A Reputable Dealership? The Consumer Financial Protection Bureau has issued subpoenas to several “buy-here, pay-here” auto lenders, citing the sale of financial products such as extended warranties and extra insurance, as well as the improper disclosure of terms and prices. These summonses are part of the bureau’s ongoing probe into the auto loan industry, including an investigation into the practice of dealers selling loans “wholesale” to banks, causing many banks to worry about potential legal and financial repercussions.
The CFPB, created by the Dodd-Frank Act of 2010, has the authority to fine dealerships it deems have broken the law. The agency has no jurisdiction over franchised new-car dealers who arrange loans through banks; however it does have authority over these small used-car dealers, who make loans themselves.“Buy-here, pay-here” dealerships often mark up the retail price of their vehicles by upwards of 80%, and charge interest rates averaging 24%. And while nearly 2.4 million vehicles were sold through these businesses in 2010, the repossession rate lingers around 30%. In fact, collection and repossession is often a critical part of these companies’ business models, with some aiming to actually maximize repossession in order to sell each car repeatedly.
This probe follows similar initiatives in the credit card and mortgage financing industries. The CFPB’s research has apparently demonstrated that dealers often markup loans made to blacks and Hispanics, and price discrimination based solely on race is obviously illegal. But what makes a loan predatory? Is it deceptive marketing and misrepresentation of a contract’s terms, or can a high interest rate in itself become predatory—in that the lender is “manufacturing default” by gouging the consumer?
Source: Automotive News
In my understanding a loan can’t be predatory if the recipient of the loan is not forced into the loan because they accepted the interest rate. Car loans however can be somewhat predatory in the sense that people need cars to get to their jobs and while cars may not be seen as necessary often without a car a person may not have a way to may a living. In these situations loans can be predatory because a person may have no choice but to accept a loan with a high interest rate.
BHPH treads ethical lines, sometimes under their heel. Yes, the geography of the US dictates access to transportation. Taxi service is a poor alternative, expensive and not always easy to schedule, plus getting to work is bad enough, the odd shopping or childcare trip just won’t work.
Still, practices are opaque. BHPH offers cars that look good, but can require a deposit that makes buying a near-junk car an alternative, and the junk car may be of equal quality. It’s also an industry with lots of very small players who may not be very sophisticated about all the legal niceties, or simply ignore lawyerly advice.
There are several chains, though my hunch is that they have a very small market share. (For new cars, even the top 150 dealers have a small market share — and the top 50 or so are $1 billion-plus businesses.) Are they better? They have more to lose from ignoring the rules of the game, and since they are more visible they’re probably also more likely to be caught. So I would think, yes, they have to have a standard business model for their outlets, and standards go with that.