Car buyers should know their rights when getting financing through an auto dealer

Imagine showing off your new car to friends and family only to get a call from the dealer — sometimes weeks later — saying your financing has fallen through.

You're given the option of returning the car or signing a new sales agreement with terms that are likely less favorable. If you're like many buyers, consumer lawyers say, you will be too embarrassed to send the car back and opt to pay more instead.


Consumer lawyers call this yo-yo financing, when dealers let buyers leave with a car and then reel them in again to say the agreement has changed. And Maryland regulators say it's just wrong.

"It's a major problem in our state and other states," says Karen Straughn, an assistant attorney general in Maryland.


Yo-yo financing is one of the issues being looked at by the Federal Trade Commission, which is holding meetings on auto financing with industry players and consumer advocates.

Auto dealers lobbied successfully last year not to come under the oversight of the new Consumer Financial Protection Bureau. They remain under the authority of the FTC, but Congress gave that agency the ability to write regulations for auto dealers much faster than before. The FTC says it is now gathering information to see if existing consumer protections are sufficient or if more needs to be done.

More is needed. Maryland, for example, protects car buyers against having a signed contract changed on them. But consumers are often unaware of these protections, regulators say, and dealers often don't follow them.

Industry representatives, though, say yo-yo financing isn't a problem in Maryland these days.

"It was an issue. That was a number of years ago," says Peter Kitzmiller, president of the Maryland Automobile Dealers Association.

But these practices largely have disappeared because consumers can shop on the Internet for financing and have a good idea of the loan terms they qualify for before they arrive at the dealership, Kitzmiller says. Also technology today lets dealers know quickly whether a customer will be approved for a loan so there aren't ugly surprises later.

When financing does fall through, Kitzmiller says, it's often because customers provided inaccurate information about their income or employment.

But Maryland consumer lawyers say they frequently hear from car buyers burned by yo-yo financing.

Ozell Carter of Temple Hills says he's one of them. He lost his car after two months because the dealer said the financing fell through. Carter is now suing.

In his lawsuit filed in April, Carter says he was offered a deal to buy a 2004 Mercury Sable for $10,175 in late October from Car Center in Waldorf. Carter signed a contract to pay $278 a month over 54 months. And a few days later got insurance and temporary tags for the car and drove off.

About a week later, according to the suit, a Car Center agent called Carter to tell him of a better deal at $235 a month over 5 years. Carter signed a new contract. Believing the car was his, he says, he sold his old auto.

But more than a month went by, and Carter hadn't received his payment book. He says the agent told him not to worry. On Dec. 23 with still no payment book, Carter went into the dealership to pay in person. That's when he was told that he didn't get financing.


Carter says he was told that to keep the car, he would now need a co-signer and his monthly payment would jump to $375 over three years. He couldn't find a co-signer and couldn't afford the higher payment. He returned the Mercury Sable on Christmas Day.

"It was devastating," says the 53-year-old. "I cried. I cried because it was a major setback."

Carter says without a car he missed work at his part-time job, and ended up renting a vehicle for a month.

Dan Moltz, general manager at Car Center, says he's unfamiliar with the details of Carter's case.

"We work hard to try to find loans for these folks," Moltz says. "We don't win in a situation like this. He doesn't get a car and we don't get a car sold."

Car Center says in court documents that the dispute should be handled through binding arbitration.

Maryland's attorney general has received 12 complaints so far this year about yo-yo financing, compared with 20 for all of last year.

That's not a huge number, but consumer advocates say customers often don't know their rights — or where to complain.

Auto financing differs from state to state. In Maryland, dealers aren't supposed to put temporary tags on a car and let a customer drive off the lot unless the sale is final.

"All the financing is supposed to be in place," says Sherman Swartz, a section manager for the investigation division of the Maryland Motor Vehicle Administration, which handles these cases.

And dealers also aren't supposed to use supplemental contracts that say the customer "shall return" the car if the financing isn't approved. These are sometimes called MacArthur agreements, referring to Gen. Douglas MacArthur who vowed "I shall return" when ordered to evacuate the Philippines in World War II.

Customers, however, must give back the car if a loan has been denied because they provided wrong information on their application.

The MVA has spelled out the rules in periodic bulletins to dealers over decades, but Swartz acknowledges the dealers often don't follow them. He says his office doesn't get lots of complaints on yo-yo financing. It tends to hear about the most egregious cases, he says, and not about all the times that a dealer and customer worked out a compromise.

Peter Holland, a lawyer who runs the consumer protection clinic at the University of Maryland, says the rules are clear: "If you have a contract signed saying you own it, then you own it."

It's not unlike buying a house. "If you were buying a house, they would never give you the keys and say, 'We will find out if we can get you a mortgage,'" Holland says.

Car buyers can avoid these problems, lawyers say, by getting their financing elsewhere.

"Try to get financing before you enter the dealership," says Jane Santoni, a Towson lawyer representing Carter. "The credit union is the best place."

If you do get a loan through a dealer, don't sign a supplemental contract indicating the financing isn't secured, Santoni says. Instead, she says, demand that the dealer put in writing that the financing has gone through.

"Don't let yourself be rushed through this," Santoni says. Many consumers get into trouble signing documents they don't understand, she says. "Be strong, take these home and take a really good look."

Jack Fitzgerald, an auto dealer with stores in Maryland and other states, says consumers should never leave the dealership until they're sure the contract is completed.

"It's unfair to let customers leave thinking they bought a car, if you don't think they bought a car," the dealer says. "It's a two-way street. If the customer is bound (by the contract), you're bound."

If you encounter problems, contact the MVA at 410-768-7541 or the state's consumer protection division at 410-528-8662.


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