Auto Fraud

"As is" isn't a license to rip you off on a used car

We get a lot of calls from people who have been fraudulently sold cars with serious defects. Generally, when a car is sold it comes with an "implied warranty" that the car will be fit to drive.

But when a consumer lets the dealer know that the car is no good and they want their money back, the dealer will often insist that the car was sold "as is," and so it's "not my problem." But the dealers don't understand the law--there are many reasons a buyer will have remedies even when the car is sold as is. I'll break down a few of them here.

  • The car was sold with a warranty or a service contract. Under federal law, a dealer can't disclaim "implied warranties" in a sale if it sold the car with a warranty or a service contract. So that means that if a car comes with any type of warranty, including Minnesota's legally-required warranty for used cars under 75,000 miles, implied warranties may apply.

  • The dealer acted in bad faith. Under Minnesota law, a dealer can't disclaim implied warranties if it acted in bad faith. This might apply if the dealer knew about the problem with the car and lied about it. Or it tried to cover up the problem, before or after the sale.

  • A dealer can't get off the hook for specific statements it made about the car. "Express warranties" can never be disclaimed. This means that if the dealer said "the car has never been in an accident," or "this car is in great condition," or "the check engine light is only on because the car needs a new oxygen sensor" when it actually needs a new engine, it can't squirm out of those untrue statements by hiding behind "as is."

Because the dealer says "as is" is their free pass to lie, cheat and steal, people often think they don't have a claim for auto fraud when they actually might. If you think you were ripped off by a dealer, get in touch.

How car dealers fraudulently manipulate the interest rate of a loan

Another type of auto fraud related to the vehicle's financing is when the dealer incorrectly discloses the financial terms of the loan. This dishonest practice is designed to dupe the buyer into thinking that the loan is more favorable than it really is.

Under the Truth in Lending Act, the dealer must accurately disclose the amount financed, the finance charge, and the annual percentage rate. Federal law requires that these terms be disclosed in the so-called Truth in Lending box (pictured above). The main point of the Act is to require transparent and consistent disclosure of finance terms so that buyers can easily compare multiple loans and decide which one is best.

Here's what the key terms mean:

Amount Financed. This is the total amount of money you are borrowing from the lender.

Finance Charge. These are all of the charges imposed as a result of the extension of credit. This obviously includes interest, but should also include any other charge that a buyer would not have to pay if it was a cash transaction.

What a shady dealer might do is to manipulate these disclosures to distort the true cost of the credit. The most common way a dealer does this is add a finance-related charge to the "Amount Financed" total rather than the "Finance Charge" total. This little trick will make the interest rate look lower than it really is.

Here's an example. Let's say you're buying a used car for $10,000. The annual interest rate is 10% and you will pay it off over 5 years (60 months). So the $10,000 would go in the Amount Financed box because it's the amount you're borrowing. And the interest amount ($2,621.25) would go in the Finance Charge box.

Because you're financing the transaction, the dealer requires that a GPS unit be installed so that it can locate the vehicle for a repossession if you fall behind on payments. The dealer charges you $500 for the GPS unit. Because the dealer allows you to roll this $500 charge into your loan, it goes in Amount Financed box right? Wrong. The GPS fee should be a Finance Charge because the dealer only requires these GPS units for buyers that finance. It doesn't require them for cash buyers. By fraudulently putting the GPS fee into the Amount Financed box, the dealer keeps the APR at 10%. But if the GPS fee was put in the Finance Charge box where it belongs, the APR jumps to 12.33%. You can verify my math if you like by using this online APR calculator.

The takeaway? Make sure you carefully review the terms of your loan to make sure the dealer isn't trying to scam you. Review every charge and ask yourself would the dealer charge this in a cash transaction? If the answer is no, then it should be a finance charge and disclosed accordingly. If the dealer improperly discloses the financial terms or misstates the interest rate, it likely has violated the Truth in Lending Act. This would give rise to claims for statutory damages, actual damages, and the dealer would have to pay your attorney fees and court costs.

Car dealers must provide title to the vehicles they sell

A particularly awful form of auto fraud is when the dealer sells a vehicle without being able to provide a title. This puts the buyer in a really bad spot. She can't sell the vehicle without the title and can't prove that she owns it if she is stopped by law enforcement of if she needs to get it back after being impounded. Fortunately, every used vehicle sale by a dealer creates a warranty that the vehicle has a good title that is free from liens. This warranty of title arises by law--so it doesn't have to be in writing--and you don't have to prove that the dealer knew about the title problem. The warranty of title can only be excluded by specific language that gives the buyer a reason to know about the title defect. This means that an "as-is" statement will not be sufficient to exclude the warranty of title.

In general, the warranty of title is breached if:

  • The dealer fails to provide title after the sale. This must be more than just a delay by either the dealer and/or DMV in processing the buyer's new title. Most often, a dealer fails to deliver title to the buyer when the title is being held by one of the dealer's unpaid creditors.

  • The vehicle is subject to an undisclosed lien. Most commonly, this is a lien from the prior owner's lender.

  • The vehicle is stolen.

Most courts have found that the warranty of title is not breached if the dealer delivers a branded title. But there may be other claims against the dealer in this situation, especially if the dealer didn't disclose the title brand.

As with most warranty claims, the buyer must give the dealer notice of the breach of warranty of title. If the dealer fails to fix the problem after getting notice, the buyer will have legal claims for breach of the warranty of title. Depending on the circumstances, these claims may require the dealer to pay the buyer's attorney fees.

What is wrongful repossession?

In this post, we will learn how to spot an illegal repossession, what to watch out for after a repossession happens, and what can be done to prevent an impending repossession.

How to know if a repossession is wrongful

When you buy a car or truck on credit, the contract typically gives the lender the right to repossess the vehicle as soon as you default on your loan. The contract will tell you what events lead to a "default" but the most common one is failure to make your monthly payments on time. But the lender has to follow certain steps, otherwise the repossession may be illegal.

  • You must be behind on payments. It would seem that this goes without saying, but I occasionally talk to people who weren't late on their payments when their vehicle was repossessed. I've also heard of situations where the vehicle was repossessed even after the loan was paid in full.

  • If your lender has accepted late payments, they must send you a letter first. In Minnesota, this is called a Cobb letter. The letter must give you notice that although the lender has accepted late payments from you in the past without repossessing, it now requires you to strictly comply with the payment due dates or it may repossess. This notice requirement may be unique to Minnesota.

  • The repo agent can't breach the peace during the repossession. In most states, including Minnesota, the repossession agent has the right to take your car without any notice at any time of day or night. No court order is necessary, as long as the repo agent does not breach the peace. Breach of the peace usually occurs when the repo man has to resort to force or threats of force to take your car.

  • The repo man can't break into a locked garage. Minnesota law forbids the repossession agent from breaking into your garage to seize your vehicle. But be careful about concealing your vehicle to prevent an otherwise lawful repossession.

  • The police cannot actively help the repossession. Sometimes, the repo company enlists the local police department to stand by during the repossession. While this is clearly designed to intimidate you into giving up your vehicle without a fuss, it probably isn't illegal as long as the police just stand by. But if the officers actively engage in the repossession, they may have broken the law.

  • If your car or truck has been wrongfully repossessed, you have the right the to sue the lender and repo agent for damages. Depending on the circumstances, the repo company may have to pay your attorney fees and court costs.

What to watch for after your vehicle was repossessed

Even if the repossession was strictly by the book, there are a number of things you need to know about the post-repossession process. In most cases, once your lender repossesses the vehicle they will sell it at an auction and apply the sale proceeds to your loan balance. Keep an eye on a few things during this process:

  • The lender must send you a letter before and after the sale. The pre-sale letter must tell you when, where, and how the vehicle will be sold. It must also tell you how much money you have to pay to get the vehicle back. The post-sale letter must tell you how much the vehicle was sold for and explain whether you still owe money on the loan.

  • You may get sued if there is still a balance on your loan. This is called a deficiency lawsuit. It happens in cases where the auction sale proceeds were not enough to pay off the full balance of the loan. In this case, the lender may sue you to recover the remaining balance. Fortunately, there are a number of ways to defend a repossession deficiency lawsuit.

What to do if your vehicle hasn't been repossessed yet

If the lender is just threatening to repossess, but hasn't seized your car yet, there are some options to avoid the repossession.

  • Can you re-finance the loan so that you can better afford the payments? Credit unions may offer better rates than more conventional auto lenders.

  • Can you sell the vehicle to a private party and get enough cash back to repay the loan? This is probably a long shot, but may be worth exploring just to cover all your bases.

  • Is filing bankruptcy an option? Both Chapter 7 and Chapter 13 bankruptcy may provide you with a number of attractive solutions to avoid repossession.

If you’ve explored all of these options with no luck, and repossession seems like a sure thing, here are some tips. First, keep all letters and documents related to the repossession, including the envelopes. Second, remove any non-essential personal property from your car (don’t forget the glovebox and trunk). Make a detailed list of any things that you must keep in the car, like jumper cables, child seats, flashlights, tools, etc. Or better yet, take pictures or video. Finally, keep in mind that you don’t have to consent to the repo man entering your house or garage. But never use violence against the repo man. Keeping your car isn’t worth risking a violent or dangerous confrontation.

Car buyers may be able to enforce a dealer's verbal promises

Express warranties are present in nearly all car sales. Under Minnesota law, an express warranty is any statement of fact or promise about the vehicle that the buyer makes to the seller. It doesn't matter if the buyer doesn't intend to create a warranty--if statement or promise is part of the basis of the bargain, it creates an express warranty. Although many express warranties are in writing, verbal representations can be express warranties too. Express warranties can't be waived by selling the vehicle "as-is." Probably the most common type of express warranty in a used car sale is the dealer's statements about the vehicle's condition or characteristics. To be an express warranty, the statement has to be specific (ie. "this vehicle doesn't need any major repairs') and has to be more simply sales puffery (ie. "this is a great car").

Another type of express warranty is when the seller promises to make repairs after the sale. It is common in many used car transactions for the seller to tell the buyer that she can bring the vehicle back if she has any problems. This is probably enough to create an enforceable express warranty.

If the seller breaches an express warranty, the buyer is entitled to sue for damages. This could included the diminished value of a vehicle that wasn't as good as promised or perhaps the cost of repairs that the seller promised to make.

Car dealers must disclose if a vehicle has a branded title

Another type of auto fraud is when the dealer fails to disclose that a vehicle has a branded title. A branded title is one with a permanent notation on it that the vehicle has a serious defect. Here's a list of the title brands used by the Minnesota Department of Motor Vehicles:

  • Prior Salvage. This is usually used to indicate that the vehicle has previously been declared a total loss by an insurance company, often because of a prior accident.

  • Flood. The vehicle has suffered flood or water damage.

  • Reconstructed. The vehicle has been altered by the removal or substitution of essential parts

  • Rebuilt. The vehicle has sustained damage in excess of 80% of its cash value and the "Prior Salvage" brand doesn't apply

  • Lemon Law Vehicle. This usually indicates that the vehicle has been bought back by the manufacturer under the lemon law.

Minnesota law requires that a dealer verbally tell you about the brand during the sales presentation--they aren't required to disclose it in writing. This can create a he said/she said situation where the buyer asserts that the dealer never told her about the branded title and the dealer swears that he did. But just because it's your word against the dealers, doesn't mean that you don't have a case. I believe that juries understand that most people would never knowingly buy a branded title vehicle. So if you're stuck with a branded title vehicle because the dealer didn't tell you about it, consider talking to a lawyer who handles auto fraud cases.

How to avoid buying a flood car

It's expected that thousands of cars damaged in Hurricanes Harvey and Irma will be put on the used car market in the coming months. These flood cars will be cleaned up, repaired, and shipped across the country. Because of our lax vehicle title laws, a substantial number of these flood vehicles will likely end up in Minnesota and sold fraudulently. Flood cars present significant performance and safety issues for unsuspecting buyers. For example, a vehicle's electrical and computer systems--including brake and steering systems--are often compromised by water damage. Water submersion may also cause damage to the vehicle's frame or structural components and often leads to mold growth in the car's interior. These problems may not appear for months or even years. Here are some tips to avoid unwittingly buying a flood car:

Inspect the vehicle closely for signs of flood damage

  • Musty or moldy smell;

  • Rust or flaking metal on the vehicle's undercarriage;

  • Electrical components, such as radio, speakers, windshield wipers, or door locks that don't work;

  • Any signs of water damage, mud, sand, or silt.

Do your homework

  • CarFax reports contain information about the vehicle's history, including where it came from. Consumers should be extremely wary of a vehicle from South Florida, Houston, or other flood-damaged areas.

  • The National Crime Bureau keeps a database of vehicles reported as salvaged by many insurance companies. Consumers may search the database for free using the vehicle's VIN number.

Keep in mind that these reports do not always provide a complete picture of the vehicle and there is often a lag between when a vehicle is, say in a flood, and when that information shows up in a database.

Ask the dealer lots of questions, including

  • Whether the vehicle has been in a flood. Keep in mind that a flood car may have a clean title, so don't rely on the dealer's misleading answer that the vehicle is a "clean title vehicle." Insist on a straight answer to your question.

  • Whether the vehicle has a branded title. Some flood cars--but not all--will have a title "brand" on them to notify buyers of flood damage.

  • Whether they've inspected the vehicle for possible flood damage. Again, get specific answers to exactly what they inspected and when.

Trust your instincts

Don't be pressured into a hasty decision and trust your gut. If you have a bad feeling about the condition of the vehicle or doubt what the salesperson is telling you, simply walk away. There are a lot of quality used vehicles out there.

Todd Murray featured in Kare 11 story about fraudulent sale of damaged cars

Kare 11 recently ran an investigative report about how Minnesota's lax vehicle title laws could lead to a surge in flood cars and other damaged vehicles being sold in Minnesota. Our own Todd Murray was featured in the story and shared his insights about this issue.

Conditional delivery: how car dealers use it to scam buyers

If you've ever bought a vehicle from a dealer and financed the purchase, chances are you signed something called a conditional delivery agreement. If you read this agreement carefully, it states that the dealer has the right to cancel the sale if the dealer can't assign your auto loan to a lender on terms agreeable to the dealer. In other words, if the dealer changes its mind about the deal, it has the right to unwind the transaction. This provision, typically in the fine print of the sales contract, is the source of one of the most widespread auto frauds and applies to both new and used car sales. Here's how the scam works: you agree to buy a vehicle and you fill out a credit application for financing. The dealer tells you that you've been approved for the loan and you sign the loan agreement and other typical sales paperwork, which contains the conditional delivery language. You either don't notice this provision because it's in the fine print or the dealer tells you it's nothing to worry about. So you give them a cash down payment and turn over your trade-in. The dealer gives you the keys to your new car and you drive it home thinking you're all set.

But you're not. A few days later, the dealer calls you and tells you that your financing "fell through" and that you need to bring the vehicle back and sign a new loan agreement. If you complain, they might threaten to repossess your new vehicle or even to call the police and report it stolen. So you go back to the dealership. And you learn that your trade-in has already been sold and that the new loan that they're demanding that you sign has a higher interest rate than the one you originally agreed to. Although you don't want to sign this new agreement, you don't have a choice because your trade-in is gone and they've threatened to repossess your new vehicle and keep your downpayment if you don't agree to the new, less favorable, loan on the spot. You need the new vehicle to get to work and to drive your kids to their activities, so you reluctantly sign the unfavorable new loan.

Dealers call this practice conditional delivery or spot delivery. Consumer advocates call it a "yo-yo" scam. Either way, it's a blatantly unfair and one-sided practice. The dealer doesn't want you to think about the deal overnight, it wants the deal closed on the spot. On the other hand, the dealer wants to keep its options open after you've driven the car off the lot. It doesn't want to be rushed into a hasty deal. The conditional delivery agreement makes the deal final for the buyer, but not for the seller.

Sometimes the yo-yo scam is simply the dealer re-thinking the terms of the sale after the fact. Other times, it's a deliberate scheme from the beginning to inflate the finance costs. There's evidence that dealers target customers with poor credit or low income. In other words, dealers use the yo-yo scam to rip off people who can least afford to be ripped off.

Although the conditional delivery provision in the contract gives the dealer some legal cover, there are ways to attack this unfair practice through a lawsuit. If you've been a victim of a yo-yo scam, you should discuss the situation with an attorney right away.

Mechanical problems after buying a vehicle? What you need to know.

used car (as-is, no warranty): probably no legal protections

Minnesota law makes it challenging to bring a case for mechanical issues on used cars that were sold as is. The only clear-cut way to defeat as-is would be if the dealer provided you with a warranty or service contract. The warranty, though, likely has to be the dealer’s warranty, not a warranty through a third party.

Another possible way around “as-is” is when the dealer lies about a vehicle’s condition. But this type of case may not require a dealer to pay the buyer’s attorney fees, so you have to do a cost-benefit analysis before paying an attorney to handle the case.

The law is stronger if you vehicle has an undisclosed prior accident, flood, or odometer rollback, but mechanical issues on as-is vehicles can be difficult to do anything about.

used car (with warranty): federal law protects you

The Magnuson-Moss Warranty Act is a federal law that provides a legal claim against anyone who fails to honor their obligations under a written warranty--even if the vehicle was bought used. The MMWA only applies to consumer goods, which are goods that are normally used for personal, family, or household purposes. The MMWA gives buyers a legal claim for damages against anyone who doesn't honor their obligations under a written warranty or vehicle service contract. The Act also requires the warrantor to pay the buyer's attorney fees and costs if the buyer brings a successful case.

To bring a viable case under the Act, you will likely need to have a mechanic inspect your vehicle and be willing to testify that the problems should be covered by your warranty.

New car — Minnesota’s lemon law protects you

Most people use the term "lemon" to describe any vehicle that has repeated problems. But in Minnesota the "lemon law” is a statute that protects buyers of new vehicles that have problems that are covered by a warranty and that can't be fixed.

There are six basic elements to a lemon law claim in Minnesota:

  • (1) The defect has to be covered by the manufacturer's warranty.

  • (2) The defect has to arise and be reported to the manufacturer or authorized dealer within two years of the date of purchase or within the term of the manufacturer's warranty, whichever date is earlier. Although there are certain circumstances where this time period can be extended, in general, the lemon law doesn't protect you against problems that crop up after two years.

  • (3) You have to give the manufacturer a reasonable opportunity to fix the defect. If you've given the manufacturer four or more opportunities to fix the same problem, or if they've had your vehicle for 30 or more days, the law presumes that they have had a reasonable opportunity to fix the issue. On one of these attempts, you have to give the manufacturer written notice of the problems. Also, if the problem affects the steering or braking systems, you may only have to allow one repair attempt.

  • (4) The defect has to still be present after the manufacturer has had a reasonable opportunity to fix it. In Minnesota, at least, the court is going to want to know whether there is still a problem.

  • (5) The problem has to substantially impair the use or value of the vehicle. This is a subjective test that is fact-specific and is usually decided on a case-by-case basis.

  • (6) The defect can't be caused by your negligence or misuse of the vehicle. You can't abuse or neglect your vehicle and then blame the manufacturer for not being able to fix it.

Before starting a lawsuit under Minnesota's lemon law, you have to engage in an Alternative Dispute Resolution process if the manufacturer offers one. The manufacturer of your vehicle will be able to give you information about their informal dispute process. This ADR process is not binding, though, and you can bring a lawsuit in court if you believe the ADR result is unjust.

If you bring a successful lemon law claim, you have the choice of a refund or replacement. The refund has to include the full purchase price of the vehicle, although there may be an offset for the mileage you've driven the vehicle. If you elect a replacement vehicle, it has to be one of comparable to the one you're returning. In addition, the manufacturer has to pay for your attorney fees and costs for bringing the lawsuit.

Prior accident used vehicles: what you need to know

One of the most serious types of auto fraud is the concealment of a vehicle's prior accident history. A previous wreck will negatively affect a vehicle in three main ways:

  • Diminished value: A vehicle with a prior accident history will almost always be worth less than a clean vehicle. The reason is simple: most people won't buy a vehicle with a prior accident, and they definitely won't pay clean retail price for it. Depending on the circumstances, a prior accident may diminish a vehicle's value by fifty percent.

  • Safety risks: It's very difficult and expensive to repair major collision damage, especially if the accident caused frame or structural problems. Once a car's structure is compromised, it may not be possible to restore its original integrity. This can pose serious safety risks if the vehicle is ever in another accident. The damaged frame will probably not perform as the manufacturer intended it to, which can expose passengers to significant injuries or even death.

  • Branded title: In many circumstances, a prior accident will result in a branded vehicle title. In Minnesota, for example, if an insurance company appears in the chain of title, the title will have a "salvage" stamp on it. A "salvage" stamp will require additional steps, such as an inspection, before a title can be issued. And a branded title will make the vehicle more difficult to sell and will significantly diminish its value.

Because of these issues, the only way to profitably sell a prior accident vehicle is to conceal its wreck history from the buyer. A dealer can buy a rebuilt wreck for less than wholesale price, conceal the accident history, and charge clean retail price for the vehicle. Or the dealer can pay pennies on the dollar for a still-damaged vehicle at a salvage auction, make cosmetic repairs, and sell the vehicle to an unsuspecting buyer as a clean vehicle at full retail price. As long as the dealer is willing to check its conscience at the door, it can increase its profit margin by selling prior accident vehicles.

If you find out that your used vehicle has previously been in an accident, the first thing you should do is get it inspected by a reputable body shop or collision center. If you're in the Twin Cities, I recommend Schoonover Bodyworks. Tell the collision center that you suspect that the vehicle has been in an accident and that you want them to examine it to confirm. If the body shop confirms that the vehicle has been in an accident, ask them whether there is any structural damage or safety concerns. Also ask whether the signs of the accident would have been apparent to a knowledgeable car dealer. And be sure to get an estimate for any recommended repairs.

Then, call or go to the dealer who sold you the car. Tell them about what you've learned and ask whether they knew about the prior accident. Ask them what they will do to fix the situation, but don't commit to anything on the spot.

It's also a good idea to discuss the situation with a lawyer with experience handling auto fraud cases. There's a good chance that you will have legal claims against the selling dealer and those claims may require the dealer to pay your attorney fees. Once you know what your legal options are, you can decide whether it makes sense to try to negotiate a resolution with the dealer or to assert your claims in court.

And if you're in the market for a used car, here are some steps you can take to avoid buying a prior accident vehicle in the first place:

  • Do your homework: buy a CarFax or AutoCheck report for the vehicle. Most prior accidents are noted on these reports, although there is a lag time between the date of the accident and when it shows up on the report. So don't rely exclusively on the CarFax report. You should also ask to see the vehicle's title to make sure it isn't branded. But remember: just because it has a clean title, doesn't mean that there wasn't a prior accident.

  • Ask the dealer: be sure to ask the sales rep about prior accidents. If he tells you that there aren't any, ask him how he knows that. It's also good to have the dealership note the lack of accident history in writing in the purchase papers. Also, be sure to read the paperwork very carefully. Some dealers will slip a disclosure of the prior accident into the fine print.

  • Get an independent inspection: ask to have the vehicle inspected by a mechanic or body shop of your choosing. You will have to pay for this yourself, but it's worth it. Prior accident damage is easy to spot by a trained professional who knows what to look for. An ounce of prevention is worth a pound of cure.

These steps don't guarantee that you won't end up with a rebuilt wreck, but they definitely increase your chances of getting a safe, reliable used vehicle.

Fight odometer fraud with the Federal Odometer Act

According to a 2002 study by the National Highway Traffic Safety Administration, there are over 450,000 cases of odometer fraud each year, making it one of the most common forms of auto fraud. The study estimates that the increased cost consumers pay to buy vehicles with odometer rollbacks is over a million dollars per year, which makes it one of the top crimes against property in the United States. Fortunately, car buyers have a powerful tool to combat odometer rollbacks--the Federal Odometer Act. The Odometer Act has several major protections against odometer fraud:

  • It prohibits odometer tampering

  • The Act forbids false statements about an odometer reading during a sale

  • It requires that a transferor disclose a vehicle's odometer reading each time it's transferred

  • The Act establishes notice procedures when a repair results in a change to the odometer reading

The Odometer Act allows a person victimized by odometer fraud to bring a lawsuit against anyone who has violated the Act with intent to defraud. Successful litigants are entitled to $10,000 or three times their actual damages, whichever is greater. Further, the rollback artist has to pay for the buyer's attorney fees and court costs. In addition, the Odometer Act provides for federal agency enforcement and many states, including Minnesota, have criminal penalties for odometer fraud.

When Buying a Used Car, Watch Out for Worthless Service Contracts

Buy a new or used car these days and you can expect the salesperson to pressure you to buy a service contract or "extended warranty." For a fee, which is usually rolled into the financing, these products provide repairs or maintenance for a certain period of time, say 2 years or 24,000 miles. But they rarely provide much benefit to the buyer and often only serve to pad the dealer's bottom line.

Here's an example of what I mean. In a recent case, our client bought a used vehicle with over 100,000 miles on it. The client also bought a service contract for an additional $2,500 or so. The service contract lasted for 5 years or an additional 100,000 miles. Our client rolled the cost of the service contract into his loan for about $50 a month. At this point, you might be thinking this sounds like a pretty good deal.

However, the fine print of the service contract provided for a maximum reimbursement of only $3,000, less a $100 deductible. So the maximum reimbursement was actually $2,900. Further, a great deal of possible mechanical problems were excluded from coverage.

 So, our client paid $2,500 for the right to be reimbursed $2,900. In other words, he paid $2,500 to potentially receive an additional $400, but only if: (a) a problem occurred; (b) the problem occurred during the term of the service contact and (c) the problem wasn't excluded from coverage. He would have been better of declining the service contract and putting the $50 a month into a savings account. The savings account could have been used for any repair at any time. And if no repairs are necessary, he could have used the money for something else.

Before agreeing to buy any service contract, make sure you understand the total cost (not just the monthly cost), the total amount of coverage, and what is covered and what's not. Don't rely on the salesperson to tell you these things, read the terms for yourself. And if you don't understand the terms, it probably doesn't make sense to buy it.

What to do if your car has missing airbags

As we discussed in an earlier post, car dealers sometimes sell a formerly wrecked car without disclosing to the buyer that it's been in a serious accident. Maybe the most shocking is where the dealer repairs the car, but doesn't replace the airbags (and of course, doesn't tell the unsuspecting buyer.) In some cases, the airbag compartment has been found filled with packing peanuts or paper towels. Airbags cost $1,000 to $3,000 to replace, and so if the dealer buys the car at auction, fails to make the repair, and doesn't tell anyone, that's $1,000 to $3,000 of pure, dirty profit to them. Here are a few steps you can take to detect whether your airbags are missing:

  • Check the airbag compartment. Is there physical damage to any of the airbag compartments? Tears or scratches in the dashboard could be indicators that the airbags have previously been deployed.

  • Pay attention to the dashboard lights. When you start the car, the airbag light should go on for a few seconds, and then turn off. If they don't turn off, you might have an airbag problem. But also be conscious if they never go on to begin with. This could mean that the indicator light has been covered up or disconnected to hide the fact that the airbag is missing.

  • Take it to a mechanic. If you have some suspicion that the airbag is missing, a good mechanic might be able to tell, at the very least, that the car was in a serious accident. They might also be able to check whether the wiring on the airbag indicator has been tampered with.

  • Order a summary report. You can order a CarFax or AutoCheck report to see if the car has been in an accident. These summary reports are hardly perfect, and often don't show when accident damage has been sustained to a car, but they can be a starting point.

How to know your car is a rebuilt wreck

Shady car dealers like to find ways to sell bad cars for as much money as possible. A really opportunistic dealer may sell a frame-damaged car with shoddy repairs, not disclosing that the car has serious structural issues. Once a car has sustained serious frame damage, it will often never again be safe to drive, unless very careful and expensive repairs are completed. The safety issues involved in rebuilt wrecks can be severe and possibly life-threatening.

Search the history

One of the ways to find out whether a car is a rebuilt wreck is to search its history. Summary history reports like Carfax and AutoCheck may tell part of the story, so they can be a good first place to look. You might also pull a title history on the car, to see if an insurance company ever owned it, or if it ever had a salvage title. You can pull a title history by contacting the state motor vehicles department in every state the car has been titled.

Look for physical warning signs

Here are a few indicators that your shiny car may be a beater underneath:

  • Paint that chips or doesn’t match indicates damage repair and poor blending.

  • Door that doesn’t close correctly could point to a door-frame deformation and poor repair.

  • Hood or trunk that doesn’t close squarely may indicate twisting from side impact.

  • Fresh undercoating on wheel wells, chassis, or engine strongly suggests recent structural repairs covered up.

  • Paint overspray on chrome, trim, or rubber seals around body openings reveals that the adjacent panel was repaired.

  • Misaligned fenders suggest a poor repair job or use of nonoriginal equipment manufacturer (non-OEM) parts.

  • CAPA (Certified Automotive Parts Association) sticker on any part may indicate collision repair.

  • Uneven tread wear reveals wheel misalignment, possibly because of frame damage.

  • Mold or air freshener cover-up suggests water damage from a leak or flood.

  • Silt in trunk may mean flood damage.

Frame damage is not always hard to spot if you know what to look for. You can also tell by taking your car to a reputable body shop, telling them that you suspect there's damage, and seeing what they say.

How to deal with an odometer rollback

Shady car dealers love to find a way to make an extra buck on a used car. One way they do this is by rolling back the odometer. WIth digital odometer displays, it is often very easy for a car dealer to roll back an odometer. We sue car dealers for odometer fraud and can get significant legal damages. Here's how you deal with odometer fraud:

Why scammers roll back the odometer

Easy--rolling back the odometer lets a dealer sell a heavily-worn car for newer-car prices. I drive a 2007 Honda Fit Sport. With 50,000 miles a car like mine might sell for $9,676. With 150,000 miles it sells for $5,067. An unscrupulous car dealer might see that $4,600 as easy money.

How to spot odometer fraud

Here are a few tips for finding a rolled-back odometer, either before or after the sale.

  • Pull a vehicle history report such as a Carfax and AutoCheck. Sometimes these don't show rollbacks, so just because a CarFax comes up clean doesn't mean the odometer is too.

  • Ask the seller for maintenance records. Even oil change records almost always mark down the mileage.

  • Look in the owner's manual or on service stickers inside the door or under the hood. Did the car dealer leave behind damning evidence?

  • Look for damage to the instrument panel. There may also be fingerprints inside the glass. This is a great sign of odometer tampering.

  • Is the brake pedal worn? Tires? Take the car to mechanic to see if they can find evidence that the car is more used than it appears.

The Federal Odometer Act may protect you.

The Federal Odometer Act is a very powerful law that punishes the perpetrators of odometer fraud. Any dealer who rolls back an odometer, or sells a car knowing the odometer has been rolled back, may be liable for triple your money damages, with a minimum of $10,000. Plus they have to pay your attorney's fees if you win.

6 tips if you must buy a vehicle from a buy-here pay-here dealership

The L.A. Times is currently running an investigative series on so-called Buy-Here Pay-Here auto dealerships. The first installment describes the basic business model used by these businesses and identifies a number of the pitfalls of buying a vehicle from them. A buy-here pay-here dealership is, as the name suggests, a dealership that finances the car loans itself, rather than using banks or finance companies. They market to people with low-income and bad credit that can’t qualify for conventional financing. In return for agreeing to finance borrowers that don’t have access to mainstream credit, the buy-here pay-here dealers drastically inflate the price of their vehicles, charge very high interest rates, agree to payment arrangements that they know you can’t honor, and aggressively repossess the vehicle once it’s in default, keeping all of the money that the borrower has already paid. And once the vehicle is repossessed, they sell it again. And again. Sometimes the same vehicle is repossessed and sold as many as eight times, creating another revenue stream for these business. The L.A. Times succinctly–and accurately–describes the business model as “sign, drive, default, repossess, and resell. The entire Times piece is a fascinating look into this booming industry and is definitely worth your time.

It would be too easy to advise everyone to steer clear of buy-here pay-here dealerships. After all, they do allow people without access to mainstream credit to buy a vehicle. And let’s face it, most people need a vehicle to get to and from work these days. But buying a car from them is very, very risky. Here are some tips if you’re considering buying a car from a buy-here pay-here lot:

  • Decide whether you really need to buy from them. Obviously, if you’re considering a buy-here pay-here dealership, you’ve decided that you need a vehicle and have been rejected by conventional lenders. But consider whether you would be better off taking the money that you’ve earmarked for a down payment to the buy-here pay-here dealer and instead using it to buy a used car outright from a private party. This would solve your transportation and financing problem, without taking on all of the risks of buying from a buy-here pay-here dealer.

  • Do your homework on the purchase price. Because the buy-here pay-here dealer knows that you’re desperate, they often inflate the list price well-over the vehicle’s Kelley Blue Book value. The Times story reports about one particular transaction where the purchase price was inflated to double the KBB price. Do your homework and make sure that you are getting a fair price.

  • Review the interest rate carefully. The Times story tells the story of one person who thought she purchased a car with an APR of 12%, when it actually was 20.3%. Make sure that the APR is actually what the contract says it is. There are a number of online APR calculators that you can use to verify the dealer’s numbers.

  • Be sure that you can afford the monthly payment. The Times story reports that 1 in 4 buy-here pay-here customers defaults on their loan. And there is ample evidence that the dealer may deliberately agree to a payment plan that they know you can’t afford because they know that they can just repossess your vehicle and sell it again to someone else. So be conservative in your estimates of how much you can afford each month and be sure to plan for emergencies when doing your budget.

  • Don’t believe what they tell you about re-financing or trading up. As the Times story details, these are often lies to pressure you into the purchase. If something doesn’t feel right to you, walk away.

  • Don’t expect them to work with you if you fall behind on payments. Their business model is heavily premised on repossessing cars in default and reselling them. So they aren’t going to be interested in working with you if you fall on hard times. They’re just going to repossess and sell the vehicle again. The Times story reports that many buy-here pay-here dealers outfit their vehicles with GPS devices and remote-controlled ignition blockers to allow for easy repossession. Those that don’t often resort to deceptive or very aggressive repossession tactics. In my experience, some of the most dangerous repossession encounters that I’ve heard about were ordered by buy-here pay-here lenders.

A vicious cycle in the used-car business | Los Angeles Times | October 30, 2011

In Minnesota, be careful about hiding your vehicle to prevent a lawful repossession

We often get calls from people whose vehicles are about to be repossessed. The callers sometimes tell us that the repossession agent threatened to have them arrested if they don't tell him where the vehicle is located and want to know whether they are guilty of a crime by refusing to tell the repo agent where the vehicle is. Under Minnesota law, it's a crime if:

  • (1) You are (a) legally obligated for an auto loan; (b) you know where the vehicle that is secured by the auto loan is located; and (c) with intent to defraud, you refuse to disclose the vehicle's location to a creditor or repossession agent that is legally entitled to repossess the vehicle.

  • (2) You--whether you are the borrower or not--conceal the vehicle if you know that the creditor is legally entitled to repossess the vehicle.

The potential penalty, provided by Minnesota Statute section 609.62, is imprisonment for up to three years or a fine of up to $6,000.

So under Minnesota law, it may be a crime to refuse to disclose the location of, or otherwise conceal, a vehicle that your lender is legally entitled to repossess. The key phrase here, though, is "legally entitled to repossess." You may have defenses to the repossession, which would alleviate the potential criminal penalties because the lender isn't legally entitled to repossess your vehicle. It's probably best to be proactive and discuss the situation with an attorney before the repo man is knocking on your door.

It's definitely worth noting that we've never been involved in a case where a repossession agent or lender filed criminal charges against someone for refusing to tell them where the vehicle was or for concealing the vehicle. In my experience, repo agents use the threat of arrest to intimidate consumers into turning over the vehicle and rarely, if ever, act on them. But there's a first time for everything and consumers should tread carefully because of the potential for criminal penalties.

You can sue a repo man who breaches the peace when repossessing your car

I've talked to a couple people lately who have told me about some really awful behavior by repossession agents. One person was run off the road by two repo agents working in tandem. Another was forced up against a wall and told that she was going to jail if she didn't turn her car over. A third was physically dragged out of her car by the repo agent.  Needless to say, all of these people were terrified by their experiences. All three of them called the police, only to be told that the police would not get involved.

Fortunately for these people, there is something that they can do. Although Minnesota law allows repossession agents to take your vehicle without a court order, they can't create a breach of the peace while doing it. Running someone off the road, slamming someone against a wall and threatening to put them in jail, and dragging someone out of their car probably all result in a breach of the peace. In addition to liability for a breach-of-the-peace repossession, the repo man may also be liable for other damages as well, depending on the severity of his conduct.

You can sue a repo agent that has breached the peace while repossessing your vehicle and receive money damages.

The police can't help a repossession agent seize your car

An alarming trend that I've noticed lately is police officers getting involved in a self-help repossession. Many times the consumer calls the police after the situation escalates and becomes violent. Occasionally, the repo agent gets the police to accompany him to the scene of the repossession. In my experience, police involvement during a repossession ranges from keeping the peace to actively helping the repo agent take the vehicle. But at what point does this police involvement become illegal? Before I answer that, here's a little background: under the U.S. Constitution, the state can't take your property without notice and an opportunity to be heard. This is called due process. But in states like Minnesota that allow self-help repossession, the creditor can repossess your vehicle without any court involvement whatsoever. Notice is not required and there's no opportunity for you to be heard before your car is taken. So why isn't this a violation of the Consitution? Because the Constitution only gives you due process rights when your property is seized by a government, or state, actor. Private repossession companies aren't state actors. But police officers are. So if a police officer assists in the repossession of your car, it's potentially a violation of your constitutional rights because a state actor is depriving you of your property without due process.

Of course, it's not always easy to determine at what point the police go from merely preventing a breach of the peace to actively assisting in the repossession. Most of the courts that have looked at this issue have noted that the police may act to diffuse a volatile situation, but may not aid the repossession agents in such a way that the repossession would not have occurred but for their assistance. If the police threaten you with arrest or command you to turn over the vehicle, they've probably crossed the line from keeping the peace into active involvement. This would violate your rights to due process and you may be entitled to bring a lawsuit against the police and repossession company for wrongfully repossessing your vehicle.