The Next Wall Street Scandal: Sub-Prime Auto Loans
Traditionally, banks, the predominant lender, have financed auto loans only to qualified customers. Over the last decade, the number of auto loans has increased dramatically primarily due to non-bank competition. That non-bank competition includes the financial arms of auto manufacturers and lenders who operate from “captive” positions as part of auto dealerships.
Less stringent borrowing criteria increases the number of troubled loans in what is commonly called the “subprime” market. “Almost 9.7% of subprime auto loans made by nonbank lenders were more than 90 days past due in the third quarter of 2017, the highest rate in the previous seven years. That was more than double the 4.4% delinquency rate for subprime loans made by traditional banks,” and this is in a robust economy. (https://www.marketwatch.com/story/auto-lending-is-vigorous-even-as-high-risk-delinquencies-build-2017-11-14). Dealerships generate large profit margins by making subprime car loans. In fact, dealerships now make more money from financing loans than they do from auto sales.
In the past decade eleven major lenders that participated in subprime financing have settled class action lawsuits alleging racial discrimination. The Consumer Financial Protection Bureau (CFPB) is charged with protecting the public against abuses by the financial industry. To prevent discriminatory practices, the CFPB passed “guidance” in 2013 to protect against racial discrimination. Last month, the Senate voted to overturn this “guidance” and yesterday afternoon, the House also voted to overturn this “guidance.”
Rion Dennis of Americans for Financial Reform is quoted as saying, “By voting to roll back the CFPB’s work, senators have emboldened banks and finance companies to engage in racial discrimination by charging millions of people of color more for a car loan than is justified. Lawmakers have also opened the door to challenging longstanding agency actions that are crucial to protecting workers, consumers, civil rights, the environment and the economy.”
(https://www.nytimes.com/2018/04/18/us/politics/senate-auto-lending-discrimination.html)
Last month, the current interim director of the CFPB, Mick Mulvaney, instead of acting to protect against abuses by Wall Street, said to 1,300 bankers and lending industry officials at an American Bankers Association conference in Washington that “We had a hierarchy in my office in Congress. If you’re a lobbyist who never gave us money, I didn’t talk to you. If you’re a lobbyist who gave us money, I might talk to you.” (https://www.nytimes.com/2018/04/24/us/mulvaney-consumer-financial-protection-bureau.html) There is something wrong when campaign contributions matter more than protecting consumers. Only Wall Street benefits when public officials are so easily bought and sold.
Wall Street profits from these predatory and discriminatory auto loan practices by bundling the subprime loans and securitizing them for sale to investors.
In 2017 Wall Street sold more than 70 billion dollars worth of auto asset backed securities to investors. (https://www.ft.com/content/37390b14-ec86-11e7-8713-513b1d7ca85a) The biggest banks are making profits, once again, off the backs of the middle class just like they did with the subprime mortgage market in 2008. “As with mortgage foreclosures, auto loan defaults can be the product of loans that are not affordable over the full life of the loan, or made unnecessarily expensive by the professionals that sell them.”
In a report by Moody’s Investors Service it was stated that, “Santander Consumer USA Holdings Inc, which is counted among the biggest subprime auto-loan firms, verified income on just 8% of borrowers on loans it recently bundled into $1 billion of bonds.” A minor drop in the economy will create a disproportionate default rate in funds holding subprime loans. This is another crisis waiting to happen. If elected, I will guard against discriminatory and predatory lending fueled by Wall Street greed. I will fight to restore responsible leadership at the CFPB.
