The Investigators: "yo-yo" auto financing - Action News 5 - Memphis, Tennessee

The Investigators: "yo-yo" auto financing

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MEMPHIS, TN -

(WMC-TV) - They drive them off the lot, only to have the dealer yank them right back.

The auto sales industry calls it "conditional financing" or "spot deliveries." Consumer advocates call it "yo-yo financing," a sales scheme targeting consumers who either can't pay cash for a used car or can't secure their own third-party financing.

A buyer puts cash down on a used car and drives it off the lot -- only to be 'yo-yo'd' right back when the financing fails. The dealer then keeps the buyer's down payment as a 'mileage reimbursement.'

It's all perfectly legal.

"It is legal, and it is a major, major problem," said Kevin Snider, a Germantown, TN, attorney and certified fraud examiner who has litigated nearly 30 yo-yo financing cases in the last 17 years. 

Snider said Tennessee law allows conditional financing in order to give auto dealers time to locate a reliable third-party for financing. When they can't, the law allows dealers to repossess the vehicles and recoup any expenses incurred -- mileage, damage, etc. -- while in the custody of the customers.

The problem, Snider said, is some used car dealers are dragging it out.

"It shouldn't take more than 48 hours to determine if someone qualifies for financing," he said. "I've seen up to 8, 9, 10, 12 weeks for the dealer to determine hey, we can't get financing and therefore, since you've used our car for the past month or two, we keep your entire deposit to cover the mileage that you put on this vehicle. 

"Basically, the dealership is making money on essentially 'renting' the car for three, four, five weeks."

When we asked Snider if this is by design, he answered, "I think it is."

Patricia Walton of North Memphis and Melissa Webb of Bartlett each put $500 down on a used car deal at the same Memphis auto dealership. The dealer allowed them to take possession of the vehicles.

Three to four weeks later, the dealer ordered Walton to return her vehicle and repossessed Webb's vehicle. In both cases, the dealer cashed and kept the women's down payment checks.

"In fact, the day they came to pick it up is when they cashed the down payment check," said Webb.

"And he says, "You're not getting your money back,'" said Walton. "I ain't ever experienced that before."

The Center for Responsible Lending released a report in 2012 about yo-yo financing. Its researchers conducted a survey of five professional organizations which advocate for consumers seeking auto financing.

The survey narrowed those consumers to 2,100 clients who attempted to finance a used car during the survey's 12-month period. Of the 2,100 consumers, 590 were victims of yo-yo financing. The survey found:

* Most of those victims had poor or no credit standing.

* Half of the 590 yo-yo financing victims had difficulty getting their down payments or trade-in vehicles back.

* Most of the victims ended up signing a second financing contract at a higher interest rate for the same vehicle.

The Action News 5 Investigators reviewed Tennessee's law on conditional financing. Like Snider confirmed, it does allow dealers to repossess vehicles and recoup expenses with little in the way of oversight.

But the law also says the state "...may revoke or suspend the license of...any motor vehicle dealer who...fails to allow the consumer to void the motor vehicle transaction if any of the terms of the transaction change..." (italics added)

Tennessee Attorney General Robert E. Cooper, Jr., took it a step further, saying, "There should be no charge to the buyer if financing fails, and the dealer should refund all deposits."

"That's the only right thing to do," said Webb. "You should get your money back."

Not so fast.

The Action News 5 Investigators learned from the dealer that both women submitted inaccurate information about either their income or their living arrangements on their financing applications.

Under the law, when that happens, all bets are off. The dealer may yank back the vehicles, cash the down payments -- and Action News 5 can't ethically name the dealer in this story.

A 'yo-yo' really does go both ways.

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