(a) When the department is not satisfied as to the ownership of a vehicle or believes that there may be undisclosed security interests in it, the department may register the vehicle but shall either

(1) withhold issuance of a certificate of title until the applicant presents documents sufficient to satisfy the department

(A) as to the ownership of the vehicle by applicant, and

(B) that there are no undisclosed security interests in the vehicle; or

(2) require the applicant, as a condition of the issuance of a certificate of title, to file with the department either

(A) a bond in the form prescribed by the department and executed by the applicant, or

(B) a deposit of cash.

(b) A bond or cash deposit filed under (a)(2) of this section must be equal in amount to one and one-half times the value of the vehicle as determined by the department and be conditioned to indemnify former owners, secured parties, and subsequent purchasers of the vehicle and their successors against loss resulting from a defect in or undisclosed security interest on the title of the applicant. An injured party may sue on the bond for a breach of its conditions, but the liability of the surety or the department may not exceed the amount of the bond or deposit.

(c) The bond or deposit shall be returned (1) at the end of three years from its filing, or (2) when the vehicle is no longer registered in the state if (2) is earlier and if the certificate of title is surrendered to the department. Service on the department of notice that action is pending to recover on the bond or the deposit extends the periods established in this subsection until 45 days after a final decision in the action on the bond or on the deposit.