There is growing evidence of widespread automobile dealer "swallowing,"
or theft, of consumer downpayments, trade-ins, and manufacturer rebates.
In these situations, the dealer fails to use the downpayment or trade-in
to reduce the consumer's obligation, but instead uses it solely to
increase dealer profit.
This is remarkably easy to do in an automobile lease. The consumer is
never told how much the car actually costs or how the monthly payments
are computed. Most consumers have no idea whether a lease payment of any
particular size reflects the downpayment, trade-in, or manufacturer's
Consumers can also be fooled in credit sales, where the consumer focuses
on the cash price and the monthly payment amount, but not the amount
financed after various adjustments. This is accentuated when the dealer
"fans" through a mound of paperwork, at times with the speed of a card
shark shuffling a deck of cards. Downpayments properly credited in a
draft sales agreement may disappear, or sale prices may mysteriously
increase when the same document is presented in final form.
The profit incentive for swallowing a trade-in or other payment is
clear. Whatever the dealer might make on a sale, stealing the trade-in
may increase the profit ten-fold.
Recognizing Dealer Fraud
Dealers caught swallowing may explain the discrepancy as a clerical
mistake. For example, a dealer may plead unintentional error where
documents show an amount financed of $13,000 even though the cash price
is $13,000 and the downpayment $1000. Dealer swallowing of downpayments
is so common today that the consumer's attorney should treat any such
"mistake" with skepticism. See if the dealer has made other such
mistakes with other customers.
Be just as skeptical if a dealer's explanation is that the consumer
misunderstood the transaction. Do not fall into the trap of treating
documentary evidence as more persuasive than your client's understanding
of oral claims. For example, a dealer may point to the sales agreement
as evidence that a used car's quoted price of $8000 was a net price
after the trade-in was credited, not $8000 before the credit. The issue
is not what the documents state, but what was promised to the consumer.
Do not underestimate a jury's capacity to believe an honest, but
unsophisticated consumer over a slick car salesperson, particularly in a
case where several consumers can testify to the same practice. See
generally, National Consumer Law Center, Unfair and Deceptive Acts and
Practices, sec. 5.4.3, 5.4.5 (NCLC: Boston 1991 & 1995 Supp).
Be particularly wary of dealer statements like "Oh, the rebate money is
already in the deal" or "Oh, we account for it someplace else; that's
the way we do it in leasing." The dealership has internal documents for
each car transaction that show precisely all debits and credits, and the
dealer should be able to show you exactly how a trade-in, rebate, or
downpayment was reflected in a lower selling or leasing price. Evasions
should be treated with great suspicion.
Similarly, a claim by the dealer that the consumer authorized the
assignment to the dealer in writing is no defense to stealing a
manufacturer's rebate. Even if the signature is genuine, the purpose of
the authorization is to transfer rebate in consideration for lowering
the sales price by a like amount.
Dealers may also argue that a lessee has no legal right to a
manufacturer's rebate because the lessor, not the lessee, purchased the
car. Even if true, the dealer has still defrauded the consumer by
claiming the consumer would benefit from the manufacturer's rebate.
Uncovering Lease Swallowing
Dealers have the easiest time swallowing trade-ins and downpayments when
the vehicle is leased because the lease does not explain how these
credits are reflected in the lease payments. Nevertheless, careful
analysis of the lease disclosure can often uncover swallowing.
First, see if the dealer forgot to disclose the trade-in or downpayment
in the lease under the amount due at lease consummation, because this is
a Consumer Leasing Act violation, giving the consumer $1000 statutory
damages plus all actual damages plus attorney fees. -2- Some of the
downpayment may be specified as going to pay off the security deposit,
first month's rent, and any other initial payments. The rest of the
downpayment must be disclosed as a "capitalized cost reduction," meaning
that it goes to reduce the size of the lease payments.
The full value of the trade-in must also be disclosed in the lease.
Nevertheless, it is probably permissible to disclose only the net trade-
in value, after the dealer pays any outstanding loan balance remaining
on the trade-in vehicle.
Even if the downpayment or trade-in is listed in the lease, this does
not mean that the lessor actually lowered lease payments to reflect this
credit. The only sure way of seeing how the downpayment was reflected in
lower lease payments is to obtain the lessor's work sheets. Short of
this, the lease itself can often indicate what happened to a trade-in or
downpayment, although this may require some careful analysis.
The best way to do this is to examine the net amount (after any trade-
in, downpayment, or rebate) the consumer, in effect, is paying for the
car, often called the initial lease balance. The question is whether the
initial lease balance is consistent with the consumer's expectation as
to how much the car costs and how much of a credit the consumer is
receiving off that cost because of the trade-in or downpayment.
Consider a lease where a consumer has turned in a trade-in with a net
value of $6000 for a car with a $15,000 sticker price. The initial lease
balance should be about $9000; an initial lease balance closer to
$15,000 indicates the trade-in has been swallowed.
In making this comparison, keep three facts in mind that may explain
away discrepancies without indicating that the downpayment has been
1) The effective cost to the consumer of a leased car is often 5% or
10% more than the car's sticker price or negotiated sale price. While
this extra charge is not "swallowing," the practice may still be
deceptive if the lessor does not disclose to the consumer this cost of
leasing as opposed to purchasing the car.
2) Not all of a downpayment should go to reduce the initial lease
balance, but may be applied instead to security deposits, first month's
rent, registration costs, and the like.
3) A gross trade-in amount is not the same as a net trade-in amount,
which is that remaining after any loan payoff on the trade-in is
Computing the Initial Lease Balance
Virtually no leases today specify the initial lease balance, but many
leases do specify how to compute this amount. If the formula is not a
separate provision, look at the provisions on early termination and
default. While the language found there may appear daunting, it is
usually little more than performing several addition and multiplication
For most leases that do not tell you how to compute the initial lease
balance, someone who understands leasing accounting can usually compute
this number for you from other numbers specified in the lease. -3-
Other times, it is necessary to discover this number from the lessor.
Discovering the Dealer's Internal Documents
Often the best way to uncover swallowing is through discovery seeking
earlier drafts of the sales agreements, and other internal documents at
the dealership. Standard dealership bookkeeping procedures are based on
very detailed debits and credits, so that there is usually a precise
paper trail for any car transaction. The consumer's attorney should
subpoena the complete "deal jacket," including preliminary or draft
worksheets, which may differ from the final worksheets. These documents
will trace all credits and debits relating to downpayments, trade-ins
and manufacturer rebates.
For example, a dealer's used car inventory may show the net value of a
trade-in vehicle. Trace that sum through the "deal sheet" which
summarizes the lease transaction. Does the net value decrease the
consumer's obligation on the new car or does it go just to the dealer's
You may also have to trace the dealer's "cash sales" account to see if
rebates or other amounts have been "washed" this way. All forms of
dealer swallowing have one constant: the dealer must manipulate numbers
for both the customer and the dealership.
Perhaps even more persuasive to a jury is the type of testimony that may
be obtained from the dealership's own personnel, who may see nothing
wrong in swallowing downpayments, trade-ins, and rebates. For example,
one salesperson recently admitted under questioning "If the customer
doesn't specifically say their down payment is supposed to reduce what
they owe us, I assume it all goes to profit. Some customers don't mind
that all, you know."
Swallowing cases should usually include tort claims such as fraud or
conversion, so that the consumer can seek punitive damages. UDAP claims
should also be added because the proof standard may be easier, the
dealer may have engaged in oral misrepresentations even if there was no
theft, and because attorney fees and multiple or statutory damages may
Swallowing in a credit sale probably involves a Truth in Lending
violation because the amount stolen may be a hidden finance charge, so
that the lender is liable for statutory and actual damages and attorney
fees. Similar remedies may be available for lease swallowing under the
Consumer Leasing Act, since the lessor may misdisclose the capitalized
cost reduction or trade-in, and because the swallowed amount may make
the early termination penalty unreasonable.
[Footnotes] 1 The following article is based in large part on
information provided by Remar Sutton, 185 Beverly Road, Suite 3,
Atlanta, Georgia 30309, 404-427-1657, President of the Consumer Task
Force for Automotive Issues, a frequent expert witness on automobile
dealer practices, and a former automobile dealer.
2 See 15 U.S.C. sec.1667; National Consumer Law Center, Truth in
Lending ch. 9 (NCLC:Boston 1994 Supp.).
3 NCLC generally is capable of doing so, and will provide this analysis
at no charge for Elderlaw and Massachusetts legal services attorneys
under our AOA and MLAC grants. There will be a fee charged for all
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