Consumer Warranty Law: 21.5.2.1 Introduction
Section 21.3, supra, sets out the lessee’s warranty claims against the lessor.
Section 21.3, supra, sets out the lessee’s warranty claims against the lessor.
The Consumer Leasing Act (CLA) requires lessors to clearly disclose the manufacturer’s express warranty, and any inaccuracy in fulfilling that requirement is a CLA violation,115 leading to statutory damages up to $2000, actual damages, and attorney fees.
Even in the extreme case of a finance lease,121 the drafters of UCC Article 2A stated that the consumer need not continue paying on a lease when the leased goods are defective. Comment 2 to section 2A-407 states: “That a consumer be obligated to pay notwithstanding defective goods or the like is a principle that is not tenable under case law . . . , state statute, . . . or federal statute.” Article 2A is less clear how this principle is to be implemented.122
This chapter focuses on fraud relating to car purchase and ownership in two specific contexts. The first is a too common situation in which consumers are led to believe they have purchased and own a car, but the dealer tries to retain the right to back out of the deal for days or even weeks after the consumer drives home with the vehicle. If the dealer decides to unwind the deal, it demands the vehicle back or requires the consumer to pay more in financing costs or other charges.
Yo-yo transactions, also referred to as spot-delivery, conditional sales, take-back, MacArthur (“I shall return”), or gimme-back transactions, are one of the most widespread automobile dealer abuses today. Dealers use this tactic in new and used car sales as well as leases. The yo-yo sale is standard operating procedure at many dealerships.
This chapter examines various approaches consumers can use to challenge yo-yo sales and sublease scams. To oversimplify, there are two major strategies in a yo-yo case. One is a fact-intensive demonstration that the dealer has engaged in unfair and deceptive acts and practices (UDAP), fraud, conversion, or other state law violations, and the consumer seeks actual, and perhaps multiple or punitive, damages.
At present about one-third of the states have some kind of official pronouncement about yo-yo sales, but there are significant variations from state to state. It is thus important to stay current with a particular jurisdiction’s statutory law and any administrative rulings from the state’s dealer licensing board, department of motor vehicles, attorney general’s office, or other state agency.
To make a transaction contingent on the dealer’s ability to sell the retail installment sales contract, the parties must explicitly agree to such a condition.14 In the most egregious case, a dealer attempts a yo-yo sale with no written document or other basis for making the sale contingent on financing. Instead the dealer preys on the consumer’s ignorance (and some courts’ confusion) as to the dealer’s role in the transaction and the relationship of the dealer and the bank or finance company.
A financing contingency that is only orally conveyed to the consumer is not effective. State motor vehicle and retail installment sales statutes require that all the terms be included in the installment sales agreement. Such oral statements also run afoul of the parol evidence rule and the statute of frauds. Moreover, the installment sales agreement itself often states that its terms supersede any other agreements, and may even state that the dealership is not bound by the statements of its employees.
The dealer may claim it is canceling the sale because the consumer lied on the credit application, and that this violation triggers a default or allows the dealer to cancel on the basis of the consumer’s material fraudulent misrepresentation. However, experience shows that the dealer is most often at fault for misstatements on a credit application.
Some dealers do not sign the financing agreement, and then argue that the financing agreement is not final for this reason. Nevertheless, the filled-in contract should be viewed as the dealer’s offer, and the consumer’s signature as acceptance, so the contract is binding.23 The dealer’s failure to sign the installment sales agreement may also violate the state installment sales act.24
Any contingency clause must comport with state law. In some states a contingency clause is illegal.26 For example, the Maryland Motor Vehicle Administration states that dealers are not to use contingent or supplemental contracts.27 A letter from the Michigan Department of Commerce finds such a contingency clause to violate the Michigan Motor Vehicle Sales Finance Act, a position the Michigan Secretary of State’s Dealer Manual agrees with.
Contingency “riders” found outside the retail installment sales agreement are subject to challenge.
Just because the agreement includes a valid contingency clause does not give the dealer the right to cancel the transaction. Events must occur that are listed in the contingency clause as grounds to cancel the agreement.
Check to see if communications between the dealer and the finance company show that denial occurred even before the consumer left the dealership with the car, or whether the underwriting standards that the potential assignees provided the dealer, often found on rate sheets or other program descriptions, demonstrate that the dealer knew in advance that the financing would fail.
In the typical yo-yo transaction, dealer employees repeatedly make oral representations that the deal is final and that a sale has been made. Such assurances will be made by the finance and insurance manager, by the salesperson, by the receptionist, and other personnel, congratulating the consumer on the purchase and even making specific statements that financing has been approved. Also look for brochures sent to the consumer indicating the consumer has been pre-approved or that all credit applications are approved.
When the dealer does not have the right to cancel the agreement, the dealer’s attempt to undo a binding credit agreement is unfair, deceptive, and wrongful, leading to potential UDAP, fraud, and breach of contract claims.51 Clearly seizing the vehicle when the dealer has no legal basis for the seizure is conversion or a related tort.52 It is also a deceptive practice for the dealer to misrepresent to the consumer its legal right to recover the vehicle.
Focusing on federal disclosure and notice requirements is one way to approach a yo-yo case. The violation of a specific disclosure or notice requirement may be easy to prove, will provide federal court jurisdiction, and will result in an award to the consumer of statutory, treble, or punitive damages, and attorney fees. In certain situations the dealer’s assignee or even potential assignees who do not purchase the consumer’s paper may be liable as well.
A common dealer practice in any yo-yo transaction is to have the consumer sign an installment sales agreement with TILA and state installment sales act disclosures, and then to send the consumer home with the car but without the paperwork.67 If the deal is later rewritten with a new contract, the dealer does not want the consumer to have more than one set of disclosures. A copy of the original disclosures would allow the consumer to see precisely how much worse the second deal is than the first.
In the typical car finance transaction at a dealership, the dealer uses the consumer’s credit application and credit report to perform an initial evaluation of the consumer’s credit. This initial evaluation will be a factor in determining which finance companies (if any) that the dealer will contact, either through financing software or directly, for approval. These potential assignees will respond to the dealer indicating whether they would purchase the installment sales agreement, and at what terms.
Dealers, as users of consumer reports, are clearly covered by the FCRA’s notice requirement. But, because most courts are refusing to recognize that there is a private right of action any longer for such FCRA notice violations,89 it is key to establish that dealers are covered by the ECOA adverse action notice requirement.
Dealers may argue that, in canceling a sale, they have made a counteroffer, and thus have not denied credit. Regulation B requires notice of such a counteroffer within thirty days.98 In addition, in many yo-yo sales, no counteroffer is made, or an offer is made only some days after an unconditional denial. Query also whether even an immediate offer of lease terms can be considered a counteroffer to a credit application. Moreover, a counteroffer would have to be a firm one; dealers sometimes back out of second deals as readily as first deals.
Another possible dealer defense to an ECOA claim is that the consumer did not supply all the required information for the credit application. But the ECOA clearly states that a written notice of adverse action is still required even when the consumer has not provided all the requested credit information.100 On the other hand, if the credit is denied because the application was not completed and not because of information in a credit report, then the FCRA notice may not be required.101
As described above,106 federal courts interpret a 2003 drafting error as eliminating a private right of action under the FCRA for notice violations. For an ECOA notice violation the consumer can obtain federal court jurisdiction and recover actual damages plus punitive damages not greater than $10,000, plus attorney fees.
Dealers, not satisfied with a one-sided transaction in which they can cancel a deal but the consumer cannot, also structure the yo-yo sale so that every aspect of the transaction benefits the dealer and not the consumer. In their eagerness to do so, dealers often violate various federal and state laws.