Alabama Doubles Down to Curb Auto Dealers’ Bad Behavior

Author: Sadie Giacomelli

7-30-2020

Alabama recently passed House Bill 393 (AL HB393) which amends auto dealer license requirements and practices in Code of Alabama 1975. Many of the revisions and additions are set to take place October 1st, 2020. Some major amendments include the introduction of a Master Dealer License, an increase in the Auto Dealer Bond amount, and modified violation penalties.

This article seeks to provide detailed information regarding the legislation passed and how it impacts Alabama car dealers and the surety industry.

Alabama Dealers Must File a New Bond by October 1st

Currently, all licensed auto dealers in Alabama must hold a $25,000 surety bond. The new bond limit of $50,000 goes into effect October 1st, 2020. All active Auto Dealer Bonds will need to be cancelled, replaced with a $50,000 minimum bond requirement, and filed with the Department of Revenue (DOR), Motor Vehicle Division. The bond amount may be greater than $50,000 on a case-by-case basis if the DOR deems it necessary. If the bond is cancelled mid-term, most carriers will pro-rate the premium and provide a refund for the old bond. 

Curbstoning Drove the Bond Increase

The Alabama legislature increased the bond amount primarily in an effort to prevent future instances of “curbstoning” and other illegal dealer actions. Curbstoning, also referred to as curbing, involves an auto dealer drawing in customers by acting as a private seller to illicitly liquidate faulty vehicles. The Alabama DOR has seen an increase in curbstoning resulting in full limit claims with underlying damages often exceeding the current $25,000 bond penal sum. The $50,000 bond limit is to supply a larger reimbursement for those financially harmed by prohibited dealer actions. 

Tax Liabilities May Be Assessed Against the Bond

Chapter 23 states that failure to comply with the tax regulations results in a Class C misdemeanor. Starting October 1st, 2020, the Auto Dealer Bond can be claimed for tax liabilities.

Surety Companies May Rethink Underwriting

The increased claims frequency and severity reported by the Alabama DOR will likely result in stricter underwriting requirements. With the bond limit increase effective October 1, 2020, surety companies have some time to adjust their criteria commensurate with the $50,000 bond limit. Failure on the dealer’s end to maintain liability insurance may end in civil fees and a bond claim up to $5,000.

Bond premium rates as a percentage of a limit will likely not increase, but the larger potential of claims could lead to enhanced underwriting such as requiring a higher credit score and more years in business to be approved for a competitive rate. 

How to File Replacement Alabama Auto Dealer Bonds

As with the current $25,000 bond, the $50,000 bond form requires signatures from both the surety company and the principal (auto dealer). Review the bond form requirements below:

• True legal name of the individual(s) purchasing the bond
• Bond must list the city, county, and state of the business’s physical location
• Name and signature of the surety company
• Execution date of the bond
• Original signature(s) of all owner(s)

Once complete, all original bond forms should be mailed to the following address for filing, along with the Power of Attorney:

Department of Revenue
Motor Vehicle Division
2545 Taylor Rd
Montgomery, AL 36117

What Other Changes Were Made to Alabama Dealer Law?

As part of raising the Motor Vehicle Dealer bond limit, the Alabama legislature further amended the 1975 law in the following sections: 40-12-264, 40-12-390, 40-12-391, 40-12-392, 40-12-393, 40-12-395, and 40-12-398. Below are some of the major changes that surety companies and Alabama dealers should be aware of as violations of these sections can lead to penalties and bond claims. 

Underwriters Should Request Proof of Insurance

Master Dealer Licenses are valid for one year starting October first each year and renewed annually. There is a 30-day grace period upon the license expiration – after that time, penalties are applied to the license. An auto dealer’s failure to acquire a license may result in a fine of $500 for the first violation and $1,000 for any violations thereafter. Not maintaining blanket motor liability insurance as a dealer may result in a civil fine up to $5,000 and the bond may be used for restitution. Bond companies should consider requiring proof of insurance to avoid such claims.

Four Licenses Are Combined to Create a Master Dealer License

The introduction of the Master Dealer License combines four license requirements into one. The Master Dealer License applies to all new (franchise), used, and wholesale dealers, as well as rebuilders. 

Nobody, other than a licensed motor vehicle dealer, is legally authorized to sell a vehicle unless recorded as the lienholder or owner or is appointed as the attorney-in-fact. Failure to comply may result in law enforcement impounding the vehicle until proof of ownership is provided. The bond can also be used for violations. 

Dealer License Plate Regulations

The amount of dealer license plates allowed changed across various license types, as referenced below:

• Franchise vehicle dealers may purchase a combined total of 35 (previously 25) motorcycle and dealer license plates  
• Used vehicle dealers may purchase a combined total of five (previously 10) motorcycle and dealer license place
• New/used vehicle dealers completing 300 (previously 1,500) title transfers in previous year may purchase an additional 25 dealer and motorcycle license plates
• Any person who acquires a dealer license plate illicitly are subject to a $200 fine (previously $100) for the first violation and $500 for any violations thereafter

Amendments to License Application Fees

Motor vehicle dealers will see a license application fee change from a flat $25 to a calculation of the average annual dealer license fees of the states contiguous to Alabama and rounded to the nearest $25. The additional dealer fee for the county general fund will also increase from $1.75 to $2.00.

The State Treasury will allocate dealer application fees as follows:

• 10 percent or $25, whichever is greater, of the application fee for the General Fund of Alabama
• Remaining money is allocated to the Department of Revenue for use in license issuance, inspection, and enforcement of other license requirements

New Off-Site Sales Requirements

10 days prior to an off-site sale, facilitators must secure an off-site sale license by applying with the commissioner and paying the $25 application fee. Facilitators are those who conduct off-site sales at supplemental locations and are licensed under Section 40-12-395. Any dealers participating in off-site sales must be listed on the application. If the facilitator fails to list participating dealers they are subject to penalties such as statutory notice of non-compliance. Further failure to comply can result in a civil penalty of $5,000.