Folding dealers shock car buyers with liens

updated 3:29 p.m. ET Feb. 1, 2009

SACRAMENTO, Calif. - The national wave of auto dealership closures has come crashing down on thousands of people who are on the hook for used-car loans that dealers were supposed to absolve.

When a car buyer still owes money on a vehicle he is trading in, the dealer promises to pay off the outstanding loan, then resells the vehicle. But as more dealers go out of business, some are sticking consumers with the bill. Lenders can then go after the previous owner who thought the debt was paid, or repossess the car from the new owner who assumed it came with clear title.

"It's devastating for people when it happens because they have two car payments and they can't afford them," said Rosemary Shahan, president of Consumers for Auto Reliability and Safety, a Sacramento-based nonprofit that lobbies on behalf of vehicle owners. "Their credit is destroyed for no fault of their own because the dealer defaulted."

Regulators in California and other states, including Florida, Iowa and Washington, are seeing a surge in consumer complaints. They warn the problem is sure to grow this year because of the deepening recession and continued trouble in the auto industry.

About a quarter of all car buyers are vulnerable because they still owe money on their trade-in or lease when they buy another vehicle, according to industry tracker Edmunds.com. It's become more common for a driver to owe money on a trade-in as people stretch their car payments over six or seven years to make them more affordable.

Inga and Brian Randle of Elk Grove, a Sacramento suburb, are among those who got burned.

In 2006, they bought two 2001 Mercedes vehicles, a CLK430 convertible and an E320 sedan, finding out afterward that the small Sacramento dealer had not paid off the previous owners' liens.

Creditors called, and the Randles found they owed $40,000 on the old loans.

"I stopped paying on both of those loans because I couldn't afford to keep paying. It's a huge stain on my credit — and I had very good credit," Inga Randle said. "Our life has really been affected by what's going on here."

The Randles now drive 15-year-old vehicles they own outright. Brian Randle is working more overtime to rebuild their savings, and the couple has been dragged into the dealership's bankruptcy proceedings.

A few states have programs that require dealers to post substantial insurance bonds to repay victimized car buyers. Consumers in states with no such program, or a poorly funded one, have little recourse but to sue and hope for at least a small slice of the assets if the dealer has filed for bankruptcy.

Authorities have brought charges in rare cases where they have proof of intentional wrongdoing, but local prosecutors, motor vehicle departments and state attorneys general are paying more attention as the problem grows.

California state Sen. Ellen Corbett, a Democrat from San Leandro, has introduced legislation that would require dealers to prove they are paying off a vehicle's lien before transferring the title. That's already a requirement in some states, said Jason King, spokesman for the American Association of Motor Vehicle Administrators.

Corbett's bill would require auto dealers to post bonds as high as $250,000 with the California Department of Motor Vehicles so liens could be paid off if a dealership collapses.

"It's becoming a serious problem because the consumer, through no fault of their own, may be facing financial ruin just because they purchased a car," Corbett said.

California is hit particularly hard because it has the nation's largest auto market, more dealers going out of business, and more buyers who owe money on their trade-ins.

MORE FROM AUTOS

Autos Section Front

Toyota to replace 3.8 million gas pedals GM selects Canada to build new Buick Nissan hatches plan to boost battery cars Source: GM has no other Saab suitors Saab’s future unclear as GM loses bidder Toyota to recall 110,000 Tundras over rust Leasing again becoming option for auto buyers GM asks Europe for up to $4.9 billion handout Electric car maker Tesla seen going public 10 strange-looking foreign cars Autos Section Front   Add Autos headlines to your news reader: