Financing Post Sale Service Contracts or Services
It’s been a pretty good month. Sales are up, customers are coming back into the dealership, and cars are moving off your lot. In February, you probably sold more cars in one month than in three months combined in 2010 and it was a short month. Have your employees been so excited to move cars that they have forgotten to push your service contracts with the sales? It could happen. Let’s look at the following scenario:
Amanda Upton bought a pre-owned BMW from you several weeks ago. She signed all the paperwork, including a motor vehicle retail installment sale contract. At the time she signed, she either declined to buy your platinum service contract or your salesman forgot to offer it to her. Recognizing that she doesn’t have a ton of knowledge about servicing a vehicle, Amanda contacted your dealership wanting to buy that service contract, but she doesn’t have the cash to pay for it in full. If Amanda bought the service contract at the time she signed the installment sale contract, you would have added it to the cash sale price of the vehicle or put it as an “other charge” in the Itemization of the Amount Financed. In that case, the service contract could be sold incidentally to the sale of the vehicle. Since the sale of the car is a done deal, and you really want to sell Amanda the service contract, you’re considering your other options.
Stop before you (1) reach for your side note (which you likely shouldn’t use in your business anyway); or (2) write up the sale of the service contract on a motor installment sale contract.
The side note doesn’t work because you are not loaning Amanda money to purchase the service contract from a third party. Even if the service contract were to be sold by a third party, you likely don’t want to venture into the lending arena. Your state may require a lending license to make a loan. The state may require certain disclosures for loans that are not required for installment sale contracts. And, note that the Truth in Lending installment loan disclosures are different than the installment sale disclosures.
Unlike loans and credit sales, credit sale disclosures under the Truth in Lending Act are equally applicable to credit sales of motor vehicles and credit sales of services. Although credit sales of services are treated similarly under federal law (for disclosure purposes), many states treat credit sales of services very differently than credit sales of motor vehicles. Some states have entirely different regulators or regulatory regimes for those sales. For example, in Texas, credit sales of motor vehicles are governed by Chapter 348 of the Texas Finance Code, while credit sales of non-motor vehicle goods and services are subject to Chapter 345. Each of those chapters provides contractual requirements that differ depending on the property or services sold.
Some states require separate licensing or registration for those engaged in credit sales of services. Again, using Texas as an example, motor vehicle credit sellers are required to hold a sales finance company license, while credit sellers of services must be registered under Chapter 345. Both are regulated by the Texas Credit Commissioner.
Getting the correct license and a compliant contract are step one and two. So, if you have the right license or registration, and you have a contract that complies with federal and state law, your dealership still needs a way to service those contracts, unless the contracts can be assigned to a third party. If you aren’t a buy-here-pay-here dealer, and don’t intend to unload the contracts, you have to set up a servicing platform to be able to service the accounts until they’re paid in full.
There’s a lot to think about before your dealership can finance the sale of Amanda Upton’s service contract. The same goes for third party vehicle repair facilities. In addition to being able to service the vehicle, you need to (1) have the appropriate licenses to sell services on credit; (2) have origination processes and a contract that are both federal and state law compliant; and (3) provide a servicing platform to service those contracts. And, by the way—if you’re not currently a credit seller, you’ll also have the added pleasure of getting to know the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Gramm Leach Bliley Act, and a whole host of other laws impacting how you extend credit.
Nicole Munro is a partner in the Maryland office of Hudson Cook, LLP. Ms. Munro represents DMS providers, forms printing companies, motor vehicle dealers, sales finance companies, and lenders engaged in motor vehicle finance transactions. She can be reached at 410-865-5430 or by email at email@example.com.