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Compliance

The Case of the Missing Cosigner

The magazine’s resident legal wiz says a reader was right to be suspicious of a buyer whose cosigner only existed on paper. Read on for more details.

January 2012, F&I and Showroom - Feature

by Michael A. Benoit

An F&I manager from New York sent a letter to the editor concerning the use of power of attorney (POA) documents in the finance office. The situation he described is an excellent example of why, as a rule of thumb, you want the folks obligated on the retail installment sales contract in the store so you can verify their identities and get their signatures. Of course, there may be instances when that isn’t possible, but those situations require more rigorous identity verification. Let’s take a look at our reader’s situation.

Customer Joe, in his 40s, wanted to purchase a $35,000 truck. He had a clean title to the trade, which was worth $7,000 in the deal. However, Joe was unemployed and his credit report demonstrated a persistent unwillingness to repay the majority of his obligations, save for a credit union auto loan which was joint and current. 

But that wasn’t a problem for Joe, as his mother offered to cosign the installment sales agreement. Because she couldn’t do it in person, she sent Joe’s sister, Jane, with a POA. Are your “Spidey Senses” tingling yet?

Jane showed up and completed a credit application in Mom’s name while our reader took a closer look at the POA. It was a short form, easily obtained on the Internet, but it appeared to have been completed by Mom and properly notarized. It provided a standard list of powers bestowed on Jane to act in Mom’s stead, including the authority to enter into a chattel or goods transaction.

The facts raise red flags on so many levels. First, you have a 40-year-old, unemployed man with a horrible credit history attempting to purchase a $35,000 vehicle. Obviously, the F&I manager’s finance sources weren’t going to approve Joe, but they would have no problem approving Mom while Joe tags along.

Second, Jane showing up with an executed POA is suspicious. Most identity theft occurs within the family because it’s so easy. Kids of all ages can access their parents’ or siblings’ information and use it to open accounts in their names. Without further verification of Mom’s knowledge (and approval) of the transaction, it would have been unwise for the F&I manager to put her on the hook for a $28,000 ticket.

These facts would have been enough for me to turn down the deal. I doubt there is much, if any, law requiring a merchant to accept a POA simply because it was presented. I also believe this is the type of situation where your well-constructed identity theft-prevention program (required by the FTC/CFPB) can save you from a world of hurt.

But the story gets better. Since Mom was the primary buyer and Joe was the cosigner, they both would have had ownership interest in the vehicle. Joe was able to contribute the $7,000 down payment, but Mom would have most likely been the one paying the contract. Would that make the vehicle a gift to Joe?

The answer isn’t entirely clear. Joe would have been a cosigner on the contract and would have been jointly and severally liable on the obligation. Hard to say if that deems the vehicle a gift, even if Mom ended up paying for it. But let’s assume (as the F&I manager did) that the $28,000 contract was a gift to Joe from Mom. In New York, you need a special rider form to the POA if the grantee (Jane) is going to grant a gift of more than $500 on behalf of the grantor (Mom). Jane didn’t show up with the rider, and our F&I manager wouldn’t finance the deal without it.

Our writer’s demand for the rider (much to the chagrin of the salesperson) effectively quashed the transaction, but I don’t think the situation need to go that far. As I previously indicated, proper execution of the dealership’s identity theft-prevention program probably would have uncovered fraud when inquiries into Mom’s and Jane’s identities were made. Alternatively, the inquiries may have gotten our writer comfortable that all was well. Only at that point would he need to have worried about the special gift rider.

When in doubt, talk to your counsel. I expect they’ll tell you that you don’t have to accept POAs, even if they are properly executed. The sure thing is that you’re far less likely to face a fraud situation when you’re dealing with customers face-to-face, and you definitely won’t have a fraud concern if you refuse to accept a POA in an instance like this.

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. Michael can be reached 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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