Be Careful Using Conditional Delivery Agreements
Does your dealership ever sell vehicles on Saturday or Sunday, but your third-party lender is unavailable to confirm underwriting and funding? What do you do? Some dealers use what is called a Conditional Delivery Agreement? A CDA is used in situations where the dealer is helping a customer secure financing through a third party that cannot be closed or funded right away for a number of reasons. A CDA should be signed before the retail installment contract is signed, but make sure your collateral is protected.The way this typically works is that a dealer looks for a bank, credit union or finance company willing to “buy” the deal based on the desired vehicle and the customer's credit information. Technically, if a retail sale is made, it is the dealer who will actually enter into a retail installment contract with the customer. The dealer will then immediately “assign” the contract to the finance company that agreed to buy the deal.
In the event that all proceeds as expected – that is, all underwriting review such as work / income is acceptable and the retail installment contract is successfully assigned to the finance company that holds it – there is no issue.
What if the deal with the lender or bank can't close because it is a Saturday or Sunday and there may be a problem with the customer's credit file or some other issue? Some dealer may choose to use a conditional delivery agreement pending future approval. In a nutshell:
- A CDA is defined as a contract between a retail seller and prospective retail buyer under the terms of which the retail seller allows the prospective retail buyer the use and benefit of a motor vehicle for a specified term.
- The agreement may not exceed 15 days and is void upon the execution of a retail installment contract between buyer and seller.
- The value of the buyer's trade-in must be agreed to and stated in the agreement.
- Seller must use reasonable care to conserve the buyer's trade-in and must return it in substantially the same condition as when the agreement was signed. If the trade-in can't be returned, seller must pay buyer the value of the trade-in as stated in the agreement.
The finance company may decide not to buy the deal after all and kick the retail installment contract back to the dealer for any number of underwriting criteria. The dealer now finds himself in the unwanted role of “holder” of the contract of what may be a bad risk and it is up to the dealer to live up to the financing terms in the contract. This is worth reiterating: If you as a retail dealer enter a retail installment contract (on behalf of a third party lender) and are unable to assign it, for whatever reason, you are now in the financing business. TIADA frequently gets calls from members who have found themselves in the unfortunate position of holding a bad retail installment contract.
To use a CDA or not to use a CDA…that is the question.
On the positive side, your customer may take delivery of his new vehicle immediately; and if the financing falls through, you are not left on the hook to finance the vehicle yourself.
On the negative side, you do not have a sale. No two ways about it; if the customer decides he doesn't want the vehicle for any reason during the CDA period before a contract is signed, he can return the vehicle to you and you must return his down payment.
- Remember that a CDA must NOT be signed at the same time as the retail installment contract.
- Insurance: Who is responsible for loss or damage of the collateral? Make sure that the CDA is clear that the customer's insurance is responsible with full coverage. As usual, the dealer must take precautions to ensure that valid insurance is in place for all times material.
- Wear, tear, and miles: Most CDA's are silent about wear and tear on a vehicle. If financing is denied and the customer walks away, are you looking at worn out or damaged vehicle with thousands of additional miles on the odometer?
- TIADA generally advises against using a CDA, but some customers may be worth it. However, be very careful about who you let drive off your lot without a valid RIC.
In 2009 the Texas legislature amended the Texas Finance Code to address the use of conditional delivery agreements by prohibiting a retail installment contract from being conditioned on the subsequent assignment of the contract to a finance company. Texas Finance Code §348.1015 effectively ended the use of conditional delivery clauses in retail installment contracts due to undocumented fees and charges.