The Importance of Understanding Your Indirect Financing Agreements

Paul R. Norman | 07.10.19

Most automobile dealers use indirect financing arrangements when selling or leasing vehicles on credit. Under these arrangements, the Retail Installment Sales Contract or Lease (RISC) is initially between the dealer, as creditor or lessor, and the buyer or lessee. The RISC is then assigned to a lender pursuant to the terms of a written agreement between the dealer and the lender. The assignment normally is ​“without recourse” (meaning that the lender assumes the risk of nonpayment), unless the dealer breaches one of the warranties of its agreement with the lender. In the event of a warranty breach, the lender has the right to require the dealer to buy back the RISC — whether or not the buyer defaults and whether or not the breach is connected with a default.

The warranties that are contained in RISC agreements vary significantly among lenders. Some agreements expressly prohibit acceptance of credit cards for down payments; others permit it and some are unclear. Some contain an absolute guarantee that all the credit information provided by the buyer is correct, while others require the dealer to warrant only that ​“to the best of its knowledge,” the credit information is correct. Some contain a warranty that the buyer signed the agreement at the dealership premises; others do not. Unless the dealer has read and understands its agreements with the lenders to which it assigns RISCs and makes sure that its sales and F&I practices are consistent with them, there is some exposure the dealer will have to buy back RISCs and incur the costs and burdens of attempting to enforce the agreements itself. 

Because lenders profit from buying RISCs from dealers, dealers have leverage in negotiating agreements with them. For example, if a dealer’s practice is to accept credit cards for some or all of the down payment under a RISC, but a lender’s standard indirect financing agreement prohibits this practice, the lender may agree to an addendum allowing it, if the dealer asks. However, I fear many dealers simply sign the agreement provided by the lender without knowing that its practices may require it to buy back RISCs in the future. 

It is important that dealers fully understand the terms and conditions of master agreements and assignment provisions relating to each of their indirect financing arrangements. Consultation with attorneys familiar with these arrangements can provide dealers valuable insight into potential pitfalls of certain lender-preferred provisions as well as identify opportunities to negotiate terms that better reflect dealerships’ actual business practices.