They say that “necessity is the mother of invention.” However, what they don’t tell you is that not all ideas lead to a viable “invention.” During the past few years, and in an attempt to cope with dwindling inventory, dealers have constantly needed to come up with new ways to turn a profit in order to stay afloat. And during this time, we have occasionally heard of enterprising finance personnel soliciting car purchasers with offers to “lower your current interest rate and monthly payment” by refinancing. This is by no means a new idea, as it has surfaced from time to time in the past. But, having now received multiple calls on this to warrant some concern and discussion, we thought it best to remind dealers once again and set the record straight.
A dealership may not perform vehicle refinances unless it is a licensed California finance lender. We have actually heard of one dealer who obtained such a license, but it is far from the norm. If you have such a license, you can take a deep breath and skip over the rest of this article. However, for the rest of you dealers, please read on.
Dealerships are exempt from the California Finance Lender’s law so long as they sell vehicles pursuant to “bona fide conditional contracts of sale involving the disposition of personal property.” [Finance Code § 22054]. So, what does that mean? Let’s first tackle the term “bona fide.” It simply means “genuine” or “in good faith.” Second, what is a “conditional contract of sale?” Well, a dealer in California customarily sells a vehicle pursuant to a retail installment sale contract (i.e., the LAW-553), and the title of the vehicle does not pass to the customer until s/he pays all of the installments. Thus, this arrangement would constitute a “conditional contract of sale.” Putting it all together, so long as a dealer sells a vehicle to a customer using a genuine retail installment sale contract, the dealer is exempt from the California Finance Lender’s law.
So then why can’t dealers refinance vehicles? Remember, that a dealer can only take advantage of the exemption when they use “conditional contracts of sale.” The emphasis here is on the word “sale.” If a dealer is not engaged in the sale of a vehicle, but still offers financing or lending, then it can no longer take advantage of this exemption, and therefore must be licensed as a finance lender. If you happen to be one of those dealers who is also a licensed finance lender and you perform vehicle refinancing, you will want to retain competent counsel to assist you with the licensing and documentation requirements—a dealer should not use a retail installment sale contract unless a sale is actually occurring. And since a refinance is not a sale, a RISC would be inappropriate.
If you have any questions regarding this, or any other situation that may arise in your sales or service departments, hotline clients are invited to contact us at (800) 785-2880 (then press “4” for hotline) or email@example.com.