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 does not 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!