America’s next big rip-off: Cars are the next subprime crisis!

From Salon:

With financial firms now pushing strongly into auto loans, here’s how Congress is helping car dealers rip you off

Wednesday, Nov 27, 2013

If you have bad credit in America, you will have lots of trouble buying a house, securing a credit card or even getting a job. But it apparently won’t stop you from one very expensive but common purchase: buying a car. And now this may augur some serious problems.

Subprime auto loans – given to people with credit scores of less than 680 – account for 27 percent of all loans for new vehicles in 2013, according to analyst Experian Automotive. That’s well above pre-recession levels. Financial firms have pushed strongly into auto loans of late, and are increasingly willing to fund subprime borrowers. This year, banks even sold $17.2 billion in auto loan-backed securities, which are bonds similar to the mortgage-backed securities that accelerated the housing bubble.

In many parts of the country without viable mass transit options, Americans need cars for transportation to jobs or schooling. And surging car sales, now at their highest pace since 2007, helps the broader economy. So an increase in auto loans isn’t necessarily bad. But when all the growth in lending comes from subprime borrowers, who are vulnerable to greedy financiers by virtue of their sheer desperation, experts get nervous.

“The question is whether it’s predatory, and where you draw the line,” says Stuart Rossman, director of litigation for the National Consumer Law Center. His organization and others have found multiple ways in which auto dealers scam subprime borrowers, forcing them into higher interest rates and longer-term loans. Auto dealers, the middlemen between a consumer with bad credit and the financing for the vehicle, have outsize power to set terms and extract profits. And though the Consumer Financial Protection Bureau is supposed to protect Americans from this kind of mistreatment, there’s a catch: Congress carved out an exemption from CFPB regulation for auto dealers, putting their oversight in the hands of the notoriously sclerotic Federal Trade Commission. As a result, just as water inevitably rolls downstream, big money has flooded into auto loans, the financial transactions with the fewest eyes on them.

Dealers obtained this power through a combination of bad regulatory decisions and rising political influence. Decades ago, each major auto company had its own dedicated financing arm; Ford dealers would have to use Ford Credit, GM dealers would use GMAC. The Justice Department’s anti-trust division, in an attempt to drive competition, ruled in the 1960s that automakers could no longer tie financing to the sale of the car. But this gave lots of leverage to auto dealers, who could now pick and choose whom they used to finance their loans. “They shop for the financing company that gives them the best markup,” Stuart Rossman told Salon.

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