Why Auto Scams Are Alive And Well

In the market for a car? There are few jobs in our country today with a lesser reputation than that of a car salesman. While there are certainly plenty of very reputable individuals within the auto industry, why do car salespeople have such horrendous reputations? Here’s why.

Although this hidden camera expose was produced by Dateline NBC back in 2003, a recent report by the centre for Public Integrity indicates that little has changed in the scams and cons practiced within the auto industry.

Let’s navigate the CPI’s Buyer Beware

After the financial crisis exposed the devastation caused by predatory lending, state and federal authorities vowed to protect consumers from practices that lured them into debt they couldn’t afford.

But Congress kept most auto loans – the second largest source of debt for Americans – out of the reach of the fledgling U.S. Consumer Financial Protection Bureau. And now many of the same tactics that led to the mortgage meltdown – like fudging facts on the loan application or charging consumers hidden fees – continue to plague auto loans, an investigation by the centre for Public Integrity found.

Our friends in Washington once again display their ineptitude in protecting American consumers. No surprise there.

The politically powerful industry has also mastered a few high-pressure tactics of its own. Chief among them is the “yo-yo,” where dealers let buyers drive a new car home in hopes of locking them into a deal and later tell them their financing fell through. The tactic can lure buyers to accept a higher interest rate.

And while the financial crisis rendered subprime mortgages extinct, Wall Street is once again buying up bundled subprime auto loans, fueling a market aimed at the most vulnerable consumers and relieving dealers of the risks of making bad loans.

The end result is that financial incentives to take advantage of auto shoppers remain unchanged while the agency charged with protecting borrowers will be powerless against an industry polling shows is the most distrusted in America.

The most distrusted industry in America? No surprise there, but why is it that people have such little trust in those peddling cars. Here’s why.

The National Automobile Dealers Association says that its members face lots of regulation already and didn’t need any further government oversight, which it argued would only end up costing consumers.

But don’t try to convince Tammy Moses of that.

The dental hygienist from Oklahoma City trusted her car salesman, a family acquaintance who joined hands with her and prayed for her troubled son.

He found creative ways to finance a 12.25 per cent loan in 2007 despite Moses’ lousy credit rating. But for some reason he limited her choice to only two cars on the lot. She fell in love with a sleek, new Hyundai Elantra, despite her father’s warning that the car looked a little askew.

On a trip to Dallas two months later, Moses lost control of the Elantra as she veered to avoid a car swerving into her lane. When a mechanic suspended the car on the rack, he immediately spotted rusted damage from an earlier wreck.

Punching the car’s ID into the computer turned up a previous owner from Georgia, according to an interview with Moses and court documents. She learned through court proceedings that the dealer, Automax Hyundai South, routinely got duplicate “certificates of origin” from the automaker to sell used cars as new.

Used cars as new? Really. A hint of fraud perhaps? More than a hint. Wow!! But wait, there’s plenty more.

A Gallup poll for the Better Business Bureau in 2008 showed that only 13 per cent of Americans trust car dealers. No other business garners so much distrust. But industry whistleblowers say that shoppers would still be shocked if they could listen to some of the private conversations they’ve heard.

John Callahan said in his three years selling cars on dealer Web sites he was troubled by the sales techniques he saw taught. “They were teaching you how to steal money from the consumer and hide the fact.”

He remembers a case where a salesman overcharged an elderly woman $2,500 on a car and cheated her $5,000 on her trade in. As she drove off the lot, everyone was high-fiving the salesman. “‘You just destroyed her. That’s awesome,'” Callahan recalls his colleagues saying. “And the management would laugh about it.”

The pressure to squeeze each customer can be intense, said Ray Lopez, a car salesman for 33 years. One major dealership in Southern California, he says, automatically fires the bottom three salespeople each month. It’s not enough just to make a sale, Lopez said. You’re expected to score big each time.

He got fed up one day after his boss chewed him out for selling a used car to his brother with only a $500 markup. “He calls me into his office and good God, I’ve never heard anybody cuss up such a storm. ‘You gave your brother a house deal? If you can’t f—- your own family and brag about it, you don’t belong here.'”

What a guy!! We definitely want to do business with this crowd, right? What is the newest scam auto dealers are employing? Yo-yo financing. What is that?

Strong incentives remain that may tempt dealers to gouge car buyers.

Most dealers don’t keep loans on their books, so they face few consequences if the borrower can’t afford the payments. And while Wall Street investors won’t touch mortgages, they continue to buy bundled auto loans from finance companies, even risky subprime car loans.

One controversial but common technique is called the “yo-yo.” That’s when a buyer drives a car home with a signed contract, but the dealer calls days or weeks later to say that the financing fell through.

Yo-yos give the dealer tremendous leverage to coerce the buyer into paying a higher price or interest rate even after the deal has been inked. Consumer lawyers say yo-yos violate the terms of the sales contract as well as Truth in Lending laws.

Research by the centre for Responsible Lending shows that one in eight car buyers making less than $40,000 have experienced a yo-yo deal. For those making less than $25,000, the incident rate rises to one in four.

In the market for a car?

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.