Colorado Auto Dealer Bonds Just Got Even Less Risky
Author: Jackson Cromer
Posted On: 08-25-2020
The State of Colorado recently passed legislation limiting a consumer’s ability to recover losses or damages from motor or powersport vehicle dealers. Senate Bill 20-140 revised the current legislation to allow for consumers to recover from the bond only if the loss or damage is a result of fraud by a licensed dealer or salesperson. The previous statute for auto dealer licensing (1 CCR 205-2) allowed for claims to be filed for fraud OR for a violation of the motor vehicle statutes as designated by the Colorado Motor Vehicle Dealer Board. The old legislation allowed for a much wider variety of claims to be filed against dealers and now claimants will have to take to the courts to seek reimbursement for a dealer’s fraudulent action. The new legislation passed on 7/2/2020 and will go into effect on 9/30/2020.
The Colorado Motor Vehicle Dealer bond was already one of the lowest risk auto dealer bond requirements in the country, primarily due to strict licensing requirements for CO dealers, which we discuss further below. The new legislation should make the bond even more attractive to surety underwriters as consumers face a more difficult, time intensive and expensive process to file claims on these bonds.
How Does the New Legislation Affect Surety Companies?
Surety companies should benefit from these changes in the law because it will now be harder and less cost efficient for claims to be filed against vehicle dealers. Two key effects of the new legislation make filing claims much more difficult and fruitful for claimants and the attorneys that represent them: (i) proving fraud, and (ii) removal of the ability for consumers to file a claim for any violation of the motor vehicle statutes. Of the two, proving fraud will, in a legal sense, be more time intensive and expensive. To prove fraud occurred, claimants will have to show the following six factors have been met:
- A representation was made by the principal (i.e., auto dealer);
- The representation was false ;
- That when made, the principal knew that the representation was false or that the principal made the statement recklessly without knowledge of its truth;
- That the fraudulent misrepresentation was made with the intention that the consumer rely on it;
- That the consumer did rely on the fraudulent misrepresentation; and
- That the consumer suffered harm as a result of the fraudulent misrepresentation
Claimants will likely have to hire legal counsel to bring their case and Colorado courts will have to hear each individual case brought against dealers. If the court finds fraud occurred, the court will issue a final agency order with a finding of fraud or file a judgment against the dealer. Regardless, this new process is likely to be lengthy and favorable to those who have the time and cash to pursue legal action. Furthermore, because claimants can no longer seek reimbursement for all violations of the motor vehicle statutes (except fraud), it is likely what may have constituted a right to recovery under the bond previously no longer qualifies as such.
Should Dealers Expect Changes With Licensing Requirements?
Colorado is a historically less risky state for surety companies when it comes to vehicle dealer license bonds and the new legislation amendments reduce the surety carrier’s risk even further. Strict eligibility requirements for dealers makes the licensing process more selective, ensuring only the most qualified applicants are able to obtain licensure. The new Senate Bill should not impact the previous licensing requirements, but dealers should remain intimately aware of the requirements set forth by the Colorado Motor Vehicle Dealer Board:
- The Board requires a net worth of at least $100,000.
- The Division will obtain a credit bureau report from Experian. This report is an indicator of an applicant’s financial fitness. The Dealer Board requires a Vantage score of at least 701 or higher for each applicant.
- It is suggested that if you are not sure of your score that you contact Experian to run your own credit report.
- If derogatory information appears, it must be resolved or explained in an attachment to your application.
- Background check: a background check will be done on every applicant. If the applicant has ever been convicted of or pled no contest to any felony or misdemeanor crime supporting court documents must be included with the application.
In addition to the financial, credit and background requirements the Colorado MVD Board also requires the following documentation to secure licensure:
- Application (DR 2109)
- License Fee
- Addendum for each owner, partner, member, or officer (DR 2109B)
- Pre-licensing Education Certificate
- Mastery Examination Affidavit (DR 2097)
- Surety Bond - submit a copy of the bond.
- Secure Verifiable Identification for all owners, partners, members or officers
- Verification of Fingerprints - see below
- Affidavit – Restriction on Public Benefits for all owners, partners, members or officers (DR 4679)
- Statement of Financial Condition for the applicant and all owners (DR 2114)
- Certificate of Good Standing from the Colorado Secretary of State (if applicable)
- Constituent Filed Document (if applicable)
- Bylaws/Operating Agreement (if applicable)
- Trade Name (if applicable)
- Business Plan
- A copy of your lease (if applicable)
- Place of Business Affidavit (DR 2044)
- Franchise Agreement (if applicable)
- Dealer Plate Affidavit (DR 2640)
- Sales Tax License
- Dealer/Wholesaler Checklist (DR 2248)
What Are The Current Bond Requirements for Colorado Dealers?
The Colorado MVD Board requires a $50,000 bond for the following dealer licenses:
- New Motor Vehicle Dealers
- Used Motor Vehicle Dealers
- Wholesale Dealers
- New Powersports Vehicle Dealers
- Used Powersports Vehicle Dealers
Small trailer dealers need a $5,000 bond should they sell trailers weighing less than 2,000 pounds. The CO MVD Board requires a copy of the bond be sent in with the application documentation referenced above. All documentation submitted to the CO MVD Board must be on 8.5’’ x 11’’ sized paper and may be submitted to the following address:
Colorado Department of Revenue
Auto Industry Division
PO Box 17087
Denver, CO 80217