UNRAVELING THE FINANCING MAGIC
Dealerships have found creative ways to deal with consumers’ negative equity in order to make more sales. Some practices are downright fraudulent, like fudging the numbers on the purchase contract in order to obtain financing.
In the article below, Young Walgenkim outlines fraudulent methods used by dealers to circumvent negative equity in order to sell more cars. This article was originally published by the Oregon Trial Lawyers’ Association.
Unraveling the Financing Magic
– By Young Walgenkim, Esq., as published in OTLA Guardian
When I tell people that I sue car dealers, the inevitable question I get is, “What is the most common violation you run into?” Interestingly enough, in my experience, the most obvious violation is also the most common one: Selling for more than the advertised price. If you are wondering, “are dealers really brazen enough to commit such blatant violations?” you have not spent much time with car dealers.
However, when you peel back the layers, this scheme of selling for more than the advertised price contains further levels of deviance.
One of the first questions I ask a potential client is, “How much did you pay for your car?” It is surprising how many people do not know the answer to that question. Often, the potential client will review his/her paperwork and will be surprised to see that the purchase price for the vehicle is several thousand dollars over what was agreed upon by the parties. What happens is the salesman and the consumer come to an agreement for a certain price, then when the consumer goes into the finance office, the finance manager writes down a completely different (and higher) price for the vehicle. Of course, this practice amounts to common law fraud. It is also a violation of the Unlawful Trade Practice Act (UTPA) and other consumer statutes. But, sometimes the cases are as simple as that. The dealer, knowing that the consumer mostly cares about the monthly payment amount, can get the consumer to ignore the purchase price. It is true that a non-sophisticated consumer will not attempt to understand the byzantine retail installment contract (RISC). Sometimes, the dealer does this to make an additional profit from the consumer, but most often, the dealer is engaging in a fraud against the finance company, as wel l as the consumer, in a practice that is called “negative equity adjustment,” or as dealers call it, “financing magic.”
Adjusting for “extras”
Many people are familiar with this tactic. Joe Consumer comes into the lot to trade in his car that is worth $3,000 but he still owes $5,000, and therefore has a negative equity of $2,000. He wants to buy a car that is worth $20,000 but has no money for a down payment. Bob Dealer knows that the finance company will never approve a loan for $22,000 on a car that is worth $20,000 for a buyer who has not paid anything for a down payment. So, the dealer shifts the numbers (see box below) around by adding $3,000 to the price of the trade-in and the price of the new car. Now the loan says the consumer is trading in a car worth $6,000, with a loan of $5,000, thus paying $1,000 down to buy a car for $23,000.
The dealer not only thinks that he has done nothing wrong, but he actually thinks he has helped the consumer by working “financing magic” to get him into a car he wants.
Ignoring for a moment that the dealer has just committed fraud on the finance company, this practice is a violation of Oregon’s Unlawful Trade Practices Act and the federal Truth in Lending Act. It also harms the consumer by failing to disclose that he or she will now be on the hook for two car loans. The Oregon Attorney General provides this commentary on the rule against negative equity adjustment:
This rule requires that a consumer be clearly informed that the negative equity in his/her trade-in has been added to his/her purchase or lease. Compliance with this rule will eliminate those situations where a consumer believes (s)he has purchased a vehicle at one price, only to discover after closer examination of the deal documents that the negative equity has been added to the cost of the new transaction. The consequences are enormous. The added cost of financing can add up to thousands of extra dollars for a consumer, plus makes it even harder to trade in the new vehicle at a later date because the negative equity on the new vehicle is even more than the original trade-in. OAR 137-020-0020(3)(aa) OFFICIAL COMMENTARY.
Dangerous practice for consumers
So, after being made aware that negative equity adjustment violates the UTPA, dealers will cease this practice right? There are several reasons why a change in their business practice is not very likely. First, this practice is extremely profitable. In the second scenario above, the dealer has made a sale to a consumer who otherwise would not qualify for financing. As a result, he receives $22,000 from the lender. After paying off the $5,000 loan for the trade-in, the dealer has $17,000 and another car that he can sell for well above the $3,000 he paid the consumer. With a few simple maneuvers, the dealer can sell a car to someone with a negative down payment, while passing on the risk to the lender. Second, the dealer actually thinks he is doing a favor for the buyer. He believes that he is helping the consumer by working “financing magic” to get him into a car he wanted. What the dealer fails to recognize is that the consumer is not given adequate information to make an informed decision about whether to make the purchase. Finally, this practice is so commonplace that dealers refuse to believe it is illegal. When their competitors are all doing it, it is very difficult for them to believe that negative equity adjustment is not allowed. In fact the practice of negative equity adjustment is so prevalent that dealers not only do not know that it is illegal, they raise it as a defense.
I have had a few cases where I alleged selling for more than the advertised price. On all these cases, the dealers raised negative equity adjustment as a defense by saying they “rolled the trade-in into the loan.” At this point, the dealer is in quite a jam. Now he has admitted to negative equity adjustment, thus violating the UTPA and the TILA, and admitted to committing fraud against the lender, who now has a right of action against the dealer as well. In addition, the dealer has now put the RISC and the bill of sale into question.
Usually, these auto fraud cases involve many more UTPA violations by the dealer, such as, misrepresentations of quality, misrepresentations of warrantyand failure to disclose material defects. In nearly every case, dealers seek to evade liability by hiding behind the “as is” language and other disclaimers in the contract. They tell the consumer that the car is in “perfect condition,” “it’s been inspected,” “it’s never been in a crash,” and “the previous owner was a poor old lady who only drove it to her bingo games.” Then they turn around and have the consumer sign the contract disclaiming any and all warranties, express or implied, prior vehicle history, any promises that could have been made by the dealer and its agents, and everything else under the sun. Now, they are saying that the contract isn’t really what it says it is. On the one hand, the dealer wants to say that the consumer is bound by all of the broad disclaimers on paper, regardless of what the consumer actually understood the agreement to be, but they also want to say that even though the contract says the consumer is purchasing the car for $23,000, the deal was really for $20,000. Dealers can’t have it both ways. Either the contract is what it says it is, and the dealer sold over the advertised price, or the contract isn’t what it says it is, and the dealer has committed unlawful negative equity adjustment, and invalidated all disclaimers. Either way, the dealer has violated the UTPA, and will be on the hook for my attorney fees. Perhaps with a constant reminder and a bit of luck, we can get these dealers to actually start being honest in their contracts.
Young Walgenkim represents consumers in auto dealer fraud and various other consumer law issues. Walgenkim is a member of the OTLA Guardians of Civil Justice at the Friends level. He is a founding member at Hanson & Walgenkim LLC, 838 Commercial St. NE, Salem, OR 97301.
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