Don’t worry, you may refinance in six months

A client called in with a problem with her dealer. She had been asked to co-sign for a friend who did not qualify for financing. When she hesitated to sign, the car dealer told her “Don’t worry, after six months, you can return to the dealership and have your name removed from the loan”. The client fell for this lie and found out when she returned to the dealership that this was a lie. Worse, the car dealer denied telling her this.

Don’t fall into this trap. A dealer signs a contract with you to purchase a car and you agree to make payments to the dealer. The dealer sells the contract to a finance company. You then start making payments to the finance company. The dealer has nothing more to do with that contract and has no authority to make changes to the contract that is now owned by the finance company.

This happens all the time. A dealer will tell you anything to get you to sign the documents and drive the car away. You are then stuck with the consequences.

Trading in Your Car to a Dealer? Watch out! The 10 day payoff rip-off.

Trading in your car and you owe money on it? Be prepared to get ripped off.

The typical dealer will add a 10-day payoff meaning he will add ten days of interest to your payoff thereby charging you for his carrying costs.

Let’s look at your trade in lien payoff:

On must distinguish between a consumer asking for a payoff and a dealer asking for a payoff. A consumer who is quoted a payoff has the luxury to decide if she wishes to pay this amount immediately, or allow interest charges to accrue. In that instance, a 10 day payoff quote, while technically unfair as some would interpret that as a grace period, without a contemporaneous disclosure that interest or finance charges would continue to accumulate during this ten day period. A decision to pay immediately, even if the quote was a 10 day payoff, would result in a refund of excess finance charges. The scenario is completely different when one puts an automobile dealer in the middle.

When a dealer takes a vehicle in on trade (Trade-in), as part of the down payment, the dealer is purchasing the trade-in that day. Historically and without even asking the consumer, the dealer calls a trade-in lien holder and ask for a 10 day payoff and inserts that amount on the RISC as the “prior credit or lease balance”. This means even though finance charges are beginning to accrue on Day 1 for Vehicle 1 ( the newly acquired vehicle) finance charges are continuing to accrue on the Trade-in for 10 days. This is hardly fair for the consumer.

The NEW 15-20 day payoff.

What is most egregious is the hidden reason for the 15 and 20 day payoffs that have become pervasive in the last 3 years. As a result of the financial crisis of 2008, many dealers went out of business. On their way out, many took trade-in vehicles and failed to pay off the trade-in lien leaving thousands of Californians with two car payments despite having sold their trade-ins to the dealers.

In 2008, the California legislature created the Consumer Motor Vehicle Recovery Corporation to compensate these consumers funded by a $1.00 DMV fee for every car sold in California. In 2010 added Vehicle Code §11709.4. requiring dealers to pay off the trade-in lien within 21 days from the date the vehicle is traded in and prohibit the dealer from selling, or transferring ownership until the trade in is paid off.

Instead of asking for the common, yet illegal 10 day payoff, some unscrupulous and inefficient dealers began asking trade-in lien holders for 15 and 20 day payoffs as they misread the new law to allow for charging consumers for finance charges on trade-in liens for up to 20 days. Did the finance companies comply? Of course, they readily quoted 10, 15, and 20 day payoffs to these dealers and in order to make it even easier, changed their own policies of quoting 10 day payoffs to 15 day payoffs as standard. Some, like Westlake Financial and Wells Fargo Bank refuse to quote a same day payoff with a per diem amount for a consumer to decide when and how much to pay, and will only quote a 15 day payoff.

Your protection is to demand a same day payoff for your trade-in lien – and if they refuse – sue them. By the way, this fraud allows you to sue the dealer and the banks and you may be able to cancel your contract, return the car, get a full refund and all of your attorney’s fees.

The Cash Customer vs. the Credit Customer

“If we raise the price of the car the bank will be happy and give you a lower interest rate because of your prior bankruptcy… and your payments will go down.”

I know most of you would not believe this, but I just got off the phone with a new client. According to the client , an Infiniti dealer near Fairfield beat him up (mentally) because of his credit score and prior bankruptcy and increased the price of the car $2,000.00 over the sticker price on a used car.

In this scenario the only way to make the monthly payment drop while increasing the price of the car is to lengthen the term (say 60 months to 72 months). Or, ask for a larger down payment, but that is not what happened here.

So, what the dealer did in effect, (smell any FRAUD?), is to charge a credit customer more than they would have charged a cash Customer. They also charged him for a service contract using the same logic (lie).

The Rule: A dealer may not charge a credit customer more for a vehicle than they would a customer paying cash. This is illegal and violates several California statutes including the Vehicle Code. Louis A. Liberty Liberty & Associates, a PLC

The Straw Buyer

Here is a Franchise BMW Dealership in the Bay Area pulling an old scam and then attempting to throw the consumer to the wolves.

A potential client went with a friend who wanted to buy a new BMW about a year ago.

The friend negotiated a monthly payment that she could afford only through a lease – as opposed to a purchase. Even with this lowered payment, she did not “qualify for financing”.

According to this potential client, she was told by the salesperson if she agreed to sign the lease in her name, she would be able to transfer the lease to her friend within a year. Of course, this little twist is nowhere on the lease agreement.

The Rule: Once you leave a dealership having signed a contract for sale or lease, it is nearly impossible to change the terms.

She went back to the dealer several times in the past 6 weeks to speak with someone in charge – of course there was no one who would help.

The salesperson gave her advice to contact “Swap a Lease”. Swap a Lease is where you give up your car to a company who finds a replacement lessee. See any problems with this “solution”?

Once you turn over your car and it comes up missing, and that replacement lessee stops making payments, you cannot report it as stolen, since you voluntarily gave up possession. The police will not provide any help and will tell you it is a civil matter.

The potential client came to our office with her problem and we emailed the dealer and BMW Financial with this scheme. To its credit, BMW Financial put pressure on the dealer to repurchase the lease contract and take back the vehicle. This process took a little over a week, and we provided our services with no charge.

The lesson: a straw purchase (lease) violates the terms of the contract BY YOU. And if you find yourself in a similar predicament, NEVER give up possession to a third party. Get yourself a good lawyer.


Louis A. Liberty

Your Consumer Rights

This is a short legal overview of some of the consumer protection laws that are there to protect you.


Your sales agreement is a Retail Installment Sale Contract (“RISC” or “CONTRACT”) between you and the dealer. You have agreed to buy your vehicle and make payments to the dealer. The dealer may sell that contract to a finance company in order to “cash” the RISC. You will be notified by that finance company to make payments to it. The finance company will typically tell you something like “You have been approved”. This is a lie. The finance company merely purchased the RISC from the dealer and is now enforcing the terms against you. The also refer to the financing as a loan. This is also a lie.

A RISC is a conditional sale contract or a credit sale, NOT A LOAN OF MONEY. California law has long distinguished between credit sales and loans. Loans are subject to constitutional and statutory provisions on usury; a bona fide credit sale is not subject to the usury law, because a credit sale does not involve a loan or forbearance of money. (Boerner v. Colwell Co. (1978) 21 Cal.3d 37, 45).

This is why we see interest rates of 11% – 20% – 30% on car contracts when usury laws would limit interest rates to 10% on a loan.

In 1974, the Federal Trade Commission mandated that the following language (known as the “FTC Notice” or the “FTC Legend”) appear in all Retail Installment Sale Contracts in the United States:


This language appears on the back of the RISC near the bottom.

In California, courts have held the FTC Legend is a material term of the contract. The phrases “ALL CLAIMS AND DEFENSES” in this contract provision and “all equities and defenses” in the statutory provision (ASFA) mean all claims and defenses, including those arising from contractual, statutory and common law.  In the leading case of Music Acceptance Corp. v. Lofing (1995) 32 Cal.App.4th 610, which interpreted identical contract language, the court, in upholding the Buyer’s right to assert claims for consequential and other damages against the holder, stated:

“The import of the cited contract clause [is] clear: [the holder] stands in the shoes of [the seller] and is subject to the same claims and defenses.”

THIS MEANS IF THE DEALER DEFRAUDED YOU, SO DID THE BANK. If the dealer is out of business, you still are able to get your damages from the bank.

BUT I WANT TO PAY CASH? OK, let the dealer provide financing and when you get your first payment notice from the finance company, pay them off in full. YOU STILL HAVE ALL OF YOUR RIGHTS AGAINST THAT FINANCE COMPANY and if there is a problem later, you can sue the finance company for the dealer’s fraud.

The Consumers Legal Remedies Act (“CLRA”), Civil Code Section 1750 et seq., the Automobile Sales Finance Act (“ASFA”), Civil Code Section 2981, et seq., the California Unfair Competition Law (“Unfair Competition Law” or “UCL”), Business and Professions Code Section 17200, et seq., and various provisions of the California Vehicle Code.

THE CLRA – The Consumers Legal Remedies Act, Civil Code Section 1750 et seq., promotes honesty in consumer transactions by precluding SELLERS of goods and/or services from engaging in various enumerated unfair or deceptive acts or practices, including misrepresentations, which are intended to result, or which do result, in a transaction with a consumer.  The legislative intent of the CLRA is to alleviate social and economic injustice stemming from the use of sharp business practices.

THE ASFA Since 1961, the Automobile Sales Finance Act, Civil Code §2981, et seq., has required transparency in consumer transactions by requiring DEALERS to truthfully disclose and separately itemize each of the enumerated charges comprising the amount financed.

The legislative intent of the ASFA is to enable consumers to guard against the imposition of false, hidden, excessive or otherwise improper charges.  The required itemizations enable consumers to know all charges included in the purchase price, the cost of financing, all amounts owed for the vehicle and the dates when payments are due.  The required itemizations also enable financial institutions to fully evaluate the risk of purchasing the contract from the SELLER.

Legislative studies reveal that seller fraud in consumer transactions is accomplished by a wide variety of methods and most often involves only modest amounts of money in any given transaction.  The studies go on to conclude that simply requiring that the seller reimburse that modest amount of money to the consumer and otherwise enforcing the transaction is ineffective at promoting the legislature’s interest in preventing future unfair and deceptive business acts and practices by the seller.  Therefore, the legislature provided that, in addition to traditional damages, seller fraud in consumer transactions, no matter how small, shall be subject to full and complete rescission and restitution.  The harshness of the remedies provided, each of which are intentionally calculated to deter careless violations by otherwise honest DEALERS, and, to chase unscrupulous DEALERS from the marketplace altogether (See Assembly Final History, 1970 Regular Session.), underscores the high degree of importance assigned by the legislature to establishing a marketplace free of unfair and deceptive business acts and practices.

Enforcement of the remedies provided is critical to implementing the legislature’s interest in establishing an environment of honesty and transparency in consumer transactions.  Individual consumers themselves, rather than governmental agencies, are entrusted and empowered with the critical task of enforcing the legislature’s esteemed social policies.  However, the Legislature discovered that many wronged consumers had been dissuaded from prosecuting meritorious actions because the modest amount of money at issue presented difficulties in obtaining and paying for legal representation.  That circumstance worked to frustrate enforcement by emboldening DEALERS to disregard consumer protection statutes, secure in the knowledge that the risk of financial loss arising from their disregard of these laws was small.

Rather than create state and/or local bureaucracies to enforce the state’s interests, the expense of which would be borne by taxpayers, the legislature sought to remove the obstacles to enforcement while holding wayward DEALERS themselves responsible for the cost of prosecuting their transgressions.  Therefore, to ensure the uniform implementation of its policies, especially in cases involving relatively modest amounts of money, the Legislature substantially increased the risk of financial loss to DEALERS who fail to strictly adhere to the mandatory requirements of these consumer protection laws by eliminating the seller’s historical right of offset, and, by requiring DEALERS to pay the reasonable attorneys fees incurred by a prevailing consumer in the prosecution of a legal action pursuant to those laws.  (See, e.g., Final Report, Assembly Interim Committee on Finance and Insurance, December 1960, pp. 29-34).

By all of its actions, the Legislature has gone beyond merely making the courts available to wronged consumers and actually intendedthem to participate in the implementation of the state’s interest in establishing an environment of honesty and transparency in consumer transactions by taking action in the courts.
THE UNFAIR COMPETITION LAW (“UCL”), Business and Professions Code Section 17200, et seq., promotes fair competition among SELLERS of similar products.  The legislative intent is to prevent unscrupulous DEALERS from driving honest DEALERS out of the marketplace through the use of prohibited business acts and practices.

The UCL prohibits “unlawful, unfair or fraudulent business practice and unfair, deceptive, untrue or misleading advertising . . . .” (Bus. & Prof. Code, § 17200.) Section 17200 is not confined to anticompetitive business practices, but is also directed toward the public’s right to protection from fraud, deceit, and unlawful conduct. Thus, California courts have consistently interpreted the language of section 17200 broadly. The statute imposes strict liability. It is not necessary to show that the defendant intended to injure anyone.” (South Bay Chevrolet v. General Motors Acceptance Corp. (1999) 72 Cal.App.4th 861, 877.) “[T]o state a claim under the [UCL] one need not plead and prove the elements of a tort. Instead, one need only show that ‘members of the public are likely to be deceived.” (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1267.) A UCL cause of action “‘may be based on representations to the public which are untrue, and “‘also those which may be accurate on some level, but will nonetheless tend to mislead or deceive. . . . A perfectly true statement couched in such a manner that it is likely to mislead or deceive the consumer, such as by failure to disclose other relevant information, is actionable under the UCL. (Linear Technology Corp. v. Applied Materials, Inc., (2007) 152 Cal.App.4th 115, 134). “Whether a practice is deceptive, fraudulent, or unfair is generally a question of fact which requires ‘consideration and weighing of evidence from both sides . . . .”    (Id. At pp. 134-135).
The VEHICLE CODE. Many times a SELLER’S conduct also violates various provisions of the California Vehicle Code relating to the propriety of certain charges in a consumer transaction for a motor vehicle.

Many dealers negotiate payments in the Sales Department. You haggle for hours and finally agree to a down payment and a monthly payment. You have a deal, right? NO! The payment you have negotiated contains enough additional monthly payment so the dealer can add many thousands of dollars of high profit items and your monthly payment will not change.

This Payment Packing violates the VEHICLE CODE.

Payment packing has long been illegal in the State of California.  It is a form of fraud that is subject to both civil and criminal sanctions. The leading case on payment packing describes the practice as follows:

[T]he . . .dealerships were engaged in a practice of misrepresenting to the customer the calculated monthly payment that he or she would pay in a deal. The customer would be quoted an inflated monthly payment amount which would assist the finance and insurance managers in presenting and selling aftermarket products based on artificially low, false numbers.

Casella v. Southwest Dealer Services, Inc. (2007) 157 Cal.App.4th 1127, 1138.  The inflated price quoted in the sales department includes what is known in the trade as “leg,” that is, deliberate overcharges, to make room for sale of the extra goods and services in the finance department without raising the monthly payment beyond the initial inflated amount. “This conduct certainly falls within the prohibition of Penal Code section 487 which proscribes making false or fraudulent representation or pretense to defraud another of money.” Casella, 157 Cal.App.4th at 1138.   Payment packing also violates the California Vehicle Code.  See V.C. § 11713.19(a)(1).
THE CODE OF REGULATIONS – a Dealer must sell you the car at the advertised price- whether you know of the advertisement or not and may not be a “Cash Only” price – nor can a Dealer charge you more for an advertised car because you have poor credit.

13 California Code of Regulations §260.04(b): “A specific vehicle advertised by a dealer or lessor-retailer shall be in condition to demonstrate and shall be willingly shown and sold at the advertised price and terms while such vehicle remains unsold or unleased.  Advertised vehicles must be sold at or below the advertised price irrespective of whether or not the advertised price had been communicated to the purchaser.”

The failure to sell to you at the advertised price also violates the VEHICLE CODE. Vehicle Code §11713.1(e): … Advertised vehicles shall be sold at or below the advertised total price, with statutorily permitted exclusions, regardless of whether the purchaser has knowledge of the advertised total price”.

California Vehicle Code §11713.1(k): It is unlawful to “Require a person to pay a higher price for a vehicle and related goods or services for receiving advertised credit terms than the cash price the same person would have to pay to purchase the same vehicle and related goods or services. For the purpose of this subdivision, “cash price” has the meaning as defined in subdivision (e) of Section 2981 of the Civil Code.


The CLRA prohibits the use of “unfair methods of competition and unfair or deceptive acts or practices” in sale or lease transactions. (Civ. Code, § 1770, subd. (a)). The underlying purpose of the CLRA is “to protect consumers against unfair and deceptive business practices and to provide efficient and economical procedures to secure such protection.” (Civ. Code, § 1760.) Any consumer who suffers any damage as a result of the use or employment by any person of a method, act or practice declared to be unlawful by section 1770 may bring an action against that person for actual damages, injunctive relief, restitution of property, punitive damages, and any other relief the court deems proper. (Civ. Code, § 1780, subd. (a)).

Selling Etch or Phantom Footprints or other Theft Protection

The cost of this is about $20 and consists of a strip of plastic, or acid etching onto doors, hoods, windows or some combination. Yet dealers charge between $199 and $399. The DMV allows dealers to apply “anti-theft devices” as only accessory pre-installed. The dealer is supposed to remove it if the customer does not want it. Some dealers refuse to remove it and will give you a variety of excuses as to why it cannot be removed and the charges to you remain. This is another lie. You have the right to have it removed and not be charged for this high profit rip off.

The 4 Square

The 4 Square is the equivalent of the “hide the pea” shell game. There are 4 squares on the paper. Trade-in, Sale Price of the New Vehicle, Down Payment and Monthly Payment. The more you put down, the lower the monthly payment is supposed to go. These are defined as “Trigger Terms”, i.e., a monthly payment amount triggers TILA, meaning once TILA is triggered, the document you are signing must contain all Truth In Lending disclosures. Of course, they do not.

Get a copy of this 4 Square for your records. The Department of Motor Vehicles requires the dealer to give you a copy of all documents that you sign.

So you sign or initial the 4 Square and Bingo… it transforms into a purchase agreement under ASFA that may not comply with TILA or ASFA giving you all your Truth-In-Lending disclosures and the whole deal is now unenforceable. So if you discover this violation, you may be able to return the vehicle and get all of your money back.

The 4 Square is also the roadmap to prove Payment Packing or LEG. That is why the Sales Desk or the F&I manager shreds these documents. That is also why it is so important for you to demand a copy. If they will not give you one, walk away.


Unless you are a cash buyer, you have probably negotiated a down payment (cash, trade-in, etc.). However, your negotiations for down payment and monthly payments likely contain “LEG.” (What does LEG mean?)

LEG is a portion of the payment that can be used to “sell” you other items without the raising the down payment or monthly payments. So your $1,500 down payment and $495 monthly payment will stay the same, but the dealer’s Finance and Insurance (F&I) department will know how much LEG to incorporate (say $75 per month), which helps the dealer include $4,000 to $5,000 of extras without raising your monthly payment. All dealers will claim they do not use this system of LEG. They all lie.

The Down Payment

The Retail Installment Sale Contract (RISC) incorporates the Federal Truth In Lending (TILA) Law. California law incorporates TILA in its Automobile Sale Finance Act (ASFA). When you make a down payment, it must be categorized. It could be categorized as a trade-in, or a deferred payment (to be made later, but no later than after the second regularly scheduled monthly payment); or anything else of value, such as an autographed baseball, or a credit card, or cash or check.

The RISC has a line to disclose each of these payments in paragraph 6. The bank, when deciding whether to purchase the RISC, wants to know how much value you have given the dealer at the time of sale. So if the dealer does not accurately describe the down payment, you may have the right to cancel the contract under ASFA.

This type of cancellation is a special “penalty” type of cancellation. Under ASFA cancellation, you are entitled to all of your down payment and all payments you made under the RISC. The dealer must take the vehicle back in its present condition, normal wear and tear included. Of course, you are responsible for any major damage that is not normal wear and tear. There is no offset or value given to the dealer for the depreciation of the vehicle since it was in your possession.

Typically, when a dealer takes a down payment that he agrees to hold before cashing, he does not disclose the deferment at line 6D and in the Payments Box. He merely shows it as a cash down payment at line 6G. This is fatal for the dealer.

He probably sold the contract to a bank with all its right, title and interest, meaning he is no longer entitled to the payment, although he is holding your check. If your engine blows up or you experience any other major repair, or merely get buyer’s remorse, you may decide to stop payment on the check.

Since the dealer knows he will have sold the RISC to a bank, he will have no standing to sue you. So, many dealers have you sign a “Hold Check Agreement.” This is automatically fatal for the dealer, because a Hold Check Agreement violates TILA and ASFA, giving you the right to cancel the contract (RISC).

ASFA demands that all material financing terms appear on one document (The Single Document Rule). Any type of check guarantee, hold check agreement, or promissory note, violates this Single Document Rule. Also, check carefully, as most of these documents charge $25 or more for a returned check, but this charge is limited by contract (RISC) and the ASFA to $15.

Under these circumstances, the dealer may take you to small claims court or a collection agency. But these “Hold Check Agreements,” unless accurately disclosed at line 6D, are unenforceable. Most judges are unaware of this law.