In 2011, the Federal Trade Commission (FTC) held a series of discussions to explore corrupt practices in the automobile lending market. One abuse that seemed to be particularly prevalent was the “yo-yo scam”. Reports showed that consumer’s dealing with auto finance problems experienced a yo-yo scam approximately 30 percent of the time.
The yo-yo scam begins with a spot delivery. The dealership sends the customer home with the vehicle even though they know there is a good chance the financing may be rejected. In many cases, the dealer receives purchase offers from multiple third parties, but is dissatisfied with the terms offered. They contact the customer and pressure them to come back and sign a new financing contract. The new contract usually comes with a higher interest rate or other less favorable terms. The dealer may refuse to return the consumer’s trade-in vehicle, down payment, or may threaten to charge them for mileage, wear and tear, or other items. In some cases, the dealers threaten to call law enforcement on charges of auto theft. Under the mounting pressure many consumers agree to the new loan terms.
As one consumer attorney stated during the FTC discussions, “In no other area of our commerce can someone sign on the dotted line, deliver the product, and then cancel the transaction and insist on the product being returned because the credit transaction did not produce the hoped for income. Dealerships engage in more auto financing transactions in a week than the average consumer will in a lifetime and should know what potential third party purchasers will require. The customer has no idea. Thus, spot delivery agreements should be banned whenever the condition to complete the deal is left at the sole discretion of the dealer. The dealer should not be able to use this method to create an unfair bargaining advantage over the consumer. Further, the yo-yo is a practice that distorts free competition, because the consumer cannot effectively shop the marketplace unless they can trust that the financing offer is a firm and real agreement.”
