Title Fraud & “Buy Here Pay Here” Dealerships

Today, we’re talking about auto dealership fraud and “buy here pay here” dealerships. Here’s a press release from the Department of Justice (DOJ) that is a very good example of how small used car dealerships can use an internal financing function to collect millions of dollars that they are not entitled to have. This article has to do with the dealership in Tennessee called Auto Masters. Remember, this is all alleged right now, innocent to improve and guilty. Basically what happens is when a small car dealership finances cars as a buy here pay here dealership. When they have ads that say “we finance anybody”, here’s how it works. When a dealership advertises itself as a “buy here, pay here” dealership or “we finance anybody”, here’s how it works:

The customer goes to the dealership and let’s say they buy a $10,000 car. They put down $2,000 and they finance the remaining $8,000. As a “buy here pay here” dealership, that dealership is the original lender of that loan. So the customer pays the dealership directly for their car payments. It’s not paid to a bank, it’s not paid to a finance company, it’s actually paid to the dealership. Because of that, the dealership is allowed to make its own credit decisions on financing, which sometimes allows for less qualified buyers to get credit. So the dealership will finance the loan and they get their payments. Usually, it’s a weekly payment system where the customer comes in every week when they get their paycheck and they pay their weekly payments. It’s not a monthly payment, it’s a weekly payment. So instead of paying $400 a month, you pay $100 a week. 

So the dealership lends this money out but at some point, they don’t have millions of dollars to have out financing on the street. So maybe once a month, they take the package of loans that they have out and package them up and they have a line of credit from what’s called a backup lender. They tell that backup lender “we have this package of loans, it totals to $152,000, here are all the loans, here are the contracts, and I want you to lend us money based on these loans” They’ll sign an authorization affidavit saying “we really have these loans that people are making payments and we want to use that as collateral to get a loan from you so we can go buy more cars”. At some point, if you finance all of your cars, you don’t get cash for that $10,000 car you only have $2,000. You can’t go buy another $10,000 car because the customer still owes you $8,000. So you can get this line of credit. You get the money from the bank and then you go buy more cars. Well, there are some requirements. 

First of all, you have to actually have that loan out on the street. Second of all, it has to be performing where you have to represent to the lender that the person’s actually making payments. Some of these lenders require that the dealer gets two or three payments first so it’s not a first payment default before they can get money or refinance from this backup lender. Well, what this dealer did was they went to the backup lender and said “we have all these loans out on the street and we want to get financing for it” and they actually collected almost $30 million from this backup lender without having proper loans in the street, they may have been made up from scratch, they may have been non-performing, they may have been delinquent. For whatever reason, they weren’t real loans that were qualified to get them financing. So how does this affect consumers?

Well, what happens is for many of these loans, the titles are secured by the backup lender or maybe they’re not even acquired at all from the trade-in customer. So if you are a buy here pay here dealership or a small dealership that does your own in-house financing and you don’t pay off your lender, the customer might be in jeopardy of getting their title. So there are a lot of dominoes that could fall for a dealer that doesn’t do the paperwork the right way. So small used car dealers that do their own financing have these financial structures behind them that are usually invisible to the public but may create consequences both for the lender because now they’re out of their money and for the retail public that may have title problems.

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