Kelly’s Korner: Repercussions of Straw Purchase
Q. What are the repercussions of a straw purchase?
A. A straw purchase occurs when one person signs the retail installment contract as the buyer, but the vehicle is really for another person. This practice is misrepresentation of the deal to the lender. Misrepresentation of the contract moves the recourse status into an unconditional guarantee clause. The lender-dealer relationship can be strained, if not divided, as a result.
The loan may not be funded when the discovery is made. And if the loan has been funded, the lender can force the dealer to reverse the funding.
The discovery of a straw deal may even instigate a full audit of all open loans the dealership has with the lender. I have seen dealerships close as a result of these audits.
Straw purchases are made out of fear of not obtaining lender approval. I have always found that if we are honest with the lender up front, they will work in every way possible to make the deal happen. Often the person with the weak credit profile will end up on Line 2 as a co-buyer on the retail installment contract. This action will help the person to rebuild a good credit profile and preserve good will between the lender and dealership.
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