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What’s Hot on the Hotline? Buying A Car for a Third Party

Robert Ebin /

By far, the most frequent call we have been receiving on the Hotline as of late involves customers attempting to purchase vehicles on behalf of others.  Although we have touched on this topic a few times in the past, there still seems to be some confusion about what can and cannot be done.  This article is meant to be a quick refresher and reference guide when the question pops up.  Judging by the number of recent calls received, this scenario will likely pop up for you in the near future, if it has not already.

Determine the Deal Type

Most calls on this subject typically start with a similar story—a parent wants to purchase a vehicle for their child, a boyfriend for their girlfriend (or visa versa), or, more frequently these days, a company for one of its employees/officers. Whatever the case may be, the initial question you as the dealer must ask is “what type of deal is this going to be?”  In other words, is this deal going to be financed (or a lease), or is the deal going to be all-cash or a one-pay?

Financed or Lease Deal

If the deal is to be financed (or a lease), a customer will not be able to purchase the vehicle on behalf of another.  This would be considered a “straw purchase.” Remember, lenders generally require dealers to warrant that the purchaser identified on the contract is the intended driver of the vehicle. If this is not the case, the contract will almost definitely be subject to a buyback under the terms of your lender agreement.

Separately, this also may be seen as the customer submitting a false credit application, which is a felony, and a situation in which the dealership does not want to be involved. [18 U.S.C. § 1014]. Moreover, federal law also states that whoever knowingly executes a scheme to defraud a lender or obtain money/credit from the lender by means of false or fraudulent pretenses shall be fined up to $1,000,000 and/or imprisoned up to 30 years. [18 U.S.C. § 1344].

Accordingly, if a lender is going to be involved, the only way in which that boyfriend can purchase (or lease) the vehicle for his girlfriend is to have the girlfriend on the contract as a co-buyer (or co-lessee) and to ensure that all standard co-buyer/co-lessee paperwork is properly completed.

All-Cash Deal

For true all-cash deals (i.e., green cash, wire, ACH transfer), there is nothing that prevents a customer for purchasing the vehicle for a third party.  Remember, there is no lender involved in this situation, and therefore there cannot be a straw purchase.  In fact, in this situation, you could theoretically simply just give the customer the vehicle’s title and have them register it however they want. In reality, though, the customer will likely want the dealer to assist them in registering the vehicle in the name of the third-party. 

As I am sure most of us know, personal relationships are fluid in nature.  I have heard stories of the father, who after purchasing a vehicle for his 18-year-old son, gets into a spat and wants the vehicle back from the son. Another tale of woe I have heard more than a few times is when the boyfriend and girlfriend break up shortly after one buys a car for the other.  However sad and drama-filled these situations are, the dealership does not want to be stuck in the middle.  To help avoid this situation, we recommend the dealer take the following steps:

  • The person paying should be the buyer on the contract.
  • Have a conversation about how the vehicle is going to be registered with the buyer prior to finalizing the deal.
  • The buyer and soon-to-be registered owner (i.e., the third party) should document their arrangement and registration instructions by signing DMV Form REG 256 (Statement of Facts) with a statement similar to the following:
    • “I, [buyer] am purchasing this vehicle for [third party] and I have instruction the dealership employees to register and title the vehicle solely in [third party]’s name. I understand that I will have no ownership rights in this vehicle. [Signature block for both buyer and third party].

One-Pay Deal

To get us all on the same page, by a one-pay deal, I mean a transaction that is done through a method other than green cash, wire transfer, or ACH, such as a personal check, for the full price of the vehicle. In this situation, it still may be ok for the customer to purchase the vehicle on behalf of a third party, but be cautious, as you will want to still ensure you have a contractual right to repossess the vehicle in case that check bounces. Let me further explain.

If the vehicle is registered to the third party but that party does not otherwise appear on the contract (remember, the contract grants the dealer a security interest over the vehicle), the dealership may not be entitled to take the vehicle from that third party in the event of a default.  To avoid this, we recommend taking the following steps:

  • The buyer (i.e., the person paying) should complete the contract as usual.
  • Have a conversation about how the vehicle is going to be registered with the buyer prior to finalizing the deal.
  • The third party should sign the contract either as the co-buyer or as the “other owner.”  The “other owner” signature line is towards the bottom of the LAW 553-CA-ARB Retail Installment Sale Contract above the Guaranty box.  By the third party signing either as the co-buyer or “other owner,” the dealership still has a security interest in the vehicle, which is the basis for repossession in case the buyer’s check bounces.
  • The dealer should collect a Statement of Facts (similar to the one discussed in the section above) that explains how the vehicle is to be registered and that is signed by both the buyer and third party.

A quick note about if the buyer is obtaining his/her own financing through, for example, a credit union. The same situation regarding false credit applications may apply, and additional risks involving bank fraud may arise. Accordingly, even if the buyer says that the credit union knows about this arrangement (i.e., that the vehicle is to be registered under the name of a third party), it is best to not get involved with this deal.

Questions?

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 hotline@autoadvisory.com.

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