What is a Motor Vehicle Sales Finance Bond?
Motor vehicle sales finance bonds are a subset of the broader license bond category that must be filed with the state government agency responsible for regulating auto sales financing as a condition of licensure for most motor vehicle sales finance companies or retail sellers. This bond guarantees the motor vehicle sales finance company will comply with the statutes and regulations of their license and provides the state agency with protection against damages from license violations.
Motor vehicle sales finance bonds must be issued by insurance carriers admitted in the state where the bond is needed. The insurance carrier issuing any surety bond, such as a sales finance bond, will also be referred to as the “surety company” or the “bond company”. Motor vehicle sales finance bonds refer to the licensed finance company as the Principal, the surety bond company as the Obligor and the state government agency as the Obligee.
Why is a Motor Vehicle Sales Finance Bond required?
Sales finance companies are required to purchase motor vehicle sales finance bonds by state statutes to protect the state government agency by transferring to a surety bond company the cost of ensuring the public is compensated for damages resulting from a finance company breaking auto financing license law. The surety company provides the government a guarantee (the surety bond) that the customers, vendors, suppliers and employees of a licensed motor vehicle sales finance company will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the auto sales finance license up to a limit specified in the bond (“penal sum” or “bond amount”). The bond company also directly receives claims from the public and determines the validity of claims. Ultimately, finance companies are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face indefinite license suspension.
Auto sales finance company bond violations triggering a bond payout may include any fraudulent, wrongful, or misrepresented act while engaging in the licensed activity, acting as a auto sales finance company under a suspended license, or using misleading sales tactics with a
consumer.
How much does a Motor Vehicle Sales Finance Bond cost?
Motor vehicle sales finance bonds generally cost between 1.5% and 10% of the bond limit.
Example: $25,000 Motor Vehicle Sales Finance Bond Cost
| Credit Score | Premium Rate | Bond Cost |
|---|---|---|
| 650 or above | 1.5% | $375 |
| 625-649 | 3.0% | $750 |
| 600-624 | 3.75% | $938 |
| 550-599 | 5.0% | $1,250 |
| 500-549 | 7.5% | $1,875 |
| 499 or below | 10.0% | $2,500 |
The actual cost of a specific auto sales finance company bond can vary widely depending on the risk associated with the state regulations and the finance company’s license history, experience and creditworthiness.
Is a Credit Check Required for Motor Vehicle Sales Finance Bond?
Credit checks are required for most motor vehicle sales finance bonds. Ultimately, the surety insurance company determines how it will underwrite and price a surety bond, and some companies may be less stringent than others.
How does the wording in the bond form impact the cost of a Motor Vehicle Sales Finance Bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and finance company(principal). While many bond forms use similar language, each bond form can be customized by the government agency requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will ultimately be passed on to the auto sales finance company via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a auto sales finance company license bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
Aggregate Limits
Bond forms always specify the penal sum defined as the maximum amount of financial damages any single party can recover from the bond related to a single claim occurrence. Most bond forms also contain a clause which limits the amount of financial damages from all parties and all claims to a specific amount (“aggregate limit”), usually the same amount as the penal sum. For example, a $15,000 auto sales finance company license bond with an aggregate limit of $15,000 will pay out no more than $15,000, regardless of the number of damaged parties or claim occurrences. Auto sales finance company bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Cancellation Provisions
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the finance company and government agency requiring the bond with the cancellation taking effect within a set period of time, usually 30 days (“Cancellation Period”). Cancellation provisions allow the surety company to cancel the bond for any reason, but most often due to the auto sales finance company failing to pay premiums due, claim payouts, or material changes in the finance company owner’s credit score. Motor vehicle finance company bonds with no cancellation provision or cancellation periods greater than 30 days will be more expensive than a bond with similar coverage containing a standard cancellation provision.
Forfeiture Clause
Surety bond claims are paid by surety companies to damaged parties to reimburse that party for the financial loss incurred up to the bond penalty amount. Certain bonds contain a clause which requires the surety company to pay the full bond penalty to the damaged party, regardless of the actual damages incurred (“Forfeiture Clause”). Motor vehicle finance company bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.