Like many car buyers, when Bradley Nigh bought a 1997 Chevy Blazer four years ago at an Alexandria dealership, he signed the deal, filled out the credit application and other paperwork, then drove off the proud owner of a new vehicle.
According to court records, Nigh got a call three weeks later from the dealer saying his financing fell through. The dealer told him he had to bring the car back and pay an additional $2,000 down payment to get financing.
Nigh, then 22, asked for his trade-in car back, but the dealer said it was sold, according to the court records, which state that when Nigh then balked at renegotiating, the dealer threatened to have him arrested for auto theft.
Nigh sued the dealership, formerly known as Koons Buick Pontiac GMC, claiming it violated Truth-in-Lending laws. The dealer said Nigh breached the contract. Nigh won $24,000 in damages; the dealer appealed that penalty. This month the case was heard in the U.S. Supreme Court.
Whether Nigh's deal-gone-wrong was a case of the shady car sales tactic known as "yo-yo financing" isn't the high court's focus. The justices are expected to rule only on monetary limits in Truth-in-Lending lawsuits. But the case has put yo-yo deals in the news.
Think of yo-yo deals as bait-and-switch financing, a trap that an unscrupulous car dealer uses to manipulate buyers into paying more, says Rosemary Shahan, president of Consumers for Auto Reliability and Safety, a Sacramento-based consumer group. "It ends up costing consumers a lot of money that they didn't intend to spend."
The standard yo-yo scenario, says Shahan, is you go to a dealership and buy a car, think you have a done deal, drive it off the lot, show it off to your family. Then, days or weeks later, you get a call saying the deal didn't go through and you need to come in and agree to new terms.
Not all cases where a credit application isn't approved and a buyer must return the car are scams. But, Shahan says, "It's a huge problem that's getting worse." All yo-yo deals rely on a common industry practice called "spot delivery" -- letting customers who buy on credit take the new car home before financing is final. And few dealers disclose that credit deals are conditional on the approval of the application.
"That is how cars are sold in this country," says Tom Domonoske, a consumer plaintiff lawyer in Harrisonburg, Va., and an expert on yo-yo financing schemes. "Dealers don't call the buyer back every time a car is sold through financing, but they set up the transaction every time so they can call back if they want to."
The automobile industry says Truth-in-Lending violations during car sales typically are technicalities or honest mistakes.
Carl Ragsdale, spokesman for the National Automobile Dealers Association, says spot delivery and conditional credit approval are just facts of life in car sales. Until recently, he'd never heard of the term "yo-yo deals," he says.
"Do these things happen sometimes? Do the terms need to be renegotiated? Yes," he says. "Do they happen purposefully? I can't answer that. If a consumer fills out a credit report factually and completely, then it is very unusual to have a spot delivery have to be returned. The dealer wants the spot delivery to be a seamless transaction and have the customer leave happy. But dealers do 35 million transactions a year, and I guess a few of them go bad."
What do dealers get out of a yo-yo deal?
Typically they get a leg up in coercing the buyer into putting more money down, or in raising the interest rate on the deal, which earns them a bigger kickback from the lender, says David Stivers, a Florida-based financial expert, auto industry consultant and former finance manager for a car dealership. "There are a lot of dealers who do not like yo-yo practices and argue against spot delivery. Lenders typically agree with that."
But marketplace pressure from buyers who want to drive away in their new car makes that stance impractical.
Domonoske recommends preventing yo-yo scams by invoking Truth-in-Lending laws. "Consumers need to understand the dealer is never shopping for the best credit terms for them. The dealer is trying to sell a credit contract that's most profitable."
He recommends comparison shopping. "Take that car price in writing to another dealer," he says. "For credit, go to another lending source. . . . You can let the car dealer make you a credit offer, but get it in writing and that's what you're shopping against. The Truth in Lending Act requires written disclosure be put in the consumer's possession so they can comparison shop."
A SQUARE DEAL
For more information on car buying and safety issues, visit Consumers for Auto Reliability and Safety's Web site at www.carconsumers.com.
The brochure "Understanding Vehicle Financing" is available from the American Financial Services Association's Education Foundation at www.afsaef.org and the Federal Trade Commission at www.ftc.gov/bcp/conline/pubs/autos/vehfine.htm.
For consumer information on buying automobiles, see the National Automobile Dealers Association Web site at www.nada.org.
Got questions? A consumer complaint? A helpful tip? E-mail details to firstname.lastname@example.org write Don Oldenburg, The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.