The Bailout Barons of Wall Street have found a new way to package and sell rancid securities and lay the groundwork for another subprime debacle, exploiting the poorest, most vulnerable Americans by gambling on high-interest loans hawked by a new breed of noxious bottom-feeder: the subprime auto title lender:
Title loans are becoming an increasingly prevalent form of high-cost, short-term credit in subprime finance, as regulators in a number of states crack down on payday loans.For many borrowers, title loans, also sometimes known as motor-vehicle equity lines of credit or title pawns, are having ruinous financial consequences, causing owners to lose their vehicles and plunging them further into debt.
A review by The New York Times of more than three dozen loan agreements found that after factoring in various fees, the effective interest rates ranged from nearly 80 percent to more than 500 percent. While some loans come with terms of 30 days, many borrowers, unable to pay the full loan and interest payments, say that they are forced to renew the loans at the end of each month, incurring a new round of fees.
With triple-figure interest rates it didn't take long for Wall Street to stick its nose into these schemes. Title lending companies (the article cites "TitleMax" and "Cash America" as examples) have taken advantage of the sudden attention being paid to them by private equity firms to churn out more and more abusive loan products targeting poorer Americans with cash flow and credit problems. In a variant of the "reverse mortgage' boon, these lenders run late-night TV commercials featuring crass come-ons such as Christmas stockings full of cash, urging people to transform their paid-for used cars into cash cows:
The rusting 1994 Oldsmobile sitting in a driveway just outside St. Louis was an unlikely cash machine.That was until the car’s owner, a 30-year-old hospital lab technician, saw a television commercial describing how to get cash from just such a car, in the form of a short-term loan.
The lab technician, Caroline O’Connor, who needed about $1,000 to cover her rent and electricity bills, believed she had found a financial lifeline.
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Her loan carried an annual interest rate of 171 percent. More than two years and $992.78 in debt later, her car was repossessed.
Wall Street firms don't particularly care what happens to Ms. O'Connor or her car. If they did they would insist that these lenders check her credit history and determine whether the loan was realistically likely to be paid back. Instead, they simply invest in the same shoddy, high interest loans, repackaging and bundling them into complex and incomprehensible bond instruments and sell them as securities to to pension funds, mutual funds and insurance companies, just like they did with subprime mortgage loans that sent us into the Financial Chaos of 2008. Like the subprime mortgage debacle, this process becomes self-perpetuating, creating an ever-increasing demand for such loan products, all of which rely on a population of desperate borrowers, usually beholden to other debts and likely to default, particularly if the economy goes south:
Americans with shoddy credit who are easily obtaining auto loans from used-car dealers, including some who fabricate or ignore borrowers’ abilities to repay. The loans often come with terms that take advantage of the most desperate, least financially sophisticated customers.
In part because of the usurious interest rates charged for these loans, nearly one in six of the 1.1 million people who took out such loans in 2013 will default to the point of having their car repossessed. This hasn't deterred the financial backers of these companies in the least, since they've played this game before. But their logic this time comes with a heavy dose of cold cynicism about human nature:
The high interest rates on the loans have enticed an influx of Wall Street money. Private equity firms are investing in lenders, and some big banks are ramping up their auto lending to people with blemished credit.Propelling this lending spree are the cars themselves, and how essential they are in people’s lives.
In most parts of the country, a car is vital to participating in the work force, and lenders are betting that people will do virtually anything to keep their cars, choosing to make auto loan payments before paying for just about any other expense.
Translated, they're betting that people will forego healthcare, rent, even food to keep their cars because cars are people's lifelines. In most cases the same companies making these shoddy, high-risk loans are the same "payday" lenders who state regulators have cracked down on in recent years. Many of them simply change their legal status as "payday" lenders to "title" lenders. These companies are ubiquitous in urban areas and prey disproportionately on urban consumers. But in many cities, a car is the last thing you need and often the first thing to go. So they've branched out state by state ("They are everywhere, like liquor stores," comments one victim) taking advantage of those Americans--often poor, often rural--whose livelihoods were shattered only a few years ago by the very same cast of Wall Street characters.
The Times reported on this "new face of subprime" this past July. Government regulators and Federal prosecutors, wary of another meltdown, are beginning to take notice. Last week, the Justice Department subpoenaed Ally Financial as part of an investigation “related to subprime automotive finance and related securitization activities.” Santander bank was subpoenaed in August, in an effort led by Preet Bharara, the United States Attorney in Manhattan. The Justice Department's concerns echo fears of a subprime mortgage redux:
At the center of the inquiry is whether lenders, clamoring for a lucrative piece of the subprime auto loan market, are hastily packaging the loans without reviewing their quality. In an echo of the subprime mortgage crisis, some regulators and prosecutors are concerned that loans with falsified information about borrowers’ income and employment are being included in investments sold to pension funds and insurance companies, the people said.
Only a few states keep statistics on the number of title lenders, but from all accounts they are exploding, as are the number of people whose financial well-being is being wrecked by them. The title lending industry, in tandem with used car dealers and banks, and backed by endless amounts of private equity funding (Putnam Investments and Legg Mason are cited as examples of firms buying up debt of TMX, TitleMax's parent) is fighting back against state efforts to rein in these practices, while rapidly expanding in those states with the most lax regulations:
[F]or every state where there has been a crackdown, there are more where the industry has mobilized to beat back regulations.In Wisconsin, it took the title loan industry only one year to reverse a ban on the loans that had been put in place in 2010. In New Hampshire in 2008, state legislators enacted a law that put a 36 percent ceiling on the rates that title lenders could charge. Four years later, though, lobbyists for the industry won a repeal of the law.
“This is nothing but government-authorized loan sharking,” said Scott A. Surovell, a Virginia lawmaker who has proposed bills that would further rein in title lenders.
The fact that these industries wreak havoc on Americans' lives by predatory lending practices should be enough to justify their prohibition. And although a subprime meltdown based on bad U.S. auto loans wouldn't totally wreck the economy, it could stall economic recovery for millions, simply for the sake of lining the pockets of those billionaires at the top echelons of the financial industry. The question Americans should be asking is what kind of society we have become that would even consider that level of risk worth tolerating.