Be Careful Using Conditional Delivery Agreements

Does your dealership ever sell vehicles on Saturday or Sunday, but your third-party lender is unavailable to confirm underwriting and funding? What do you do? Some dealers use what is called a Conditional Delivery Agreement? A CDA is used in situations where the dealer is helping a customer secure financing through a third party that cannot be closed or funded right away for a number of reasons. A CDA should be signed before the retail installment contract is signed, but make sure your collateral is protected.

The way this typically works is that a dealer looks for a bank, credit union or finance company willing to “buy” the deal based on the desired vehicle and the customer's credit information. Technically, if a retail sale is made, it is the dealer who will actually enter into a retail installment contract with the customer. The dealer will then immediately “assign” the contract to the finance company that agreed to buy the deal.

In the event that all proceeds as expected – that is, all underwriting review such as work / income is acceptable and the retail installment contract is successfully assigned to the finance company that holds it – there is no issue.

To use a CDA or not to use a CDA…that is the question.

On the positive side, your customer may take delivery of his new vehicle immediately; and if the financing falls through, you are not left on the hook to finance the vehicle yourself.

In 2009 the Texas legislature amended the Texas Finance Code to address the use of conditional delivery agreements by prohibiting a retail installment contract from being conditioned on the subsequent assignment of the contract to a finance company. Texas Finance Code §348.1015 effectively ended the use of conditional delivery clauses in retail installment contracts due to undocumented fees and charges.

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