By on July 21, 2014

20subprime-blog480

The issue of subprime car loans, specifically loans with exorbitant interest rates for used cars, has filtered into the New York Times, with the paper’s Dealbook section running an investigation into the practice.

The NYT article serves as a primer on the subprime auto loan crisis, though it focuses on used cars, and the unscrupulous practices of dealers who charge interest rates as high as 25 percent for used cars, which are frequently repossessed and then re-sold, enabling dealers to make vast profits many times over on the same car.

The Times also found evidence of hardball sales tactics and fraudulent loan documents, with some salesmen facing criminal charges related to their heavy-handed sales tactics and fraudulent loan applications. The article also focuses on the securitization of these loans, and Wall Street’s hunger for them thanks to the higher yields that they pay

Investors, seeking a higher return when interest rates are low, recently flocked to buy a bond issue from Prestige Financial Services of Utah. Orders to invest in the $390 million debt deal were four times greater than the amount of available securities.

What is backing many of these securities? Auto loans made to people who have been in bankruptcy.

An affiliate of the Larry H. Miller Group of Companies, Prestige specializes in making the loans to people in bankruptcy, packaging them into securities and then selling them to investors.

The average interest rate on loans bundled into Prestige’s latest offering, for example, is 18.6 percent, up slightly from a similar offering rolled out a year earlier. Since 2009, total auto loan securitizations have surged 150 percent, to $17.6 billion last year, though some estimates have put the total volume even higher. To meet that rising demand, Wall Street snatches up more and more loans to package into the complex investments.

Much like mortgages, subprime auto loans go through Wall Street’s securitization machine: Once lenders make the loans, they pool thousands of them into bonds that are sold in slices to investors like mutual funds, pensions and hedge funds. The slices that include loans to the riskiest borrowers offer the highest returns.

Rating agencies, which assess the quality of the bonds, are helping fuel the boom. They are giving many of these securities top ratings, which clears the way for major investors, from pension funds to employee retirement accounts, to buy the bonds.

None of this is news for anybody that has been following the topic on TTAC, nor does the NYT article cover the risks related to subprime lending in the new car market. But the Times does advance the argument that the lending practices of certain banks could pose a systemic risk if the subprime auto loan market faces a major downturn.

While losses from soured car loans would be far less than those on subprime mortgages, the red ink could still deal a blow to the banks not long after they recovered from the housing bust. Losses from auto loans might also cause the banks to further retrench from making other loans vital to the economic recovery, like those to small business and would-be homeowners.

If those losses materialize, they could pummel a wide range of investors, from pension funds to insurance companies to mutual funds held by Americans preparing for retirement. For the huge baby-boomer generation, including many whose savings were sapped by the 2008 crisis and the ensuing recession, any losses from the auto loan securities could deal them another setback.

After outlining the deteriorating underwriting standards and outright fraud used to get unworthy buyers into overpriced cars with usurious loan terms, NYT article closes by noting that in Q1 2014, repossessions were up 78 percent year over year. While the NYT points the finger at ratings agencies for being complicit in fueling the subprime bubble, at least one agency has taken notice.

As it stands now, the average vehicle loan term is 66 months, according to credit rating agency Experian, with loan terms of 73 to 84 months make up nearly a quarter of loans originated in Q1 of this year. The average amount financed for a new vehicle loan and the average loan payment also hit new highs in that same period. All of this suggests that Americans are financing vehicles with ever higher transaction pricing and stretching out the payments to unprecedented lengths, all in the name of a lower, more manageable monthly payment with little regard to how affordable the actual vehicle is. But as well all know, it’s different this time.

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69 Comments on “The New York Times Shines A Light On Subprime...”


  • avatar
    schmitt trigger

    “Wall Street’s hunger for them thanks to the higher yields that they pay”

    ” the unscrupulous practices of dealers who charge interest rates as high as 25 percent for used cars, which are frequently repossessed and then re-sold”

    Those two statements pretty much sums it up.
    Additionally, the repo companies have lots of work.

    All told, a win-win-win scenario, except for the gullible and ignorant consumer.

    • 0 avatar
      Omnifan

      Even with the higher risk of buying subprime notes with 18% interest, you can make your investment back quickly (relatively speaking) and if it defaults, you can at least break even. That’s much better than the poor souls who are paying 24% on a car note.

      When Chrysler was going out of business in the late 70′s, Chrysler Financial commercial paper was yielding 23% on notes secured by car financing. I used to buy them with 30 day maturities to minimize the risk. Very low default rates on the car loans, the commercial paper never defaulted during the government loan guarantee process. Can’t lose.

      Self regulation is still the best policy. If you don’t understand the terms and costs, don’t sign it. If you do, then you got what you deserved.

  • avatar
    kcflyer

    Here we go again. My only question is. If and when this bubble burst will it still be George Bush’s fault? Kidding, my point is that it does not matter which flavor of scoundrels you prefer, they all turn a deaf ear to stuff like this until it becomes a political problem for them.

    • 0 avatar
      ClutchCarGo

      The root problem is that the Feds have been unable to establish a regulatory regime that can adequately supervise the financial market, mostly due to the heavy lobbying and political contributions from those very financial markets. The Great Recession only started with sub-prime mortgages, and if that had been where it ended, things would not have deteriorated like they did. Completely unregulated credit default swaps and synthetic collateralized debt packages (thanks a lot, Commodity Futures Modernization Act) created the huge losses and market insecurity that led to the freeze up, since no one knew who had exposure or for how much. If sub-prime auto loan securities stay as they are, the bubble potential will be kept small. I just worry that the greed-heads will again start inventing ever more complex side bets when the pool of auto loans starts to shrink, and it’s those unregulated, thus unreported, side bets that inflate a bubble that will have to burst.

      • 0 avatar

        The government by definition can’t run “business”. It doesn’t worry about “profit-and-loss”. If it runs out of money, it just TAXES people more.

        The greatest danger to businesses is free market. If they can succeed or fail without bailouts, they’ll be more careful than to make high-risk loans.

        You are correct – the government CAN’T adequately supervise the financial market. that’s not its job. It should STAY OUT of it.

        • 0 avatar
          highdesertcat

          However, the current administration has decided to play an active part in running America’s business sector.

          And this is exactly what the majority voted for. Occupy Wall Street, anyone?

          ” the government CAN’T adequately supervise the financial market” but it sure injects itself at every opportunity…….

          • 0 avatar
            VoGo

            desert cat,
            Do you have any evidence of your assertion that “the current administration decided to play an active part in running America’s business sector”?

            Yes, we did invest in GM, Chrysler, AIG and a few other financial firms to keep the economy afloat, but exited holdings as soon as the markets had restabilized.

            But today? What industry has been nationalized? What has fundamentally changed for American business showing that the Federal government as taken such an active role?

          • 0 avatar
            highdesertcat

            VoGo, there is plenty of evidence where the current administration is trying to stimulate the US economy by putting pressure on corporations, large and small, to lend money, expand their operations by hiring workers, etc, in whatever their field of venture is.

            This is unusual and has not been done during MY lifetime, although it may have been done under FDR in various ways prior to WWII, like CCC, TVA and others.

            Are you not aware of these tactics or do you not own a home that is mortgaged? Have you not heard about the refinancing opportunities out there for people underwater?

            When the Fed makes money as cheap as it is today, does this not entice people to borrow money even if they cannot possibly repay it during their lifetimes?

            Do you ever visit Money or Finance boards, like the Wall Street Journal, Dow-Jones, et al, to word up on what’s going on in the financial sector of the US?

            If you don’t know, you don’t know. That’s cool with me too. But those are great places to read up on what’s coming down the pike.

            Long before Microsoft revealed their planned layoffs for the next year, other people already knew about it, and that those layoffs would affect mostly H1B employees in the US and foreign nationals overseas, not Americans.

            How about the pressure on Apple to bring both its money and its manufacturing back to the US?

            Do you think either of these giants would choose to do so out of the goodness of their corporate hearts?

            But, of course the greatest nuisance for the current administration is the pharmaceutical companies who are shifting their corporate headquarters and tax-liability out of the US and to Ireland, and other places. That is lost revenue for Uncle Sam!

            Why do you think that is?

            The US auto industry may be the second largest market on the planet, but it is still small compared to other industries playing on this planet.

            Why do you think Big Oil still gets so much preferential treatment from the US government? It’s because of the Billions in revenue the US government collects from them.

            American businesses do not have to be nationalized to have an effect on the US economy. If they leave or reduce their tax burden that can also have an effect.

            But such a discussion would not be in line with this topic. I recommend the Wall Street Journal for starters. It holds a wealth of information.

          • 0 avatar
            VoGo

            desert cat,
            The Fed -which is independent and not an agency run by the administration – has influenced interest rates for many decades. That’s a big part of its job, actually.

            Presidents have been pressing business for many years. You are old enough to remember back to JFK pressing the steel giants to hold the line on pricing.

            All of your accusations are things that presidents have done for decades, but which you seem to always blame Obama for. I will leave it to your introspection to figure out why he is so different from other presidents that you feel so compelled to attack his administration daily.

            This is a site about cars: any chance you could stick to the subject and keep the “current administration” lies to yourself?

          • 0 avatar
            highdesertcat

            VoGo, they’re only lies if you don’t agree with them, which leads me to believe that you are a supporter and doing very well with current policies.

            Any administration, regardless of political alignment, is responsible for how well we Americans are doing. Yep, even car salesmen.

            Where were you on the previous administration? Or the one before that? They each had tremendous influence over the US auto market place. If people do well, they will buy. And I did very well under both of those administrations.

            You stated in another comment you never criticized Shrub. Well, you should have! His policies ran America onto a sandbank in the middle of the river. Oh, but what a ride it was until we got beached! Even in spite of 9/11. A lot of people made a lot of money on that boatride, including me.

            As I recall, it was Shrub who initially bailed out GM and Chrysler after they died. Was this not a heated topic on ttac and other sites?

            The subject of cars encompasses a wide variety of supporting industries, financial, insurance, maintenance & repair, retail parts, wholesale and retail sales, etc etc etc.

            If you don’t like my comments, feel free to skip over them, or change your screen name again. Your writing style and phraseology give you away and someone with the same arguments attacking others with different perspectives on the industry.

            Are you even a part of the industry? Have you ever been? Do you even know what it is like to try to peddle cars in the market place? Have you ever had to make payroll for your business?

            I’m not interested in your qualifications. Really, I’m not. Your questions give you away. If you don’t know how current government policies affect the economy, including the US auto industry, then I have overestimated your knowledge of the subject.

    • 0 avatar
      jkross22

      BUSH!!!! Drink.

  • avatar

    I could take the fiscally conservative Republican hardline and say that if you “can’t afford prine credit then you deserve nothing”…

    …or the libertarian line: “let the free market work and get government out of the banks…”

    But let me just say that there are many people with credit damage due to circumstances completely beyond their control and they NEED a basic car just to get to work.

    Subprime loans should be given to people for low-cost NEW domestic-made cars (ONLY). Especially if the government is backing them.

    More jobs for the big 3. More sales for the Big 3. If you want an import YOU WORK HARDER FOR IT. PERIOD.

    YES I AM A PROTECTIONIST AND PROUD OF IT.

    A car loan can help them build credit. If they default, take the car back.

    • 0 avatar
      VoGo

      Define domestic made and “Big 3″, BTS.

      Because cars like the Camry have the most US domestic content, and there is no such thing as a Big 3 US automakers, since one of them is UK based and controlled by Italian shareholders.

      • 0 avatar

        #1 cars built in the US-taxed states by citizens of the USA.
        #2 cars built by Ford, GM or Chrysler
        #3 cars with an MSRP below $18,000

        • 0 avatar
          VoGo

          #1: So nothing from Canada (like your 300)?
          #2: Why Chrysler? FCA is NOT American.

          And why give these benefits to subprime borrowers only? Don’t people with good credit also deserve cheap loans from the government?

          • 0 avatar

            My 300 wouldn’t be on the list because:

            #1 It’s way more than $18,000

          • 0 avatar
            Lou_BC

            #1 cars built in the US-taxed states by citizens of the USA.

            - that removes a large portion of FCA’s truck lineup. The “big trucks” from FCA are Hecho en Mexico.

            - No HellCat…. Made in Canada.

            Ironic.

            Ideology has an interesting way of twisting reality.

        • 0 avatar
          seth1065

          Big truck
          Since your king for a day what cars do the big 3, really big 2, make in the USA that meets your list, I agree many people have had it hard and their credit took a hit and you need a car in most of the USA but plenty of people f u p themselves by being greedy or keeping up with the Jones. I think your gonna look far and wide to find cars on “your List” Since Chrysler is foreign owned sorry just because your a fan boy they do not make you US company.

          • 0 avatar
            DevilsRotary86

            seth1065,

            I got curious so I ran an autotrader search for my area with that criteria. Some cars that meet the 3 criteria are:
            – Ford Focus
            – Rental-spec Ford Fusion S
            – Chevrolet Cruze
            – Chevrolet Sonic
            – odd enough, a couple dealers in my area are advertising Mustang V6 6MT’s in the $17k range. I guess they are clearing out the last 2014′s for the 2015′s.

            Now for FCA products: (I will leave it to you guys to argue if FCA is “American” or not, but here they are)

            – Dodge Dart
            – Jeep Patriot/Compass
            – Dodge Grand Caravan AVP

            Note that this isn’t an exhaustive list, but an idea of some that would meet those criteria.

        • 0 avatar
          SomeGuy

          Toyota is just as American than the Big 3…The economy is global now. BMWs are going to be made in Mexico. The same country that does the Ford Fiesta.

          • 0 avatar

            SomeGuy

            NO…it isn’t.

            when those monthly sales reports come back and it shows Ford sales vs. Chrysler sales, vs. GM sales vs. Toyota sales, vs. Nissan sales, vs. Honda sales…

            IT AIN’T THE SAME.

            This is supposed to be a FREE MARKET. You can buy any car you want – with your money. But these people who are disgusted by the idea of an American car and demand the cheapest, lamest import they can get…

            …as far as I’m concerned, YOU BETTER WORK HARDER AND FIX YOUR CREDIT FIRST cause I – THE TAX PAYER – REFUSE TO PAY FOR IT.

            BEGGARS DON’T CHOOSE.

            If you desperately need a car for you and your job and kids and you want MY HELP…then you are desperate enough to buy domestic-made.

            Let Honda, Hyundai and Toyota use THEIR BANKS to give out subprime loans for Americans to buy THEIR CARS.

            PROTECTIONISM will save this country.

            Let’s try some. Start by SECURING OUR BORDERS.

          • 0 avatar
            28-Cars-Later

            Each of those cars has a different mission, and snobby/pretentious != Mexican assembly.

          • 0 avatar
            KixStart

            BMSR: “But these people who are disgusted by the idea of an American car and demand the cheapest, lamest import they can get…”

            I wonder how they got so disgusted with American cars? Maybe they owned a few?

          • 0 avatar

            Kixstart

            I don’t really care where they got the idea.
            If they can’t afford it – THEY DON’T GET TO CHOOSE.

          • 0 avatar
            Vega

            @btr: “then you are desperate enough to buy domestic-made.”

            One of the biggest shills for domestic products unintentionally reveals that he is aware of a fundamental market truth. Beautiful.

            Also, you somehow did not reply to the other comments about Big 3 cars built in Canada, Mexico etc. Somehow reality does not fit your simplistic worldview…

    • 0 avatar
      tekdemon

      You are economically illiterate if you think anything you wrote is even vaguely feasible. Buying a brand new car, even a low cost one, is a horrible idea for someone whose credit is bad enough that they need to borrow money at a 24% APR-they should be trying to save up what they can to buy a reliable but cheap used car, not racking up huge amounts of debt to drive a car that doesn’t even exist-there’s no such thing as a super low cost vehicle from the big 3 that’s made in the US. GM’s cheapest cars are made in Korea and Ford’s cheapest cars are made in Mexico, and not only is Fiat very questionably domestic (seriously how are they different from a transplant at this point?) but they don’t even make any ultra low cost cars that compete with the chevy spark or ford fiesta. The cheapest new cars are from Nissan or Mitsubishi and not made in the US.

      I won’t even get into how counterproductive protectionism is. If it worked then I’d expect us to have all sorts of new US tire factories by now.

  • avatar
    jmo

    The primary issue, in the case of home and car loans, is if the risk is being priced correctly. If you charge 100 guys with terrible credit 20% interest and 20% of them default in 2 years and you recover 50% from the repo – that’s a solid business.

    You only get into trouble when you mis-price the risk.

    • 0 avatar
      sunridge place

      Common sense like that has no place in fearmongering discussions like this.

    • 0 avatar

      Placing risk is most effectively done when YOU KEEP THE GOVERNMENT OUT OF IT.

      The government doesn’t need to worry about profit-and-loss statements. They just raise taxes (the highway fund for example sees large portions of money not going to road purposes).

      These companies aren’t in the game to lose money. But they’ll take more risks if Uncle Sam has their backs.

      • 0 avatar
        jmo

        “These companies aren’t in the game to lose money. But they’ll take more risks if Uncle Sam has their backs.”

        That’s not really true.

        http://www.reuters.com/article/2010/04/08/financial-crisis-dancing-idUSN0819810820100408

        Chuck Prince’s comment was basically that if he and the bank didn’t dance, the board would find someone who would. Same situation here. You can only avoid a market for so long before your board begins to question why all your competitors are making so much money.

        It’s the nature of markets and also why they tend to blow up occasionally.

  • avatar
    sunridge place

    ‘The NYT article serves as a primer on the subprime auto loan crisis, though it focuses on used cars, and the unscrupulous practices of dealers who charge interest rates as high as 25 percent for used cars, which are frequently repossessed and then re-sold, enabling dealers to make vast profits many times over on the same car.’

    Actually the NYT article isn’t really about ‘dealers’ who offer the high interest rates. It is about the financial institutions that offer them. I’m sure the dealers are marking them up a point or two but none of the examples are BHPH dealers nor is the ‘re-sell’ of the repossessed vehicle by the dealer mentioned at all.

    Also, when people go on and on about longer length loans, they never mention that these traditional finance contracts are growing smaller and smaller as the % of new car sales. Leasing is over 25% of the volume. These longer purchase finance contracts are more than balanced out by the leasing activity that brings people back into the showroom sooner. Although I’m sure you can find some gloom and doom from someone on that as well if they’re presenting only half the story…the bad half that serves their point versus the whole picture.

    • 0 avatar
      VoGo

      Sunridge,
      I for one am disappointed that so many Americans either lease or take out long term loans. Both scenarios play out to the same end point, which is that people are not building equity in their vehicles, as a means of saving.

      Many poor are formerly middle class people who lived paycheck-to-paycheck. Then, a job loss or illness causes them to lose their cars and even homes, because they had no savings to buffer the loss.

      If they had chosen to pay off a $15K car over 5 years, rather than lease or take on a 7 year loan, the vehicle would be paid off when calamity hits, and they still have wheels to get them to the doctor or job interview.

      I don’t suggest that new laws to prevent leasing or long term loans are the answer; education and more attractive savings options are.

      • 0 avatar
        bunkie

        One the cruelest aspect of the car financing game is that you do not “build equity” in any depreciating asset. Vehicles should be treated like any other depreciating asset: it is an expense that must be justified using a cost-benefit analysis and a budget analysis.

        BTSR is correct in that a car can can held to establish or re-establish credit. But it must be viewed coldly. “Equity” is best built by investing. Purchasing a car is not “investing” in a financial sense.

        I must highly recommend George Orwell’s masterpiece “Down and Out in London and Paris”. In it he describes, in the starkest terms, how the wealthy benefit from poverty. I’m paraphrasing here, but in it he says “There is more money to be made taking pennies from the poor than pounds from the rich”. This observation follows his mental calculation of the nightly income from a commercial flophouse compared to that of a high-end London hotel.

        • 0 avatar
          krhodes1

          There is no reason at all that any modern car should not last 15+ years. It is always cheaper to fix the one you have than to buy a new one. So you are far better off buying and holding. Once the car is paid off, the ongoing maintenance expenses are minimal in comparison to the costs of acquisition.

          If a person is in a position where the only loan they can get is at 25%, they have systematic lifestyle issues.

          • 0 avatar
            pragmatist

            Even a long term (without crazy interest) is better than a lease because there is an end and you still have something. A lease is like a loan that never ends… in the end you have nothing and may often need to throw down more cash for your next lease.

      • 0 avatar
        koshchei

        Perhaps regulation protecting the kind of people you describe from loan sharks as well. Conditions across the country are not uniform, and as such not everybody is afforded access to the same borrowing conditions.

        In Canada, we see this to some extent too. The people tend to fall into one of two categories:

        1) The born loser. Working three minimum wage jobs, barely scraping by, this person is screwed for life based on where they live (no regional economy to speak of) or some dumb decision they made when they were still a teenager (dropping out, a criminal record) that acts as a barrier preventing them from entering a career stream. Their economic circumstances are such that they can’t afford access to education either. These people try like hell, but are running on top of an avalanche and will never do better than where they are.

        2) The author of their own misfortune. Lazy, indolent, and unwilling to try. These people deserve everything they get.

  • avatar
    Land Ark

    I would think that by now we would have learned that there is no risk to lending practices like this. Well, no risk to the lending institutions anyway. We’ve seen what happens to banks that make awful loans, nothing. So why would they stop doing it?

  • avatar
    87 Morgan

    This is a non issue, born of people who lack even a basic understanding of the automotive market and the housing market.

    1. Houses are difficult to wholesale quickly, due to the dollars involved with picking up even the worst of foreclosure.

    2. The wholesale automotive market is surprisingly liquid. There are plenty of auction houses and online auction sources for banks to move there reposed inventory.

    If…the economy sours, yes the repos will increase. However as we saw in 08-10 the used market will flourish due to the demand for affordable basic transportation. The bond holders of the securities will receive the bulk of their principal back when the cars go to auction. Most of these loans come with an acquisition fee charged to dealer, in some cases up to 25% of the purchase price. So a 20k. car has a 5k fee or discount aplied to it. The dealer has to own the car right and collect enough down payment to get in line with the bank call.

    These securities are in demand as they pay a high yield, in the teens. Go buy a government bond in the low single digits and you will understand the ‘risk’ associated. Pension funds will not get wiped out by sub prime autos like they did with sub prime mortgages, it is not possible. The loan amounts are too small with maturities that are too short with the underlying asset too liquid to create systemic risk to the system.

    As for whether these activities should be occurring in the first place, that is a tough discussion. If someone has rotten credit due to tough times and needs a car, what are they to do. Believe it or not, the dealer would rather then have good credit so they don’t have to pay the acquisition fee to the bank this cuts into the gross margin on the car and in come cases eliminates any profit. Why should the government start regulating who can buy a car and can’t along with what type of car they are permitted to sell…@BTSR. The government does not back these loans, there is no FHA, Fannie Mae etc for auto loans.

    Of all the financial industries/structures available it seems as though the sub prime auto business is the most fluid and creates the most commerce with little regulation. If anyone things that WF or Toyota credit etal are going to start lending money to folks who need these loans at low rates you are kidding yourself. TFS buys well if you are buying a new toyota, they could care less if you are buying a used Mazda 3.

    • 0 avatar
      fincar1

      One small amendment:
      1. Houses are difficult to wholesale quickly, due to the dollars and time involved with picking up even the worst of foreclosure.

      Never forget the time value of money….

  • avatar
    seth1065

    Is there any way to figure out how many of the long loans are of the 0 % for 60 months we need to move the metal kind, while I hate long loans I can see the logic of taking a GM for example up on that offer if I plan on keeping the car as long as the loan. Not sure if that is adding to the adverse car loan length or not.

  • avatar
    carguy

    This is a direct result of the Fed and its continued cheap money policy. We may not be seeing run-away inflation but there are plenty of other undesirable side-effects. One of them is an inflating equities market and the other is a return to sub-prime adventurism.

  • avatar
    kvndoom

    I just want to know which ticker I need to buy to get in on this action!

  • avatar
    friedclams

    I’m surprised no one has mentioned Cash For Clunkers… I know it was a few years ago but I believe its effect on inflating the prices of used cars is still being felt. This hurts the working poor who need a car. The prices paid to finance the beaters mentioned in the NYT article are mind-boggling.

    • 0 avatar
      28-Cars-Later

      Yes and no. I made a similar argument two years ago but someone gave me a link where a study showed it had little effect. The current environment you’re seeing is the result of significantly lower production from 2007-2011 along with a combination of inflation and ZIRP driving up new car prices. Since most people are struggling with the new car prices they go used and run into higher demand and lower supply than in years prior.

  • avatar

    Derek – A few comments:

    RE: “The NYT article serves as a primer on the subprime auto loan crisis”

    What “subprime auto loan crisis?” Has a crisis been declared?

    RE: “though it focuses on used cars, and the unscrupulous practices of dealers who charge interest rates as high as 25 percent for used cars, which are frequently repossessed and then re-sold, enabling dealers to make vast profits many times over on the same car.”

    The “unscrupulous practices of dealers? How about the “unscupulous practices of some dealers?” Is it your intent to paint with the same broad brush? Is it unscupulous to charge a 25% interest to someone who has demonstrated that don’t pay attention, let alone pay those they own money to?

    Unless you are talking about Buy Here Pay Here (BHPH) it isn’t the dealer charging the interest rate, it is the sub prime lender. The dealer might get a small piece of the interest rate for originating the loan. You really need to make the distinction between the two. The BHPH dealer holds his/her own paper and sets the interest rate. The sub prime dealer does not and sells the paper to a lender that will accept the deal, generally under extremely tight guidelines. Note I did NOT say tight “credit guidelines.” And that’s the point. After all, these are generally people with under 580 credit scores.

    If not for sub prime and, in particular, BHPH dealers, these customers would have no other option to get wheels except to hold up the corner 7/11 or go to Tony and Guido at Kneecap Motors, if you know what I mean. In the BHPH business, a third of all deliveries have to be repossessed BECAUSE THE PEOPLE DON’T PAY. That involves considerable recovery costs. In many states the vehicle cannot be resold for a “curing period,” to allow the customer to “catch up” the payments and redeem the car. The cost of collection is considerable even for those who eventually pay. Many of these cars are equipped with GPS tracking.

    Unlike Tony and Guido, many BHPH dealers report to the credit bureau. MILLIONS of people have been able to redeem and rehabilitate their credit via BHPH.

    Are you saying it is unscrupulous for a BHPH dealer to price for the risk of doing business with the most risky of all borrowers?

    Its a business I’ve never been directly involved with. But I’ve watched it closely and recently attended their conference here in LV. Someone needs to accurately tell the story of sub prime and BHPH. OR maybe we should get rid of them all and see what that gets us. Amazing is how many people live in these BHPH cars. If YOU want to loan money into that environment, go right ahead. I’ll take a pass.

    Also please note: I am NOT saying there aren’t issues in the BHPH world. There are states where a BHPH dealer can garnish wages. Some of those dealers will purposely put someone into more vehicle than the buyer can probably afford. After all, if they get it back they can resell it, after incurring some costs, plus they can still garnish the first owners payroll (if they have a job in the state) for any deficiency. This is another reason why there needs to be a distinction made between sub prime and BHPH.

    Some BHPH dealers are able to sell of some of the “held paper” after it is “seasoned,” meaning the buyers have paid regularly for a period of time. The loans are sold at a discount, so the BHPH dealer isn’t “holding the paper” any longer and has capital to turn again on more BHPH notes.

    Frankly, when writing about this industry it should be required that the business first be explained. The public doesn’t know about or grasp the very important distinctions between the two businesses. But then, the average guy doesn’t understand credit default swaps and/or the mortgage crisis. It amazes me to see that so many have grasped the FOX line that Liberals forced banks to make risky loans to undeserving poor people, which melted down the global economy. The very mention of the term “sub prime” conjures up the emotions of many based on the mortgage crisis which triggered the “Great Recession.” Common attitudes i hear include, “These people don’t deserve to drive cars!” “Make ‘em walk.” etc., etc. Then others think dealers are gouging these customers.

    • 0 avatar

      RE: As it stands now, the average vehicle loan term is 66 months, according to credit rating agency Experian, with loan terms of 73 to 84 months make up nearly a quarter of loans originated in Q1 of this year. The average amount financed for a new vehicle loan and the average loan payment also hit new highs in that same period. All of this suggests that Americans are financing vehicles with ever higher transaction pricing and stretching out the payments to unprecedented lengths, all in the name of a lower, more manageable monthly payment with little regard to how affordable the actual vehicle is. But as well all know, it’s different this time.”

      Americans have been financing vehicles with ever longer transaction pricing and stretching out the payments to unprecedented lengths for the purpose of a lower, more manageable payment the 4.5 decades I’ve been in the business. This is nothing new. What is relatively new is the amount of information available inviting ever more analysis.

      Leasing has also been useful in making payments more manageable. Would you prefer, as a consumer, to lease your car for 24 to 39 months or finance it for 84 months? I don’t do either. My question is rhetorical. As long as residuals are relatively conservative and INSURED, there isn’t a lot of risk to lenders. Not reported on these days, because I guess it isn’t considered “news,” is the fact that lease lenders have been making HUGE profits at the end of term on vehicles returned on leases. It was sure news when hundreds of millions in residual losses were reported. And that was overblown. It was also due to the idiocy of the lease lenders at the time. They behaved as if there had never been a value downturn on “heavies” during a fuel spike before.

      • 0 avatar
        Toad

        Ruggles, back in my truck selling days banks would often require “recourse” on marginal used truck loans: if the loan went bad within a set period of time the bank charged the DEALER for the loan balance plus fees. The dealer was responsible for cleaning up the mess as they saw fit; it was no longer the bank’s problem. This made dealer F&I staff look a lot more closely at recourse buyers and was a huge incentive to not engage in or encourage any kind of fraud.

        Do any banks in the automotive subprime arena require dealer recourse, and if not, why not?

        • 0 avatar

          Yes, I’ve signed a few recourse deals myself. But I believe what you described here is called “Limited Repurchase.” The dealer is on the hook until the loan “seasons,” when they bank takes over liability.

          All of the sub prime financing these days is WOR. (Without Recourse.) The reason is that if the dealer is going to assume the entire liability, he/she probably wants to get the potential interest income to offset defaults and deficiencies, of which there are MANY.

      • 0 avatar
        28-Cars-Later

        Excellent post.

  • avatar
    Toad

    In the Times article all of the car buyers knew what their payment was before they drove off the lot; they signed the loan papers, took the keys, and hoped for the best. Then they could/would not make the payments and the car was repossessed.

    THAT’S WHY THE INTEREST RATE FOR SUBPRIME LOANS IS HIGH. The buyers (and lenders) knew there was a high risk the buyer would default. Since the buyers already had bad credit it was probably not their first repo, and probably won’t be their last. It would not matter if the interest rate was 0%; some people, for a variety of reasons, don’t/won’t/can’t pay their debts. When you build up a bad payment history the risk is priced accordingly.

    Making the car dealers and the banks the villains is easy but stupid; buyers are subprime because they have bad payment histories. The only real solution is to eliminate subprime loans. In the housing market that means lots of people that might have owned now rent; in the auto market that means lots of people will have to start walking. You can argue that this is good or bad, but you either accept subprime loans and their attendant drawbacks or you eliminate them and deal with those consequences.

    Fraud is another matter; banks may have to adopt a third party screening system or do live applications via Skype so car dealers can’t game the applications process. Fraud by borrowers or lenders is inexcusable.

    • 0 avatar
      highdesertcat

      Toad, great comment! But sometimes it is the dealers that are pushing the buyer to finance. Even when they don’t want to finance.

      My grandson and his wife bought a 2014 Accord EX-L V6 this past Saturday. The dealership pushed him to finance it with great terms. I mean excellent terms! Their logic was, “Keep your money, use someone else’s money to buy the car with.”

      The salesmanager told him he was pre-approved for any length of loan he wanted, no “real money” down, just his 2010 Wrangler in trade.

      His dad and I advised him against it and he didn’t bite. Bought the Accord with the Wrangler in trade, $11,500 in real money, and the remainder (<$3500) on his credit card (the remainder will be picked up by his dad, father-in-law and me, as a baby gift from the three of us).

      The dealers want people to finance so they can get extra money from the kickbacks. I can't see paying more for something if you have enough money to cover the cost, no matter how "good" the deal sounds.

      These subprime loans are good only for people who can't afford to buy anything in the first place. Kinda like a NINJA-loan for cars.

      And if they are willing to pay the outrageous interest rates, let them have cake and eat it too!

    • 0 avatar
      Scoutdude

      While many times the customer knows the payment when they drive off the lot there is still a lot of bait and switch that goes on. The tell the customer that their interest rate and payment will be X. Then a day or two later they call up the customer and tell them that the lender has rejected that loan and that they “found” a lender that will finance them but the interest rate and payment will be higher. Many customers feel that they are over the barrel and agree to those higher rates. Sometimes the dealer will play that game multiple times.

      A good example was given to me by my friend. His wife’s brother went to the local (small town) Ford dealer to trade in their pickup on a used car. On Monday he got a call that the financing fell through but they found another lender ect. He agreed to the new terms and even went to the dealer and signed more paper work. Seeing a sucker they tried it again only this time the guy said I can’t do that I’ll just have to bring the car back and get my truck back. The only problem was that once he got his truck back it someone had way fewer miles showing on the odo than when he traded it in. The bigger problem came when he told my friend who’s dad worked for Ford and his job was auditing dealers.

      • 0 avatar

        RE: “The only problem was that once he got his truck back it someone had way fewer miles showing on the odo than when he traded it in.”

        Had he played his cards right he could have gotten the “new” car for free. Dealers go to jail and lose their dealer’s license for that kind of infraction. When a single incident shows up the authorities will go through the entire company with a fine tooth comb. I’ve seen it happen where a number of plain clothes and uniformed officers show up along with a TV camera truck and news people. They march into the dealership with a subpoena and leave with boxes of all the records they want to have to make their case. Then, they interrogate all of the employees. This is usually a death sentence for the dealership.

        Was this an independent used car dealer or a franchise dealer?

    • 0 avatar

      All True. We ALL abhor the worst of the practices in the BHPH/Sub Prime business, but this article and Derek’s comments do not properly distinguish between the two, IMHO.

      • 0 avatar
        highdesertcat

        And your opinion is worth more than those of many here, including mine. Since I left the business, even I have to acknowledge that things have changed. And not always for the better.

  • avatar
    seth1065

    Devils Roatary 86,
    Thanks for the info I thought some of these were made in Canada ( FCA mini vans) and I thought the Sonic and cruze were not made in the US so I learned something today thanks

    Seth

    seth1065,

    I got curious so I ran an autotrader search for my area with that criteria. Some cars that meet the 3 criteria are:
    – Ford Focus
    – Rental-spec Ford Fusion S
    – Chevrolet Cruze
    – Chevrolet Sonic
    – odd enough, a couple dealers in my area are advertising Mustang V6 6MT’s in the $17k range. I guess they are clearing out the last 2014′s for the 2015′s.

    Now for FCA products: (I will leave it to you guys to argue if FCA is “American” or not, but here they are)

    – Dodge Dart
    – Jeep Patriot/Compass
    – Dodge Grand Caravan AVP

  • avatar

    My credit isn’t *bad*…it’s just mostly non-existent. But apparently VW offers 1.9% financing to people about to graduate, or people who’ve graduated within the previous 24 months, so long as they have a stable income (I do). So now—despite my previous and eternal ban on Volkswagens—I’m looking at pulling the trigger on a new Jetta SportWagen TDI w/sunroof and nav this Friday. I do love the way the TDI cars drive, and they keep their resale value quite well. Then I can do a 36-month loan, 48 months at the most, and spend the rest of the time basking in vehicular equity. I *would* wait for the next SportWagen/Variant, but I don’t have that kind of time…

    • 0 avatar
      28-Cars-Later

      “But apparently VW offers 1.9% financing to people about to graduate, or people who’ve graduated within the previous 24 months”

      Yup, hook the kids early. Just say no /s.

      • 0 avatar

        Well, I’ve got enough set aside to pay for this particular vehicle in its entirety; I just don’t want to. I have no problem with paying a minimal amount of interest to own a new or nearly-new car, and yes, if the experience goes well, I may purchase *another* Volkswagen, at a lower (or nonexistent) interest rate. I don’t mind being a marketing target if it gets me what I want…

    • 0 avatar

      All auto manufacturers have “First Time Buyer” and “College Grad” programs. You aren’t limited to VW.

  • avatar
    hreardon

    I have no issue with subprime auto lending, I do take issue with blatantly illegal sales tactics.

    But that’s another issue altogether.

    The thing that many people are missing, however, is that cheap money ultimately pushes up the prices on cars for *everyone*. Ultimately, you and I all pay the price for super-cheap money in the form of higher transaction prices.

    Everyone “needs” a car, just like everyone “needs” a house and “needs” a college education. When the market gets sneaky and finds ways to make these goods affordable (unlimited student loans, 3/1, 5/1, interest only ARMs, 84mos. auto financing, leasing) to the masses, prices go up. I think that housing and college tuition are the biggest offenders by far, but we’re seeing it in auto transaction prices.

    Mind you, I’m not making any moral or financial judgments on these products because for many people they are legitimate means to purchase and are being done so in a reasonable, measured fashion. But as with anything, done to excess or recklessly it’s dangerous.

    Subprime autos won’t take down the economy like housing did. I do think, however, that student loans have become a major drag on consumer spending in the 18-35 demo and that people are on the whole far less cash-flush than they were a decade ago. As a result I don’t think we’ve seen the end of these financing models, if anything this is the early phase of creative finance for a generation of debt-rich, cash people citizens.


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