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Yo-Yo care sale financing terms - Can the customer also use the terms to back out of the deal?

Posted by Clyde Hutchins | Nov 03, 2016 | 0 Comments

Yo-Yo care sale financing terms - Can the customer also use the terms to back out of the deal? 

As time passes, I see more and more auto dealers engaged in “yo-yo” sales. A “yo-yo” sale is one where the automobile dealer claims to have arranged financing on the sale of a vehicle, but later reneges on the deal. In view of the unilateral right of dealers to back out of the deal, it could be argued that there is no binding contract and the customer can also back out of the deal and unwind the deal.

In the typical yo-yo sales case, the customer chooses a vehicle to purchase, makes a down payment, hands over the keys to their trade-in, signs all the paperwork with the financing department and drives off the lot in the newly purchased vehicle. A few days later, the dealer calls the customer and explains that the financing did not go through. The dealer demands that the customer return the vehicle or sign a new financing deal on less favorable terms.

Under Colorado law, yo-yo sales are allowed with certain conditions. See C.R.S. § 6-1-708(a). First, the dealer cannot guarantee that the customer has been approved for financing if approval is not final. The “guarantee” can be made verbally or in writing. Second, the dealer cannot sell your trade-in before financing is finalized. Third, if financing is not approved, the dealer must return your down payment and any trade-in vehicle.

There is no Wyoming law directly addressing yo-yo sales. However, under Wyoming's Consumer Protection Act, yo-yo sales could be considered an “unfair or deceptive act or practice.” See W.S. § 40-12-105(xv).

Some may ask how is it possible that a dealer can engage in yo-yo sales. Isn't the deal finalized when the customer is signing the paperwork at the dealer's financing office? Well, interesting, the retail installment sales contract typically includes a provision giving the dealer the option to back out of the deal. It often reads as follows:

SELLER'S RIGHT TO CANCEL

Seller agrees to deliver the vehicle to you on the date this contract is signed. Seller intends to assign this contract to a financial institution. If Seller does not assign this contract to a financial institution, Seller may cancel this contract upon written notice. In that event, you may enter into a new contract with different financing terms or you may pay with alternate funds arranged by you. Upon receipt of our notice, you must immediately return the vehicle to Seller. If you do not immediately return the vehicle, Seller may use any legal means to recover it (including repossession) and you will be liable for all expenses incurred in recovering the vehicle, including reasonable attorneys' fees. All terms of this contract are in full force and you are responsible for any loss or damage to the vehicle and the costs of repair of any damage while the vehicle was in your possession.

What this provision means is that the dealer is taking the position that it has the option of shopping around for your credit contract. If it does not find a deal it likes, it can back out of the deal. This is a unilateral right to cancel the deal.

In view of the nature of the dealer's unilateral right to cancel the deal, it can be said that it is not a binding contract. “If it appears that one party was never bound on its part to do the acts which form the consideration for the promise of the other, there is a lack of mutuality of obligation and the other party is not bound.” First Sec. Bank, N.A. v. Murphy, 964 P.2d 654, 658 (Idaho 1998). In the automobile dealer yo-yo cases, we see the dealers relying on the provision quoted above, or one very like it to cancel the deal and take back the automobile. This is a unilateral right of cancellation. However, there is no objective standard for cancelling the contract. It just states, “Seller intends to assign this contract to a financial institution. If Seller does not assign this contract to a financial institution, Seller may cancel this contract upon written notice.” The contract cannot be binding based upon the dealer's intent. There must be an objective mechanism at play. There is none in the “yo-yo” sales context.

About the Author

Clyde Hutchins

Clyde Hutchins is the founder of Harmony Law. Prior to opening Harmony Law, Mr. Hutchins worked in the Wyoming Attorney General's Office for several years where he developed a strong consumer protection enforcement unit. In that position he led over 120 investigations and enforcement actions under the Consumer Protection Act. He worked on numerous joint cases with the Federal Trade Commission and other states, including Colorado, on consumer protection matters. Mr. Hutchins is also a contributing author to Consumer Protection Law Developments, Second Edition. Previous to his work in the Attorney General's Office, Mr. Hutchins was in private practice in Anchorage, Alaska where he was the chief litigator for a firm. Mr. Hutchins represented municipalities on various matters. Mr. Hutchins provided counsel to businesses and investment advisors regarding compliance with securities laws. He was also a bond lawyer and worked on municipal financing matters. Prior to that, Mr. Hutchins practiced civil litigation with a law firm in Cheyenne, Wyoming. Mr. Hutchins devotes his spare time to his family, traveling and enjoying the great outdoors.

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