By AnnaMaria Andriotis and Ben Eisen
Joyce Parks was struggling to afford her Kia Soul when, she
says, the dealership where she had bought it pitched her an
unconventional idea: Stop making the payments.
Ms. Parks, 63, says employees told her that she couldn't trade
in the Soul, but that she could buy another car. To get rid of the
Soul, the dealership told her, she should have the lender repossess
it, Ms. Parks said.
The trade-in, where a buyer hands a car back to a dealership and
uses it as credit toward another one, is often a crucial step in
car buying. But some dealerships are instead telling buyers to give
their old cars back to their lenders -- and selling them new ones
-- in a practice known as "kicking the trade."
It is difficult to estimate how often this happens. Auto-sales
veterans say the practice is an open secret in some showrooms.
Broadly, vehicles are getting more expensive and Americans are
struggling to afford them. Dealerships now make more money
arranging financing than selling vehicles. If a car loan goes bad,
it typically isn't the dealership on the hook -- it is the borrower
or lender.
The National Automobile Dealers Association said there is no
evidence to suggest "kicking the trade" is prevalent. Dealerships
"could not sustain carefully cultivated relationships" with lenders
"if they were to engage in the type of behavior alleged," a
spokesman said.
Consumer lawyers say they have seen more such cases. Five years
ago, "it happened two or three times per year," said Daniel Blinn,
a Connecticut-based attorney who has sued dealerships and auto
lenders. "Now, we hear it at least once per month."
Credit-reporting firm TransUnion calculates that nearly 24
million U.S. vehicle loans were originated in 2018. About 300,000
of those vehicles were repossessed within 12 months, up 17% from
2014. Such a quick souring of the loan can be a signal of some sort
of auto fraud.
Roughly a fifth of people who have had a car repossessed over
the last several years take out another auto loan within a year of
the repossession, TransUnion says.
Dealerships typically don't make loans. When consumers need
financing, a dealership electronically sends their loan
applications to banks, credit unions and other lenders. They, in
turn, decide whether to fund the loan.
Problems often begin with consumers who buy cars they can't
afford or sign loans they don't understand. But dealerships can
compound the trouble. Some dealerships are inflating borrowers'
incomes on loan applications so they can sell them bigger or more
expensive cars, according to lawsuits and interviews.
When dealerships kick the trade, they typically get a lender to
approve a loan for the buyer's new vehicle. Next, the buyer
generally goes home with two vehicles and two loans. It is only
then the buyer asks the original lender to repossess the original
car.
Connex Credit Union sued Connecticut dealership Barberino Nissan
in 2016, alleging the dealership "repeatedly told customers to just
deliver the keys to Connex." Barberino denied the accusations but
agreed to a settlement roughly a year ago, according to the
dealership's lawyer.
Lenders generally say they will cut ties with dealerships that
do this. Often, though, the lenders aren't aware it is
happening.
Ms. Parks, a former dietary aide in Gastonia, N.C., said she
told dealership employees she couldn't afford the used Nissan Rogue
they wanted her to buy. She said she signed a bank loan for it
because she felt out of options.
Ms. Parks then told Kia Motors Finance, the lender on her Soul,
she wanted to return it. The dealership told her not to mention she
had just bought another car, she said.
After a few months, Ms. Parks couldn't make the payments on the
Rogue either. It was repossessed too.
Ms. Parks now drives a used Nissan Murano her family bought her.
Her credit score has plunged. She owes at least $15,000 on the Soul
and Rogue, according to her credit report.
She is suing the dealership, Kia of Gastonia. It shut down last
year. A lawyer for the dealership didn't return requests for
comment.
When a lender takes back a vehicle, it typically tries to sell
it, but that is often not enough to cover the outstanding loan.
Sometimes borrowers don't realize they are responsible for their
remaining debt even after they get rid of the vehicle tied to
it.
Perla Amante of Hawthorne, Calif., struggled to pay for her Kia
Sorento after her husband died in 2018. At her dealership's
instructions, she said, she signed a loan for a Kia Forte and then
called the Sorento's lender, Ally Financial Inc., to say she no
longer wanted it.
Ally told her she would be billed for the amount left over after
Ally resold the car. Ms. Amante, 70, a retiree who worked in
customer service, said the dealership hadn't mentioned this risk.
She contacted a lawyer, who got the dealership to take back the
Forte.
When Whitney Davis's Hyundai Sonata was having mechanical
problems in 2016, she returned to the Connecticut dealership where
she bought it used.
The dealership told her it would take the car and sell her
another one, she said. But after she signed a loan for a used
Nissan Altima, she was told she couldn't trade in the Sonata, she
said. When she explained she couldn't afford two car loans, an
employee told her to have the Sonata's lender take it back, she
said.
"He made it seem like it was something they deal with a lot,"
said Ms. Davis, who is 29 and an office manager.
The Sonata's lender took back the vehicle and soon informed Ms.
Davis she still owed nearly $9,000. Her credit score plummeted.
An owner of the dealership, Car Nation in Middletown, Conn.,
pleaded guilty in federal court in December to a charge related to
giving false information about loan applicants to auto lenders.
Trent LaLima, an attorney for the owner, said his client didn't
cheat any car buyers and "would never have tolerated any such
activity."
The dealership has shut down. An attorney for the dealership
disputed Ms. Davis's account but wouldn't give details.
Ms. Davis recently got a loan for a used Jeep Grand
Cherokee.
Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com and
Ben Eisen at ben.eisen@wsj.com
(END) Dow Jones Newswires
February 15, 2020 05:44 ET (10:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.