‘Straw purchase’ case highlights dangers of creative financing

Charles Campbell Articles

A recent California Court of Appeals ruling should provide all that is necessary for dealerships to remain vigilant in their ongoing efforts to remain in compliance with rules, laws, regulations and legal mandates.

In the case involving Champion Chrysler-Jeep-Dodge in Downey, Calif., the appeals court upheld the lower court’s decision of a $45,000 judgement. In addition to this, the court also allowed the lower court’s award of $260,000 in attorney’s fees.

At issue was the Bank of the West’s demand that Champion buy back a loan that was assigned to the bank under false pretenses. In short, a daughter negotiated a purchase of a new Dodge Charger from Champion. However, the loan was put together with her father signing the sales and loan documents.

Champion sold the contract to Bank of the West without disclosing that it was, in fact, a third-party transaction due to the simple fact that the daughter, and not the father, would be the person actually using the vehicle and making the payments.

All went south when the daughter couldn’t make the payments any longer and the vehicle was ultimately repossessed. Upon the daughter conveniently claiming to the bank that her name was never involved in either the purchase order or the RISC (retail installment sales contract), she immediately contacted the bank and the dealership demanding that the loan be retracted, and all be set right according to her demands.

To make things worse, the dealership bought back the contract from the bank, upon realizing that this third-party transaction, commonly referred to in industry terms as a “straw purchase,” was an obvious mistake and violation of the bank’s dealer-lender agreement.

However, Champion contested the legal fees. In addition to all of this aggravation, the dealership finally settled a separate suit with the customers by cancelling the loan and paying them $20,000.

This should certainly make dealerships become more involved and provide sincere and regular oversight into the processes, policies and procedures in place within their sales, and finance and insurance (F&I) offices.

It is important to remind dealerships that, while the Consumer Financial Protection Bureau has been tamed down with regard to providing oversight of dealership finance practices, a number of state attorneys general have started to pick up the overwatch into the financial and ancillary products handling of the dealerships.

If a dealership doesn’t conduct routine checks into the sales and F&I practices within their dealership, as well as maintain a vigilant compliance program for the overall everyday working procedures of the entire dealership, they could easily find themselves facing legal challenges from a variety of legal watchdogs as well as consumer litigants.

This article is also published in the RV Daily Report.

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Charles Campbell

Charles Campbell is a nationally recognized authority in areas of Federal rules, laws and regulations. Along with his well reviewed, and insightful, articles and his unique, dynamic and energetic, presentations, he remains a highly sought after presenter, public speaker and educator. He heads up the acclaimed U.S Compliance Academy, and may be reached at (541) 408-4136 or at charlesc@uscomplianceacademy.com