On Wednesday, April 13, 2016, Iowa Governor Terry Branstad signed 12 new bills into law, including Senate File 2228, relating to both new and wholesale Iowa motor vehicle dealers. A major change in the bill includes a significant increase to the bond amount. The new required amount is $75,000, effective July 1, 2016. This is an increase from the current requirement of $50,000. The new legislation requires the Department of Transportation to establish a program to allow for electronic application submissions and transfers of funds as well as sets a limit on documentary fees.
Purchasing a Bond in the New Amount
The current $50,000 requirement is effective until June 30, 2016. On or after July 1, 2016, new dealers should contact a surety bond provider to purchase a bond in the amount of $75,000 if not already bonded and doing business. Those applicants with exceptional credit can typically expect to pay a premium equal to 1% of the total bond amount.
Dealers who wish to renew their bond may be disappointed if the quote they receive is higher than what they are currently paying, despite no significant change to their credit. However, it is important to remember that premiums are calculated as a percentage of the total bond amount. Therefore, paying 1% of a $75,000 bond will cost more than paying 1% of a $50,000 bond.
Those who have lower credit scores will pay more for their bond—anywhere from 4-12% of the total bond amount—due to underwriters perceiving a greater risk of the applicant being unable to cover the cost of a claim against the bond. Although the initial cost may be high, if the applicant’s credit improves during the year, they may be approved at a lower rate when seeking a quote for their renewal.
Why Do Iowa Motor Vehicle Dealers Need a Bond?
Vehicle dealers in Iowa must submit a surety bond to the Department of Transportation before they are legally able to become licensed as a dealer in the state. The department requires the bond in order to protect itself, as well as consumers, from a dealer’s failure to abide by all rules and regulations described in Chapters 321 and 322 of the Code of Iowa. By providing a surety bond, principals (motor vehicle dealers) are guaranteeing to the obligee (the department) that they will furnish a valid certificate of title for every vehicle sold. The bond also protects the consumer from the dealer’s failure to comply with the odometer requirement established by section 321.71.
In the event that a dealer does not comply with all pertinent rules and regulations, any harmed parties may have grounds upon which to claim against the bond. If it is found that the claim is valid, the surety may pay out up to the full amount of the bond in order to settle the claim. If the surety does pay any money, they will then turn to the principal in order to collect reimbursement for all money paid. Once the aggregate amount of claims against the bond reaches $75,000, no further claims may be brought against the bond.
The surety also has the right to cancel the bond at any time during the license period, which they may do by providing 30 days’ written notice to the Department of Transportation. Once the principal is made aware that the bond is set to be canceled, it is of the utmost importance that they find a new surety provider so that they do not risk being penalized.
For more information regarding surety bonds for Iowa motor vehicle dealers, check out our dedicated bond page.
Other Changes to Note
There are two primary changes to be aware of due to the passage of SF 2228:
- Implementation of applications being electronically submitted and processed by January 1, 2018
- Establishing a cap for documentary fees
By implementing this electronic system to handle applications, titling, registering and funds transfers for vehicles that must be registered, the department expects to improve the efficiency and expedite the process. The electronic filing system is also expected to reduce the cost for all parties involved.
The second change is the adoption of a maximum documentary fee of $180 per vehicle sold that dealers may charge for preparing registration documents and an application for the issuance of a certificate of title, as well as the dealer’s performance of other related services on the customer’s behalf. Once the state has implemented their electronic system in 2018, the maximum documentary fee will be reduced by $25. SF 2228 also mandates that the documentary fee must be included in the price of the motor vehicle and that the dealer must disclose to the customer the exact amount of the fee.
We’ll be sure to continue to update this page as more information regarding these changes becomes available.
Want to be notified of more changes like this? Sign up to receive updates from the Surety Bond Insider here.