Submission Number: 00055
Received: 12/28/2011 5:03:03 PM
Commenter: Thomas Domonoske
Organization: Legal Aid Justice Centyer
Agency: Federal Trade Commission
Initiative: Public Roundtables: Protecting Consumers in the Sale and Leasing of Motor Vehicles; Project No. P104811
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The Yo-Yo Sale
Many of the panels at the various roundtables discussed the acknowledged practice of giving a consumer a credit contract before the dealer has determined whether the dealer wants to be bound by that contract. The roundtables revealed that two types of dealers exist—those who will wait to give a consumer a credit contract to sign until the dealer has determined it will follow those credit terms, and those who will give a credit contract to a consumer to sign before the dealer has determined that it will be bound by the contract. The FTC should require all dealers to give unconditional approval to the transaction before the dealer gives a consumer a credit contract to sign.
For the car credit market, 85 to 90% of the loans are negotiated with the dealer. In many cases, the dealer sells the credit contract to a third-party finance company. As Andrew Koblenz explained in San Antonio, the dealer can buy down the interest rate to make the sale of the credit contract more attractive to finance companies. This was done by the dealer in Madrigal v. Kline Oldsmobile, Inc., 423 F.3d 819, 821 (8th Cir. 2005). Mr. Koblenz also stated that at least six different compensation schemes can be in play between the dealer and the finance company when the dealer is negotiating to sell a credit contract. For examples of the detail exchanged between finance companies and dealers see the file labeled credit acceptance sheets.pdf and gateway financial sheets.pdf.
The important aspect is that the dealer chooses who to try to sell a credit contract to and how much the dealer will accept in exchange for the credit contract. When the dealer is not happy with the terms the finance industry will provide for a credit contract, it can choose not to sell that credit contract. The distinction between the dealers in paragraph 1 is a function of three events: first, a dealer getting a consumer to sign a credit contract that it intends to sell before an unconditional offer from an assignee is received and is acceptable to the dealer; second, an assignee never providing an unconditional offer that is acceptable to the dealer; third, the dealer choosing not to follow the credit terms. Some dealers never allow step one to happen and other dealers will simply accept the stream of payments on credit contracts when the dealer is not happy with the terms that can be obtained by selling the credit contracts; in this latter situation the dealers are simply following the law as applied Walker v. Walker Mobile Homes, 965 S.W.2d 271 (Mo. App. 1998). For these dealers, because their consumers are given credit or lease contracts to sign that reflect the terms the consumer will necessarily receive by signing the credit or lease contract, these consumers are able to make a knowledgeable car purchase decision because the information they were given is necessarily true.
Unlike the dealers who give credit contracts that will necessarily be followed, many dealers try to claim the right to cancel credit contracts in the future if the dealer is not happy with the terms under which the dealer can sell the credit contract. A variety of documents are sometimes included in the many documents given to the consumer to sign that attempt to set forth such a condition. See the file Spot Agreements.pdf for some examples. The legal problems with such documents are numerous and start with the contradiction between the credit contract and these separate agreements. See Patton v. Jeff Wyler Eastgate, 608 F.Supp.2d 907 (S.D. Ohio 2007). Putting aside that contradiction, the documents do not assert a proper condition because the dealer can always buy down the rate to sell the contract. Thus the illusory condition of whether the contract is sold or not is actually in the dealer's control and depends whether it will drop the price sufficiently that the contract will sell. Finally, the transactions are not properly either condition subsequent or precedent deals.