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Automobile Fraud: 4.4.2 Is the Sale an Illegal Condition Precedent or an Illegal Condition Subsequent Yo-Yo Transaction?

In challenging a yo-yo sale, it is imperative to allege all possible law violations, without assuming whether the contract involves a condition precedent or a condition subsequent. To allege that the dealer’s conduct in a condition precedent transaction violates certain laws invites the dealer to argue that the transaction is, in fact, a condition subsequent one, in which such conduct is allowed.112 Instead, the consumer should make allegations in the alternative.

Automobile Fraud: 4.4.3.1 Introduction

In a condition precedent sale, the dealer is the owner and, until the sale is finalized, the consumer’s rights and obligations regarding the vehicle are those of a bailee, not an owner. Rather than consistently retain ownership until the condition precedent has been met, dealers will often treat the consumer as the vehicle’s owner for some purposes, although not for others. These practices can lead to a series of actionable law violations, as described below.

Automobile Fraud: 4.4.3.2 Earning Interest Before the Financing Is Extended

Check to see when the financing documents state that interest charges began accruing. In a condition precedent sale, until the condition precedent (typically the assignee agreeing to purchase the paper) has been met, no sale has occurred. The consumer does not have title to the car, and the consumer has not yet borrowed any money. The dealer still owns the car. Consequently, no finance charges should be accruing. No proceeds have been disbursed, so no interest should be charged on those proceeds.

Automobile Fraud: 4.4.3.4 Service Contract’s Term and Excessive Finance Charges Relating to That Contract

Service contracts purchased by consumers will be for a fixed time period, and typically that period will begin when the contract is signed. But, if the consumer does not own the vehicle and there is no bailment agreement requiring the consumer to repair the vehicle, the service contract term should not begin until the consumer actually owns the vehicle. In addition, the consumer will be paying finance charges on the prepaid service contract before the service contract should actually take effect.

Automobile Fraud: 4.4.3.5 Excess Insurance Premiums and Related Finance Charges

Dealers may also start the term of various insurance policies—such as GAP, credit, and physical damage insurance—from the date the consumer drives off with the car, instead of the date the consumer becomes the owner. The dealer may even force place insurance before the consumer actually owns the car. Any insurance sold in conjunction with the sale should have a start date, not as of the date the car is delivered to the consumer, but as of the date the condition is met and the consumer becomes the vehicle’s owner.

Automobile Fraud: 4.4.3.6 Improper Treatment of the Consumer’s Trade-In

If a sale is truly a condition precedent transaction, then the dealer has no right to sell the consumer’s trade-in until the sale of the new car has been finalized. The trade-in is provided to the dealer on the condition that the sale goes through. The consumer has not separately sold the consumer’s existing vehicle to the dealer; the sale is part of the purchase of the new vehicle. To sell the trade-in before the sale of the new car has been finalized is conversion and a UDAP violation.123

Automobile Fraud: 4.4.3.7 Improper Use of Temporary Tags

Dealers who put temporary tags on a vehicle in the consumer’s name or give the consumer a temporary registration or title create the false impression that the consumer has purchased the vehicle, preventing the consumer from trying to back out of the sale. Such practices may also be illegal. Temporary plates under state law are usually only available when title has been transferred, which is not the case in a condition precedent sale.

Automobile Fraud: 4.4.3.8 Improper Use of Dealer Plates

In a condition precedent sale, the car should be driven with dealer plates, because the dealer still owns the vehicle. In some states though, dealers cannot allow consumers to use the dealer’s plates on a vehicle for a lengthy period of time. For example, Maryland allows such use of dealer plates only for a period of ten days from the date of delivery.126 In effect state law places limits on condition precedent sales, requiring the dealer to quickly decide if the condition precedent has been met.

Automobile Fraud: 4.4.3.9 Dealer Misrepresentation As to Consumer’s Cancellation Rights

Massachusetts UDAP regulations require that, in any condition precedent sale, notice be provided to the consumer that the consumer can cancel the contract and receive a full refund until the dealer accepts the contract.127 Failure to give the notice or abide by its terms is a UDAP violation. Even when state law does not explicitly state that the consumer can cancel a condition precedent sale, the dealer cannot misrepresent the consumer’s rights to cancel.

Automobile Fraud: 4.4.4.1 Titling Practices

In condition subsequent yo-yo transactions, dealers play fast and loose with federal and state titling requirements, because it is inconvenient for them to follow the law. In a condition subsequent sale, by definition, ownership passes to the consumer. If the transaction is legally canceled, ownership transfers back to the dealer. Each of these transfers must be evidenced by signatures on a title document, so that these transfers become a permanent part of the vehicle’s chain of title. Dealers violating these legal requirements are then whipsawed.

Mortgage Lending: ALASKA

Legal Interest Rate: Alaska Stat. § 45.45.010

Contract Interest Rate: Alaska Stat. § 45.45.010

Open-End Loans: Alaska Stat. § 06.20.285 (Open End Loans); Alaska Stat. § 06.20.230 (Small Loans Act)

Mortgage Requirements: Alaska Stat. § 06.15.250 (Mutual Savings Bank Act) (restrictions on investments in first mortgages); Alaska Stat. § 06.05.207 (real estate loans/restrictions)

Appraisers: Alaska Stat. §§ 08.87.010 to 08.87.900; Alaska Admin. Code tit. 12, §§ 70.100 to 70.990

Mortgage Lending: ARIZONA

Legal Interest Rate: Ariz. Rev. Stat. Ann. § 44-1201

Contract Interest Rate: Ariz. Rev. Stat. Ann. § 44-1201

Criminal Usury Cap: Ariz. Rev. Stat. Ann. §§ 13-2208, 13-2320

Mortgage Requirements: Ariz. Rev. Stat. Ann. §§ 33-701 to 33-715

Reverse Mortgage Loans: Ariz. Rev. Stat. Ann. §§ 6-1701 to 6-1708

Appraisers: Ariz. Rev. Stat. Ann. §§ 32-3601 to 32-3680

Mortgage Brokers and Loan Originators: Ariz. Rev. Stat. Ann. §§ 6-901 to 6-913, 6-941 to 6-949, 6-991 to 6-991.22

Mortgage Lending: ARKANSAS

Legal Interest Rate: Ark. Const. amend. 89, §§ 2 (for federally insured depository institutions), 3 (for all others)

Contract Interest Rate: Ark. Code Ann. §§ 4-57-101 to 4-57-105

Mortgage Requirements: Ark. Code Ann. §§ 18-40-101 to 18-40-110

Reverse Mortgage Loans: Ark. Code Ann. §§ 23-54-101 to 23-54-109

Appraisers: Ark. Code Ann. §§ 17-14-101 to 17-14-414

Mortgage Brokers and Loan Originators: Ark. Code Ann. §§ 23-39-501 to 23-39-518 (Fair Mortgage Lending Act)

Mortgage Lending: CONNECTICUT

Legal Interest Rate: Conn. Gen. Stat. § 37-1

Contract Interest Rate: Conn. Gen. Stat. § 37-4

Criminal Usury Cap: Conn. Gen. Stat. §§ 37-4, 37-7

Open-End Loans: Conn. Gen. Stat. §§ 36a-555, 36a-563, 36a-565 (small loans/licensing and restrictions)

Mortgage Requirements: Conn. Gen. Stat. §§ 36a-261, 36a-265, 36a-705 to 36a-708 (disclosures), 49-1 to 49-31v

Home Improvement Loans: Conn. Gen. Stat. § 36a-266

Mortgage Lending: DISTRICT OF COLUMBIA

Legal Interest Rate: D.C. Code § 28-3302(a)

Contract Interest Rate: D.C. Code § 28-3301

Appraisers: D.C. Code §§ 47-2853.151 to 47-2853.154

Mortgage Brokers and Loan Originators: D.C. Code §§ 26-1101 to 26-1121 (Mortgage Lender and Broker Act)

Mortgage Lending: FLORIDA

Legal Interest Rate: Fla. Stat. § 687.01

Contract Interest Rate: Fla. Stat. §§ 687.01, 687.02

Criminal Usury Cap: Fla. Stat. §§ 687.03, 687.031, 687.071, 687.146

Open-End Loans: Fla. Stat. § 516.02 (consumer finance chapter)

Mortgage Requirements: Fla. Stat. §§ 697.01 to 697.10

Home Improvement Loans: Fla. Stat. §§ 520.60 to 520.98 (§ 520.78) (Home Improvement Sales and Finance Act)

Appraisers: Fla. Stat. §§ 475.610 to 475.631

Mortgage Lending: GUAM

Open-End Loans: 14 Guam Code Ann. §§ 3501 to 3515 (regulated loans)

Appraisers: 22 Guam Code Ann. §§ 30101 to 30125

Mortgage Brokers and Loan Originators: 9 Guam Code Ann. §§ 46.100 to 46.104 (Mortgage Fraud Act); 18 Guam Code Ann. §§ 36301 to 36324 (Secure and Fair Enforcement for Mortgage Licensing Act)

Mortgage Lending: ILLINOIS

Legal Interest Rate: 815 Ill. Comp. Stat. § 205/1

Contract Interest Rate: 815 Ill. Comp. Stat. § 205/4

Criminal Usury Cap: 720 Ill. Comp. Stat. § 5/17-59

Open-End Loans: 205 Ill. Comp. Stat. § 5/5d

Mortgage Requirements: 765 Ill. Comp. Stat. §§ 5/11, 905/5 (mortgage requirements)

Reverse Mortgage Loans: 765 Ill. Comp. Stat. §§ 945/1 to 945/40 (Reverse Mortgage Act); 205 Ill. Comp. Stat. §§ 5/5a, 5/6.1, 5/6.2 (repealed eff. Jan. 1, 2016)

Mortgage Lending: IOWA

Legal Interest Rate: Iowa Code §§ 535.2, 535.4

Contract Interest Rate: Iowa Code § 535.2

Uniform Consumer Credit Code (UCCC): Iowa Code §§ 537.1101 to 537.8101

Residential Mortgage Loans: Iowa Code § 535.9 (prepayment penalties; includes agricultural loans)

Alternative Mortgage Loans: Iowa Code §§ 528.1 to 528.9 (§ 528.4—prepayment penalties)

Appraisers: Iowa Code § 543D; Iowa Admin. Code r. 193F-1.1 to 193F-17.2

Mortgage Lending: KANSAS

Legal Interest Rate: Kan. Stat. Ann. § 16-201

Contract Interest Rate: Kan. Stat. Ann. § 16-207

Uniform Consumer Credit Code (UCCC): Kan. Stat. Ann. §§ 16A-1-101 to 16A-9-102; Kan. Stat. Ann. §§ 50-623 to 50-643 (consumer protection)

Residential Mortgage Loans: Kan. Stat. Ann. § 16-207 (§ 16-207(b)—prepayment penalties; § 16-207(h)—balloon payments and negative amortization)

Appraisers: Kan. Stat. Ann. §§ 58-4101 to 58-4127, 58-4701 to 58-4725

Mortgage Lending: MASSACHUSETTS

Legal Interest Rate: Mass. Gen. Laws ch. 107, § 3

Contract Interest Rate: Mass. Gen. Laws ch. 107, § 3

Criminal Usury Cap: Mass. Gen. Laws ch. 271, § 49

Open-End Loans: Mass. Gen. Laws. ch. 140, § 114B

Second Mortgage Loans: Mass. Gen. Laws. ch. 140, §§ 90A, 114B

Appraisers: Mass. Gen. Laws ch. 112, §§ 173 to 195; 264 Mass. Code Regs. §§ 2.01 to 12.03

Mortgage Lending: MISSISSIPPI

Legal Interest Rate: Miss. Code Ann. § 75-17-1

Contract Interest Rate: Miss. Code Ann. § 75-17-1 (Miss. Code Ann. § 75-17-25—finance charge defined); Miss. Code Ann. §§ 75-17-21, 75-67-119 (interest rates for small loan licensees)

Residential Mortgage Loans: Miss. Code Ann. § 75-17-31 (prepayment penalties; includes agricultural loans)

Appraisers: Miss. Code Ann. §§ 73-34-1 to 73-34-131

Mortgage Lending: MISSOURI

Legal Interest Rate: Mo. Rev. Stat. § 408.020. See Mo. Const. art. III, § 44

Contract Interest Rate: Mo. Rev. Stat. §§ 408.030, 408.035, 408.080, 408.455

Criminal Usury Cap: Mo. Rev. Stat. § 408.095

Residential Mortgage Loans: Mo. Rev. Stat. §§ 408.036, 408.052 (§ 408.036—prepayment penalties; § 408.052—points and fees)

Second Mortgage Loans: Mo. Rev. Stat. § 408.232

Reverse Mortgage Loans: Mo. Rev. Stat. §§ 443.901 to 443.930

Mortgage Lending: NEBRASKA

Legal Interest Rate: Neb. Rev. Stat. § 45-102

Contract Interest Rate: Neb. Rev. Stat. §§ 45-101.03 to 45-101.05

Reverse Mortgage Loans: Neb. Rev. Stat. § 45-1068

Appraisers: Neb. Rev. Stat. §§ 76-2201 to 76-2250, 76-3201 to 76-3222; 298 Neb. Admin. Code §§ 1-001 to 8-003

Mortgage Brokers and Loan Originators: Neb. Rev. Stat. §§ 45-701 to 45-754 (Residential Mortgage Licensing Act); Neb. Rev. Stat. §§ 45-189 to 45-191.11 (loan brokers)