When a Car Loan Means Bankruptcy
The mortgage industry set the stage for the recession by luring people into ruinously priced loans they could never hope to repay, then selling those loans to Wall Street in mortgage-backed securities that went bad. The federal government has since tamed that industry, outlawing most of the risky and deceptive practices that led to that crisis. It must now do the same with the auto lending industry, where the practice of roping people into loans that damage them financially is all too common.
Predatory loans arranged by unscrupulous auto dealers have long been a source of hardship for low-income consumers who can least afford them. But the problem has worsened since major banks entered the picture and began buying up car loans to package them in securities sold to pension funds, insurance companies and others. Banks that are scrambling to buy such loans have sometimes formed alliances with unscrupulous dealers, including one who was indicted on grand larceny charges that he defrauded two dozen buyers.
Dealers who can offload loans to banks before the loans fail take the same rapacious approach that mortgage lenders took in the run-up to the recession. They prey on less sophisticated borrowers, falsifying the borrower’s income information and writing loans with astronomical interest rates and hidden fees that deliver a quick profit to the dealers.
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. Borrowers who desperately need cars to get to work or to convey ailing parents back and forth to the doctor often feel that they have no choice and end up signing on the dotted line.
A recent story on the used car lending industry by Jessica Silver-Greenberg and Michael Corkery of The Times offers a disturbing account of how dealers and lenders work together to fleece vulnerable buyers. After examining bankruptcy and civil court filings, the reporters found that ruinously priced loans carried interest rates that sometimes exceeded 23 percent. The initial amount borrowed was typically at least twice the value of the car being purchased. Some used car dealers submitted loan applications to lenders that contained incorrect income and employment information. One borrower said the dealer had falsified her income, thus allowing her to qualify for a loan she could not afford.
Some of these borrowers, naturally, end up in bankruptcy, with the cars repossessed. And because the resale value of the cars falls short of what the borrower owes, some people end up shouldering payments on a vehicle long after it is repossessed. This pushes borrowers deeper into poverty.
Federal prosecutors are investigating the subprime auto lending business, focusing on how questionable loans are packaged and sold to investors. One issue here is whether the lenders fully disclosed the creditworthiness of the borrowers whose loans made up the securities.
The government also must require that auto dealers, like mortgage lenders, verify that borrowers have the ability to repay their loans and meet their other expenses. In addition, regulators should bar the dealers from gaining additional profit by manipulating interest rates. Beyond this, banks that buy auto loans should be held strictly accountable for any irregularities.
The main regulators of this industry, the Consumer Financial Protection Bureau and the Federal Trade Commission, need to move swiftly and aggressively on these matters.
Written By The Editorial Board (2014 August 8) When a Car Loan Means Bankruptcy. Retrieved on August 15, 2014 From NYTimes.com