Thursday, April 14, 2016

Car Trouble

In 2011 Don Foss, perhaps the richest used-car salesman in the history of the world, commissioned a half-hour film about himself and posted it to YouTube. The Don Foss Story opens with one of his TV ads from the 1970s, ads for which Foss hired an actor to portray him. (The real Foss, who is portly and balding, says he might have played himself "if I looked like Robert Redford.") At the ad's conclusion, we meet the film's narrator: "Today I'm going to guide you through the story of a truly remarkable man," he intones before lobbing the auto billionaire his first softball: "Don, your story pretty much epitomizes the great American Dream. I'm sure everybody wants to know how you did it."

What Foss did was practically invent the subprime car loan, a market that today exceeds $100 billion a year. First as a dealer, and later as the founder of an auto-financing company called Credit Acceptance, he was "really the first to see all the money to be made arranging the financing for cars that would otherwise end up in the crusher, and selling them in poor neighborhoods," says a longtime auto industry consultant.

The Don Foss Story casts things a bit differently. It includes a lot of talk about the nobility of extending credit to people no one else would lend to. If not for Credit Acceptance and its imitators, how would people make it to and from work, shuttle the kids to school, or take Mom to her dialysis appointments? By 1995, when the Wall Street Journal ran a front-page story on this "corner of the lending world J.P. Morgan would not recognize," Foss' personal stake in Credit Acceptance was worth $550 million. The company's stock was trading at $21 a share then. Today the price hovers around $200.

Virtually all of this growth has taken place since 2008—not despite the Great Recession, but largely because of it. When millions of Americans lost homes to foreclosure and millions more lost their jobs, it created a vast new reservoir of customers with tarnished credit and little cash. The amount of money loaned to these subprime borrowers—who now account for nearly a quarter of all auto loans—has more than doubled since 2009, the New York Fed reports. And because car loans, like mortgages, can be bundled and peddled to Wall Street investors, subprime auto bonds have emerged as an attractive replacement for the disgraced subprime mortgage bonds. In 2009, auto financiers sold about $3 billion worth of subprime auto bonds through the securities markets. By 2014, that number was $22 billion.

While the subprime auto market is nowhere near large enough to bring down the economy, there are unmistakable parallels to the mortgage debacle. Delinquencies and repossessions are on the rise industry-wide, and there have been reports of falsified loan applications. At least eight banks have come under scrutiny for allegedly jacking up interest rates on black and Latino car buyers. Big players including Ally Financial and Fifth Third Bank (America's ninth-largest bank) recently paid out nearly $200 million to settle such accusations. "Auto loans are now the most troubled consumer financial product," Sen. Elizabeth Warren (D-Mass.) noted last spring. "The market is now thick with loose underwriting standards, predatory and discriminatory lending practices, and increasing repossessions." (...)

Foss took Credit Acceptance public in 1992. It was around then that Ohio lawyer Ron Burdge, in the process of suing a used-car dealer, obtained a copy of Credit Acceptance's corporate manual and realized, with a mix of horror and awe, that "they had created this remarkable system for taking every last dime from their customers." Of Credit Acceptance's nearly 300 employees, roughly 200 were in collections, and the company pursued delinquent borrowers with machinelike efficiency. If that didn't work, a company lawyer would sue the customers for damages—including additional interest and legal fees—and then go after their wages in states that allowed it. "They brought everything to a totally new level," said Burdge, who used what he learned in subsequent lawsuits against the company.

Three years later, when a Wall Street Journal reporter arrived in Michigan to profile Foss and his business, it wasn't uncommon to find customers saddled with interest rates as high as 30 percent. Borrowers typically paid twice what the car had cost the dealer, the paper reported, and often those vehicles didn't outlast the loans that financed them. Eventually, Credit Acceptance and other subprime lenders would even start requiring borrowers to install starter kill switches that allowed the companies to incapacitate their vehicles from afar, "pretty much guaranteeing that the car loan is the first one people pay every month," a former Ford finance manager told me. Credit Acceptance now finances sales for thousands of used-car lots across the United States, and Foss' success has inspired any number of imitators: Capital One, Santander, and Wells Fargo are just a few of the big players that piled into the business of extending car loans to desperate people at borderline usurious rates. "The thing I didn't realize about going public is that you tell everybody how your business works," Foss cracked in one interview.

by Gary Rivlin, Mother Jones |  Read more:
Image: Ross MacDonald