"A New Kind Of Hybrid": The Terrifying New Way Disadvantaged People Are Buying Cars

It was halfway down an email that was anonymously forwarded to me a few weeks ago, buried between torpid paragraphs grown thick and encrusted with the deliberately Byzantine language of Wall Street analysis. And it said something like this:

In Detroit, Michigan thus far in 2017, nearly one in eight of all available civil lawsuits filed in the city involve (this firm) suing borrowers. Overall, 72% of these lawsuits resulted in the company garnishing the wages or tax refunds of borrowers. In essence, the company is a new kind of hybrid: a debt collector that originates its own loans — a combination that has proved extraordinarily profitable for investors as the business of lending to troubled borrowers has surged since the financial crisis.

A debt collector that originates its own loans, generating more than 10 percent of all civil lawsuits in Detroit. Something wicked this way comes.

Long-time TTAC readers may recall that I worked for Ford Motor Credit in the early Nineties, doing credit approvals and working with the collection department to find collateral. It was a very junior position — I’m not going to pull any of that “youngest manager in the company history” BS — and it didn’t pay very well. But it did give me the chance to work for, and learn from, some remarkably level-headed people.

At FMCC, we made every effort to ensure the success of our loans. That meant asking questions and offering solutions that went remarkably, perhaps uncomfortably, far into the realm of loco parentis. I can still remember one of my bosses, a perpetually frustrated African-American woman suffering from painful carpal-tunnel and joint pain issues, saying to me, “Jack, you and I both know that kid doesn’t need an F-250 to go to his job. Offer him approval on a Ranger… tell him he can have a 4×4 if he doesn’t ladle on the options.” Other times, she’d direct me to call the applicant’s spouse and find out whether or not she was “really on board” with a new Mustang GT.

I had another boss, a mousy-looking and deeply reserved early-thirties woman named Tina who was a dead ringer for actress Kristen Wiig. She had an uncanny, almost psychic, nose for straw purchasers. She could look at an application for 10 seconds and tell me who was really going to be driving that new Bronco or Tempo. I was very much in love with her, more so after she had an argument with our branch manager and showed her displeasure by getting herself a new Chrysler LeBaron in flagrant and flamboyant violation of the branch’s unspoken policy. In the afternoons I would move my chair to “avoid the sun glare” but really my purpose was to watch her sitting at her terminal, quietly chewing her lip and looking to the ceiling in quiet desperation. She did not like her job.

We who toiled in the credit-approval department were under constant pressure to approve the worst sort of garbage loans available. The dealers would regularly threaten us with the withdrawal of their floorplan business if we didn’t step up our approval ratings. At some point in 1992, the biggest dealer in our market made good on his threat, going to GE Capital for floorplan after a remarkable meeting in which he showed up apparently coked to the gills in a new Cobra R and screamed at our management loudly enough to be heard through two layers of sound-insulating glass. The following week, that dealer put in a remarkably bad application for a conversion-van buyer. There was about $17,000 worth of profit baked into the deal. On the top of the fax, the F&I manager had written “PLEASE!” with a smiley-face next to it. Tina dropped the fax roll into my lap on her way out to lunch, the keys to the LeBaron jingling in her hand.

“Wait 45 minutes,” she said, “then call him back and tell him Tina says to run it by GE Capital.” Her brown skirt crackled with electricity and her legs were short but muscular beneath it. I went into the mailroom and did pushups until I felt I had control over my impulses.

Sometimes our best efforts went for naught and an account went to collections. Our branch employed six collectors and one supervisor, a hard-faced but height-challenged fellow who spent his days walking by desks and barking orders.

“Oh no he doesn’t. We’re not third in line behind the landlord and Columbia Gas. It’s summertime. He doesn’t need hot water.”

“Payments don’t end when the warranty ends. Not for shitbirds who run a Festiva all the way to sixty months.”

“Well, tell Grandma that if she didn’t want to make a payment she shouldn’t have signed the second line on the lease.”

Each and every single time the collection department repossessed a car, there had to be a meeting between the original approver, the head of collections, and the branch manager. I remember Tina coming out of one meeting in tears, followed by the grim-faced collection manager who had been berating her about the approval. I popped up out of my chair and my face must have been easy to read because the branch manager quick-stepped between us. “Everybody,” he reassured me, “is doing their best here, it’s nothing personal.”

The next day, the collection manager stopped by to thank us both for ensuring he had a solid co-signer on a particularly bad loan. I daydreamed about breaking his jaw then taking Tina to lunch at my father’s club, where she would agree to marry me despite the fact that she was already married and a decade-plus senior to me. I mention these things so my younger readers can understand: not even birds are born knowing how to fly.

I also want to point out something that should be obvious: Ford Credit, like every other ethical firm of which I have ever been aware, never knowingly put people in a bad situation with a loan. We didn’t want to collect on them. We wanted them to enjoy their cars and then to trade them in for another Ford. Our purpose was to help sell Fords and to make money. It was a good purpose and we kept Ford afloat a few times when the business of financing cars was better than the business of selling them. I have never felt a moment’s shame for anything I did at FMCC. We were decent and aboveboard in all our operations. It was business the way my father told me business should be done.

As reluctant as we were to approve bad debt, and as reluctant as we were to collect aggressively on it, we were even more reluctant to use the courts against our customers. Our collectors liked to handle things by what Robert Ringer called “the law of the jungle.” We’d do whatever we could to get you to pay for your car and if you couldn’t pay for it, we’d repossess it. But we didn’t use the courts to do our dirty work for us unless there was no other way. More than once I saw our collection manager repossess a car, sell it at auction, then effectively forgive a balance because he didn’t want to put the borrower through court. “No way for him to get there anyhow, unless you and Tina pull your usual tricks and decide to lease him a Mark VIII,” he’d laugh.

Perhaps that makes it easier for the reader to understand why I am personally disgusted by Credit Acceptance Corp (NASDAQ:CACC) and their tactics. When nearly one-eighth of the Detroit civil court docket is taken up by one company, then I can’t see that as anything other than a weaponized use of the courts against people who shouldn’t have their loans in the first place. At Ford Credit, we considered a ratio of one repossession to every hundred approvals to be cause for concern; what does it say if you’re running at dozens of times that level? There’s nothing accidental about a rate like that.

You can read the document that I was sent right here. When it arrived in my inbox, it was accompanied by some laconic in-house notes written by an employee of a major firm, noting that CACC was outperforming predictions so far this year. A new kind of hybrid, indeed. You make loans knowing they’ll go bad. Then you collect on your own debt, using the biggest fees and penalties you can muster.

I’m not saying that CACC does anything illegal. To the contrary, they appear to be very well-acquainted with the law and its applications. Nor am I prepared to say that what they do should be illegal. I do, however, think that this “hybrid” process represents a definite choice of profit over ethics. We all know that it’s wrong to deliberately put someone else in over their head. It’s wrong on a personal level, it’s wrong on a corporate level. Regardless of profitability.

I’ve worked in “subprime banking” myself and I can recite all the boilerplate about how high-interest-rate, high-risk lending is actually beneficial to a community and to its members. The question becomes: At what point can an honest man stop mouthing those excuses? I’d suggest to you, dear reader, that the point is well south of becoming a civil court’s most frequent flier.

[Image: Bike Tourist/ Bigstock.com]