Is it wise to keep putting the car before the cash?

Dealerships can and should take some of the risk out of making spot deliveries, experts say.

In the past, "it was scary" making spot deliveries, says Mike Stoll, director of the professional services group for ADP Dealer Services Inc. in Hoffman Estates, Ill. The Internet has made it quicker and easier for customers to submit financial information and for dealerships to review customer credit histories, submit credit applications and get lender approvals.

In a spot delivery a customer takes delivery of a car before a lender buys the finance contract. Afterward, it's up to the dealership to get the contract bought as soon as possible. The tricky part can be getting the contract bought at the same terms agreed on with the customer.

Spot deliveries can happen when a deal falls outside normal banking hours. They also happen when a dealership wants to seal a deal as quickly as possible -- for instance, before a customer can bolt to a competitor.

In practice, the use of spot deliveries varies a lot among dealerships because of different store policies and variations in state laws.

In a survey of 158 dealerships for ADP, Stoll said, 37 percent of the respondents said they never do spot deliveries; 14 percent use spot deliveries for half of their customers or more. (See chart, at right.)

When the 63 percent who said they do spot deliveries were asked why, the highest percentage, 43 percent, said they do them "only when my bank is not open"; 32 percent said they do them "to save a customer time"; and 25 percent chose "It's our policy, we spot deliver every vehicle."

Richard Bellino, finance director for AutoFair Honda in Manchester, N.H., told Automotive News in an email that his dealership aims to spot-deliver every deal. "The main component is to 'control the customer.' We spot because it secures the deal and now we have control."

AutoFair Automotive Group, based in Manchester, has a total of five dealerships in New Hampshire and Massachusetts. Bellino said spot delivery is common in New Hampshire but a practical impossibility in Massachusetts because of state regulation.

At the other extreme, spot delivery is virtually universal in California, said Brian Maas, president of the California New Car Dealers Association in Sacramento. That's because California has what's called a "conditional" sales contract.

As the name implies, the customer signs the contract on the condition that if financing is not approved, the dealership has the right to cancel the deal and take the car back, Maas said.

"Obviously, in the vast, vast, vast majority of cases, that never happens," he said. "Of the 1.8 million new vehicles we're going to sell this year, I'd say well over 95 percent are going to be what you would consider to be spot deliveries."

Stoll of ADP said nowadays he advocates making spot deliveries routinely, with some conditions. Spot deliveries have to be part of an overall plan to speed up the entire dealership work flow surrounding the customer's shopping and purchasing experience -- including but not limited to F&I, he said.

The dealership also needs to look at the customer's credit history, with his or her permission, he said. Stoll said dealerships shouldn't just guess what a customer's credit score is. In addition, the F&I manager must have a can't-miss knowledge of which lenders are likely to approve which types of loans, Stoll told Automotive News.

"Today, you know it is going to get approved, at what rate," assuming all those other things are done, he said.

Technology speeds things up and helps reduce the risk, Stoll said. Customers can supply all the relevant information online and give permission to check their credit history before they arrive at the dealership, he said. That eliminates steps that previously had to take place at the dealership in the customer's presence.

"We are advocating through technology to put a business plan for spot delivery in place and to collect the customer's information in advance, so it allows the customer to forgo having to provide the information during the dealership process," Stoll said. "The current definition -- we are not advocating spot delivery as we know it today."

Dealerships can reduce the risks of spot delivery to what they consider an acceptable level, but there's never zero risk. There are serious downsides to a spot delivery gone bad.

If no lender buys the contract, the most likely outcome is that the dealership has to rewrite the contract for the deal.

That means the dealership has to get the customer to come back and sign a new contract. Almost by definition, the new contract is likely to cost the customer more money in terms of a bigger down payment, monthly payment or both. After all, no lender approved the original deal.

For goodwill reasons the dealership may decide to honor the original deal even if it costs the store money. For instance, a lender may demand a bigger down payment, and the dealership might decide to pay it. Even so, the customer would still need to sign a new contract, Stoll said.

As a last resort, subject to local regulation, a dealership can demand a car back, provided the customer signed a document acknowledging the spot-delivery deal was subject to finance approval, he said.

Re-contracting can have a bad effect on customer satisfaction. It's also a hot button for federal regulators, including the Consumer Financial Protection Bureau and the Federal Trade Commission, cheered on by consumer advocate groups and their supporters in Congress.

In particular, auto finance industry critics have latched on to the term "yo-yo financing" to describe the case in which a dealership purposely makes a spot delivery at unrealistic terms, knowing the deal won't get approved. The idea is to squeeze more money out of the customer the second time around. To some critics, "yo-yo financing" means practically the same thing as spot delivery.

The term crops up often, including in an editorial last month in The New York Times entitled "When a car loan means bankruptcy."

"One of the more egregious tactics is the 'yo-yo,' in which the buyer drives away believing that the deal has been closed, only to be summoned back days or weeks later and told that original deal has fallen through and that he or she must either surrender the car or accept a higher interest rate and terms that are much less advantageous," the editorial said.

The National Automobile Dealers Association says there's no evidence that yo-yo financing is as common as consumer advocates seem to think.

"We are not aware of any credible evidence which indicates that fraudulent 'yo-yo' transactions are prevalent in today's marketplace and none was presented to the Federal Trade Commission when it thoroughly examined this issue during a series of motor vehicle roundtables in 2011," NADA told Automotive News in a written statement.

Anecdotally, F&I managers and industry experts say spot deliveries for the most part account for a minority of deals, and rewriting contracts accounts for a smaller subset within spot deliveries.

Adam Marburger, finance director for AutoCenters Nissan in Wood River, Ill., said spot delivery isn't his first choice.

"I like deals clean. I like a solidified deal," he told Automotive News.

Nevertheless, he said the dealership is aggressive about getting as many customers as possible in cars while they are at the dealership. He said the dealership does about 20 percent of its volume as spot deliveries, often because of late-night deals.

It's an easy call for prime-risk customers but less easy for customers with subprime credit, he said. The dealership sells about 200 vehicles a month, roughly 50-50 between new and used, he said.

"If somebody is credit-challenged and it's 8:30 or 9 at night -- and you'd be surprised how often it's 8:30 or 9 at night, and then it's even later when you're doing the paperwork, we're one of those stores, we're busy late at night -- if they have a substantial down payment you can sign them," he said.

"But with subprime, it's definitely more kind of deal-by-deal."

Out of 20 percent spot deliveries, Marburger said he averages fewer than one rewritten contract a month.

F&I trainer and consultant Gil Van Over, president of gvo3 & Associates in Crown Point, Ind., said in his opinion spot delivery is trending downward, especially for prime-risk customers, because dealerships have such easy access to more or less instant, online approval, even at odd hours.

However, he said, many dealerships continue to stick with spot deliveries "in the teeth of" advanced technology.

Based on dealership compliance reviews his firm does, Van Over estimated "5 to 10 percent" of total deals get rewritten. Of the total volume the company reviews, he said "less than 2 percent" show what he considers potential signs of yo-yo financing.

When a deal is redone, Van Over said he considers it suspicious if the customer's interest rate increases by more than 25 basis points, or 0.25 percentage points; if the monthly payment increases by more than 10 percent, or if the customer has to come up with more cash down, no matter how big or small the amount is.

"We would be concerned if we saw it as a pattern," he said. "It's going to happen every once in a while."