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Borderline Issues

August 2012, F&I and Showroom - Feature

by Michael Benoit

Recently, I’ve heard a fair amount of dealer chatter about sales to out-of-state residents; some good, some not so much. As a practical matter, I don’t know of any legal reason why you couldn’t sell to such a customer. The complaints I’ve read seem to revolve around difficulties in working with out-of-state departments of motor vehicles (DMV), as well as difficulties or expenses related to shipping vehicles to other states, out-of state taxes, etc. In other words, there are lots of potential operational headaches.

Despite all that, I don’t know one dealer who would pass up a sale solely because it may be more labor-intensive. Sometimes it’s just geography that makes it appealing to customers: Why buy in your state if you can get a better deal across the border? That happens a lot here in the D.C. area. You can set foot in Virginia, D.C. and Maryland in the span of about five seconds.

Geography plays a big role, but the Internet has completely changed the playing field. I can easily purchase a car sitting in California online and have it shipped to me here in D.C. That probably wouldn’t make sense unless I was looking for a very specific vehicle that was hard to find here, but there is nothing to stop me from buying a new Ford or Chevy from any dealer in the country.

As a dealer working with an out-of-state customer, there are a few things you’ll want to watch from a legal/compliance perspective. First, love your Internet customers, but be wary. As President Reagan put it, "Trust, but verify." If I was inclined to engage in a little identity theft, I might find a transaction where my physical presence is not required more appealing than one where I’d have to show my face.

The Red Flags Rule (Remember that?) requires, to the extent the customer is financing or leasing the vehicle, that you apply your identity theft-prevention program to the customer. At a minimum, that involves getting some comfort that the customer is who he or she claims to be. If the customer is in the dealership, you can look at his or her driver’s license to see whether the picture and description match the customer. If the customer is presenting an out-of-state license, you’ll want some comfort that it is legitimate. How many of you in California know exactly what a valid Virginia license looks like? Fortunately, there are reference tools available to help with that.

If your customer is someone you’ll never see because they’ve chosen to complete the transaction online, you’ll want to take additional precautions. For example, inquire about items on the customer’s credit report. Or better yet, pose out-of-wallet questions; that is, questions whose answers are not easily found in a stolen wallet or credit report. Several compliance software providers can provide a list.

Your finance sources will also want some comfort that the customer is who he or she claims to be. In fact, I know of some dealer agreements that require a "rep and warranty" from the dealer to the effect that the customer was physically present in the dealership for the closing of the finance transaction. That’s not a legal requirement, but it can be something important to a financial institution in today’s environment of increased regulatory scrutiny.

There’s also the concern over which state law applies to the finance transaction: yours or the customer’s? Most courts will apply the choice of law in the retail installment sales contract, but some feel compelled to apply the law in the customer’s state of residence at the time of the transaction. This is especially tricky in cross-border lease transactions. Virtually every state has adopted Article 2A of the Uniform Commercial Code. It deals with leases, and it contains a provision rendering a choice of law that is other than the lessee’s state of residence at the time of the transaction, or within 30 days thereafter, void.

Bottom line is there is no legal reason why you couldn’t sell into other states, but there are some precautions you should take. One is to talk to your attorneys about any issues they see in working with a customer from another jurisdiction. Take steps to verify the legitimacy of the purchaser in a finance transaction. Look closely at your dealer agreements with your financing sources and see what, if any, restrictions they place on remote transactions. Finally, be careful about any choice-of-law issues that might cause your finance source to kick a contract back to you. Then sell, sell, sell!

Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. He is a frequent speaker and writer on a variety of consumer credit topics. E-mail him at michael.benoit@bobit.com. Nothing in this article is legal advice and should not be taken as such. Please address all legal questions to your counsel.

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