Borrower Nightmares: Soldiers battle car dealers over inflated prices, loan terms

Introduction

Lori Mendoza saw an advertisement last year from South Colorado Springs Nissan, a dealership that promotes itself as “Proudly Serving our Military” and promises bargains for men and women in uniform.

That sounded good to Mendoza, an active-duty soldier stationed at nearby Fort Carson (Colo.) Army Base. With help from her mother, who co-signed on the deal, she traded in an older BMW and drove away with a 2010 Nissan Rogue.

Then things took a wrong turn, according to a lawsuit Mendoza filed in federal court in Colorado.

The dealership, she claimed, boosted the cost of the transaction from the agreed-upon $27,000 to $35,000, admitting it had made a “mistake” only after she caught the discrepancy. Then, the suit said, it gave her a runaround about nailing down the financing she said it had guaranteed on the deal.

When Mendoza came back to the dealership to return the Rogue and cancel the transaction, another snafu emerged: The dealership claimed, the suit said, that it had already auctioned away the BMW trade-in. Later, when she demanded copies of her sales contract and the federal “truth-in-lending” disclosures, the suit alleged, a dealership staffer refused, saying he didn’t want Mendoza using the documents as “ammo” against the dealership.

Wyn Taylor, an attorney for South Colorado Springs Nissan, said the BMW was eventually returned to Mendoza and her mother. Steve Kern, the dealership’s general manager since February, told iWatch News that “we work very hard to help our men and women in the military.”

In a written statement about the case, Taylor asserts the dealership acted properly, and that documents signed by Mendoza showed the total cost of the deal was always in the $35,000 range. The statement also says the financing was never guaranteed and Mendoza knew, even though she was allowed to start driving Rogue, that the deal couldn’t be consummated until the loan was approved.

For Mendoza, the issue is now settled — she and dealership resolved the lawsuit on undisclosed terms. Many other men and women in uniform, though, are still vexed by car financing deals gone bad.

Consumer advocates and military officials claim that some car dealers target soldiers, sailors, Marines and other service members for predatory financing and other tricks that drain their bank accounts and, in some instances, interfere with their ability to do their duties.

“I think it happens every day of a week,” said Michael Archer, a retired Marine officer who serves as director of legal assistance for Marine bases in the Carolinas and Georgia. “I think it’s at least as likely as not that when a troop buys a car, he’s overpaying either on the price of the car or the price of the loan.”

When it comes to dealers that fly American flags and post signs that say “Welcome Military,” consumer advocates often joke that “the bigger the flag, the worse their practices are,” said Rosemary Shahan, president of Consumers for Auto Reliability and Safety, a California-based advocacy group.

The practices at some dealers are enough of a concern that the Federal Trade Commission has invited Archer, Shahan and other experts to speak at a public hearing Aug. 2 in San Antonio to focus on the problems servicemen and women face when they try to buy cars on credit. Industry officials deny that car dealers routinely take advantage of members of the armed forces.

“I don’t see military being targeted. I don’t see that,” said Larry Laskowski, executive director of the Independent Automobile Dealers Association of California, which represents some 450 used-car dealers in a state that is home to more than two dozen military bases.

In instances where there are bad apples that “don’t adhere to a code of ethics,” Laskowski said, there are laws on the books that are designed to protect service members and other consumers.

The National Automobile Dealers Association didn’t address questions from iWatch News about military members who purchase cars on credit, but it told the FTC “any abuses which may have occurred” in auto financing “are isolated and most assuredly are not prevalent.”

Easy targets

Next month’s FTC hearing is another sign of the increasing attention on consumer problems faced by members of the U.S. military.

In recent months, three of the nation’s largest financial institutions — Bank of America Corp., Morgan Stanley and JPMorgan Chase & Co. — committed nearly $80 million among them to settle claims they improperly foreclosed on military personnel or overcharged them on their mortgages.

The new federal Consumer Financial Protection Bureau (CFPB), which officially kicked off operations on Thursday, has signaled it will make protecting military consumers a priority.

On July 6, the CFPB and the military’s top uniformed lawyers released a “joint statement of principles” aimed at providing better protections for service members when they borrow money or buy things on credit. Officials said they’ve set up procedures to work together on addressing consumer complaints and improving financial literacy for servicemen and women.

“Service members and their families sacrifice a great deal for our country and they deserve advocates who will use every available resource to protect them from financial threats,” said Holly Petraeus, the consumer bureau’s assistant director for the Office of Servicemember Affairs and the wife of Army general and newly confirmed Central Intelligence Agency chief David Petraeus.

“Through this partnership and our other efforts,” she said, “we will work to make sure that the days of military families being easy targets for predatory practices and unscrupulous lenders are a thing of the past.”

When it comes to policing auto loans, the CFPB is handicapped because of a loophole written into last year’s Dodd-Frank financial reform law after intense lobbying by car dealers: The bureau has authority over auto lenders, but it generally won’t have authority over car dealers, which play a crucial role in the auto financing process. Dealers often prepare loan applications and work hand-in-hand with lenders in hammering out loan terms.

As part of a legislative compromise, the law increased the FTC’s rulemaking authority over car dealers. An FTC spokesman told iWatch News that the agency has “has done extensive military outreach to provide service members with consumer education about finances and avoiding fraud.” The FTC is also working to coordinate its efforts with the CFPB, including talks about how about sharing access to complaints, the spokesman said.

Battlefield promotion

For their part, military brass have spent much time in recent years documenting the problems caused by lenders and car dealers that cater to men and women in uniform. When soldiers get ensnared in bad deals, military officials say, the fallout can affect their “mission readiness” and, if their credit is ruined, put their security clearances at risk.

“It absolutely affects their ability to perform their mission,” Archer, the Marine regional legal director, said. “When you have a lance corporal who literally has his finger on the trigger, he needs to be focused entirely on the front post site and where he’s shooting, rather on extraneous personal concerns about whether somebody is going to take away his car or his house.”

Some car dealers like to locate near military bases because many of the troops stationed there “are of an age when they’re probably going to get their first car, and they’re all concentrated in one place,” Archer said.

A November 2009 memorandum by Archer sketched out several examples of the sales tactics and credit practices that car dealers used to fleece young Marines stationed at Camp Lejeune in North Carolina and at other installations in the Southeast.

One bold car salesman trespassed onto Camp Lejeune, “conducting an impromptu class to our most junior Marines on how car dealers will rip them off. Yet the salesman describes how he can ‘hook them up’ with a reputable dealer to avoid scams.” At least one “class,” Archer wrote, “is held when the salesman sneaks into the auditorium during a break between legitimate orientation classes.”

In another instance, the memo said, a dealership tricked a Marine lance corporal into buying an overpriced car by promising him free round-trip airfare to visit his parents in a distant time zone for Thanksgiving. It turned out the airfare wasn’t free — it had been financed into the loan contract at 13 percent interest.

Across the country in Southern California, three Marines stationed at Camp Pendleton are pressing lawsuits claiming that a nearby car dealer, Certified Auto Sales, falsified information on their credit applications.

In one of the three lawsuits in San Diego County Circuit Court, Areon Simon claims the dealership gave him an imaginary promotion on his credit application — listing him as a corporal when he was in fact a private.

Another Marine, Logan Turk, claims Certified Auto Sales reported on the credit application that he was buying a 2006 Mitsubishi even though he was really buying a 1997 Camaro.

A third Marine, Mark Splawn II, alleges that the dealer socked him with what amounted to a hidden finance charge, increasing the price of his 2006 Mazda because he had a poor credit history. It also promised him that the Mazda was in good condition, his suit says, but he soon discovered the vehicle had serious defects, including a leaking battery and “worn and unsafe” tires and front brakes.

Christopher Ramey, an attorney for Certified Auto, denied that the dealership engaged in fraud or did anything improper.

In Simon’s case, for example, Ramey said the dealership didn’t submit any information about Simon’s rank or employment to the lender — that was Simon’s responsibility, the lawyer said. “Mr. Simon signed and delivered the application to the lender,” Ramey told iWatch News.

He added that the dealership made it clear to Splawn, Turk and Simon that the vehicles were being sold “as is,” and that they were welcome to take them elsewhere if they wanted to have an independent mechanic check them out. He said a judge ruled in the dealership’s favor in November in a similar case of another Marine who claimed that he’d been sold a defective vehicle, finding that the “as is” label meant just that — “as is.”

Certified Auto’s owner, Joseph Romero, “is a small-town dealer,” Ramey said. “He’s probably one of the nicest guys I’ve ever met. It’s unfortunate that Mr. Romero has been victimized” by consumer attorneys seeking to generate fees for themselves.

The three Marines’ lawyer, Hallen Rosner, says his clients’ stories are examples of how poorly service members often fare when they buy cars on credit.

Rosner, who frequently represents service members in credit disputes, says many are young and aren’t “future-oriented” — which is understandable, he said, since they’re often waiting to be transferred to overseas war zones. Car dealers like them as customers, he said, because they’re “bankable” — they have steady incomes and ready access to loans from military credit unions.

“They’re a vulnerable group, like any other group that gets exploited,” Rosner said. The Navy and Marine Corps maintain lists of off-limits car dealerships that sailors and Marines aren’t supposed to set foot on, he said, but “it takes an awful lot to be put on that banned list.”

iWatch News intern reporter Shirley Gao contributed reporting to this story.