I was reviewing reports of court cases recently and ran across something that sounded familiar. It also sounded a few warning bells. I’d like to share my observations with you.
"Dolly" saw a 2006 Nissan Murano advertised on the Internet. When she contacted the dealer about the car, a dealer representative quoted the purchase price as $15,500. When Dolly drove to the dealership to pick up the car, a second representative told her the purchase price was actually $21,500. “Molly,” Dolly’s sister, agreed to act as a co-signer so that Dolly could get a better rate. A dealership representative drove to Molly’s house and had her sign a blank retail installment contract. A month later, Molly received the completed documents. The contract showed the amount financed as $23,800. The contract also showed Molly as the sole buyer and borrower. Molly and Dolly sued the bank that bought the contract from the dealership. The sisters argued that the bank violated the Truth in Lending Act, the Equal Credit Opportunity Act, and state unfair trade practices and consumer protection laws. The bank unsuccessfully moved to dismiss.
It’s too early in the course of this lawsuit to make any judgments about who did what to whom; that will come later after some discovery or, if it comes to it, after a trial. For now, I want to focus on Dolly’s claim that the car was advertised on the Internet at $15,500, but that when she arrived at the dealership, the price was $6,000 higher.
It is possible that the price discrepancy was simply an error on the part of whoever did the Internet ad, or that there is some other innocent explanation for the extra $6,000. It’s also possible that the Tooth Fairy is real. When I hear facts like this, alarms go off and I start asking myself questions.
What if this dealer was advertising the vehicle on the Internet at $15,500, and what if the Internet ad said something in small print like, "for cash and good credit customers”? I’ve actually seen Internet ads like that.
And what if Dolly’s or Molly’s credit wasn’t strong enough to qualify for purchase by a non-discounting sales finance company? And what if the only sales finance company willing to buy Dolly’s or Molly’s deal was a deep-discounting buyer who would buy the contract only if the dealer agreed to a $6,000 haircut? And what if the dealer simply tacked the expected $6,000 haircut onto the car price to recoup the haircut?
I read this case a week after I was in the offices of a sales finance company that buys retail installment contracts from dealers at a discount. The compliance officer of the company described to me a problem he was wrestling with. It seems that his company had just bought a contract financing the sale of a Chevrolet pickup truck, showing a cash price of $15,000. The compliance officer, however, had gone to the dealer’s Web site and had found the very same truck advertised at $11,000. Was it just coincidence that the contract had been bought at a $4,000 discount? The compliance officer wanted to know what, if anything, the company could do about the deal.
Now, either these two situations just happened to pop up at the same time, or they illustrate a more-common-than-I-thought dealer practice that is (1) illegal and (2) dangerous.
If practices like these are occurring at your dealership, write this on a piece of paper and post it on the break room bulletin board: "YOU CANNOT INCREASE THE PRICE OF A CAR TO COVER A DISCOUNT YOU TAKE ON THE SALE OF A FINANCE CONTRACT FOR THAT CAR."
Why not, you ask?
Because when you increase the price of the car to cover the discount, the amount of increase in the purchase price suddenly becomes a finance charge for federal disclosure purposes, that’s why. And, unless you disclose the price increase as a finance charge (and no one does), you’ve violated federal disclosure laws.
Along the way, you’ve probably also violated the maximum finance charge rate provisions of your state’s retail installment sales law, state advertising laws that require you to sell cars at the price at which you’ve advertised them and state laws that prohibit "unfair and deceptive" acts and practices. You’ve also, no doubt, violated the terms of the dealer agreement between you and the sales finance company to which you have sold the discounted contract, subjecting yourself to the potential liability of buying the contract back if the sales finance company demands that you do so.
If your dealership sells retail installment contracts to sales finance companies at a discount, the dealership needs to understand how to do so, and how to price its cars, without violating the law. Although most dealers will probably dislike changing their practices to accommodate those pesky laws, they will find that they will sleep better at night if they do.
Time to schedule another visit to the lawyer’s office.
Thomas B. Hudson, Esq.
Hudson Cook, LLP