07/25/2011 12:21 pm ET | Updated Sep 24, 2011

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

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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 ...

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