td auto finance dealer agreement
When a customer walks into a car dealership and drives out with a new vehicle financed on the spot, a seamless transaction has occurred. Behind that simplicity, however, lies a complex and crucial legal document: the Auto Finance Dealer Agreement. This is not the loan contract the customer signs, but the foundational B2B (business-to-business) partnership agreement between the car dealership and a lender, such as a bank or a specialized auto finance company. This agreement is the invisible engine that powers the entire indirect auto lending market, enabling dealers to offer immediate financing and transforming the car-buying process for millions.
The core mechanism governed by this agreement is indirect lending. Unlike a direct loan where a customer goes to their own bank to get pre-approved, in an indirect model, the dealership acts as the intermediary. The process is a well-oiled machine: a customer chooses a vehicle, fills out a credit application at the dealership, and the dealer’s finance manager then submits that application to one or more of their partner lenders. The lenders review the application and, if approved, send back the terms. The dealer presents the offer to the customer, who signs the retail installment sale contract. The dealer then “sells” this contract to the lender, receiving the full payment for the car upfront. The customer then makes their monthly loan payments directly to the lender.
## Anatomy of the Agreement: Key Sections and Responsibilities
The dealer agreement is a detailed contract that meticulously outlines the rules of this partnership, focusing on risk, responsibility, and compensation.
### 1. Dealer Representations and Warranties
This section is a series of promises the dealer makes to the lender. The dealer warrants that all information provided is true and accurate. This includes the customer’s information on the credit application, the details of the vehicle (VIN, mileage, condition), and the fact that the vehicle has a clean title. If the dealer misrepresents any of this information, they have breached the agreement.
### 2. Recourse vs. Non-Recourse: The Allocation of Risk
This is the most critical and heavily negotiated part of the agreement, as it determines who is financially responsible if the customer stops paying their loan.
- Non-Recourse: This is the most common arrangement. Once the lender buys the loan contract from the dealer, the lender assumes all the risk of default. If the customer stops paying, it’s the lender’s problem.
- Full Recourse: In this high-risk scenario for the dealer, if the customer defaults on the loan, the dealer is obligated to buy back the loan contract from the lender for the outstanding balance. Dealers may agree to this in exchange for the ability to get financing for customers with lower credit scores.
- Limited Recourse: This is a hybrid model. The dealer might be responsible for buying back the loan only if the customer defaults within a specific, early period (e.g., the first 90 or 180 days).
### 3. Dealer Reserve: The Compensation Model
This clause explains how the dealership makes a profit on the financing itself. The lender will provide the dealer with an interest rate at which it is willing to buy the loan, known as the “buy rate.” The dealer is then permitted to offer the customer a higher interest rate, known as the “contract rate.” The difference between these two rates is the “dealer reserve” or “spread,” which is the dealer’s commission for arranging the loan. For example, if the lender’s buy rate is 6%, and the dealer signs the customer at 7.5%, the 1.5% difference is the dealer’s profit. This practice has faced regulatory scrutiny from bodies like the U.S. Consumer Financial Protection Bureau (CFPB) to ensure fairness.
### 4. Indemnification
This is a standard legal protection clause. It states that the dealer must indemnify, or compensate, the lender for any losses, legal fees, or damages that arise from the dealer’s own errors, fraud, or breach of the agreement’s warranties.