What Is the Purpose of the Oregon Motor Vehicle Dealer License Bond?
In order to obtain a vehicle dealer certificate, Oregon Vehicle Code 822.030 requires auto dealers to file a license bond with the Oregon Department of Transportation (ODOT) to provide monetary protection to the state and the public from dealership violations, typically arising from the sale and transfer of vehicles.
What Businesses Need the Oregon Motor Vehicle Dealer License Bond?
Anyone who sells, brokers, and/or displays for sale more than five vehicles per year must hold a Vehicle Dealer Certificate per the Oregon Vehicle Code. To obtain the certificate, Oregon dealers must file a surety bond in the amount of $50,000 with ODOT. Dealers selling only motorcycles, mopeds, Class I all-terrain vehicles and/or snowmobiles are only required to carry a $10,000 limit bond.
What Do Surety Underwriters Need to Know?
Used motor vehicle dealer bonds are among the riskiest license bonds in the country and Oregon is no exception. According to industry sources, loss ratios on used auto dealer bonds in Oregon have averaged over 40% during the past 10 years, second only to California.
Used car dealers in general are prone to claims given auto dealers are a top target of consumer complaints, and motor vehicle dealer claims tend to be larger than typical license bond claims given the average value of the asset (vehicle) transfer the surety bond covers; in other words, consumers are more likely to file claims on large purchase items. Most dealers have relatively low margins on expensive inventory, often creating substantial business and personal debt obligations. Dealers often turn to “flooring companies” to finance their inventories, and the Oregon Department of Transportation allows flooring finance companies to file claims when a dealer defaults on a flooring finance loan after the car has been sold.
A potentially larger cause of the elevated claim activity and loss ratios is the lack of a deterrence mechanism for auto dealers in Oregon. ODOT does not suspend a dealer’s license in the event that a surety company is not reimbursed by the dealer for the payment of a valid claim on the dealer’s bond. Instead ODOT will accept a new bond from a different surety company in place of the bond the original surety company cancelled due to the claim and reinstate the vehicle dealer certificate irrespective of whether the original surety was reimbursed for the claim. In an effort to ensure licensees (bond principals) take responsibility for license violations, many state and local licensing authorities keep the business’ license in suspension for a bond claim until the surety company confirms it has been reimbursed or otherwise settled with the bond principal.
For used car dealers, especially those requiring the $50,000 license bond limit, underwriters should consider a careful review of the bond principal’s credit report, claims history (if available) years in business and potentially even business financials and collateral.
What Do Surety Claims Handlers Need to Know?
Claims on Oregon Motor Vehicle Dealer Bonds are generated by the public when financially damaged by a dealer. Claims against the surety bond can be for any of the following infractions set forth in Oregon Vehicle Code OVC 822.005:
- Not Transferring Vehicle Title or Providing False Title
- Unauthorized Vehicle Alteration
- Falsifying Vehicle Records
- Improper Display of Vehicle for Sale
- VIN Number Tampering
- Failure to Pay Interest of Related Parties in Vehicle Sale
- Selling Vehicles from an Unauthorized Location
- Failure to Pay Fees Due to the DMV
The claim to the surety company will come directly from the affected public party. A dealer’s retail customer can file a claim up to the full $50,000 limit of the bond. Any other type of claimant can only submit a maximum claim of $10,000.
ODOT does not specify a timeline for surety companies to respond to the claimant. However, ODOT is mandated to resolve all complaints to their department within a 25-30 day window. Therefore, the surety company must refer to the more generic rules promulgated under the Oregon Department of Consumer and Business Services’ Insurance Regulations (836-080-0225, 836-080-0230 & 836-080-0235) for the timeline to follow a claim which is as follows:
Can a Vehicle Dealer Avoid the Bond Requirement?
Yes, but only if the dealer files a letter of credit (LOC) from their bank with ODOT. An LOC works in essentially the same way as a surety bond by providing a financial guarantee to the public; however, there are a few distinct disadvantages to dealers when choosing an LOC over a surety bond: (1) the dealership must have a relationship with a bank that will extend credit for the dedicated bond limit; (2) LOCs are usually fully collateralized by the dealer’s cash set aside at the bank while most auto dealers can obtain a bond without collateral ; and (3) banks typically charge fees for an LOC which can be higher than surety bond premiums.
How Much Does the Bond Cost?
The Oregon Motor Vehicle Dealer bond typically costs between $500 to $4,500. Most surety companies determine the rate based on the applicant’s credit score and experience as a licensed dealer.
How Is the Oregon Motor Vehicle Dealer Bond Filed?
Dealers must send the original bond form by mail to the Oregon Department of Transportation. The bond must include the raised seal of the surety carrier and be signed by the carrier’s attorney-in-fact and the bond principal (aka the dealer).
Newly licensed used car dealers must submit the bond form (Form 735-370B) with the following ODOT forms:
- Application Form 735-370
- Certificate of Liability Insurance Form 735-370B or Exemption Form 735-7024
- Supplemental Location Application Form 735-372 (if more than one location)
- Certificate of Education Completion 735-370
- Copies of all owners’ photo ID’s
All documentation must be sent to the following location:
Oregon Department of Transportation (ODOT)
3930 Fairview Industrial Drive SE
Salem, OR 97302
Can the Oregon Motor Vehicle Dealer License Bond be Cancelled?
Yes, the bond can be cancelled at any time by the surety or principal by sending a cancellation notice to ODOT. Surety companies typically return any unearned portion of the premium following the cancellation of the surety bond subject to any minimum earned premium amounts in their rate filings. The bond remains active and in force for 30 days after the cancellation has been received by ODOT or until replaced by another surety carrier’s bond.
Do Motor Vehicle Dealer License Bonds in Oregon Renew?
The Oregon dealer bond is required as long as the dealer holds an active vehicle dealer certificate. The Oregon Motor Vehicle Dealer License Bond is continuous until cancelled by the surety or the principal, so unless the surety company cancels mid-term or decides not to offer renewal terms, the bond remains active as long as the bond principal pays the renewal premium as invoiced. Surety companies typically offer premium payment terms ranging from 1-3 years. The three year term is popular as many dealers like to match their bond renewal date with their license renewal date which also renews every three years.
Do Oregon Motor Dealers Need Any Other Bonds in Oregon?
A vehicle dealer in Oregon does not have any other bonding requirements related specifically to their occupation. However, most dealers have notaries in their office. While the state of Oregon does not require notaries to purchase a bond, notary E&O insurance is recommended and sold by many surety companies.