A Car Dealer Scam to Avoid

Unfortunately there are too many car dealers willing to commit scams and illegal
activities. Not all dealers are bad but, the actions of a few have left a stain on the
industry resulting in the perception among the American public that every car dealer is a
scammer or an out-right criminal. I know this is not the case, but I also know that there
are plenty of bad car dealers praying on consumers so as The Auto Insider I want help
protect you from a prevalent car dealer scam, Title Fraud. It has been around for years
and I recently read a story about a dealer committing this scam in the San Diego Union-
Tribute. The story details the penalties a now defunct Mitsubishi dealer in Escondido
California received for being found guilty for the crime of title fraud. The news article
describes how the two dealer principles have been found guilty of misdemeanor counts of
failure to transfer ownership of vehicles. Only one owner showed up to the court date
and he was sentenced to 1 day in jail, 3 years probation and ordered to pay $40,000 in
restitution. The second owner, who failed to appear, has had a bench warrant issued for
his arrest. This Mitsubishi dealer had 32 complaints against them and the guilty verdict
followed a 10 month investigation.

A Dealer commits title fraud for two main reasons, desperation or greed. Today there are
a surprising number of car dealers who are having trouble paying their staff and their bills
forcing them to make desperate decisions like committing title fraud. When a dealer is
desperate title fraud is appealing because it is remarkably easy to do and offers immediate
and substantial amounts of money, so of course it also attracts the extremely greedy car
dealers. A car dealer can commit title fraud in two ways, when you trade a car in and
when you purchase a car from them.

I want to use a typical car deal to show you how a car dealer commits title fraud with
your trade-in. Let’s assume I am doing business with the crooks from Escondido and I
just traded-in a 2004 Volkswagen Passat. I bought the car 3+ years ago and I have 10
months of payments left at $375 per month. As part of the deal they give me $14,000 for
the car. Now I still owe $3,750 on the Passat so the dealer is putting $10,250 towards the
purchase of a new car and they will pay off the remaining $3,750 I owe to the bank for
the Passat, a very typical car transaction. In most states by law the dealer has between 3
to 5 business days to complete the deal by paying off my old Passat’s bank.

This is standard car dealer business but some dealers use a scam so they can hold your
trade-in’s title and use that money for themselves. They might wait a month, two months
or maybe plan on never paying the $3,750 to the Passat’s bank. A dealer does this so they
can use that money without permission, interest free. And while they commit title fraud
their customer’s credit gets damaged. Who do you think is responsible for the $3,750
still owed on the Passat in our example, you guessed it…. ME! A car dealer pulling this
scam will do a great job of lying to the lender and customer to put off having to pay off
the trade-in for as long as possible.

The other way a car dealer can hurt you by committing title fraud on the car they sell to
you. Using the San Diego crooks again for my example; let’s say I went in and bought a
new 2007 Mitsubishi Eclipse SE Coupe from them for $23,500. I put $3,500 down and I
am financing the remaining $20,000 plus interest, tax and tags, over six years. Another
simple, straight-forward car transaction and I stroke them the $3,500 check, sign all the
paperwork and drive away in my hot little sports car, everything’s great right? Sorry,
remember I made the mistake of buying my Mitsubishi in Escondido so instead of
completing the transaction (with the California DMV and the bank I have my loan with)
in 3-5 business days, you guessed it, they decide to pull a scam and not properly issue a
title and not complete all the associated paperwork.

When a dealer does this they can delay paying off my new Mitsubishi to their floor plan
company. You see, virtually every dealer uses floor plan to stock their lot with inventory
(I only know of two that don’t). Floor plan is a program that allows a dealer to have cars
on their lot that they have not yet purchased. The dealer uses a lender to that provides ‘a
loan’ that enables the dealer to stock a large number of cars on their lot without tying up
huge amounts of money. The lender receives interest payments from the dealer for their
inventory and is paid-off when a car is sold. For most dealers they could not or would
not want to keep 150 cars on their lots without floor plan (if those 150 cars averaged a
cost of $20,000 each the dealer would need to tie up $3,000,000 in their inventory). So,
when I bought my Eclipse I took out a $20,000 loan from a bank. That bank pays the
Mitsubishi dealer $20,000 on my behalf for the car. Then the car dealer is responsible to
pay the floor plan bank their money. This is usually done within 2 or 3 business days.

Every day ethical car dealers payoff their floor plan lenders for the cars they sell, but
remember I was unlucky enough to do business with the San Diego scammers and they
decided to delay paying off their floor plan lender so they could use the $20,000 from my
loan for their own purposes. Now, you may not care that a bank is getting scammed, but
you are in danger too. When a dealer plays with the title of a car they sold they must
‘fudge’ some paperwork to ensure they do not get caught in the scam (a dealer caught
doing this could lose the ability to have floor plan and be put out of business). Typically
they will delay the registration of the car (a dealer doesn’t register cars until they are
sold). So in the example we used lets assume that they do not register my car so they can
use the $20,000 they received from my car loan and now that dealer has put me in a very
dangerous position.

Imagine if I am in an accident, no fault of my own but my car is damaged and I’m hurt
badly enough to need medical attention. The accident is not my fault but when the
insurance company for the person who hit me finds out that my Eclipse is not registered,
that gives them the legal right to deny my claim because an unregistered car does not
have a legal right to be on the road. So the at fault driver’s insurance company refuses to
pay for my medical needs or the damage to my car, all things they would have paid for
had my car been insured. To make matter worse, my insurance company does not pay me
anything because they are voiding my coverage for driving and unregistered car! Now
my medical expenses along with the cost to repair the Eclipse come out of my pocket
which could easily total $75,000 to $150,000 or more!
So, a dealer not handling your title properly can be a big problem, yet it is an easy scam
to avoid. If you trade-in a car to a dealer and the dealer is responsible for the payoff call
your trade-in’s lender and let them know that they should expect a payoff shortly from
(name the car dealer). Also, it is not a bad idea to write that lender a letter to state when
you traded in their car, what the total trade-in value was and when you gave the car dealer
possession of that lender’s car. The bank will appreciate this information, they might
contact the dealer to alert them to their knowledge of your situation and this would
greatly discourage a dealer from committing this scam on you. And if the dealer is
foolish enough to attempt this title fraud the information you gave to the trade-in’s lender
will help prevent that bank from looking to you for any future payments and not
damaging your credit status.

Now, if you have a loan with a bank for a new car I recommend calling that lender the
day after you take possession of your new car and inform them that you are in possession
of the car and ask them when your first car payment will be due. While on the phone go
over information like your name and address to be sure everything is correct. A car
dealer trying to commit this scam will often put incorrect information on banking
documents to mislead the bank to delay their anticipation of payment. During your
phone conversation with the lender make note of the people you spoke with. By making
this phone call you are cemented your business relationship with that lender and if there
is a problem in the future you have already established an ownership time-line. And
finally, call your insurance carrier to ensure that they are aware that you are in possession
of a new car and that any funds that have been paid to them to insure your old vehicle are
now applied to the new one. When this information is confirmed make note of it, you
want to know that you have insurance in place when you are driving that new car. Taking
these precautions can go a long way to helping you avoid serious troubles and financial
losses in the future. When you are buying a car you need to be smart and be careful!