Consumer Protection

The FTC’s Proposed Auto Dealer Rule (Part 1): Yo-Yo Financing

By: Christine Hines (NACA) and Erin Witte (Consumer Federation of America)

For the first time in over a decade, the Federal Trade Commission (FTC) has proposed a rule directly addressing unfair and deceptive financing practices by auto dealers. The proposal contains a host of prohibited misrepresentations, required disclosures, and specific requirements pertaining to the sale of add-on products. The FTC explains at length the problems that consumers face when purchasing a vehicle and how, despite its history of enforcement action against car dealers, consumer problems persist. There are numerous facets to the rule, and advocates are encouraged to see the FTC taking a broad approach. This blog series is intended to highlight and explain certain components of the rule and the practices by dealers that it attempts to address.

Spot Deliveries and Yo-Yo Sales

The proposed rule includes consumer protections, but also should create stronger safeguards. One such safeguard would be to require specific actions during a transaction to ensure that consumers know when a car deal is final. This would help avoid abusive yo-yo financing practices. In its proposed rule, the FTC describes the common dealer practice of yo-yo financing:

“[Y]o-yo financing… occurs when a dealer obtains a consumer’s agreement to a deal that has not been finalized, allows the consumer to drive the vehicle off the lot, and then directs the consumer to return and engages in unlawful tactics, such as failing to give back a consumer’s trade-in vehicle, while refusing to honor the deal or pressuring the consumer into entering a new deal.” (Part IV(C), Section-by-Section Analysis, Section 463.3)

The FTC’s Proposed Approach to Yo-Yo Sales

The FTC attempts to address this problem by providing that certain conduct pertaining to yo-yo financing would be an unfair and deceptive practice, including:

  • “Making any misrepresentation, expressly or by implication, regarding… when the transaction for the sale of the car is final or binding on all parties” (§ 463.3(h)); and
  • “Making any misrepresentation, expressly or by implication, regarding… [k]eeping cash down payments or trade-in vehicles, charging fees, or regarding initiating legal process or any action if a transaction is not finalized or if the consumer does not wish to engage in a transaction” (§ 463.3(i)).

 Rather than explicitly prohibiting spot deliveries or yo-yo sales, the proposed rule provides that dealers cannot make misrepresentations to consumers about the finality of a deal or the consequences of a sale that is ultimately not financed. There are several reasons why this approach should be stronger.

  1. It opens the door to the use of “spot delivery agreements,” which facilitate yo-yo- financing abuses.

Dealers add “spot delivery agreements,” or similar documents to the paperwork in a car transaction, which contain language that allows dealers to hold the door open for themselves to change the terms of the deal with the car buyer. Dealers will (and frequently already do) use this language to make the signed credit contract conditional on their ability to sell the contract to a third party. After a car buyer has signed a contract and leaves the dealership believing they have finalized a deal to buy the car, a dealer can then summon the buyer back to the dealership multiple times to alter the original deal, making it a yo-yo sale. Car buyers often find themselves under pressure to agree to less favorable terms to keep the car. FTC research has found that car buyers typically do not realize that a dealer is not treating a transaction as final.

  1. Car buyers suffer significant harm from yo-yo sales.

In a recent case in Oregon, a car buyer was forced to miss work after a dealer refused to refund his down payment. According to the consumer, he and the dealer signed a credit contract and he drove home that day with the car, believing that he had purchased it. Two weeks later, the dealer called him back claiming the loan had not been approved, and they signed a new contract. Nearly a month later, the dealer informed him that financing had fallen through and he would need to return the car. However, the dealer allegedly refused to return the consumer’s down payment leaving him with no funds to buy another car. As a result, the consumer had no way to get to work and lost wages due to the dealer’s actions. The consumer eventually brought claims against the dealer alleging violations of Oregon’s unlawful trade practices act.

This story is unfortunately not unique, and consumers have described experiences such as returning to the dealership numerous times over several months only to have the deal fall through, being threatened with repossession, losing thousands of dollars on down payments, being accused of committing a crime by refusing to return the vehicle they purchased, and many other nightmare scenarios.

  1. Yo-yo sales undermine federal consumer protection laws.

Spot delivery frustrates the purposes of the Truth in Lending Act. TILA was intended to assure consumers of the accuracy of the terms presented in credit contracts so consumers could compare credit terms and make informed decisions. But if an auto dealer can treat their credit contracts as non-binding, then the terms contained in those contracts cannot serve as accurate disclosures to consumers.

 Yo-yo sales also often violate the federal Odometer Act. Under the Odometer Act, any time a car transfers ownership, its mileage must be disclosed on its title documents to preserve accurate mileage records and prevent odometer tampering. When a yo-yo sale occurs, dealers typically do not provide title documents to the consumer at the time of the purchase. Therefore, the dealer leads the buyer to believe the sale is final, but the dealer is not treating the transaction as final. As a result, the required odometer disclosure is not made at that time. If the deal is later finalized, dealers will often employ various unlawful tactics to make it appear as if the disclosure was made properly.

  1. State laws regulating spot deliveries do not sufficiently protect consumers.

Several states including Oklahoma, Oregon, and Nevada have laws intended to target consequences of yo-yo financing. For example, Oregon bans dealers from selling a trade-in vehicle before it finalizes the sale. Additionally, in Oregon and other states, buyers have the right to unwind the deal if the dealer cannot assign the credit contract to a third party within a certain amount of days. However, these and other state protections are ineffective at preventing yo-yo abuses. Despite state attempts to limit some consequences of yo-yo financing, dealers are still able to sign contracts they do not intend to be bound by and continue to pressure consumers into less favorable terms.

 What should the FTC do to address yo-yo sales?

 The FTC welcomes alternative approaches in the proposed rule. In fact, Question 16 of FTC’s proposed rule directly asks whether the Commission should consider alternative approaches to address misrepresentations in the finality of a car deal. The answer to this question is YES.

The best way for the FTC to address this problem is to ensure that a deal is final when the credit contract is signed.

 A bright line FTC rule, as proposed in a petition filed by consumer advocates, would benefit all market participants. The FTC should require language in every credit contract explaining the plain legal consequences of a signed contract, specifically that the credit terms of the signed contract are final when presented to the car buyer to sign, and that the credit terms cannot be changed whether or not the contract is or will be assigned to a third party.

Suggested language for a rule: 

“A. Every consumer credit contract for the sale of a vehicle by a dealer shall include the following paragraph:

“BY PRESENTING THIS CONSUMER CREDIT CONTRACT TO A CONSUMER FOR SIGNATURE, THE DEALER AS CREDITOR AFFIRMS THAT THE CONSUMER HAS BEEN FULLY APPROVED FOR THE CREDIT THAT IS BEING EXTENDED. ANY TERMS THAT ASSERT THAT THIS CREDIT CONTRACT IS “CONDITIONAL” OR “NOT YET APPROVED” OR SIMILAR TO THAT EFFECT SHALL BE VOID AND UNENFORCEABLE. ONCE SIGNED BY THE CONSUMER, THIS CREDIT CONTRACT CANNOT BE WITHDRAWN BY THE DEALER WHETHER OR NOT THIS CREDIT CONTRACT IS ASSIGNED TO A THIRD PARTY.”

Requiring all credit contracts in car sales to be final at the time of signing will protect car buyers. The proposal in the petition is modeled after the FTC-enforced Holder in Due Course Rule which requires auto dealers to include certain disclosures within the credit contracts. The FTC has previously found that the Holder Rule worked to protect consumers while imposing no significant costs on businesses. A similar disclosure requirement about the finality of the deal would also carry minimal costs while assuring consumers about the integrity of the transaction.

 The proposal in the petition would promote clarity by simplifying auto transactions. Even many dealers are unable to answer the question of who owns a car when a consumer drives it off the lot. This can create confusion when it comes to dealers’ and consumers’ obligations regarding odometer disclosures, insurance coverage, warranties, and other legally significant issues that hinge on who owned the car at a point in time. The proposed rule would greatly simplify the flow of information throughout a car sale making it easier to enforce legal requirements.

The rule would enhance competition in the auto market. Currently, any dealers that do not use yo-yo practices are at a competitive disadvantage. If all dealers are held to the same standard, consumers can make more informed buying decisions. Additionally, the market would reward efficient deal-making between dealers and third-party financing companies.

Comments on the FTC’s proposed rule are due September 12.