How Dealers Can Commit Title Fraud On Consumers

Title Problems in Car Buying
Don’t think just because you buy a car from a licensed automotive dealer that you’re out of the woods on title problems. There’s a very common scheme that some used car dealers mostly used car dealers, occasionally a new car dealer will use that constitutes financial fraud and harms consumers. It’s called floor plan fraud, and not many people know this, but dealerships do not own their cars outright with cash, just like you. Dealerships have car loans too.

The Dealer’s Lot
If you look at all the cars on a dealer’s lot, for example, if there are 20 cars on a used car lot and each car averages $15,000, that’s $300,000 worth of cars sitting on that dealer’s lot. Most dealers don’t have $300,000 in extra cash, or if they do, they don’t want it tied up in their inventory. So what they do is get a line of credit called a floor plan or floor line, and that floor line finances their vehicles for them. When they buy a vehicle from an auction, from a trade-in, or from wherever, the bank actually writes a check for that vehicle not the dealership and the bank holds the title, just like with your car financing.

Selling the Car
When the dealership sells the car, the dealership calls up the bank and says, “Hey, I sold that 2020 Toyota Camry, send me the title.” The bank says, “No problem, send us the money.” So the dealership sells the car, takes the money from the customer, sends it to the bank, and the bank sends them the title, which they can then transfer to the customer.

Cash Flow Problems
Sometimes what happens is if a dealership is running short on cash, they will do this: they will sell you a car that 2020 Toyota Camry. They take, let’s say, $20,000 from you; you paid for the car. Instead of taking that money and giving it to the bank to pay off the loan and get the title, they’ll just keep it to pay payroll, rent, expenses, whatever. Now the bank is still holding the title, and you can’t get a new title or registration for your car. It’s called floor plan fraud or being “out of trust” with your lender, and it creates a problem because you have a temporary tag that runs out. Maybe the dealership gives you another paper tag; next thing you know, the dealership goes out of business.

Real-Life Example
In this case this was in Massachusetts; this is just one example this happens all the time. Twenty-five people reported being defrauded by the scheme. Police determined that Edward Secui, 46, allegedly receives cars on loan from a local auction but does not get the titles until he pays the auction in full. So the auction in this case is the lender. The cars are then sold at the dealership; he completes the sale, takes the payment, attaches fake or forged license plates, and promises the title will be mailed which, of course, never happens.

Victims Left Hanging
Secui stops responding to the victims and never pays the auction. The purchasers never receive the title and cannot register the vehicle because the auction company still owns the vehicles. They are in the process of repossessing them. So the lender can actually take the car from you even though you paid for it. Now if it’s a small used car auction, they might go through with that repossession. Sometimes if the floor plan lender the bank that lent the money is a larger lender like Wells Fargo or Chase, they might not take a car from a consumer (though they legally could). They have the right to, but they may just pursue it against the dealer instead.

Protecting Yourself
So how do you protect yourself against this? What we recommend doing if you’re buying a used car from a dealer: obviously they can’t hand you the title because they’re going to handle the registration and title paperwork. Even if you’re financing the vehicle through your own bank, have them show you the title. Just say, “Hey, before I do this deal, show me you have the title.” If they don’t have the title in hand, tell them you’ll come back and pay for it when they have the title in hand.

Ensuring a Smooth Transaction
Here’s what they’ll have to do: they will have to pay that floor plan lender for the car before they get your money, and then they’ll get your money to cover what they paid out. They might say, “Well, we can’t do that.” Well, guess what? If they can’t do that—if they don’t have enough cash in the bank to cover one car—do you want to do business with them? So if they can’t show you the title (they don’t have to give it to you; they don’t have to sign it over to you, just show you they have it in their hand), we don’t recommend buying the car. Tell them, “Well, it’s at the floor plan bank.” No problem go pay it off, get the title here, and then I’ll pay you for the car, or I’ll sign loan documents for the car, whichever you’re doing.

Avoiding Floor Plan Fraud
You don’t want to leave that to chance. Remember, we’re talking about your hard-earned cash you saved up for this vehicle, or even if you’re financing the vehicle, your hard-earned cash that you have to pay for it. And don’t think that if the dealer doesn’t get a title, you don’t have to pay for the vehicle. If you finance the car through another lender whether it’s your own bank or through the dealer that lender you signed a contract with expects you to pay off the loan even if you don’t get a title or the bank doesn’t get a title. You still have to pay the loan because they paid the dealer.

Red Flags and Final Thoughts
So you don’t want to have your money at risk by dealing with a dealer that doesn’t have a title. The dealer might say, “Well, we don’t have the title on hand because it’s at the bank.” Hey, no problem. Just pay off the bank, get the title, and I’ll pay you for the car. If the dealer is unable or unwilling to do that, it could be a red flag that they don’t have much cash on hand and they’re running tight—which means that might be a decision factor for you or that they’re trying to scam you.

Conclusion
So don’t fall for floor plan fraud. This is one example of an article where this happened recently in Massachusetts, but this happens all the time. Dealerships going out of trust, dealerships leaving people holding the bag. This is a way you can avoid it as an informed consumer. If you found this helpful, be sure to check out our other articles to see if there’s other information that might be helpful about this same subject or maybe even other related subjects that could assist you with resolving your issue.

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