certainty that no damages can be sustained by a prospective purchaser / borrower as a result of its dealings with a car dealership that operates in accordance with the basic principles outlined in this article, and that any damages that a prospective purchaser / borrower may feel that they have sustained are more likely than not the result of the prospective purchaser / borrower’s own actions and inactions.
© 2012 by Don Coker.
ABOUT THE AUTHOR: Banking and Lending Expert Witness 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.
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.