Imagine this: You buy a car, sign all the paperwork and drive home. A few days or weeks later, you’re contacted by the dealer and told the financing has fallen through and you need to bring back the car or pay more money.
Leslie Hurst of Ludlow, Ky., doesn’t have to imagine what it’s like to be the victim of a “yo-yo” finance scam. Three weeks after she bought her car, the salesman called and said she couldn’t afford it and needed to bring it back.
“I couldn’t understand how this could happen,” she says. “I had signed a contract and finance agreement with them. I had a payment plan set up. As far as I was concerned I had bought the car.”
Not knowing what else to do, she returned the car, which left her without transportation.
For Carolyn Edwards of Wellington, Fla., the yo-yo financing nightmare started three weeks after she bought her Range Rover. The dealer called and said she couldn’t afford it. Edwards wouldn’t return the vehicle, so the dealer had it repossessed.
“It was horrible. It was very humiliating,” she remembers. “They took the vehicle away with all my stuff inside.”
“The dealers were lying,” says attorney Raymond Ingalsbe, who represents Edwards and Hurst. “Once a buyer signs an installment credit contract, financing is extended by the dealer.”
If the dealer can’t sell the contract for the price they expected, Ingalsbe explains, they tell the buyer the financing fell through and demand a bigger down payment, a higher interest rate or both. In some cases, they want to cancel the deal and demand the vehicle back.
The yo-yo scam is really bait-and-switch on the financing. According to new research from the Center for Responsible Lending (CRL):
- The victims are usually buyers with poor credit or no credit and few financing options.
- More than half the victims of a yo-yo scam had trouble reclaiming their down payment or trade-in vehicle.
- A majority signed a new contract – with a higher interest rate – for the same car.
“This is much more than a once-in-a-while problem,” notes CRL’s Chris Kukla, senior counsel for government affairs. “This is a pretty pervasive thing.”
For its report, Deal or No Deal: How Yo-Yo Scams Rig the Game against Car Buyers, the Center for Responsible lending surveyed five organizations that help people with auto finance problems. It found that 27 percent (that’s 590 out of 2,100 people) of their clients in the last twelve months experienced a yo-yo scam.
The National Automobile Dealers Association says the practices laid out in the CRL report should not be present in the marketplace. In a statement to msnbc.com, David Hyatt, NADA’s vice president and chief communications officer, wrote: “It’s important to note that the CRL report describes 590 complaints of alleged yo-yo financing that is fraudulent and already illegal in all 50 states. In those cases, it’s a matter of enforcement.”
(Read: NADA’s comments to the Federal Trade Commission, pages 6-9)
Today’s sales are conditional
Dealers say most auto sales today are conditioned upon financing – you get the car on the spot, even though the loan approval isn’t final. In other words, when you finance through the dealer, in most cases the dealership reserves the right to unwind the deal if it doesn’t make enough money selling your loan on the open market.
NADA says the conditional nature of the transaction is explained to customers. Language to that effect is in the paperwork they sign.
Tom Domonoske, an attorney with 15 years experience handling auto financing cases, says many people don’t understand that the dealer can revoke the sale after they sign the sales contract.
At the same time, the finance manager is looking the consumer in the eye and saying, ‘Congratulations, you’ve bought the car,’ they’re slipping in this document that says we haven’t agreed to sell you anything yet.”
It’s not easy to protect yourself. Only about a third of the states have any sort of restriction on conditional auto sales. Everywhere else, there’s only one guaranteed way to eliminate the risk of getting burned by a conditional sale being revoked: Skip the dealer financing and get your auto loan from a bank or credit union or some other lender.
“This would prevent a yo-yo transaction and let you negotiate the best deal,” says John Van Alst with the National Consumer Law Center.
Unfortunately, as Van Alst points out, this is not an option for many people with bad credit.
If you finance through the dealer you need to read the contract and look for any language that says the sale is conditional.
Can something be done about this?
The car dealers don’t see any problem. Consumer advocates want the federal government to end this practice. They want federal rules in place that require auto sales contracts to be binding on both parties.
“We think the one-way deal is unfair,” says Chris Kukla with the Center for Responsible Lending. “The dealer should not have the ability to back out of the deal – days, weeks or even months later – because they’ve decided that the profit is not to their liking. No other industry is allowed to do that. We think it’s inappropriate and it needs to stop."
Last year the Federal Trade Commission held a series of workshops on auto financing. Will this result in new regulations?
“We are considering what next steps, if any, we should take,” says Malini Mithal, assistant director of the FTC’s division of financial practices.
These next steps could include consumer education, enforcement actions or new rules.
My two cents
Right now, unless you’re a lawyer or have one read the sales contract for you, you can never be 100 percent sure that your sale is final when you finance through the dealer. That’s crazy. That’s why I hope the FTC will propose some new rules that protect buyers.
The industry says there are millions of these conditional transactions each year and most take place without a hitch. OK, but why should anyone be left in the lurch like this?
Car buyers today want to drive home with their new vehicle. Dealers want you to do that so you can’t shop someplace else.
We live in a computer age. These transactions can take place at Internet speed. If the dealer can get his price for my loan, then sign the paperwork and be bound to it. If not, tell me you can’t sell me the car today.
Let’s make this work for everyone.
How a Dealer "Yo-Yo" Scam Works