At the National Alliance of Buy Here/Pay Here Dealers Meeting in Las Vegas, there was much discussion about why such dealers should form what's called a “related finance company” or RFC.
Such a company buys retail installment sales contracts from its related dealer, in the process creating some happy tax results that are way too complicated for us consumer credit compliance lawyers to understand.
Every silver lining has a cloud, however, and this one is no different. What's the problem? Well, from a legal standpoint an RFC is a separate and different critter from its related dealer. That, in a nutshell, is the problem.
The RFC is separate because it is another company — a separately-incorporated legal entity. It is different because it is not in the business of selling cars, but rather is in the business of buying retail installment sales contracts from its related dealership.
The “separate” and “different” statuses create several topics that the dealership and the RFC need to noodle on.
Dealers in most states need to be licensed to sell cars. The RFC doesn't sell cars, so in most states it doesn't need a dealer's license. Under the laws of many states, however, the RFC will need a license for the activity of buying retail installment sales contracts from its related dealership.
Most states that license this activity call companies that buy these contracts sales finance companies.
Sales finance companies are usually required to have minimum levels of capital, are sometimes subject to bonding requirements, are subject to separate auditing procedures by the applicable state regulator, and face other regulatory and statutory hurdles.
Something as simple as record keeping (we're talking here about “credit-compliance” record keeping — how long you must retain the sale and credit documents in the deal jacket, for instance — and not accounting record keeping) can create a problem.
Often sales finance companies are subject to credit compliance record-keeping requirements, and there's no assurance that the RFC's credit compliance record-keeping requirements will be the same as the related dealership's credit compliance requirements.
Federal law offers some surprises, as well. The RFC must provide its own privacy notices when it acquires contracts from its related dealer. If it holds and collects the contracts, it must also send out annual privacy notices as well. Both the RFC and its related dealership must develop a privacy “safeguarding” policy.
Both the dealership and the RFC should check the Treasury Department's Office of Foreign Assets Control (OFAC) list of “Specially Designated Persons” (SDN), the so-called “bad guy” list.
The dealership and the RFC should do an initial OFAC/SDN check; the RFC should screen the OFAC/SDN regularly, since it will be accepting payments, and thus “doing business” with the customers until their obligations are satisfied.
There are other problems as well, depending on how the dealership and the sales finance company do business. Think about it this way: From a legal and consumer credit compliance regulatory standpoint, the dealership's RFC is nothing more or less than a miniature General Motors Acceptance Corp., subject to all the same rules and regulations that apply to GMAC.
Ken Shilson of the Houston-based accounting firm of Shilson, Goldberg & Associates warns that there are real dangers from the tax and accounting standpoints in not setting up an RFC correctly. He also warns of thorny state and local sales tax issues.
So if you form that RFC, consult your accountant for tax and accounting advice, see your corporate lawyer about forming the corporation and check with your consumer credit compliance lawyer about the RFC's consumer credit compliance responsibilities under federal and state law.
Thomas Hudson is a law partner with Hudson Cook and editor in chief of CARLAW. He's at 410-865-5400.