Bonded Title on Trade In?
TIADA routinely provides guidance to dealers applying for a bonded title when there is a missing title that cannot be located or an issue with the chain in custody of an original title. However, a dealer recently contacted our office with the question of whether they could accept a trade in on a vehicle with a bonded title.
Could or should? A dealer can in fact accept a trade in on a vehicle with a bonded title. A bonded title generally has the same force and effect as a regular title. The surety company posting the bond provides a guarantee to the applicant that the title is insured against defects. The surety company generally provides due diligence on title research to sufficiently safeguard against third party claims. As a result, the surety bond should protect the new owners against the unknown third parties from the past, lienholders, etc. Those prior claimants should then file a claim against the bond and not the car.
Can a dealer sell a vehicle with a bonded title? Yes. A dealer that accepts a vehicle on trade should be able to sell a vehicle at retail, finance, or at auction. However, there are some important issues to consider when dealing with a vehicle with a bonded title.
- Valuation. What do you price the car at trade or retail? As a general rule of thumb, a vehicle with a bonded title will have a diminished value when compared to an identical vehicle with a clean title due to the uncertainty of resale issues, legal issues, etc.
- Disclosures. This is where dealers need to pay attention. If a dealer attempts to remarket a vehicle with a bonded title, the dealer should go above and beyond in disclosing the bonded title and be truthful about possible encumbrances and valuations, if known.
- Misrepresentation. A dealer that is less than forthcoming describing, pricing, or noting a bonded title defect could very well end up a defendant in a lawsuit based on misrepresentation.
- Liens. A seller finance dealer can also attach a lien to a bonded title. However, there is little statutory guidance on possibly having to compete with prior lienholders, if any. While the surety bond should cover such issues, a dealer may get in a dispute between attorneys.
- How old is the bonded title? Transportation Code 501.053(d) notes a three-year anniversary of a bonded title. So a dealer that finds a vehicle with a mature bonded title may be able to purchase such a vehicle at a discount in anticipation of the title becoming clean in the near future.
- Unknown claimants. Could a third-party attempt to repo the car based on the original title and or otherwise challenge the title? The short answer is yes. Anyone can claim or sue anyone. While such unknown parties should make a claim on the surety, not everybody knows how to do process a surety claim. Again, such claims from the past could lead to possible misrepresentation issues today if a dealer says there is nothing to worry about with a bonded title.