Yo-Yo Car Lending and the Economic Collision

One of the catalysts for the recent great recession was mercenary tactics by some in the mortgage industry, according to a recent article in the New York Times.  People were lured into ruinously priced loans which were in turn sold to Wall Street as mortgage backed securities that not surprisingly, went bad. 

There are new federal regulatory agencies which have issued guidelines, regulations and laws that have tamed those practices, prohibiting the riskiest and most deceptive mortgage lending practices.

So, now, the Times reports, these unscrupulous lenders have apparently taken their predatory lending practices to the automobile loan industry.  Predatory loans are not new, particularly to low income consumers.  However, the situation has worsened now that major banks have entered this market, buying up riskier car loans to package and sell as securities to pension funds, insurance companies and other purchasers in this secondary market.  Less than scrupulous car dealers are now in the position where they can make certain high risk loans that they might not have made previously, even falsifying income, building in loans with usurious interest rates and burdensome fees that provide  quick profits to dealers who package these loans and sell them off to the banks before the loans have a chance to go bad.

Federal prosecutors are now investigating some players in the subprime auto lending business.  One particularly offensive tactic is called the “yo-yo” whereby a car buyer drives away from the lot believing it is a done deal, but is contacted a few days later and told the “original deal” has fallen through and that if they don’t want to give back the car, they must re-sign at an even higher interest rate.  The New York Times’ Editorial Board called its piece “When a Car Loan Means Bankruptcy”.    

© David G. Hicks

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