Beware of fraud resulting from lien release law

NY’s new dealer lien release law exposes lienholders to title fraud

On June 17, 2013, NY Vehicle and Traffic Law Section 2121(b) goes into effect. This new law will enable dealers to release vehicle liens without lienholder consent. The law is intended to enable dealers to quickly resell vehicles that come in on trade. (The law is attached at the end of this article.)

How does the law work?

A dealer who wishes to get a lien released can send an application for a clear (lien-free) title directly to the DMV. As part of the application the dealer must demonstrate that:

  • The dealer sent notice of its intent to obtain clear title to the lienholder at least two weeks prior
  • The lienholder represented that a certain sum was sufficient to pay off the lien
  • The dealer sent such sum to the lienholder.

The DMV must issue a new lien-free title to the dealer within 15 business days of receiving the dealer?s application. There is no hearing process at the DMV.

The law also creates an automatic BFP defense which provides that no subsequent purchaser of the vehicle can be held liable for any error in the removal of a lien. In other words, lienholders will not be able to pursue rights in a vehicle that has been resold by a dealer.

The law states that any dealer who has obtained a lien release shall indemnify any lienholder damaged by an error in the lien removal process.

How can this new law be used to defraud lienholders?

Here is one scenario: thieves use straw-purchasers or stolen identities to finance ten high-end cars in New York. The thieves then copy the letterhead from ten legitimate dealers from all across the state and fabricate a false lien-release application for each car which contains all of the required information. The thieves open P.O. boxes in the towns where they have stolen the dealer letterhead and request that DMV send the new lien-free titles to the various P.O. boxes.

DMV is under pressure to issue clear title within 15 days so it is probable that unless there is a glaring error in an application DMV will issue ten new lien-free titles. The thieves pick up the titles, close the P.O. boxes and count the score?ten lien-free vehicles worth an average of $60,000 each, which is a $600,000 profit with minimal risk.

Upon discovery of the fraud the lienholder cannot pursue the actual dealer whose letterhead was stolen because the dealer was never involved; its identity was stolen. The lienholder can?t pursue the vehicle because the new law prohibits holding any subsequent buyer liable (automatic BFP defense). The lienholder is left holding the bag with only a name on a contract to pursue in collections.

Other problems that come to mind are:

  • Dealers using the law to float a quick source of funds
  • False payoff letters used to short-change the lienholder
  • Dealer fraud before going out of business (Note: dealer bonds only protect consumers, not lienholders).

What is the possible solution?

The right court challenge may result in the law being declared unconstitutional. A lien is a property right. The Due Process clauses of the NY and Federal Constitutions hold that no property right may be taken without notice and a hearing. The lack of any type of hearing by DMV before the lien is released may provide the basis to strike down the law.

The DMV is still in the process of drafting regulations that will implement the law so lienholders still have a chance to influence the process. If you have ideas for regulations that could eliminate fraudulent use of this law, please call me at (518) 713-2030.

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