Why Sleazy Auto Lenders Are the Nation’s Most Reckless Drivers
Companies / Banking Stocks Nov 18, 2014 - 09:22 PM GMTBy: Money_Morning
Shah Gilani writes: There’s a lot of action over in the subprime auto sector, and it’s not pretty
The saying is “Where there’s smoke, there’s fire.” So, it’s probably just a matter of time before the mainstream media and the general public catch on and see the flames being vigorously fanned by greedy lenders.
It’s the same old story – and one I’ve recounted here before.
Lenders are making subprime auto loans to low-income (and no-income) borrowers, most of whom are down on their luck. And the lenders are teeing those folks up to hit them out of the park again.
The name of the game is yield. That’s what it’s been since the U.S. Federal Reserve started manipulating interest rates further and further down.
Yield-hungry investors want more income. Fee-hungry bankers want to deliver it to them. And car-hungry buyers are getting suckered.
A lot of the country’s current economic “optimism” is predicated on surging auto sales. So, maybe the state of the economy isn’t as rosy as the president, Congress and the media would like us to believe.
And today I’ll show you why…
Bottom Feeding for Borrowers
Auto lenders fan out to dealers, especially to used-car dealers, where low-income borrowers are more likely to shop. The lenders tell the dealers to sell cars, and they’ll make loans so borrowers can drive off in that shiny used clunker.
However, the lenders don’t want customers with good credit to borrow to buy. They want to lend to struggling people whose credit is so bad that they know they’re going to get hit with a lot of interest.
And these borrowers, no matter how “subprime” their situation, can get loans.
You see, the worse their credit, the higher the interest rate. Because the car might be older, they’re going to want a warranty and some other must-have services and “upgrades” to make sure the car is going to get them where they want to go. And for too many of those folks, that’s the unemployment office.
But what if the borrowers don’t pay? No matter – lenders “protect” these cars as collateral and can pick them up wherever they are turned off and left on the side of the road because of the neat shut-off devices dealers are installing.
That, however, is another story.
What am I worried about? I’m looking at the smoke and figure the flames are coming.
If you haven’t seen the smoke, here’s where it’s coming from:
The U.S. Justice Department has subpoenaed GM Financial (NYSE: GM) and Santander Consumer USA Holdings Inc. (NYSE: SC) over their subprime auto underwriting and securitization practices.
The U.S. Securities and Exchange Commission (SEC) is looking into Ally Financial Inc.’s subprime auto lending practices.
The New York State Department of Financial Services is suing Condor Capital Management, a subprime auto lender accused of stealing from its customers.
The New York County District Attorney’s Office recently subpoenaed Capital One Financial Corp. (NYSE: COF) regarding its subprime auto-lending business.
The New York City Department of Consumer Affairs said on Friday it’s investigating used-car dealers’ tactics for getting low-income borrowers to take out more expensive loans with hidden fees.
The federal Office of the Comptroller of the Currency’s deputy comptroller for supervision risk management said in a speech on Oct. 28 that he’s concerned about borrowers’ equity in their cars relative to the amount borrowed and the actual resale value of the cars.
And the federal Consumer Financial Protection Bureau is on the case, too. It’s opening more investigations after extracting $98 million from Ally Financial last year, having charged the lender with jacking up interest rates and fees to African American subprime auto borrowers.
That’s a lot of smoke.
What’s sad in all this is that sophisticated lenders and auto dealers are using these poor folks in order to soak them and then repossess their cars. And then they’re doing it again and again to as many down-on-their-luck borrowers as they can wave into their showrooms and onto their lots.
Do you still think auto loans are just the minor leagues compared to the mortgage game that home lenders played not long ago?
If so, it’s time to think again.
Money Morning/The Money Map Report
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