Finance Companies Kick Back Deals, Are Conditional Delivery Agreements On The Rise?
I'm not sure CDAs are on the rise but it's unusual to get two phone calls about CDAs in the same week.
I'm not sure CDAs are on the rise but it's unusual to get two phone calls about CDAs in the same week. So, I thought I would offer a refresher in this week's blog.
Most dealers know that a CDA is used in situations where the dealer is helping a customer secure third-party financing.
Typically, a dealer looks for a bank, credit union or finance company willing to “buy” the deal based on the vehicle and the customer's credit information.
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.
So now what, if a retail sale is made it is the dealer who will actually enter into a retail installment contract with the customer. This is very important, who is obligated to finance the purchase is no trivial matter, as we will see below. If all goes as planned, the dealer will then immediately “assign” the contract to the finance company that agreed to buy the deal.
But what if things don't go as planned?
The finance company may kick the deal back to the dealer for any number of reasons. We will debate the justification for kicking these deals back in another blog at another time. Either way, the dealer is now the holder of the contract and it's up to the dealer to live up to the financing terms spelled out in the contract, (welcome to the finance business).
We frequently get calls from members who have found themselves in the unfortunate position of holding a bad retail installment contract. One potential tool to consider is a CDA.
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.
Other things you must consider:
• 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.
• 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 CDAs 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.
As we all know, third party finance carries inherent risk for a dealer (subprime finance especially); that is just part of the game. Dealers in this line of business may want to consider using conditional delivery agreements in those situations where the vehicle will be delivered before the financing is finalized.