Auto Dealers & Lenders Prey on Subprime Borrowers:
Stuck in you auto loan? Upside down in your car? Paying double digit interest?
You’re not alone.
More reports are emerging that indicate that many car buyers find themselves stuck in abusive car loans. Unfortunately, such loans are most likely for borrowers who have poor credit history, moving them out of standard financing channels and into the “sub-prime” financing arena. This is the first of a series of posts which explores the aggressive financing tactics used by auto dealers and lenders, defines those deceptive and abusive practices and provides possible solutions for consumer relief.
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The Market: Subprime Auto Loans on the Rise Where is the Abuse? How a Dealer “Yo-Yo” Scam Works Sample Yo-Yo Contract Say No! to the Yo-Yo
The Market: Subprime Auto Loans on the Rise
Recent reports from credit reporting agencies like Equifax and other major publications like the New York Times indicate that automobile loan originations are sky rocketing to levels approaching pre-recession highs of over 2 million originations per month(1). Consumers tend to hold onto autos longer during bad economic times and will repair rather than replace an aging vehicle. The median age for of an auto in the U.S. has increased to a record 11.4 years, an age at which the cost of major repairs turns an owners focus to the buying mode; consequently, loan originations have exploded in the first four months of 2014 to 8.1 million, an eight year high.
Equifax reports that 30% of all auto loan originations are categorized as “Sub-prime” with $46.2 billion being lent in that sector in the first four months of 2014, again an eight year high. The sub-prime auto lending sector has more than doubled lending volume since the mortgage market implosion in 2009.
When market conditions coalesce to drive up demand for new auto debt and that new demand is fueled by a huge appetite for high yield securities on Wall Street secured by auto loans, the stage is set for abusive lending. (We will write more about the Wall Street factor soon.)
Where is the Abuse?
Unfortunately, auto lending industry is largely unregulated and only recently has it come under scrutiny by the Consumer Financial Protection Bureau “CFPB” and the Federal Trade Commission “FTC” for discriminatory and abusive lending(2). Both the FTC and the national non-profit group Center for Responsible Lending, which works to protect families by fighting predatory lending practices, have identified “Yo-Yo” Lending also called “Spot Delivery” as one such abusive auto lending practice.
How a Dealer “Yo-Yo” Scam Works
The yo-yo scam is a ploy by the dealer to keep the consumer from shopping for a better deal. During this time, the dealer has the opportunity to determine whether or not it can get a better deal in terms of vehicle price or finance contract it will sell to the lender for the car it just “sold” to the unsuspecting consumer. Effectively, the scam leads the consumer to believe that the financing arrangement to purchase the vehicle is as good as finished, but may take a few days to finalize “the details.” The consumer is allowed to drive off the dealer lot in the vehicle they are purportedly qualified to buy; then, after some period, the dealer asserts the right to cancel the transaction because none of the lenders the dealer hoped to sell the financing contract to would purchase the installment contract on terms acceptable to the dealer. As a result, the consumer is required to return the vehicle they have assumed they purchased and the dealer strong arms the consumer into a different vehicle with less favorable terms or requires additional money and or interest to maintain the same vehicle. Of course, the dealer claims the “the lender” has decided that it will not accept the deal it committed to, when in fact, the dealer has reneged on the deal as the creditor. The dealer then offers less favorable terms for financing and typically on a different vehicle both to the disadvantage of the consumer.
“In no other area of our commerce can someone sign on the dotted line, deliver the product, and then cancel the transaction and insist on the product being returned because the final credit transaction did not produce the hoped-for income.”4