Why the DMV Requires Texas Motor Vehicle Dealers To Be Bonded

As the price of oil continues to drop, motor vehicle dealers nationwide are seeing a historic increase in sales. In fact, Chris Isidore of CNN Money reports that automotive sales in 2015 surpassed the previous record, set in 2000, by about 6% at nearly 17.5 million cars and trucks sold. Now that more cars than ever are leaving lots, the number of dealers has grown as well. According to a census taken by the Bureau of Labor Statistics, the number of motor vehicle and parts dealers increased by almost 1% between Q3 2014 and Q2 2015 alone.

Texas is among many states experiencing an increase, with more than 21,000 motor vehicle and salvage dealer licenses issued by the Texas Department of Motor Vehicles annually, adding to the list of licensed Texas motor vehicle dealers that is already 457 pages long!

Because purchasing a car is one of the largest investments a person will make, Texas holds its auto dealers accountable to ensure that their clients’ needs are met in compliance with all state rules and regulations. Therefore, it is important for all applicants to familiarize themselves with the licensing process—especially the requirement to obtain a surety bond— before submitting an application.

Know What Kind of License You’re Seeking

Since the automotive industry is so huge in Texas, there are many different types of vehicle dealers, all with slightly different license requirements. For the purpose of this guide, the focus will solely be on dealers who will engage in selling new and used motor vehicles. However, a complete list may be found by consulting Chapter 3 of the Dealer Manual.

In order for a dealer to sell used vehicles in Texas, they must receive a general distinguishing number (GDN) that indicates the specific category of vehicle being sold by the dealer, and a new application is required for each type of vehicle that the dealer is going to sell. For example, if a dealer wishes to obtain a license to sell both motorcycles and utility trailers, they must have a GDN for both types of vehicles.

Applicants who wish to sell new motor vehicles must obtain a franchised dealer license as well as a GDN for the class of vehicles that they will be selling. As long as the class of vehicle does not differ, one GDN can cover multiple dealership locations, so long as they are within the same city limits.

Once an applicant has established the type of license he or she would like to receive, they must fill out all relevant forms pertaining to their desired license type. For a more in-depth look at the application process, the Texas Department of Motor Vehicles provides a step-by-step explanation of how Texas motor vehicle dealer licenses are issued once the application is received.

Understanding the Bond Requirement

One of the most misunderstood aspects facing Texas motor vehicle dealers upon applying for an initial or renewal license is the requirement to obtain a $25,000 surety bond pursuant to Texas Transportation Code §503.033. A common misconception is that a bond is a type of insurance that protects the dealer, while in actuality, that is far from the truth. A surety bond, unlike an insurance policy, is a three-party contract between the principal (dealer), obligee (state) and the surety (insurance company) in which the principal agrees to pay all money borrowed to purchase motor vehicles and to transfer the title of every vehicle sold. In the event that the principal fails to live up to the terms and conditions established by the surety bond and damages occur as a result, a claim, payable to the obligee, may be filed up to the full amount of the bond— $25,000 for Texas motor vehicle dealers. The principal may have the financial resources to resolve the claim themselves, however, if they are unable to do so, then the surety that issued the bond will pay up to the full bond amount to settle the claim.

It is here that a surety bond differs from an insurance policy. An insurance company assumes risk when issuing an insurance policy, which is factored into the premium, whereas a surety bond assumes that there will be zero risk resulting in a financial loss. Therefore, dealers applying for a bond will be required to sign an indemnity agreement guaranteeing that the surety is not liable for any claims and that any money the surety does pay out in settlements will be repaid to them by the principal.

In order to be acceptable by the Texas Department of Motor Vehicles, bonds submitted by Texas motor vehicle dealers must meet the following criteria:

  • Must be on the correct form
  • Must be in the amount of $25,000 with a sufficient surety company
  • Must have a 2-year term; effective on the first of the month and expiring on the last day of the month (ex. 1/1/2016 – 12/31/2018)

Additional information on the Texas motor vehicle dealer bond may be found by visiting our dedicated bond page. You can also watch our video detailing the steps to getting bonded in Texas.

Texas Motor Vehicle Dealers: Get Your Bond Today!

These bonds are subject to underwriting, so the premium that applicants pay is largely based upon their credit score. However, with excellent credit, applicants may pay as little as $306 for the full 2-year term! So if you’re applying for your Texas motor vehicle dealer license and need to purchase your bond, give us a call at 1 (800) 308-4358 or request a free, no-obligation quote through our website.

Get a Free Texas Surety Bond Quote

About the Author

Jon Gottschalk
Jon Gottschalk is the Educational Outreach Director for Suretybonds.com and regularly blogs at the Surety Bond Insider to keep consumers informed on new legislation and updates in the commercial surety industry. He is also a licensed property & casualty insurance producer in Missouri.