HB 1376: License Bond – Motor Vehicle Dealers
Motor Vehicle Dealers must post a surety bond in the amount of $25,000 in favor of the State according to HB 1376. The existing law had already required a license for this type of business. This bond must be obtained in order to instill the payment of fines, penalties, costs and fees that the Secretary of State assessed. This bond will secure the payment of damages owed to persons obtaining a judgment against the dealer for violations of the law. This became effective on July 1, 2009.
On a national and global scale, more and more vehicles are being purchased and driven than ever before. With the ever increasing amount of vehicle owners on the road, both the value of new and used cars, and the risks associated with car buying have increased alongside. It goes without saying that as more vehicles are being sold at higher prices than ever before, opportunities have arisen and been exploited by dishonest motor vehicle dealers around the country that have sought to take advantage of customers.
Whether it be a used-car dealer masking a vehicle defect from a customer, or a new vehicle dealer taking advantage of car buyers via overly excessive prices, threats certainly exist for today’s new and used car buyers. Additionally, the growing number of “chop shops”(garages that illegally modify/resell stolen vehicles) nationwide is additional cause for concern. While these types of instances are clearly the minority, unfortunately it’s always the corrupt few that cause the greater masses of honest business owners to endure necessary control measures.
How can these threats be mitigated?
Amidst this growing threat to consumers, states and municipalities have responded with new, stricter laws governing the sale of automobiles (new and used). Such laws have been designed to protect consumers from misrepresentation and fraudulent activity by auto dealers. As is the case with many other commercial bonds, these laws require motor vehicle dealers to become licensed in their state of operation and also to obtain either a used car dealer bond or a motor vehicle bond (also known as an auto dealer bond) in order to ensure they comply with the applicable laws.
What exactly does a motor vehicle dealer bond guarantee?
As you’d likely infer, the state or municipality requiring the surety bond is the obligee, while the vehicle dealer is the principal. These types of surety bonds guarantee that new and used vehicle dealers will provide purchasers of vehicles with a clear title to the vehicle, and that dealers will not partake in fraudulent activities that could mislead or deceive customers. These guarantees apply to not only the auto dealers but their sales force as well.
There are numerous types of surety bonds that fall under the license and permit bond category, and they can come with a wide variety of guarantees. Below is a list of the primary classifications for guarantees that accompany different types of license and permit bonds.
Compliance-only Bonds: These types of surety bonds guarantee that principals will be in compliance with all pertinent laws for a specific activity or business.
Compliance bonds with third-party liability: Similar to compliance-only bonds, these types of license and permit bonds guarantee that the principal will comply with the laws pertaining to the activity they are licensed for. However, they also come with a guarantee that the surety will pay damages to any third-party group or individual that happens to suffer from any losses incurred due to non-compliance by the principal.
Forfeiture Bonds: When dealing with this classification of license and permit bond, a surety must forfeit the entire amount of the surety bond in the unfortunate event that the principal does not complete a project per the terms of the contract, or is otherwise found to be non-compliant. What makes this different from many other guarantees, is that instead of simply paying for damages incurred as a result of a contract violation the surety must forfeit the entire amount of the surety bond. This is common for license and permit bonds that come with a financial guarantee.
Tax or Fee Bonds: This type of license and permit bond guarantees that the principal will both properly account for and remit taxes and fees collected through the their business operations. Common examples are liquor tax bonds, fuel tax bonds, and sales tax bonds.
Merchandising and Dealer Bonds: Simply put, this classification of license and permit bond guarantees that a principal partaking in merchandising activities will comply with all applicable laws and regulations. Essentially, they act to deter fraudulent practices or misrepresentation by a principal, and provide the necessary protection for the public. A common example would be an auto dealer bond, which protects the public from fraudulent practices by a motor vehicle dealer.
Reclamation and Environmental Protection Bonds: These types of surety bonds guarantee that any land altered or damaged during the course of business operations by a principal will be fully restored to its original state upon completion of work. Details on what specific restoration must take place should be included in the permit filing, and often times can include actions such as planting grass seed, replacing topsoil, etc. In regards to the environmental protection guarantee, principals must promptly clean up any spillage or runoff that could unintentionally pollute local land or water in the vicinity of the principals operation.
For more information, see our section on License and Permit Bonds.
Similar to last year, the Surety and Fidelity Association of American (SFAA) noticed a trend of amended state bills that change specific requirements pertaining to motor vehicle bonds (type of commercial bond also referred to as “auto dealer bonds”). These new bills are either requiring an increase in the motor vehicle bond amount, or an extension of its application to include additional vehicle types as well. The five states with recent enactments by state legislature are Colorado, Idaho, and Pennsylvania.
In Colorado, Senate Bill 144 (SB 144) requires that all motor vehicle repair shops operating in the state must obtain a surety bond twice the amount of the retail value of a vehicle whenever they choose to seek title for any abandoned vehicle.
Idaho has two new requirements pertaining to motor vehicle regulation. House Bill 365 mandates that all dealers of motor-driven cycles comply with the $20,000 surety bond requirement, which currently is in existence for vehicle dealers operating in the state. Additionally, Idaho House Bill 440 requires all dealers of truck campers to obtain a $10,000 license bond.
The enactment of Pennsylvania Senate Bill 1019 (SB 1019), makes it a requirement for all state recreational vehicle dealers to obtain a license bond in the amount of $30,000, in order to act as a security against any possible claims. Specifically, this license bond will protect against claims brought up by an agency of the commonwealth for money past due, such as fees, licenses, unpaid taxes, payment of criminal penalties, civil fines/penalty, etc.