Subprime Loans, Consumer Abuses Still Common in Auto Sales

When Congress passed legislation to protect consumers from abusive lending practices by banks, credit card issuers and other financial institutions, it made one big omission: car dealers and their financing arms.

Why? Well, it certainly wasn't because no one ever complains about their last car deal. It's because car dealers are very good at lobbying Congress and their state legislatures and thus managed to talk, cajole and donate their way out of being covered by the new Consumer Financial Protection Bureau.

But if there's any remaining doubt that this was not the best solution to the problem, a survey of attorneys who handle consumer protection matters should settle the question.

The survey findings include:

• 87% of surveyed attorneys said they receive between 21 and 200 or more requests for assistance each year from consumers experiencing problems buying and/or financing a vehicle.

• 91% of attorneys turn away people who said they suffered abuses in auto dealer sales/finance transactions because they simply get more requests for help than they can handle.

• 83% of attorneys said that the consumers they interviewed “always” or “often” received a product (car or financing) from an auto dealer that was different from what was described to them during the purchasing transaction.

• 96% of attorneys surveyed said that the abuses their clients suffered were part of a general industry practice.

“Our survey, conducted among participating legal aid and private attorneys working on consumer auto issues, indicates that the current market for cars and car loans lacks transparency and has perverse incentives that reward dealers for putting consumers in loans that are more likely to fail, rather than rewarding dealers for putting consumers in safer loans,” said John Van Alst, a staff attorney at the National Consumer Law Center with expertise in consumer auto sales and financing.”

“Regulators, such as the Consumer Financial Protection Bureau and the Federal Trade Commission,” said Van Alst, “should put into place stronger consumer protections, including instituting a right of rescission or cooling off period for the purchase of a used car, financing, and any add-ons; stopping dealer loan markups; and ending yo-yo sales.

Implementing such protections would help ensure that consumers don’t get taken for a ride when buying or financing a vehicle from auto dealers.”

This survey was conducted from April 5-10, 2011. Three hundred and fifty legal aid and private attorneys across the United States who identified themselves as working on auto issues as part of their practice were invited to participate. Of those, 47 attorneys completed the survey.

Key findings

More key findings of the survery include:

1. Most consumers do not understand the terms and conditions of the sale when buying a vehicle. Nearly three-fourths (70 percent) of attorneys said their clients seldom (51 percent) or never (19 percent) understood what they were purchasing.

2. Most consumers do not understand the terms and conditions of financing or leasing a vehicle. Nearly eight out of ten (79 percent) of attorneys said their clients seldom (62%) or never (17%) understood the financing or leasing terms and conditions related to purchasing a vehicle from an auto dealer.

3. Most consumers complain that they received a car or financial arrangement that was different than what they thought they were to receive. Eighty-three percent of attorneys said that this was “often” or “always” the case with consumers they interviewed. Only 4 percent of attorneys said this was “seldom” or “never” the case.

4. “Yo-yo” financing, in which the dealer and buyer execute all the sales and financing documents and then the dealer attempts to cancel the transaction or change the terms, is common throughout the US, and practiced by both independent and franchise auto dealers.

Nearly 96 percent of responding attorneys across the country said auto dealers in their area engage in the practice. Of those attorneys finding the practice, three-fourths said that both franchise and independent auto dealers in their area engage in the yo-yo practice.

5. Most attorneys (89 percent) advise consumers not to purchase add-on products, and 66 percent said that the majority of consumers they interviewed, with time to reflect, would not purchase these products either. Specifically, attorneys were asked about rust-proofing, service contracts, window etching, and GAP insurance. Additionally, 94 percent of attorneys agreed that there were incentives for a dealer’s finance and insurance department to sell these add-ons even if not in the best interest of the consumer; 81 percent said that add-on pricing is not clearly posted, preventing consumers from comparison shopping.

6. Consumer abuses when purchasing and financing or leasing a vehicle through auto dealers is common. The vast majority (96 percent) of attorneys said that abuses in auto sales and financing were part of a general industry practice. In addition, auto dealers and lenders themselves admitted to 85 percent of the attorneys that consumer abuses were general business practice.