Deal or no deal? FTC challenges yo-yo financing tactics

Not many kids play with yo-yos these days, but an FTC complaint against nine related Los Angeles-area car dealers charges that the companies engaged in (among other things) illegal yo-yo financing practices – and for affected consumers, it was no game. Even if you don’t have clients in the auto industry, this case merits your attention. Additional allegations regarding phony online reviews, misleading add-ons, and deceptive advertising illustrate key consumer protection principles applicable to all marketers.

First, a bit about auto financing. Many dealers regularly offer financing as part of the transaction, particularly to consumers who may not have the cash or a pre-arranged loan to pay for the car. Although the dealer may be the creditor, it doesn’t usually service the financing contract and instead looks to assign it to a bank, credit union, or finance company. Sometimes the consumer drives the car off the lot before that assignment happens, and the dealer reserves the right to cancel the deal within a few days in case it can’t assign the loan. If the dealer cancels and asks the consumer to return the car, it generally has to give the consumer back his or her down payment, trade-in, and any other consideration.

So what is yo-yo financing? It’s a practice that often targets people struggling to make ends meet. Suppose the third-party financing falls through. Rather than handling the financing themselves or returning the consumer’s down payment and trade-in, some unscrupulous dealers use deceptive or unfair tactics to pressure consumers into a different deal so the dealer doesn’t lose the sale.

According to the FTC complaint against Sage Auto Group and affiliates, that’s what happened to some people doing business with the defendants. The dealer would sign a contract with a consumer that included financing terms and then let the person drive off the lot. But if the dealer couldn’t (or didn’t) assign the financing contract, in some instances it wouldn’t just cancel the transaction. Instead, according to the complaint, the dealer would call the consumer back to say that financing fell through and then falsely claim that the consumer must sign a new financing contract, often with less advantageous terms. The FTC alleges that in some cases, the defendants falsely told buyers that if they refused to agree to the new terms, they would lose their down payment or trade-in. In other instances, the defendants didn’t even cancel the transaction and when consumers resisted demands to sign a different deal, the company allegedly said it would report the car as stolen or repossessed – and even threatened to have their own customers arrested and prosecuted. 

You’ll want to read the complaint for the details of the defendants’ alleged yo-yo financing practices and why the FTC is challenging them as deceptive and unfair.

The complaint also charges that without consumers’ consent, the defendants packed some people’s financing with pricey add-ons like extended warranties, Guaranteed Auto Protection (GAP), auto maintenance, and VIN etching. The FTC says dealers falsely told some consumers that the add-ons were required or would improve their chances of getting financing.

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Additional counts challenge “what the headline giveth, the footnote taketh away” tactics the FTC has alleged as deceptive in numerous other cases. For example, in English and Spanish ads, the defendants prominently touted a Nissan Versa for “$38 a month” and “$38 down.” Buried in the fine print was the statement “$2695 Due at signing.” What’s more, that “$38 a month” payment applied only for the first six months. After that, consumers had to fork over $179 per month for the remaining years. And only in the fine print did the ad disclose that the deal was for a lease, not a purchase.

What about that 2014 Nissan Altima one of the defendants advertised in Spanish for “$99 al mes” ($99 per month)? Only in the fine print did the company disclose that the deal came with major strings attached – for example, a 740 credit score, a five-year credit history, and qualifying for a college graduate discount. To top it off, the Spanish-language ad included those tiny “disclaimers” in English.

Not surprisingly, consumers took to social media to complain about the defendants’ sales practices. According to the FTC, the defendants responded by having their employees or others deceptively pose as satisfied customers to post positive reviews.

For example, according to the complaint, following a number of negative Yelp reviews, one dealership’s internet manager pretended to be a consumer, posted a five-star review, and commented that “a salesman told me when customers don’t get there price one way they want to get revenge is to put a bad review to taint the reputation of the place.” The lawsuit alleges that the internet manager’s wife got into the act, too. Without disclosing her connection to the company, she posted a five-star review and added, “auto dealers have a bad rep and most dealers have bad yelp reviews, I will not let it bother, go inn and ask for Internet department and they will take good car[e] of you.”

The FTC says the defendants also included bogus reviews on their own websites. As one purported “customer” claimed, “I would like to update my review to state that this dealership is truly exceptional and I really appreciate the way they treat their clients.” Would it be material to consumers to know that the glowing accolade came from an employee? We think so, which is why the complaint challenges the independence of the reviews.

In addition to charging that the companies’ practices violated the FTC Act, the lawsuit alleges violations of the Truth in Lending Act, the Consumer Leasing Act, Reg M, and Reg Z. Filed in federal court in California, the complaint names Universal City Nissan, Kia of Downtown Los Angeles, Glendale Nissan/Infiniti, Mercedes-Benz of Valencia, West Covina Toyota/Scion, West Covina Nissan, Sage Covina Chevrolet, Sage Pre-Owned, and Sage Hyundai. The complaint also named brothers Joseph, Leonard, and Michael Schrage (also known as Sage), Sage Holding Company Inc., and Sage Management Company.