How to detect a car loan modification scam

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While scammers targeted homeowners during the housing downturn, car loan scams are now beginning to grab the attention of government watchdogs.

One popular car loan scam is being perpetrated on car owners who hope to avoid getting their car repossessed, but it’s not the only one. Learn how to spot this and other deceptive practices that car buyers face, and what to do about them.

Car loan scams moved front and center in March 2012, when the Federal Trade Commission brought its first two cases to stop car loan modification scams. The FTC filed a complaint against Hope for Car Owners LLC, and Kore Services LLC, doing business as Auto Debt Consulting, in U.S. District Court, Eastern District of California and received a permanent injunction against Hope for Car Owners in December.

According to the FTC, Hope for Car Owners charged consumers $200 to $500 and promised to reduce their monthly car loan payments by 30 percent to 50 percent. Auto Debt Consulting charged consumers $350 to $799 and promised car loan payment reductions of 25 percent to 40 percent.

Similar to mortgage scams

“The scams are similar to mortgage loan modification scams, with the scammers telling customers that they could stop their car from being repossessed and that they could lower their payments,” says Gregory Ashe, senior staff attorney with the Bureau of Consumer Protection at the FTC.

“Clearly the name Hope for Car Owners is a play on the government’s Hope for Homeowners program, implying some government connection, but no government programs exist for car owners,” Ashe says.

Ashe says the scammers typically will tell consumers to stop paying their car payment and to not talk to their lender. The scammers say they will be in touch with the auto financing lender, but they do nothing or make only one initial contact.

“We have a rough estimate that these two companies took in about $662,000 total from approximately 2,200 victims,” Ashe says.

Ashe says repossession can occur after just two or three months of nonpayment.

To avoid becoming the victim of a car loan modification scam, the FTC recommends contacting your lender directly as soon as you realize you will have trouble making your car payment. The longer you wait to call, the fewer options you’ll have available.

“Auto lenders are not typically lowering interest rates or reducing the principal balance on a car,” Ashe says. “If any relief is to be had, it’s typically to extend the term of the loan to reduce your monthly payments or to defer missing payments to the end of the loan. You’ll pay more over the life of the loan, so there’s no real savings — but at least you have a chance of affording your car payments.”

While the FTC has focused attention on loan modification scams, some car loan scams target consumers at the beginning of the car buying process, too.

‘Yo-yo’ financing scams

The Center for Responsible Lending reported in April 2012 that its study of five organizations that help consumers with auto financing problems revealed that about 27 percent of complaints these organizations received involved “yo-yo” financing. A yo-yo scam occurs when a car dealer leads a buyer to believe that the financing is final, accepts a trade-in or a down payment and allows the buyer to leave the dealership with a new car.

Days or even weeks later, the dealer will call the buyer and say the financing fell through and the buyer needs to come back and sign a new contract, typically with less favorable terms. The CRL says these scams often target consumers with fewer financing options because they have bad credit or no credit profile.

“If the financing doesn’t go through, the dealer may require you to secure other financing at a higher interest rate or ask you to return the car,” says Christopher Kukla, a senior counsel for government affairs with the CRL in Durham, N.C. “The dealer can charge you for wear and tear on the car or even a daily rental fee for the period you’ve had the car if you choose not to refinance.”

The CRL reports that some consumers say they have been denied the return of their down payment or have been told their trade-in is no longer available if they try to return the new car. Yo-yo financing is illegal in every state, says Paul D. Metrey, chief regulatory counsel for financial services, privacy and tax with the National Automobile Dealers Association in McLean, Va .

“It is important to distinguish between fraudulent yo-yo financing and legitimate conditional sales or spot deliveries,” Metrey says. “There are millions of auto sales transactions each month, and most are conditional sales, pending loan approval from a finance source.”

In order to avoid a yo-yo scam, consumers should shop around for a car loan at several sources — including a credit union, bank, online auto lender and the dealer, says Eric Hoffman, spokesman for Americans Well-Informed on Automobile Retailing Economics in Washington, D.C.

“Dealer financing on the spot is predicated on the fact you’re providing accurate information such as your credit and payment history and your income,” Hoffman says. “Be as honest and as accurate as you can be, and then see if the dealer financing is in line with other financing offers.”

Kukla says consumers should realize they have the right to take home the financing documents to read before signing them.

“Also, you can tell the dealer you won’t take the car home until the financing is final,” Kukla says.

Negative equity scams

The FTC took administrative action against four dealers for Truth in Lending Act violations because those dealers did not clearly explain to consumers that when they offered to “pay off” the balance due on a trade-in, they were actually taking the negative equity and applying it to the borrower’s new car loan balance. Some customers complained that they didn’t know this until they signed their new auto financing paperwork.

“Consumers need to carefully read the paperwork before they sign it, because it doesn’t matter what’s said. It matters what’s in writing,” says Ashe. “If you don’t understand something, then don’t sign it.”

Loan packing

Kukla says consumers often feel pressured to purchase additional products such as an extended warranty, gap insurance, rustproofing, tire rotation and service contracts when they buy a car.

“Some of these items are beneficial, and some are not,” Kukla says. “The dealer will offer to wrap these items into your loan, but they may be cheaper elsewhere.”

Kukla recommends that car buyers do their research and take the dealer’s offer home to compare it to pricing available from a credit union or bank.

“We’ve gotten used to buying a car the way we buy everything else, buying it and taking it home the same day,” Kukla says. “Consumers should always take advantage of their right to take their time.”

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