The practice of subprime auto loans is booming in the United States, targeting customers with bad credit with loans that often fail. The companies behind it are making huge profits.
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About 10 years ago, the use of subprime mortgages drove this country into a financial crisis. Subprime loans are most often made to low-income borrowers with lower credit scores. They have high interest rates and people default more than traditional loans. Today, subprime used car loans have become a huge business and not just for car dealers. Anjali Kamat of the WNYC member station looks at lending practices.
ANJALI KAMAT, BYLINE: It’s a beautiful morning at the edge of Central Park in New York City. Anouyen Meda Celeste, who passes by Celeste, has just worked at night.
Did you have a long night?
ANOUYEN MEDA CELESTE: I did. But everything is fine.
KAMAT: Did you just come out?
CELESTE: Yes, I did.
KAMAT: How long was your shift?
CELESTE: It was 8-9 a.m. now.
KAMAT: Today Celeste is a registered nurse. He arrived in New York City about five years ago at the age of 19. He grew up in West Africa. And from the start, he knew he wanted to take care of people.
CELESTE: I wanted to go to med school, and then, you know, once you get here, you meet med school, that – that scares you, because if you’re alone here you have to take the safest and fastest route.
KAMAT: So he went to nursing school instead. To pay, he needed a job with flexible hours.
CELESTE: I was like, I need the Uber. And people were saying that, you know, they can make 15, some say $ 2,000, a week.
KAMAT: All he needed was a car. He went online and found what looked like a good deal at a used car dealership, a low mileage 2015 Chrysler for $ 10,000. He says he put in $ 4,000 and took out a loan for the rest.
CELESTE: I was told it was just a bank. And then I didn’t really know their name exactly. It was the acceptance of credit. I didn’t even know the name.
KAMAT: Accepting Credit – Celeste had never heard of this before, but the company that finances her loan is a household name with used car dealers across the country.
(EXCLUSION FROM THE ADVERTISEMENT, “WHAT IS CREDIT ACCEPTANCE?”)
UNIDENTIFIED PERSON N ° 1: So you need a new car? Tired of being denied funding? Well, accepting credit can help.
KAMAT: Celeste signed the papers and drove out of the parking lot in her new car. He says his contract came in the mail a week later with some things he says he didn’t realize was part of the deal, a sale price of $ 17,000 plus tax and an interest rate 22.99% subprime. He had signed up to pay $ 32,000 for a car he said would cost $ 10,000.
(EXCLUSION FROM THE ADVERTISEMENT, “WHAT IS CREDIT ACCEPTANCE?”)
UNIDENTIFIED PERSON # 1: We are a finance company that works with auto dealers across the country who specialize in helping consumers with no or bad credit.
KAMAT: Celeste had entered the murky world of subprime auto finance. It’s eerily similar to the subprime mortgages that sparked the last financial crisis. And the largest share of these loans come from independent auto finance companies like the credit acceptance. They give loans to consumers that no one else will fund. But unlike other large subprime lenders, Credit Acceptance also functions as a collection agency, suing consumers after they default. That’s when he repossesses the car, sells it, and sometimes will take legal action to collect the loan balance.
UNIDENTIFIED PERSON # 2: So I was in credit acceptance for almost nine years.
KAMAT: He is a former employee of the credit bureau. He agreed to speak to us on the condition that we do not share his name. He says that the financing and then the collection of the loans is intentional. Acceptance of credit, he says, uses a proprietary software system that incentivizes dealerships to increase the market value of used vehicles. The larger the loan signed by the buyer, the higher the commission received by the dealer.
UNIDENTIFIED PERSON # 2: CAC is the lender and the collector wrapped in one. So of course you want to have the most money to spend, which is why you are paying the dealers to inflate the price, which inflates the contract amount owed on accepting credit.
KAMAT: So the higher the interest rate, the higher the profit margin …
UNIDENTIFIED PERSON # 2: The more money there is to collect, to garnish, to pursue.
KAMAT: WNYC obtained data on all loans made by the company in a single month in 2016. It showed that the majority of cars were sold for much more than their market value, about 35% more. The credit acceptance did not respond to our findings or to their former employee’s claims except to say that the legal process generated less than 2% of their total collections last year.
UNIDENTIFIED PERSON # 2: Acceptance of credit sees it as, how can I put this customer in a position where, in the event of default, I have the greatest amount of money to collect through alternative collection channels like the justice system?
KAMAT: And that money doesn’t just add to the benefits of accepting credit; it also goes to their backers on Wall Street. This includes their investors, their bondholders and banks, like Wells Fargo. Credit Acceptance has issued more than $ 6 billion in auto asset-backed subprime securities – mostly bonds backed by subprime auto loan pools. Their bonds are highly rated by rating agencies and offer yields of up to 4%.
AARON GREENSPAN: It’s a very strange set of circumstances where, like, high finance has been married with that kind of seedy underbelly of the auto industry.
KAMAT: It was Aaron Greenspan, a transparency expert who wrote a detailed report on the company and also bypassed the company’s stock. But the credit acceptance stock has grown by over 2,000% over the past decade. Meanwhile, back in the Bronx, Celeste, the 24-year-old who bought the Chrysler, couldn’t afford her nearly $ 500-a-month payment and eventually stopped doing so.
CELESTE: I was, like, OK, that’s enough. I have to, like, return the car.
KAMAT: Credit Acceptance repossessed the car, auctioned it off, then sued Celeste for what she still owed on the loan – just over $ 7,000.
(SOUND PRESENTATION OF THE ARCHIVED RECORDING)
UNIDENTIFIED JUDGE: Plaintiff, Credit Acceptance Corporation, against defendant …
KAMAT: But just before her second Bronx County Civil Court hearing, Celeste met Shanna Tallarico.
SHANNA TALLARICO: Most of the clients we help, it’s usually at the stage where the credit acceptance has sued the consumer and is trying to recover the amount of the shortfall.
KAMAT: Tallarico is an attorney with the New York Legal Assistance Group, which provides support to consumer debtors. She challenged their lawsuit against Celeste on the grounds of false publicity, deception, fraud and violating the federal Truth in Loans Act. After seven months of delays, Credit Acceptance dropped the lawsuit. Thousands of others like Celeste are not so lucky. Tallarico said the overwhelming majority of consumer debtors in New York City do not have access to a lawyer.
TALLARICO: The fact that people are not represented is very much integrated into the economic model.
KAMAT: Over the past 10 years, Credit Acceptance has filed nearly 25,000 cases in New York State alone. For NPR News, I’m Anjali Kamat.
(NOSAJ THING “ERASE” SONG)
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