On the road (to ruin) again: the return of sub-prime

  • Article by: AN EDITORIAL , The Sacramento Bee (MCT)
  • Updated: August 6, 2014 - 11:37 AM

This time it's car loans, but otherwise we've seen this movie, and its bad ending, before.

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Not even a decade after Wall Street gamblers took us to the brink of global economic ruin, the same players are back abusing the financial product that caused so much trouble - the subprime loan.

This time the loans are for used cars sold to lower-income Americans who can’t afford them. It’s such a lucrative market that, according to the New York Times, subprime car loans have increased by 130 percent in the last five years. And Equifax reported this spring that subprime auto lending was the highest it has been since 2006.

The deals sound the same, too: Millions of people with terrible credit and no real way of repaying big debts are handed auto loans for used cars. Sometimes their financial information is exaggerated or even false.

The purveyors of these loans are financial institutions with familiar names, such as Wells Fargo, and private equity firms that have lots of money to spend and not enough get-rich-quick ways to invest. It’s apparently good business to steal from the poor, so much so that firms are bundling up the loans and selling them as securities to banks and mutual funds. Maybe even one of yours.

The good news is that, as repugnant as this practice may be, it’s unlikely to threaten the U.S. economy in the same extreme way that the implosion of the housing market did in 2008. Cars are much easier to repossess than single-family homes.

That’s also the bad news. It took the near-collapse of the American economy to crack down on the risky behavior of Wall Street’s financial titans. Those same titans, for the most part, escaped from real harm thanks to taxpayer-funded bailouts. Meanwhile, Americans collectively lost trillions of dollars of wealth. Those on the bottom rung suffered the most, as they usually do, from the job losses and wage stagnation that still persists six years later.

In fact, jobs are in such demand that workers will do most anything to keep them - including signing a contract for a car they know they can’t really afford so they can get to work each day.

For people with decent credit and moderate salaries, auto loan rates at the moment range between 4.14 percent to 4.71 percent, depending on the length of the loan. People with exceptional credit can probably find a loan with 0 percent financing.

The rates that subprime borrowers are paying are significantly higher, as much as 23 percent. That means that if they managed to pay off their car loan, they’ve paid the equivalent of two cars.

This is not the only way that poor folks have been preyed upon when trying to buy a car in legal if reprehensible ways. In 2011, the Los Angeles Times documented how Buy Here Pay Here dealerships across California and the nation were ripping off people with bad credit by financing cheap used cars at about 30 percent interest rates.

One of those people profiled was a Hmong woman from Sacramento who bought a Honda Odyssey for $13,000. Her contract said the interest rate was 12 percent. It turned out she was actually paying an interest rate of more than 20 percent.

In California, those revelations led to legislation that tightened rules about how cars are repossessed and require used-car dealers to provide better disclosure to customers. But clearly there are still plenty of ways to profitably fleece people desperate for transportation.

The 2008 subprime housing loan meltdown led to the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, which created new agencies including the Consumer Financial Protection Bureau. An amendment to Dodd-Frank exempts auto loans from the CFPB’s authority.

Subprime auto loans are bad news for consumers and to our country’s fiscal health. Lawmakers should rein them in before they lead us down another path of economic doom.

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