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"Yo-Yo" Deals In Finance: I Don't Think So

If you listen to the true believers at the National Consumer Law Center (NCLC),the legal support for consumer advocates and plaintiffs’ lawyers around the country, they will tell you that dealers regularly write retail installment contracts with customers knowing that they will be unable to sell the contracts to financing sources. According to NCLC, dealers do this with the intent of calling the consumers back to the dealership to write deals that require more downpayment, higher APRs or that otherwise disadvantage the customer. NCLC calls these “yo-yo” deals.

I don’t believe that such practices are as common as the NCLC would have you think. Actually, until recently, we had not encountered such practices in any of our dealer audits. Last summer, for the first time, we found a dealer who cheerfully reported that he contracted with everyone that he could talk into signing a retail installment sales contract. He said that he did it in order to “take the customer out of the market.” He stopped the practice when we told him that at the very least, it probably constituted an unfair and deceptive trade practice under state and federal law.

Although some states prohibit or limit the practice, many do not, and conditional deliveries, or spot deliveries, as they are sometimes called, are commonplace in most states. Let me stop for a minute and define these terms.

A conditional delivery, or spot delivery, occurs when a dealer takes a credit application and determines, from the information provided by the buyer and from a credit bureau report, that he can sell the customer’s retail installment contract to one of his regular financing sources. The dealer then has the customer sign the deal documents and take the car home. The vast majority of spot deliveries go off without a hitch. The buyer has provided complete and accurate credit data, and the finance source buys the contract. These are not “yo-yo” deals.

Sometimes, though, the train comes off the track. The buyer forgets about the fact that, say, she just lost her job, or she misstates her income, or forgets how long she has lived at her current address. The buyer now no longer falls within the credit criteria of any source the dealer uses. Now, assuming that the dealer has had the foresight to have the buyer sign an “unwind agreement” of some sort, it’s time to drag the buyer back to the dealership to see if the deal can be salvaged. Sometimes it can, sometimes it can’t. These also are not “yo-yo” deals.

Then there are those, in our experience, rare cases of actual misconduct or fraud by the dealer. Either the dealer thinks like the one we encountered, and wants to “take everyone out of the market,” or the dealer has a crooked F&I operation that provides false credit information on behalf of the buyer in an effort to sneak a deal past the financing source. These are “yo-yo” deals. In our experience, very few dealers actually engage in such transactions.

The relative rarity of these transactions doesn’t faze the NCLC, or, for that matter, the press. They know a good, catchy (and loaded) headline phrase when they hear one. So, they call every conditional delivery transaction a “yo-yo” deal. And judges sometimes even erroneously adopt the incorrect terminology.

Conditional deliveries have been under attack by plaintiffs’ lawyers for some time. They claim federal Truth in Lending violations, unfair and deceptive trade practices, fraud, violations of state titling and registration laws, regulations and other causes of action. How can you shield your dealership from these claims?

Have your lawyer review your conditional delivery procedures to determine, first, whether the laws in your state permit the practice, and, if so, whether the practice is regulated.

If state law permits you to engage in conditional deliveries, have your conditional delivery agreement reviewed by your lawyer, as well. Make sure your lawyer knows what your dealership’s actual conditional delivery procedures are so that the agreement matches those procedures. 

Institute practices that are fair to the buyer—don’t for example, sell the buyer’s trade-in vehicle while you are trying to assign her contract.

Don’t make the conditional delivery process a profit center by attempting to charge a daily or mileage charge for the use of the vehicle if the deal has to be unwound. Make sure you can recover for actual damages, but absorb the other charges as the occasional cost of doing these sorts of deals.

Check your state’s titling and registration rules to make sure that your conditional delivery process complies with such requirements.

Check your arbitration agreement to make sure that it applies to a conditional delivery and that it survives a terminated deal.

Go over your conditional delivery process with your insurance company—you don’t want to wait until your buyer has plowed into a school bus with a car you have out on conditional delivery to determine what your potential liability might be.

When you have all your ducks lined up, you can do conditional deliveries with a minimum of risk. And you can also correct all those media types when they ask you if you do “yo-yo” deals by saying, “No, we do conditional deliveries.”

Vol 4, Issue 6

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