There is growing evidence of widespread automobile dealer "swallowing," or theft, of consumer down payments, trade-ins, and manufacturer rebates. In these situations, the dealer fails to use the down payment 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 down payment, trade-in, or manufacturer's rebate.

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. Down payments 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 down payment $1000. Dealer swallowing of down payments 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 down payment 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 down payments 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 down payment 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 down payment may be specified as going to pay off the security deposit, first month's rent, and any other initial payments. The rest of the down payment 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 down payment 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 down payment was reflected in lower lease payments is to obtain the lessor's worksheets. Short of this, the lease itself can often indicate what happened to a trade-in or down payment, although this may require some careful analysis.

The best way to do this is to examine the net amount (after any trade-in, down payment, 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 down payment.

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 down payment has been swallowed:

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 down payment 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 deducted.

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 steps.

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 down payments, 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 gross income?

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.

Dealer Testimony

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 down payments, 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."

Consumer Remedies

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 be available.

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 others.