What is a “Yo-Yo” Sale?
Believe it or not, it’s quite common for California car dealerships to sell or lease a vehicle to a consumer who the dealership believes will not be approved for financing. In these cases, car dealers usually assure their customers that approval is “guaranteed” or has already occurred, even though they know otherwise. Dishonest car salesmen who engage in this practice do it because there is a clause in virtually every California auto purchase or lease contract which states that the dealership has up to ten days to cancel and rescind the deal if it is unable to find financing. This type of devious sales practice is referred to in the automobile industry as a “yo-yo” sale.
The purpose of a yo-yo sale is to convince a customer to buy or lease a vehicle even though they can’t afford the credit terms. The way it works is that the dealership tells the customer that the financing has been “approved,” the customer signs the contract, and then takes the vehicle home and shows it to his or her family and friends. Dealers know from experience that people quickly become attached to new cars, and that when the dealer calls in ten days to cancel the transaction the consumer is more likely to want to come in and sign a new second contract – which will be on more expensive credit terms – than to want to return the vehicle and then explain to his or her family and friends that the car had to be returned because of the consumer’s poor credit. Yo-Yo car sales raise (at least) six potential legal issues.
Backdating Vehicle Purchase or Lease Contracts
Dealers will sometimes illegally backdate the second purchase contract to the date the first contract was signed. This is illegal under both state and federal law, and results in the consumer paying interest on the transaction that he has no legal obligation to pay. Federal and state financial disclosure laws treat this as a serious legal violation. Backdating a vehicle purchase or lease contract is usually a sufficient basis, by itself, for permitting the consumer to later cancel the deal, return the vehicle, and get their money back.
Consumers should bear in mind that applicable laws may in some instances require that the consumer act promptly to rescind the transaction if backdating is the basis for the deal’s cancelation. So if you discover that your motor vehicle purchase or lease contract has been backdated, you should contact an attorney to discuss your legal rights at your first reasonable opportunity.
Attempting to Rescind a Deal AFTER the Ten Day Deadline Has Expired
Sometimes car dealers who engage in this practice make a mistake, and fail to cancel the deal prior to the ten-day deadline. After ten days, the transaction can no longer be canceled by the dealer, unless the consumer also agrees to cancel the deal. In these situations, it is not uncommon for dealers to falsely threaten customers. Some threaten repossession, some threaten to “call the cops,” and some threaten to ruin the customer’s credit rating. All of these threats are baseless. The dealer can do none of these. The contract was signed, the period for canceling it expired, so, as car dealers are fond of saying “a deal is a deal.”
One extremely important fact of which consumers should be aware is that in these situations car dealers frequently send a letter to the consumer that is dated on the tenth day after the transaction (i.e., within the cancelation deadline) but which is actually mailed later, after the deadline has expired. IF YOU RECEIVE A LETTER LIKE THIS, IT IS CRITICALLY IMPORTANT THAT YOU KEEP THE ENVELOPE IN WHICH THE LETTER WAS SENT. The post-mark on the envelope can prove that the dealer falsified the date on the letter.
Finally, because consumers (with the assistance of California lemon law attorneys, like the author of this Web site) started noticing the post-marks and keeping the envelopes in which these letters were sent, many dealerships have started using their own postage meters to backdate the post mark by a few days in order to claim that the dealer complied with the deadline. These situations present significantly greater problems in proving that the dealer missed the deadline, but it is not necessarily impossible to do so. Contact an experienced California lemon law attorney immediately if you receive a backdated cancelation letter to discuss your legal rights.
3. Threatening Customers Who Want to Return the Vehicle Instead of Signing a Second Contract
Some car dealers outright lie to their customers and tell them that they HAVE TO come back and sign a second contract, rather than returning the vehicle if the customer chooses. Our law firm has heard reports of car salesman threatening everything from “not following through on the deal will ruin your credit” to “since you took the vehicle without paying for it we will call the cops and have you arrested.” Of course, neither is even close to true. If the dealership cancels a transaction, then you have done nothing wrong, and always have the option of returning the vehicle and canceling the deal.
4. Refusing to Refund the Entire Down Payment
Another type of illegal conduct occurs when the dealer tells the customer that he or she is not entitled to a full refund of their down payment. Some dealers claim that there is a “re-stocking fee” or that they cannot refund the sales tax or the price of optional equipment purchased with the vehicle. Again, none of these are true. California law clearly states that if a car dealer rescinds a vehicle transaction because of an inability to obtain financing, then the dealer must repay ALL amounts that the consumer paid, including sales tax and any optional items that were included in the purchase contract. The dealer is not even allowed to impose any charge for the mileage that the customer put on the vehicle – no matter how many miles were driven.
5. Not Returning & Refusing to Pay Required Compensation for the Trade-In Vehicle
Sometimes car dealerships cancel a deal after they have already sold the customers trade-in vehicle to someone else. Unfortunately, California’s Automobile Sales Finance Act (California Civil Code Section 2981 et seq.) currently allows them to do this. However, if a dealer cancels a deal after disposing of the customer’s trade-in vehicle, then the Automobile Sales Finance Act also specifies that the dealership must compensate the customer for the trade-in vehicle by paying the GREATER of the trade-in vehicle’s fair market value or the trade-in vehicle’s value as stated on the purchase contract.
This can be important because in some cases (in an attempt to get the deal financed) dealer’s structure transactions by either over-valuing or under-valuing the trade-in vehicle. So, if they over-valued the trade-in on the purchase contract the customer should not accept less. Similarly, if the trade-in vehicle was under-valued on the purchase contract the customer should not accept less than the vehicle’s fair market value. Consumers should refer to vehicle valuation services like Kelley Blue Book to determine the market value of their vehicle prior to accepting any payment from the dealer.
6. Dealer Knew Customer Had No Real Chance of Getting Financed
In some instances, a “yo-yo” sale itself may be illegal under California consumer protections statutes such as the Consumers Legal Remedies Act (California Civil Code Section 1750 et seq.) and the Unfair Competition Law (California Business & Professions Code Section 17200 et seq.). In order to make it worthwhile for a consumer to proceed with this type of claim, a consumer would essentially need to be able to prove that: (i) the “yo-yo” sale caused monetary damage to the customer in some manner; and (ii) that the dealer had a specific reason to know that financing would be denied (e.g., poor credit score, insufficient income, etc.).
In any event, if you been the victim of a yo-yo transaction, and it resulted in monetary damage, then you should contact an experience California lemon law attorney for advice.