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Buy Here Pay Here: The Subprime Auto Loan Scam

Beware of Buy Here Pay Here used car scams (photo: Bill Herndon)

More attention needs to be paid to the LA Times’ excellent series on subprime auto loans. The first installment concerned Buy Here Pay Here used car dealerships, and how they hook low-income borrowers into high-interest loans, then repossess the car when the loans go bad and resell the car to the next mark. This is an endlessly repeating cycle, where the same lemon can be sold and resold multiple times. And if you’re current on your payments or if you worked out what you thought was a modification, well, that’s just an inconvenience.

A year and a half later, Lee fell behind on her payments and filed for bankruptcy. So she was relieved when the dealership called and offered to make her loan more affordable. The sales manager even promised to throw in a free smog check. Lee, 35, drove back to Repossess Auto on a rainy Monday evening, handed the keys to an attendant and sat down with the manager.

Moments later, she said, employees parked four cars tightly around the Ford, blocking it in.

There would be no new deal. Lee’s car was being repossessed. She and her children waited in the rain until a friend could drive them home.

Lee, who described that night as “one of the worst experiences of my life,” had stumbled into the bare-knuckle world of Buy Here Pay Here used-car sales.

The used-car dealers prey on the necessity among even low-income individuals of having a car. They will pay whatever they need to get one, regardless of the terms. And then they get locked into a rate they can’t afford. That’s the whole point for the dealership, which wants to make money off the vehicle again and again. One car has been resold eight separate times, according to the LAT investigation. The BHPH model is so reliant on repossession that they outfit the cars with hidden GPS devices and remote-control ignition blockers.

But perhaps more shocking is how Buy Here Pay Here dealerships, which have increased their market share in recent years, are funded and sustained. It will sound familiar to anyone who went through the housing bubble. [cont’d]

“The amount of return from these loans you can’t get on Wall Street. You can’t get it anywhere,” said Michael Diaz, national sales manager for Small Dealers Assistance Inc. in Atlanta, which buys loans originated by Buy Here Pay Here dealers. “It’s the gift that keeps giving.”

Investor money is pouring into the industry from several sources, helping Buy Here Pay Here dealers expand their reach and raise their profile […]

Buy Here Pay Here is also being boosted by one of the sophisticated financial strategies that drove the nation’s recent housing boom and bust: securitization.

Loans on decade-old clunkers are being bundled into securities, just as subprime mortgages were a few years ago. In the last two years, investors have bought more than $15 billion in subprime auto securities.

Although they’re backed mainly by installment contracts signed by people who can’t even qualify for a credit card, most of these bonds have been rated investment grade. Many have received the highest rating: AAA.

That’s because rating firms believe that with tens of thousands of loans lumped together, the securities are safe even if some of the loans prove worthless.

Just wow. This is the precise scam that we saw during the housing bubble, where securities are sliced and diced to give the illusion of safety. Because subprime autos can be repossessed and resold quickly and easily, and because the investment is smaller, it’s arguably safer than subprime mortgages. But the deficiencies in the system are evident. And considering that the system relies on fraud (the Buy Here Pay Here dealers lard up extra fees and engage in other forms of chicanery), you can see the whole market come crashing down if any law enforcement official ever bothered to investigate it the way the LAT did. However, keep in mind that, thanks to Rep. John Campbell and others, auto dealerships were exempted from Consumer Financial Protection Bureau oversight. So this falls into a regulatory crack, at least at the federal level.

The third installment of the series, a consumer-friendly piece on better places to purchase a used car other than Buy Here Pay Here dealerships, is due tomorrow. But there’s enough in these first two stories to merit an investigation.

CommunityThe Bullpen

Buy Here Pay Here: The Subprime Auto Loan Scam

More attention needs to be paid to the LA Times’ excellent series on subprime auto loans. The first installment concerned Buy Here Pay Here used car dealerships, and how they hook low-income borrowers into high-interest loans, then repossess the car when the loans go bad and resell the car to the next mark. This is an endlessly repeating cycle, where the same lemon can be sold and resold multiple times. And if you’re current on your payments or if you worked out what you thought was a modification, well, that’s just an inconvenience.

A year and a half later, Lee fell behind on her payments and filed for bankruptcy. So she was relieved when the dealership called and offered to make her loan more affordable. The sales manager even promised to throw in a free smog check. Lee, 35, drove back to Repossess Auto on a rainy Monday evening, handed the keys to an attendant and sat down with the manager.

Moments later, she said, employees parked four cars tightly around the Ford, blocking it in.

There would be no new deal. Lee’s car was being repossessed. She and her children waited in the rain until a friend could drive them home.

Lee, who described that night as “one of the worst experiences of my life,” had stumbled into the bare-knuckle world of Buy Here Pay Here used-car sales.

The used-car dealers prey on the necessity among even low-income individuals of having a car. They will pay whatever they need to get one, regardless of the terms. And then they get locked into a rate they can’t afford. That’s the whole point for the dealership, which wants to make money off the vehicle again and again. One car has been resold eight separate times, according to the LAT investigation. The BHPH model is so reliant on repossession that they outfit the cars with hidden GPS devices and remote-control ignition blockers.

But perhaps more shocking is how Buy Here Pay Here dealerships, which have increased their market share in recent years, are funded and sustained. It will sound familiar to anyone who went through the housing bubble.

“The amount of return from these loans you can’t get on Wall Street. You can’t get it anywhere,” said Michael Diaz, national sales manager for Small Dealers Assistance Inc. in Atlanta, which buys loans originated by Buy Here Pay Here dealers. “It’s the gift that keeps giving.”

Investor money is pouring into the industry from several sources, helping Buy Here Pay Here dealers expand their reach and raise their profile […]

Buy Here Pay Here is also being boosted by one of the sophisticated financial strategies that drove the nation’s recent housing boom and bust: securitization.

Loans on decade-old clunkers are being bundled into securities, just as subprime mortgages were a few years ago. In the last two years, investors have bought more than $15 billion in subprime auto securities.

Although they’re backed mainly by installment contracts signed by people who can’t even qualify for a credit card, most of these bonds have been rated investment grade. Many have received the highest rating: AAA.

That’s because rating firms believe that with tens of thousands of loans lumped together, the securities are safe even if some of the loans prove worthless.

Just wow. This is the precise scam that we saw during the housing bubble, where securities are sliced and diced to give the illusion of safety. Because subprime autos can be repossessed and resold quickly and easily, and because the investment is smaller, it’s arguably safer than subprime mortgages. But the deficiencies in the system are evident. And considering that the system relies on fraud (the Buy Here Pay Here dealers lard up extra fees and engage in other forms of chicanery), you can see the whole market come crashing down if any law enforcement official ever bothered to investigate it the way the LAT did. However, keep in mind that, thanks to Rep. John Campbell and others, auto dealerships were exempted from Consumer Financial Protection Bureau oversight. So this falls into a regulatory crack, at least at the federal level.

The third installment of the series, a consumer-friendly piece on better places to purchase a used car other than Buy Here Pay Here dealerships, is due tomorrow. But there’s enough in these first two stories to merit an investigation.

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