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.

LEG

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.

The Legal Mumbo-Jumbo of the RISC Relating to the Dealer’s Right to Rescind

If you read the contract carefully, you signed a paragraph in the middle of the page titled “Dealer’s Right to Rescind” or “Dealer’s Right to Cancel.” It then refers you to a box on the back page of the RISC buried in a paragraph on the right near the bottom of the page. I have never known a dealer to ask a consumer to read the back of the contract.

This box actually tells you the dealer intends to sell (assign) the contract to a financial institution, and if unsuccessful, the dealer can demand you return the vehicle, and they will refund your down payment and return any trade-in vehicle. They must do this within 10 days of the purchase date. On the 11th day, they forfeit this right to have you return the vehicle. If you decide to stick with the RISC on its original terms, make sure you pay the monthly payments to the dealer in a timely fashion as outlined in the Payments section.

There is no state law giving this right to the dealer, it is only a contract provision that you unknowingly signed.

If you decide to sign a new contract, beware. This is the time to really read the proposed, new contract to see what changes the dealer has made. You can force the dealer to take out all of the high profit items and reduce the sales price. This is true especially when you have purchased a new car. If you do not get the terms you now want, walk away. The dealer must sell that new car to the next victim as a used car. They do not want to do that since the car will most often bring a lesser amount as a used car. Of course, many dealer will violate the law and sell that used car as new. The new customer then has an action against the dealer for selling a used car as new.

Many dealers also play “banker” and do not sell these contracts to a financer and never use this “Right to Rescind.” Such dealers typically charge 25%-30% interest, and you pay $10,000 for a $3,500 car. Consumers who accept these terms typically have poor credit and focus on monthly payments only, with no idea of the serious overcharges.

The Call Back from the Dealer “We are having trouble getting your loan approved” or “The bank requires you to sign more papers.”

There are many reasons for the call back. Most often, the dealer has overcharged you for the car, and the contract price exceeds the guidelines of that bank. This is a scary proposition, because most banks will buy a contract with a sale price of up to 130% of fair market value and this does NOT INCLUDE extras such as service contracts. If you have exceptionally good credit, there is no cap and a bank could approve a contract of 200% of Fair Market Value. This sometimes happens when a consumer trades in another car with lots of negative equity that is rolled into the new RISC.

A second reason for the call back, is that the dealer KNEW he could not sell the RISC at that rate or amount financed, and PLANNED to call you back in a few days after you had shown all your friends your new car. That way, you would sign ANYTHING to avoid telling your friends and family members you did not qualify for automobile financing.

So, if your dealer tells you the bank requires you to return and sign a new contract, he is lying. They all do it. They do not want you to know what is really going on. The most often-used lie is, “The bank requires a larger down payment.” This will help to bring the amount financed into line with the bank’s guidelines.

When you get this call, the dealer is notifying you he cannot get a financial institution to purchase your RISC and he is opting to cancel the contract. Let him know you know your rights, you are returning the vehicle and you want your down payment and trade-in vehicle back immediately. YOU are now in the driver’s seat.

The dealer does not want to lose this deal. If you are a good negotiator, this is the time to put it to the dealer. The dealer may then lower the price of the vehicle (not to help you, but to bring the amount financed within a bank’s guidelines.) But at this point the dealer already has tried to rip you off. You need not sign a new RISC no matter what the dealer says.

The First Big Lie “We are working on getting you financed.”

The first thing you must know about a car deal is that there is no “loan” if you have the dealer provide financing. The dealer is in the business of selling sales contracts to finance companies.

If you read the contract carefully, at the very top the title reads “Retail Installment Sale Contract” (RISC). The Dealer is also named as “Creditor.” Thus, the dealer is financing the vehicle on the terms contained in the contract.

Most dealers sell these contracts to banks or other financial institutions. When the dealer says, “We are working on getting you financed,” that means he is working on selling your contract to a bank or other financial institution. If the dealer has not made a gross error, or has not exceeded the bank’s lending guidelines, most often you merely get notified from a bank that “Your loan was approved,” which is another lie. Remember, they (the bank?) are merely the “Holder” of the RISC, having purchased the RISC from the dealer under an “Assignment.”

You are not the “Customer” of this bank. The dealer is the customer, and the bank will always side with the dealer because the dealer brings this business to the bank. Should the bank ask too many questions of the dealer, or not purchase a high percentage of these RISCs, the dealer will take his business to a less “nosey” bank. Of course, the less nosey banks usually charge 20-25% APR or more.

If your credit is poor, the dealer may add $2,000-$4,000 or more to the price of the car because he knows in advance based upon your credit score that his bank is going to charge him up to 30% of the amount financed as a “discount” AND the interest rate of 20-30%. Dealers who charge a higher price to consumers with poor credit scores than they would charge to cash customers are violating California law.

However, it is difficult to prove a dealer has charged that higher price. And most people who have this low credit score merely want to know what the monthly payments are going to be and do not even realize they are signing a contract for many thousands of wasted dollars. By the way, the RISC is designed to focus your attention on areas of the contract that do not contain numbers, which discourages you from asking questions about the charges you are agreeing to pay.

Automobile Dealer Fraud

Did you know Automobile Dealer Fraud is ranked as the number one consumer complaint throughout the nation? Dishonest car dealers are deceitfully swindling average consumers of thousands of dollars.

Here is a partial list of Dealer Fraud:

From my perspective, having sued hundreds of car dealers and the banks that allow the fraud to continue, the system is out of whack. Everyone at the dealership is working on commission. The more the dealer charges you, the more profit he makes and the more the bank makes. Your finance company works for the dealer – not you. So the bank is not there to help you – it is there to help itself – and the dealer.

Frame Damage

This scam is very easy to catch – If there were a government agency watching. The problem is the DMV is sound asleep.

There are dealer auctions where the public is not allowed. The frame damaged cars are advertised to dealers along with undamaged cars mixed in. The dealer is able to run a CarFax to determine if CarFax has caught the structural damage information. If not, the dealer puts it on the “buy” list.

On the day of the auction, the auction announces Frame Damage and usually sells the car under a Red Light (Red Yellow and Green lights are turned on according to condition). The dealers bid accordingly.

The successful bidder takes the car back to the dealership and prints out a CarFax. He then advertises the car as coming with a “clean” CarFax. Later, when caught, he pulls out the CarFax and professes he relied on CarFax and had no idea the car had frame damage.

The more professional thief has you sign a “disclosure” he has slipped into the pile of documents you sign at purchase. It can be a Buyers Guide – you sign on the back side – and he gives you a copy of the back side only – and when you complain, he produces the Buyers Guide with a fresh disclosure on the front – the part he did not give you.
The other is to have you sign a DMV document entitled “Statement of Facts”. It is a 4 page document that you sign on page 4. Of course it is blank, and he tells you it is a DMV required document if you even ask. He then fills in the “disclosure” – sitting waiting to be used against you.

Your only hope is the car was sold through Manheim Auction as Manheim gives the auction announcements to AutoCheck. So, if the car was sold to the dealer at Manheim, you may be able to show dealer knowledge by getting the AutoCheck. However, no other auction has this relationship with AutoCheck.

Adesa is the second largest auto auction in the country. Adesa and the other independent auctions do not report condition announcements to AutoCheck so there is no way to fully protect yourself against a dealer buying frame damaged cars from these auctions.