Automobile Leasing Scams: 'Pockets of Profit.'
O'Loughlin, Terrence J., Desjardins, Garry, Consumers' Research Magazine
The Federal Reserve Board recently issued amendments to the consumer leasing provisions of the Truth in Lending Act strengthening the rules as to what car dealers must disclose to consumers before they sign an auto lease. The new requirements, under what is known as Regulation M, will provide essential information about costs and terms. (They went into effect this past January 1.) But don't think that leasing will hence forth be without hazards. As the following article outlines, there are plenty of sleazy ways unscrupulous dealers can scam the unsuspecting consumer.--Ed.
In 1992, when the Florida Attorney General's Office opened its investigation of various complaints concerning automobile leasing, the office began, as one might anticipate, by reviewing documents and taking sworn testimony of automobile dealers and their employees. The office was shocked and appalled by what it uncovered. One of the first witnesses subpoenaed was a lease manager of a large automobile dealer who was earning over $100,000 per year leasing cars. He was also a former criminal defense attorney from New York. This former attorney was shown a lease transaction where the trade-in vehicle, which should have been credited, had not been. In other words, the former attorney credited the value of the trade to the dealer's profit and the hapless consumer derived no financial benefit; the consumer got nothing for his car. When challenged by this dishonesty, the erstwhile lawyer said that it was simply another "pocket of profit in the deal." These "pockets of profit" are the subject of this article, and although the new Regulation M disclosures will reduce the opportunities for these lease frauds, it will not totally eliminate them.
Automobile leasing ranks as one of the most complex financial transactions consumers can enter. They must be vigilant at the inception of the contract, vigilant regarding the conditions during the contract, and vigilant when they return the vehicle. At each juncture, they can be victims of an unfair, deceptive, or fraudulent activity.
Scams at Lease Inception
Prior to January 1, 1998 (the advent of the new Regulation M disclosures) the basic lease scam was premised on the primary missing variable in the documents, the gross capitalized cost--the price upon which the lease is based--followed by the second missing variable, the interest rate. (See "What You Should Know About Auto Leasing," CR, June 1995.) When the absence of those two crucial numbers was coupled with the frequent use of "n/a" for other disclosures, where a number should have been placed, a consumer would frequently have no means of ascertaining the true cost of the lease. In other words, the debits or costs which the consumer would bear would have two or three missing variables. As a result, even if the consumer knew his actual credits, he could not subtract the credits from the debits, to produce the net capitalized cost, since the sum of the debits would be an unknown. By keeping the customer in the dark, dealers could more easily accomplish the first type of scam: the "flip." Can these same initial frauds still be employed now? Unfortunately, the answer is a robust yes.
* The Flip. Typically, consumers spend numerous hours negotiating the sales price of their new car and may not even have considered leasing. However, after reaching an agreed-upon sales price, to purchase and finance the vehicle, the consumer is ushered into the finance and insurance manager's office where the transaction is finalized. Finance and insurance (F&I) managers are the "closers." The F&I manager will then negotiate the transaction and may even attempt to re-negotiate the previously agreed upon price. The ploy is to "flip" the consumer, who intends to finance the vehicle, over to leasing that same vehicle. If the flip succeeds, the F & I manager may totally ignore the agreed-upon sales price and the promised allowance on the trade-in. …