As counsel for franchised and independent dealers across the U.S., I regularly get calls from clients about a bank “kicking” a contract back to the dealer due to default or lack of insurance. The first question the dealer always asks is “Can I go repo it?” Without more information, the answer is no. The dealer must ask three important questions.
First and foremost, why did the deal get sent back to the dealer? Did the dealer mess up the paperwork in F&I? If so, no the vehicle can’t be repossessed. The dealer must service the contract for the life of the loan or reassign it on the same terms. If the customer defaulted on the loan, the dealer might be able to repossess the vehicle.
Second, who is listed as lien-holder on the title? If a 3rd party lender is listed, the lender must assign the contract AND the lien back into the dealership’s name. Once the dealer is listed as the lien-holder, the dealer is almost clear to repo the vehicle.
Third, how did the customer breach the contract? If the customer breached the installment contract for lack of insurance, the dealer can usually go ‘hook it’. If the customer defaulted on payments, the answer will depend on state law and the grace period in the contract.
Assuming the dealer can lawfully repossess the vehicle, the next issue is whether the dealer knows the repossession laws. It’s not over once the dealer physically has the car back. The dealer must send a series of notices to the customer. First, a notice telling the customer he/she has a specified amount of time to claim any personal belongings left in the vehicle.
In most states, the customer must be given a chance to “cure” their default. The dealer must send the customer notice informing the customer what amount he must pay to cure his default. The amount will differ from state to state and by the terms of the contract. Some contracts and states will allow the dealer to accelerate all payments. Thus, for the customer to ‘cure’ he will be obligated to pay the entire loan in full, plus costs and late fees. Other states and contracts may not permit acceleration and the customer is only obligated to pay the past due balance, plus costs and fees. In any case, a notice must be sent informing the customer of the balance due to cure and retrieve the vehicle.
Now, if the customer does not “cure”, the dealer must send notification to the customer regarding the vehicle’s resale. Each state will specify how far before the sale this notice must be given; Ohio, for example, requires at least 10 days before the sale.
Now that all but one of the notices has gone out, you can finally sell the vehicle. But how? Each state has rules regulating the sale of repossessed vehicles. In most states, it must be sold at a public auction. However, some are allowing dealers to sell it at a ‘public sale’ (i.e. at the dealership) if the vehicle is advertised for a certain period of time in the local paper. It is imperative to check your state law before selling the vehicle. If the sale is done improperly, you may be liable to the customer for more money than they’ve actually paid you for the car!
After the vehicle is sold, the customer is entitled to an accounting of all costs and credits associated with the sale, repossession and resale of the vehicle. Each state specifies how this notice must be itemized. If the vehicle is re-sold for more than the customer owed, the customer is entitled to the surplus. However, this is unlikely. It is more likely that there is a deficiency and the customer still owes the dealership money. The dealer, on recourse loans, may bring a suit in court for the remaining amounts due.
After the accounting is mailed to the customer, the dealer is done with its obligations under most repossession laws and can return to business as normal. If the dealer believes it will be in the position to repo another vehicle in the future, it’s a smart idea to put into place a written repossession policy. The policy should lay out the notices required; the content of those notices; and the amount of time the dealer has to send such notice. By putting this information in a written document, it will guide future employees on the requirements of repossession and eliminate a lot of questions. But, if you do run into questions, call your attorney!