CRL's First Ever Report on Car Lending Practices
AFFIL Partner the Center for Responsible Lending recently published their first ever report on predatory auto loans. CRL is a leader in researching predatory lending and working to end it. Much of the information commonly accepted about the housing market – for example, that there is a new foreclosure every 13 seconds – comes from CRL research.
So it’s exciting that they’re turning their attention to a new issue: car financing. Unfortunately, the report’s findings are not so uplifting. CRL used industry data and a consumer survey to pinpoint these systemic problems impacting North Carolina consumers:
Yo-Yo Scams: One quarter of low-income car buyers have experienced a “yo-yo” scam. This obscure practice ends up costing these consumers an interest rate 5 percentage points higher than they originally agreed to – which amounts to quite a bit of money. In a yo-yo scam, the consumer drives off the lot thinking they own their car, only to be contacted by the dealer and told that the financing “fell through.” The consumer can either forfeit the whole sale (and repay the loan in full) or refinance on worse terms if they want to keep the car.
Kickbacks: CRL found that consumers in North Carolina in 2007 spent $665 million on dealer “kickbacks,” a practice similar to the “yield spread premiums” which fueled the subprime mortgage bubble. Kickbacks give dealers an incentive to charge higher interest rates, because they get to keep a share of the interest payments over the life of the loan.
Loan Packing: CRL found that African Americans and low-income borrowers are more likely to receive useless add-ons when they buy a car. Add-ons include vehicle servicing contracts, extended warranties, theft deterrent packages, and credit life and disability insurance. Sometimes, dealers say these purchases are mandatory in order to process car loans.
CRL recommends banning kickbacks and yo-yo scams, and addressing loan packing by requiring dealers to present consumers with the cost of the vehicle, all fees, and add-on products up front.