Finance sources and most dealers remain worlds apart in their understanding of the term “lender.” - Illustration by mayrum via Getty Images

Finance sources and most dealers remain worlds apart in their understanding of the term “lender.”

Illustration by mayrum via Getty Images

Or so you would think if you consider how differently they view dealership financing. Over the years, I have represented both dealers who enter into retail installment contracts and the banks and finance companies who buy the RICs from the dealers. In working with folks from both sides of this divide, I quickly concluded that the dealers were looking through one end of the binoculars, while the banks and finance companies were looking through the other end.

I’ve found there are few dealers who understand that in a typical RIC transaction, the dealer is the creditor. Many (most?) dealers feel that they are in the business of selling cars, and that the financing of those sales transactions is the job of the bank or finance company, entities that dealers regularly erroneously refer to as “lenders.” These dealers might consider themselves as agents in gathering credit and other information from car buyers and in getting the RIC and other related documents executed by the buyer. But, if you asked these dealers if they financed their buyers’ purchases, they would deny it.

Some finance company folks share the dealers’ view of the dealer’s role in the RIC process. But those in charge of establishing and enforcing the legal framework for dealer financing have a completely different view of the process and the roles of the participants. In their view, the finance companies and the banks are simply “buying a coupon,” analogous to buying a bond. The bank or finance company is on the hook for the credit risk of the car buyer, but every other risk belongs to the dealer.

If the car buyer defaults in her payments and the finance company or bank discovers that she lied on her credit application, presented false credentials, or held herself out as the car buyer in a straw purchase, the bank or finance company likely will turn to the dealership and, citing representations and warranties contained in its contract for the purchase of RICs from the dealership, demand that the dealership step up to the loss. The same result would ensue if the dealership’s F&I folks “dummy up” the buyer’s credit application with phantom income, invent nonexistent trade-in vehicles, engage in “powerbooking,” or pull any other shenanigans.

The only risk that the bank or finance company wants to be on the hook for is the risk that the actual buyer buying the actual vehicle accurately described in the RIC fails to pay as agreed. The bank or finance company has loaded up the contract it uses to buy RICs from dealers with every representation and warranty that it can dream up to ensure that its risk is so limited.

Banks and finance companies typically are very reluctant to negotiate the terms and conditions under which they buy RICs, and those terms and conditions are usually pretty comprehensive. If you’d like to get an idea how tough those terms and conditions can be, I’d suggest that you whip out two or three of those dealer agreements and peruse them, with special attention to the section dealing with the dealership’s representations and warranties.

Thomas B. Hudson is a partner in the law firm of Hudson Cook LLP, publisher of Spot Delivery, and editor in chief of CARLAW. Contact him at [email protected]. © 2018, all rights reserved. Single print publication rights only, to F&I and Showroom (1/19). HC No. 4837-4147-8529.2

About the author
Tom Hudson

Tom Hudson


Thomas B. Hudson Esq. was a founding partner of Hudson Cook LLP and is now of counsel in the firm’s Maryland office. He is the CEO of LLC and a frequent speaker and writer on a variety of consumer credit topics.

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