Car Buyers Get Keys, But Deal Isn't Done
By Dina ElBoghdady
After Maggie Young drove off a Damascus auto dealer's lot with a Chevrolet Silverado in July 2003, she learned that her
dealer-arranged financing fell through, presumably because of her less-than-perfect credit history.
The dealership, which had already sold her trade-in, demanded she return the 2000 Chevy or find financing
elsewhere. When she did neither, it repossessed the truck, towing it away in November 2003 from the parking lot
of the Mount Airy Safeway where Young is a cashier.
"They gave us the keys and let us drive away" with the car, said Young, who remains locked in a legal battle with the dealer. "They told us it was a
done deal."
For decades, dealer-arranged financing has helped fuel automobile ownership by making the car-buying process more convenient and by promoting sales with
low- and even no-interest loans.
But cases like Young's show the other side of the process and demonstrate what consumer advocates say is persistent confusion among consumers about
how auto financing works and when the transactions that put them in new cars are actually complete.
Though many customers assume the process is finished once they fill out the paperwork, sign a contract and accept on-the-spot delivery of the vehicle,
that is only an intermediate step. The dealer must still send the customer's financial information to a bank or lending
agency, and the transaction is not complete until the lender has approved it.
Though that can happen almost immediately in the cases of people with clean credit reports or with dealers wired directly into a lender's computer
system, some deals can take days or weeks to be completed.
Meanwhile, buyers who drive away in their dream cars can be subject to a rude surprise, particularly if their job status, income or credit record
falls short. They may fail to be a "qualified buyer" for purposes of the low
promotional rates that car companies advertise, and thus be confronted with higher interest charges, or they might be rejected outright and forced to
return the car.
Such cases have spurred dozens of lawsuits and regulations in recent years, including legislation before the Maryland Senate that would require dealers
to provide better disclosure about financing terms. Consumer advocates say tight competition in the auto industry may exacerbate the problem because
salespeople want to push through as many deals as possible.
"For the low-income person, the effects can be devastating" if transportation or a trade-in vehicle is lost or
repossession is added to a credit record, said James W. Speer, a staff attorney at the Virginia Poverty
Law Center. "They lose days at work, their already poor credit gets worse, and their finances unravel. . . . They're living on the edge, and it doesn't
take much to push them over."
Dealers say consumer advocates, and overzealous lawyers, are blowing the problem out of proportion.
Most loans get approved without a glitch at reputable dealerships, they say. And when they do not, it is usually because customers provide
inaccurate or incomplete information on their credit applications, said Carl Ragsdale, chief operating officer of dealer services at the National
Automobile Dealers Association.
Rather than cast blame, Ragsdale said, consumer advocates should appreciate the fact that dealers often help get loans approved for buyers
who might have trouble arranging credit on their own.
As for providing the car to buyers on the spot, that is a feature that consumers demand, he said.
"Do abuses happen? Yes, they happen," Ragsdale said. "But there are roughly 30 million automobile transactions in the course of a year in this country,
and the number of spot deliveries in which the terms or conditions are changed is infinitesimal."
The Maryland attorney general's office estimates that up to a third of the 1,130 complaints it received last year about car sales involved spot
deliveries.
Maryland law requires dealers to immediately return any deposit or trade-in to the buyer if financing falls through, according to a bulletin released by
the Maryland Department of Transportation in 1998.
"But those rules are not being enforced," said Maryland Sen. Alex X. Mooney (R-Frederick).
Mooney introduced legislation this year that he says would clear up confusion about the law and yield broader enforcement power to state
regulators. His bill bans dealers from selling a customer's trade-in until the sale is complete and requires buyers to sign paperwork stating they
understand they can go outside the dealership for financing.
Dealers testified against the legislation at a Senate hearing last week, arguing that they should not be burdened with more paperwork in a process
they think already explains things to consumers well enough.
In Virginia, the state's Motor Vehicle Dealer Board, which oversees dealership licensing, said it has contact with 300 consumers every month. It
could not determine how many of those interactions relate to spot deliveries. But those that do often come from buyers who have lost their
trade-ins and do not want to return their cars when a loan is denied, said Bruce Gould, the board's executive director.
"It sounds cold-hearted, but buyers have to read what they sign," Gould said. "And once they do, they can choose not to take the car until the deal
is finished."
Virginia law requires dealers to notify buyers "in bold type no less than 10-point" that the sale is final only when approved by a lender and that
buyers can back out if the original deal collapses. The notice also should inform buyers that they can get down payments or trade-ins back if they
return the cars in the same condition within 24 hours of learning about the credit denial. The District does not have any specific laws regulating spot
delivery. D.C. officials say they have received no complaints about the practice but noted that the District has few car dealers.
Consumers are sometimes their own worst enemy. Many of them unwittingly sign away the rights provided them by law at the tail end of the buying
process, as dealers rush them out the door, said Jesse Toprak, director of pricing at Edmunds.com Inc., which runs an automotive information site for
consumers.
"A customer spends hours negotiating the upfront price of the car, but very little time examining the details of the financing" or shopping around
for better terms, Toprak said.
Besides, dealers give customers the "impression of ownership" when they hand over the keys, said Jonathan Sheldon, a staff attorney with the
National Consumer Law Center.
"Their goal is to lock in the consumer and keep them from going to another dealership," Sheldon said. When the deal collapses, many consumers agree to
pay a higher interest rate because they get attached to the car, he said.
That higher rate sometimes means higher profit for dealers. It is standard practice to mark up the finance charge so that a buyer who qualifies for a
12 percent rate, for instance, is offered 15 percent and the dealer pockets the difference, according to consumer advocates, dealers and others in the
industry.
"When they call a deal off, what they're really saying is, 'We were not happy with the terms we could get when we tried to sell the credit
contract," said Thomas D. Domonoske, a Virginia attorney who said he been involved in about 60 botched spot-delivery cases in the past six years.
Several automakers with large financing arms have capped the markups in recent years, including General Motors Corp. and Ford Motor Co. Mooney's
bill would require dealers to tell buyers about the lowest rate they qualify for and about any interest that is added on, a provision adamantly opposed
by dealers. A Maryland House bill that would have limited any interest add-ons was rejected earlier this month by a House panel.
While legal and regulatory battles play out, Young is awaiting her day in court. She and her husband had to pay $6,000 in cash for a used vehicle to
replace the one that was repossessed. When her oldest daughter went to college last year, the couple could not co-sign the loan.
In court records, the dealer, Damascus Motor Co., denies any wrongdoing.
"It has been a very lean and stressful time," Young said.