Auto Dealer Bonds: When They Are Required
All of the parties involved in motor vehicle transactions must trust the dealers as an essential part of the deal. Creditors and sellers trust that they will be repaid for financing and inventory, and customers trust that the dealers will be honest about the vehicles they sell. Finally, the government trusts that auto dealers will follow all state laws and remit the appropriate taxes. Earning this trust is critical for auto dealers to grow their businesses and be successful.
Auto dealer bonds are something that dealers must purchase as a cost of doing business. These bonds protect the state government, creditors, and customers when auto dealers engage in business. Most states require motor vehicle dealers and dealerships of all types to purchase auto dealer bonds before they can obtain a dealer’s license. Here is some information about auto dealer bonds and who might be required to get them.
What Is an Auto Dealer Bond?
An auto dealer bond is required by most state governments before someone can obtain a dealer’s license. Since auto dealers cannot legally operate their businesses without obtaining licenses, this means that getting an auto dealer bond is a necessary part of starting a business as a motor vehicle dealer.
Dealer bonds are not a type of insurance. While your liability policy will provide some protection against claims that might be filed against you or your company, a dealer’s bond instead protects your customers, creditors, and the state government in the jurisdiction in which you operate. Dealer bonds are contracts that involve the following parties:
• Principal – The individual or dealership that is seeking the bond
• Obligee – The party requiring the principal to secure the bond, which is normally the state government
• Surety – The company that issues the bond and guarantees the principal will follow the laws and perform as promised
Once a bond is issued, it does not protect the principal against claims. Instead, if valid claims are filed against the surety, the auto dealer will be responsible for paying them. The surety company will only step in and pay claims when the dealer fails to pay the valid claims. When that happens, the surety can pursue legal action against the auto dealer to recover damages for its losses. Losing a surety bond because of violations of the law or failing to meet its obligations can force a dealer to close their business since losing a surety bond can also mean losing the dealer’s license.
Purpose of Auto Dealer Bonds
State governments require auto dealers to be bonded and insured before they will issue dealers’ licenses. Before you can obtain your dealer’s license, you will have to purchase a surety bond guaranteeing that you and your dealership will comply with all relevant laws and regulations and will operate your business ethically.
The purpose of the auto dealer bond requirement is to protect consumers from fraud committed by motor vehicle dealers, dealerships, and their employees. The protection offered by an auto dealer bond for consumers varies, depending on the state and locality where the dealership is located.
Who Is Required to Get an Auto Dealer Bond?
Motor vehicle dealers are required to obtain licenses, and all states that require dealers to be licensed also require them to purchase surety bonds before they can obtain their licenses to operate. Who is considered to be an auto dealer varies from state to state, but individuals who buy or sell between two and six vehicles during a year are generally required to obtain a license and purchase a surety bond.
There are some exceptions to this rule for certain parties, including the following:
• Individuals buying or selling vehicles for personal use
• Government agencies buying or selling vehicles while acting in their official capacity
• Individuals appointed by a court to dispose of an estate’s assets
• Banks and other lending organizations that are federally authorized to repossess or dispose of motor vehicles
Other than the above-listed parties, you will be required to get an auto dealer bond if you engage in buying and selling more than the maximum number of vehicles each year in your state when the vehicles are not intended for your personal use. Some examples of dealers that are required to be bonded to obtain licenses include the following:
• Salvage auto dealers
• Individual dealers selling more than the maximum number of vehicles each year
• Auto dealers
• Auction vehicle dealers
• Used vehicle dealers
• Auto dealerships
• Wholesale dealers
In some states, only used vehicle dealers are required to purchase surety bonds. Some states also require varying bond amounts based on the type of dealer license the dealer is seeking.
Regulation of Auto Dealers
Auto dealers are regulated by state governments under their state’s licensing laws. Dealers must undergo several licensing requirements to obtain licenses. They might have to complete dealer education programs, purchase surety bonds, and undergo background checks. If a dealer violates the licensing laws and regulations, the government or consumers can file claims against the dealer’s surety bond, and the surety company can then go after the dealer to recover any money that the surety is forced to pay on unpaid claims. Dealers can also lose their surety bonds and licenses if they fail to comply with the law.
Cost of Dealer Bonds
You will not automatically be approved for an auto dealer bond. Instead, the surety company will complete an underwriting process to determine the level of risk that issuing a bond to you might pose and whether to approve your application. If you are approved, you will have to pay an upfront premium ranging from 0.5% to 10% of the maximum bond amount. Whether your application will be approved and the percentage you might have to pay will depend on the underwriting factors. Some of the factors considered by surety companies during the underwriting process include the following:
• Available working capital
• Credit history
• Experience
• Reputation and character
If you have great credit and a lot of experience, you can expect to pay a low rate for your surety bond. However, if you have poor credit, limited experience, and a problematic history, your bond application might be denied, or you might be charged a high percentage of the total bond amount as a premium fee.
Avoiding Surety Bond Claims
As an auto dealer, you must do everything you can to avoid claims against your bond. This means that you must comply with all applicable regulations and laws in your state. To avoid claims, you should operate your business ethically and honestly. Some of the types of activities you should avoid include the following:
• Tampering with the vehicle’s odometer
• Misrepresenting the condition of the vehicle
• Failing to deliver a valid certificate of title for a purchased car
• Failing to remit vehicle sales taxes to the state
• Buying or selling stolen vehicles
• Failing to report the sale of a vehicle
• Failing to promptly and fully pay sellers
• Engaging in illegal practices or activities
• Failing to honor warranties
• Failing to timely pay taxes and fees
If you want to be an auto dealer, you will likely also be required to purchase an auto dealer bond to secure a license. Once you purchase a bond, you must maintain it and avoid claims. As long as you remain in the business of selling motor vehicles, you must keep an auto dealer bond in effect.
