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Unfair and Deceptive Acts and Practices: 7.2.3.1 Introduction

This subsection reviews dealer financing practices in the common situation in which the dealer originates the credit sale agreement and immediately assigns the obligation to a bank, finance company, or other creditor. It does not cover when the consumer goes directly to a lender for a loan and then uses the proceeds of the loan to purchase a vehicle.

Unfair and Deceptive Acts and Practices: 7.2.3.3 UDAP Challenges to Dealer Kickbacks

UDAP claims may be the most successful approach to challenging creditor kickbacks to dealers on the financing. Any oral misrepresentation by the dealer should be actionable. For example, any dealer representation that the dealer got the consumer the best rate possible or that the financer would not accept anything less than 16.5% is clearly false when the buy rate was in fact 14%. If a consumer asks the dealer whether the creditor will accept a lower interest rate, the dealer’s answer may also be deceptive.155

Unfair and Deceptive Acts and Practices: 7.2.3.5 Dealer’s Altering of Consumer’s Credit Application, Fictitious Down Payments, and Other Frauds on the Financer

A common practice is for a dealer, intent on making a sale and obtaining financing approval, to falsify the consumer’s creditworthiness.162 The dealer will be selling the installment contract to a creditor without recourse, meaning that the creditor, not the dealer, bears the loss if the consumer cannot afford the payments and defaults. Meanwhile, the dealer has made a profit on the car sale and has obtained a kickback from the creditor on the financing. Often automobile credit is securitized.

Unfair and Deceptive Acts and Practices: 7.3.1 The Turnover System

One of the most oppressive and potentially unfair and deceptive sales techniques that car dealerships employ is the “TO” or turnover system, in which a series of sales personnel are used to wear down a consumer. The first salesperson the consumer meets is a “liner” or “greeter” who qualifies the consumer—that is sizes up how vulnerable the consumer is and how much the dealer can take advantage of the consumer.

Unfair and Deceptive Acts and Practices: 7.3.2 Dealer’s Illegal Use of Consumer Credit Reports

A dealer’s illegal use of a consumer’s credit report may not only be a UDAP violation but also a violation of the federal Fair Credit Reporting Act (FCRA). The violation occurs when a car dealer pulls a consumer’s credit report almost as soon as the consumer walks into the showroom. The dealer requires the consumer’s driver license claiming that it needs to copy the license in order to allow the consumer to test drive a car, or that it will be used to enter a contest, or just as a precondition for meeting with a salesperson.

Unfair and Deceptive Acts and Practices: 7.3.4 Dealers Hiding Trade-Ins’ Negative Equity

In a surprising number of credit and lease transactions, the vehicle the consumer wishes to trade-in has negative equity. That is, the vehicle is worth less than the outstanding credit obligation on that vehicle, or the early termination of a lease on that vehicle will create a sizeable early termination charge. Thus, the consumer’s obligation will go up because of the trade-in, not down.

Unfair and Deceptive Acts and Practices: 7.3.11 Hired Guns, Tent Sales, and Other Short-Term Techniques

Used car dealers sometimes employ special sales techniques aimed at selling a number of cars quickly, by attempting to force consumers to act quickly to buy during this “once in a lifetime” event. Dealerships will often bring in outside groups to market these sales and sometimes to actually sell the cars as well.293 These hired guns are often referred to as liquidators or promotion specialists.

Unfair and Deceptive Acts and Practices: 7.4.6 Sale of Salvage and Flood-Damaged Cars and Undisclosed Body Damage

A large number of the used cars sold each year in this country were actually declared “total” losses because of wreck damage, were then rebuilt, and ultimately were resold to unsuspecting consumers. Millions more are sold that were in a serious wreck, but were never declared to be total losses. Each time a major flood hits an area, thousands of cars suffer flood damage, but many of these cars are resold to consumers unaware of that flood history.

Unfair and Deceptive Acts and Practices: 7.4.9.1 General

Many vehicles have defects but were never returned to the manufacturer, either as a goodwill buyback or pursuant to a lemon law. Sale of such used cars without disclosing serious defects should be a UDAP violation.363 Even though the FTC considered and rejected a version of the FTC Used Car Rule that would have required dealer disclosure of mechanical defects, the fact that the FTC failed to do so does not prevent it from being a UDAP violation to fail to disclose such defects.364

Unfair and Deceptive Acts and Practices: 7.4.13 Excessive Price

Used car dealers are notorious for price gouging on both cars and add-ons. There is a growing body of evidence that dealers discriminate on the basis of race, gender, and other invidious categories when pricing vehicles and add-ons.389 Such price discrimination may violate federal and state discrimination statutes.390 When excessive used car prices are hidden in a finance charge, this may also lead to Truth in Lending Act violations.391

Unfair and Deceptive Acts and Practices: 7.4.14.1 General

There has been an explosive growth of “buy-here, pay-here” (BHPH) dealerships. These used car dealers concentrate on those who perceive themselves as high credit risks who would have difficulty finding automobile financing elsewhere. Targeted-advertising offers financing for all comers, which is not difficult for the dealer because the price of the vehicle may be fantastically overpriced, and the dealer may demand a large down payment that exceeds the vehicle’s value.

Unfair and Deceptive Acts and Practices: 7.5.2 Pricing Misrepresentations

State UDAP statutes prohibit assorted deceptive pricing representations concerning discount and special bargains,410 bait and switch, and the advertising of unavailable cars.411 Price representations must clearly disclose what the purchase price includes and other additional costs must be disclosed.412 An advertisement offering $99 a month, no money down is deceptive when the dealer only is offering the car at $99 a month or no money down, but not

Unfair and Deceptive Acts and Practices: 7.5.10.1 Obligation to Disclose Known Defects

Safety and other material defects in a car must be disclosed before purchase.489 Failure to disclose defects known at the time of sale is a UDAP violation despite the dealer’s later compliance with federal automobile recall notice regulations.490 A manufacturer and dealer engage in a deceptive practice when they conceal knowledge concerning a car’s defects and misrepresent to a consumer the cause of a car’s problems.491 Similarly, it is deceptive n

Unfair and Deceptive Acts and Practices: 7.6.3 Early Termination and Default

A major area of consumer concern involves penalties that consumers are charged when they default or terminate an automobile lease early. The UDAP issues are three-fold: misrepresentations and failures to disclose the true nature of early termination liability; lessor misapplication of its own early termination formula; and formulas that produce excessive charges and unreasonable results.

UDAP statutes should be able to challenge the following lessor practices:

Unfair and Deceptive Acts and Practices: 7.6.4 UDAP Violations at Scheduled Termination, Including Charges for Excess Mileage and Wear

Virtually all consumer automobile leases today are closed-end, meaning that the consumer at lease termination has no liability for the fact that the vehicle has depreciated more than originally anticipated. It is thus a UDAP violation to misrepresent that the consumer would owe a large penalty at scheduled termination (to encourage the consumer to “flip-over” the lease to a purchase).536

Unfair and Deceptive Acts and Practices: 11.2.2.1 Discovery Rule

Once the applicable statute of limitations has been identified, the next step is to determine when the time period starts to run. The general rule is that the limitations period begins from the time a reasonable person would be put on notice concerning the facts constituting unfairness or deception.42 In some states, this discovery rule is explicit in the statute.

Unfair and Deceptive Acts and Practices: 11.2.5 UDAP Recoupment Claims After the Limitations Period Expires

The most common situation where the limitations period has run involves a UDAP counterclaim to a collection action, since the collection action may be brought several years after the underlying sales transaction took place. But even where the UDAP limitations period has expired, the consumer may still be able to use the UDAP claim by way of recoupment against the seller’s or assignee’s recovery on the debt.