By on May 3, 2013

The volume of car loans is near pre-carmageddon levels, but a federal probe of business practices threatens  to “slow the booming car-loan industry,” the Wall Street Journal writes.

According to the report, the Consumer Financial Protection Bureau (CFPB) has issued subpoenas to U.S. auto lenders over the sale of extended warranties and other financial products.Meanwhile, the Justice Department is looking into auto dealerships that make their own loans to customers with poor credit and charge higher rates.

Says the Journal:

“Any new restrictions could affect millions of Americans who use loans to buy new and used vehicles each year. Add-on products, such as extra insurance, are a popular mechanism used by car dealers to boost profits.”

Though such products are legal, regulators are probing whether terms and prices are adequately disclosed. The CFPB has pursued a similar strategy with credit-card companies, fining them over the use of deceptive marketing practices to sell products like identity-theft protection.”

Roughly three-quarters of all new-vehicle purchases are financed or include add-on products, the National Automobile Dealers Association (NADA) told the Wall Street Journal.

Outstanding auto loans totaled $783 billion at the end of 2012, the most in nearly four years, says the Federal Reserve Bank of New York.

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32 Comments on “Feds Primed To Shoot Down Some Sub-Prime Loans...”

  • avatar

    America is now on a DEBT STANDARD.
    It sounds like this:

    “If you owe me $1000, I’m worth $1000”.

    There is really nothing backing up this “money” (FIAT PAPER CURRENCY) besides mathematical algorythms which NOBODY understands.

    I haven’t actually held anything more than a $20 bill in months because all of my money enters my bank accounts via Direct Deposit and leaves via electronic transfer.

    Is it really even there? Is it any more than ones and zeros?

    It’s like playing Monopoly: no matter how much money you have near the end of the game, you just dump it back in and start over.

    That being said: subprime loans – no matter how you feel about them, or government bailouts, are merely methods of keeping the ball rolling. Those who’ve amassed wealth and cash are fine. “They” have to give everyone “that can’t” some reason to wake up tomorrow and keep on trying.

    If people were truly forced to “live within their means”, you’d see a repeat of the REDUCED CREDIT and REDUCED spending that pushed us into this “recession” in the first place.

    While I’m sure someone will want to argue that the “recession” is due to failure of “the house of cards” built on bad behavior, the simple fact is, this has happened before and it will happen again. It’s called a “Boom & Bust” cycle – the inevitable consequence of a system built on nothing.

    “The Rich do none of the work and pay none of the taxes. The Middle class pays all of the taxes and does all of the work. The poor are there just to SCARE THE SH!T out of the middle class – keep em showing up at those jobs” – –George Carlin.

    Your job as an American is to take on as much debt as you can without capsizing. Keep on buying and rebuying that junk from China so we can pay them back for lending us all that money for our wars and overpriced fighter jets that are ASPHYXIATING our own pilots.

    • 0 avatar

      Here’s a very good documentary about the money system used in the first world. You may already know it, but it explains why there are always recessions and why they’re always going to be recessions… we’re screwed:

      By the way, you’re right… we all live in a debt based system

      • 0 avatar

        We are at a point where the FED must keep interest rates BELOW 0% just to keep the national debt serviceable.

        Comptroller David Walker warned of this 8 years ago (lookup David Walker Glenn Beck Youtube)

        When I was a kid, my family opened a trust fund and a bank account for me which I remember vididly was drawing 10% interest. Now I’ve got money in accounts earning less than 4% – you damn right I’m pissed off.

        • 0 avatar

          I’d love for the Fed to just say “screw it” and start raising rates, because leveraging the US’s political/military power over the rest of the world for *their* ever more worthless dollars cannot work forever. It will never happen, but I’d love to see some balls put into our centrally [bank] planned economy.

    • 0 avatar

      inb4 tinfoil hat accusations.

    • 0 avatar
      28-Cars-Later DOT com/watch?v=wlMwc1c0HRQ

    • 0 avatar

      “besides mathematical algorythms which NOBODY understands.”

      Or can spell, evidently.

  • avatar

    “The volume of car loans is near pre-carmageddon levels, ” true as far as it goes. GDP is above pre-carmageddon levels. I would have thought the amount of debt as a % of GDP would be key, not the absolute amount.

  • avatar
    Felix Hoenikker

    Big Trucks,

    Boom and bust economics predates the advent of “fiat money” in the US. Just look back into the 1800s to see the same cycles when we were on the gold standard.
    And they will continue as long as some means of extending credit is avaialbe with or without bank participation.

  • avatar

    I think the line about the guy being too dumb/soft to not sign up for the TrueCoat is telling. This actually seems to be the type the regulators want to defend from products that are “too easy” to buy. It’s tough to protect someone who’s not smart/interested in protecting himself from hustlers.

    “They say [the extras] only add $8 to your payment each month versus the out-of-pocket cost. They kind of beat you down,” said Mr. Pelonio, 60 years old.

    Then it goes on to say that the govt should stay out.

    “But he also said he doesn’t know if regulation is the solution: “I don’t like to have a lot of additional government involvement in what businesses do.””

    I can just imagine some well meaning political thinking WTF.

    Maybe this is an argument for better home economics teaching in school?

    • 0 avatar

      The feds involvement here is about reducing misrepresentation through increased disclosure. Forcing dealers to disclose real costs will help shoppers make better decisions. Much like disclosing nutritional information on packaged food, its about giving the consumer more information to make a better choice. That will not stop some idiots from making poor choices but at least buyers will have the facts.

  • avatar

    It’s about time. The Feds are spending our tax money wisely here. Don’t blame the banks for lending, don’t blame the consumer for spending money they do not have and don’t blame the auto industry for gleefully allowing rampant debt.
    Someone has to keep an eye on things and that is what we pay taxes for.
    Personally I manage my finances better but I was younger and stupider once and while angry with restrictive debt regulation, am grateful for it now. Use Debt wisely, don’t abuse it and it can be your friend.

  • avatar

    I love it –the Fed wont do squat to any of the big financial players where it counts–DERIVATIVES. They refuse to collar the BIG issues affecting the future. How about we look at that and at student loans. What a joke they are. Of course, they’re needed as a lender of last resort–the gold standard would put us into a Greek style depression–but thats a whole nother story.

    • 0 avatar

      Well, Neinneinnein, that’s simply because the auto dealership lobbyists haven’t gotten around to pushing their position on our Congresscritters!

      Joking aside, your point is well taken: Wall Street successfully robbed the world for hundreds of billions of dollars and not one person has been held culpable for the damned thing. Literally sickens me.

  • avatar

    Nothing will come of it, because if risky loans were made truly illegal then certain groups would not be able to obtain loans, and that would be deemed discriminatory. Besides, In the scheme of things, such as the coming bubble in worthless student loans, auto debt is not the most worrisome problem out there. A bank can repo a car. Who wants to repo a student?

    • 0 avatar

      I would love to see some student repos, sounds like a future Fox show.

      In all seriousness, I do hope some sort of “repo” is devised, the most logical in my mind is revocation of degree/diploma (which already does occasionally happen). If this were to occur, the education cartel would finally expose to the rest of us how utterly worthless their product truly is… if you’re out in the business world at least three years and this happened to you, I can’t see future employers saying “well your degree was revoked we cannot hire you”. Nobody really gives a flip about a bachelor’s degree at this point, its viewed almost as a high school education in some circles.

    • 0 avatar

      How many student loans were given with an APR? That was part of the meltdown in 2008… People that bought overpriced homes with rates that adjusted in 2,3,5 years.

  • avatar

    Can someone explain to me where the problem arises? The more risk, the higher the interest rate to cover the risk. In the long run, if there are X defaults on the loan, shouldn’t the higher interest rates cover the risk?

    The idea that high returns come from high risk is something I remember even from high school economics. Where do sub-prime loans become dangerous?

    • 0 avatar

      The loans are dangerous because the higher interest rate will likely never cover the cost of the loan, if borrowers default. What happens is that artificial demand (artificial because it was a creation of the sub-prime market which would never have materialized in the first place in an unfettered economy, that is, an economy where sound banking is the rule) creates a stimulus for increased production (meaning more workers working to produce widgets-in this case cars) in order to satiate the aforementioned artificial demand. It is a cycle. But it is a cycle that cannot continue indefinitely.

      Once borrowers begin to default en masse, banks are strapped with loans that usually exceed the value of the collateral upon which the loan was based (this is especially true with cars, or student loans). If banks then mark to market (that is, devalue the collateral to the now existing market rate) then there is the risk of bank insolvency, especially if the bank has a large percentage of its outstanding loans in a particular defaulted commodity.

      Next, due to multiple defaults, demand for the item drops because existing supply has thoroughly saturated the market, causing commodity prices to drop, and also causing whatever factories that are producing the item to hold excess inventory. This typically results in layoffs, creating even less demand than hitherto.

      You are right, if we are talking about one or two people within the context of a larger community, it is not a big problem. If it is a sizable portion of the population and economy, it is another story altogether.

      We just went through this in the housing market. Next will be student loans, then maybe cars, who knows? The only action a government has to combat this situation (other than getting real, which governments never do) is to “push the can down the road” by infusing dollars into banks in order to keep them from failing should they mark down their toxic (worthless) assets. Some people say it will necessarily come to an end, perhaps sooner than later. Others think, “Brazil, the country of the future, and always will be.”

  • avatar

    There is a lease turn in and repo lot near my house. Their very large parking lot is at least two-thirds full week after week with cars, trucks, and even some RVs and boats. And most of the vehicles don’t look like lease turn ins either.

    I personally keep an eye on the Jeeps as I drive by. Some sweet ones have been in there, and one I noted recently that looked like all of it’s after market modifications had been stripped. It was sitting on small tires without even the soft top. Poor thing…

  • avatar

    Seven year subprime auto loans? What might be their default rate during the next recession? Nobody knows. I don’t think the Fed wants a lot of them floating around out there.

    • 0 avatar

      There’s one fella on here who advocates that these subprime loans should be well-underwritten. No matter how well they are underwritten, there’ll be major defaults during the next recession.

      Anyone can lose their job — even federal civil servants. Yeah, I know a couple of them who got canned because of the sequester. If the funding runs out and you don’t have career status, you can get canned.

      What makes it worse is when the lenders take these subprime auto loans, bundle them and then sell them off to willing international “investors” for a percentage like they did during the recent housing/mortgage collapse. We should all remember how that turned out in 2008.

      Even Obama in his liberal ways would not wish that upon anyone who follows him. All these so-called new “safeguards” to keep Bush’s Great Recession from ever happening again are not going to keep us from having future recessions. That’s just the nature of our economic beast, ups and downs, ups and downs.

      • 0 avatar
        sunridge place

        You’ve come a long way in a week.

        Last week it was Clinton’s fault. Now, its exotic bundling from Wall Street that caused the problem which didn’t start going crazy until the 2000’s. You are taking some solid steps forward in your thinking. When you can handle learning about credit default swaps, you’ll know why the home loan crisis differs from subprime auto lending.

        Guess what is different?

        1. Subprime mortgages weren’t at double digit interest rates like subprime auto loans and thus didn’t have solid profits built in to handle a higher default rate
        2. No one is assuming the cars increase in value as they issue second liens etc

        Nice to see you taking baby steps in your comments here.

        • 0 avatar

          In all seriousness I can’t imagine subprime auto loans could ever provide the same negative impact to the economy as did subprime mortgages in 2008. They are a much simpler instrument, and interest rate doesn’t usually reset. Plus, experience is an excellent teacher.

          In fact, subprime auto loans have been around for 60+ years, just not traded in financial markets until about 1996 or 7 (?). “We tote the note”. Believe me you will need plenty of return to make up for defaults in hard times. The old “we tote the note” guys who both sold the cars and provided the financing would sell $1,000 cars for, say, $1,200 effectively raising the interest rate a bunch.

          Credit default swaps are just insurance. They aren’t much good if the insurance company goes broke. If you wanna buy insurance from Billy Bob’s Credit Default Swap Company, be my guest. I doubt ‘ol Billy Bob is going to get the AIG treatment from the government(s) next time.

          The Fed guys were asleep at the wheel in 2002-8. Imo, they won’t make the same mistake twice in a row. They can’t really regulate these subprime auto loan markets very much, but I think they at least want to put a lid on how many subprime auto loan-based products are out there.

          Note: there is the Fed as in Federal Reserve Bank as I used it in the last paragraph. And “Feds” as applied to the Justice Department, the Treasury, et. al. as used in the article. They do talk to one another and sometimes co-ordinate their actions.

          • 0 avatar

            jimbob, I agree. Subprimes have been around for decades.

            And when the whole she-bang went belly up, we, the people, should not have been forced to bail out the works.

        • 0 avatar

          Sunny, I haven’t changed my mind. I still believe what I posted. I merely said that there is at least one individual who advocates…. That doesn’t mean that I share that belief.

          I have not wavered from my initial position. You see it your way. I see it mine.

          I have no problem with that because that is what makes America great.

          Opinions are like a$$ holes. Everybody’s got one. And we each have to live our lives in accordance with our beliefs.

        • 0 avatar

          My reply to your comment went the way of the moderation circular file. IOW, lost forever.

          And since we often differ in our views, it merits no further input except to say that I have not changed my position from my initial comment.

          I said there are different opinions on the subject, but I did not say I agreed with them.

  • avatar

    Speaking of add-ons…

    Was just at a Honda dealer looking at new accords. The dealer had a $495 charge for a TrueCoat like product applied to the car. I told the salesman I didn’t want it and he said “sorry, it’s already on there, you have to take it if you want to buy the car”. It really bugged me to the point where I just walked away.

    Note: This same car also had $400 nitrogen filled tires and a $195 pin stripe. Talk about pure profit! I’m sure he would have hit me up for something else later in the process.

  • avatar
    big al

    I remember a few years ago, a black dude had a large chain of dealerships in the States(more Eastern then West,I think) specializing in sub-prime,new buyers,and young people trying to establish credit and just starting work…His idea,and it was a good one ,was that if the weekly or bi-weekly payements weren’t made,the cars were wired up and if the right codes weren’t inputted,they wouldn’t start……..I remember most customers were quite happy with the setup and noted it was ,in a lot of cases,their only option to get a vehicle……He ended up getting sued(of course) and the claiment was probably “helped” by some rights group or the other….I don’t remember the outcome,but I’m sure someone here will remember the guys name and outcome of the lawsuit.

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