Dealership Suspended After Selling Cars Without Titles

Licensed Dealerships and Title Problems
We’re seeing more and more of these vehicle title problems popping up from people that bought cars at dealerships. This is not, you know, buying a car from some guy on Craigslist on the street corner or buying a car on OfferUp or Facebook Marketplace where the seller was kind of maybe sketchy at best. These are people that bought cars from licensed car dealerships and didn’t get a title. Here’s a person who bought a cheap Wrangler. The dealer won’t give me a title, making it impossible to get license plates. And when they went back to the dealer, the dealer laughed at them. Can’t drive their new vehicle because they can’t get titles and plates. How does that even happen? This is a dealership.

Dealership License Suspensions
Well, it is happening. Here’s a new car dealership, Lefon Hyundai in Detroit, that had their license suspended because they were selling cars without titles, selling vehicles, and failing to have a title in possession of the vehicle. They also failed to properly complete the state’s title application. How does this happen? Well, here’s one of the scenarios that can come up that you may not know about as a consumer, but it’s important to be aware of when you’re buying a car from a dealer.

Dealer Financing Explained
Dealers, like consumers, actually finance their cars. If you buy a car, you’re going to get a car loan, and you make payments on it. Dealers have car loans on all the vehicles in their inventory. It’s called floor plan credit, floor plan financing. The word “floor” comes from the cars on your showroom floor—there’s a plan for financing it. So what happens is, you might think, well, the dealer, why do they have to finance their cars? Think about how many cars are on a dealer’s lot. Even if a dealer has 100 cars on their lot, and let’s suppose each car averages $35,000, that’s $3.5 million of inventory sitting on a lot.

Costs for Smaller Dealers
Let’s say a new car dealer. First of all, most new car dealers have more than 100 cars, and cars don’t cost $35,000 anymore; now they’re $40,000. So that’s a minimum. Even if you have a small mom-and-pop used car store that has 10 cars on their lot, and they are $7,000 each, that’s $70,000. Think about the mom-and-pop car dealer with a little trailer on the corner. $70,000 might be a stretch for them to come up with, so they do this floor plan financing.

How Floor Plan Financing Works
How does it work? When you buy these cars, whether it’s from an auction, from the factory, or from a trade-in, you contact your lien holder—that’s called a floor plan lender—and you tell them, “Look, I just bought this 2022 Jeep from the auction.” Great, we will pay the auction, wire transfer them the money. You go get the car, you ship it. We’re going to hold the title. And that’s the key: the lender holds on to the title.

Title Holding by Lenders
Just like you as a consumer, when you finance a car, the bank holds your title too because they don’t want you to sell it without paying them. The floor plan lender wants to do the same thing—they want to hold that title to make sure the dealer just doesn’t sell the car, pocket the money, and not pay them off. Let’s say the dealer bought that car for $22,000; the lender financed it. Now the dealer sells it for a profit. Let’s say they sell it for $25,000.

Dealer Responsibilities and Cash Flow Issues
They make $3,000. They take the $25,000, take $22,000, give it to the lender, and keep the $3,000 for profit. What they’re supposed to do is send that $22,000 to the floor plan lien holder to get the title. Then, when they get the title, they can get an application, put it in your name, and you’re good to go. They sign the back. However, sometimes if that car dealership is running short on cash—maybe they have to make payroll or pay their rent—that’s where title problems come up.

Financial Mismanagement and Ponzi Schemes
They might have a problem getting the title from the lien holder if they don’t have the cash. They figure, “Well, I’ll just use this buyer’s money to pay some bills, and I’ll pay for it later.” It becomes a Ponzi scheme, like taking your money to pay somebody else’s car off and their money to pay your car off. Next thing you know, the lender has what’s called an out-of-trust scenario.

Risks for Buyers and Lenders
If that dealership maybe even only has five cars that they didn’t pay off, it doesn’t sound like a lot, but five cars could be $100,000. If the car dealer is short on cash, they may never be able to come back from that $100,000. If they’re already losing money, they can never pay it back. This results in buyers not getting titles for cars.

Issues for Buyers with Car Loans
What makes it worse is if you are a buyer who financed the car when you bought it. Let’s say when you bought that $25,000 car, you went to a bank, such as Chase Bank, and took out a car loan for $25,000. They paid the dealer for the car. If the bank doesn’t get the title, you still have to pay that car loan, and you have no title for your car.

Bank Options in Title Disputes
Your bank is not going to waive your loan just because the dealer didn’t give you a title. They paid the money. When you get a car loan, the bank writes a check to that dealer for 100% of the car in full, so they’re already out the money. If the dealer doesn’t give the bank the title, the bank can either call the loan in full and make you pay it back or convert it to a personal loan instead of a car loan, increasing the rate.

Advice for Buyers
What do we recommend you do? If you go to a car dealer and are going to buy a car, have them at least show you the title. They’re not going to give you the title, but before you sign the paperwork or give the money, say, “Show me the title that you have it in your possession.”

Avoiding Title Issues
If they can’t show you the title, if they say, “Well, we don’t have it, even if it’s at the floor plan lender,” you can say, “That’s fine. Why don’t you get the title first, and then I’ll buy the car?” If they can’t do that, it might be a sign that the dealer is cash-strapped and not someone you want to do business with.

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