September 19, 2014

Non-Bank Automotive Lenders May Face New Federal Scrutiny

In a proposal released this week, the Consumer Financial Protection Bureau announced it intends to exercise increased scrutiny over non-bank auto finance companies that make, acquire or refinance 10,000 auto loans or leases per year. There are approximately 38 auto finance companies in the U.S. meeting that criteria. Combined, these companies provide roughly 90% of the non-bank auto financing in the U.S. To put that figure in perspective, those companies financed the automotive transactions of about 8.6 million consumers in 2013 alone. According to the Federal Reserve Bank of New York, the lenders covered by the proposed rule accounted for more than half of the $355 billion auto loan market last year.

The agency has yet to specifically name all 38 of the entities in question, but experts say the non-bank financers active in the automotive market include most of what are known as the "captives," lending divisions of the automakers themselves. This would include Ford Motor Credit, Ally (formerly GMAC), American Honda Finance, BMW Financial, and the like.

loan%20app.jpg “Many people depend on auto financing to pay for the car they need to get to work,” CFPB Director Richard Cordray declared. “Non-bank auto finance companies extend hundreds of billions of dollars in credit to American consumers, yet they have never been supervised at the federal level. We took action after we uncovered auto-lending discrimination at banks we supervise. Today’s proposal would extend our oversight, allowing us to root out discrimination and ensure consumers are being treated fairly across this market.”

Fair treatment for consumers -- who could be against that? As it turns out, those very finance companies as well as car dealers, are expected to push back. Yet, such newly-extended oversight would be a tremendous help for consumers. The agency would have the authority to examine a wide variety of deceptive behavior, including claims the financing companies make to consumers about their loans or leases, whether the companies accurately report consumer data to credit bureaus, and unlawful debt collection practices.

“We have a responsibility to make sure that the economy that we’re rebuilding is one where middle-class families feel like they can get ahead again, where hard work pays off, where everybody gets a fair shot and everybody does their fair share,” President Obama said in 2012, when he appointed Richard Cordray to head the CFPB. In response to criticism from the banking lobby, he has emphasized that lenders who do not engage in deceptive practices have nothing to fear from the CFPB.

Once the proposal is published in the Federal Register, a public comment period begins. Meanwhile, an informal but lively debate has already begun on the CFPB's own blog. You can read it and weigh in with you r own comments here.

Meanwhile, the CFPB has been holding field hearings in Indianapolis this week. Among other participants, Chris Kukla, Senior Vice President of the Center for Responsible Lending, stated, "For too long, a huge portion of the auto lending market has operated with few rules and few consumer protections. Abusive practices like selling consumers unnecessary insurance and overcharging on interest rates have festered. As a result consumers have lost tens of billions of dollars paying extra interest or paying for worthless add-on insurance products. Some auto lenders have also contributed to the exponential growth of subprime auto lending by pushing consumers into longer-term loans and loans they do not have the ability to repay. Oversight is clearly needed."

September 17, 2014

Car Buying Tips You Don't Want to Miss

If you dread - absolutely dread - buying a car, you are not alone. A reported 83% of Americans loathe the process of dealing with a car salesman. You would rather go to the dentist, handle a job interview, or sit through dinner with the in-laws. But, the truth is that you can make the job of buying a car less painful by getting prepared.

Chris Radomile (along with an anonymous insider co-author) recently penned a piece for the the popular and irreverent blog, "Cracked," recommending 5 key points to help the hapless car buyer. You can read the full, colorful discussion here.

The authors point out:imgres.jpg

1 - If one dealer seems to have a better price, read the small print
2 - Negotiate on the total price of the car, not the monthly payment
3 - The Internet is your trump card
4 - Car buying isn't nearly as bad as it used to be
5 - A shocking amount of customers prefer haggling

Of these five points, we would particularly agree with items #2 and #3. Doing your homework on the internet is crucial to car buying these days, and a thorough Google search can save you money in overall price and/or monthly payments for years to come. One of the best sources is the car valuation feature on the Edmunds website. You can access this tool here. Also, download one of the many available percent calculator apps so that you can quickly compute the true cost of credit.

With respect to item #1, if one dealer seems to have a better price for the same make/model vehicle, we recommend not only reading the small print, but reading the very large print that might say "AS IS." It is shocking how many people ignore this red flag. If the price is too good to be true, there could be something seriously wrong with the car.

With regard to items #4 and #5, it is true that many consumers are more comfortable with the whole negotiating process, now that they have more information available about the cars themselves. Nonetheless, car buying in some ways is even worse than it used to be, because the dealer finance departments (called "F&I") have slick software programs and aggressive sales techniques to up-sell the customer on after-market items. The best thing is to research the estimated price of the car you want before financing, calculate what the car will cost with all the finance charges, and resist buying any aftermarket items when you sign the contract. These add-ons are usually unnecessary and consist of high-profit negotiable price opportunities for savvy dealership salesmen.

After you know what the price of the car should be before financing, pull your own credit report, so you know what your score is, and do not authorize the dealer to pull another. Estimate what you think you can make in car payments per month. Do not wait for them to tell you what you can afford. Set that amount of money aside in a bank account each month for 2-3 months, to see for yourself if it will "break the bank." Only then do you know what you can really afford.

One final word to the wise. For the remaining 17% of people who do not dread buying a car, but consider it a form of suburban entertainment, don't take the family on a Sunday afternoon. Take only your spouse or co-buyer, or a truly objective trusted friend. The American car lot is not a playground, but rather a dangerous place for your financial well-being. If you want to spend a weekend afternoon with the children, go to the beach or a movie or a park. Otherwise smart people can make bad deals because they brought the whole family with them for a test drive. A few hours later, they are still there, the kids are hungry, and Mom or Dad will sign anything just to get home.

September 12, 2014

Consumer Financial Protection Bureau Gets Green Light For Arbitration Survey

One of the troubling things about forced arbitration is that most people know nothing about it. The problem is, what you don't know can hurt you. The participants in arbitration are often sworn to secrecy. No wonder most people are in the dark. But, when it comes to private judging, there is good reason to be afraid of the dark. The rules of evidence do not apply and the arbitrator is not bound by the facts or even the law.

A forced arbitration clause in the fine print of contracts strips consumers and borrowers of their right to go to court, their right to a jury, their right to appeal. Increasingly, arbitration clauses also ban right to participate in class actions, which are the only way to vindicate many consumer rights. Statistics overwhelmingly show that, even when individuals can afford to bring or defend their cases in arbitration, they usually lose. They find out - only too late - that the secret system of private judging has the odds stacked against individuals who appear without legal representation.

Consumer advocates including non-profit groups like Public Justice, the National Consumer Law Center and the National Association of Consumer Advocates have fought for a long time against forced arbitration clauses favored by corporations, and the corrosive effect they have on the civil justice system. images.jpg One of the leaders in this effort is Paul Bland, Executive Director of Public Justice. He summarizes the role of the CFPB at the present time, "Under the Dodd Frank Act, the CFPB has to complete a study as to whether the use of forced arbitration clauses by lenders is harmful to consumers. If the Bureau finds that forced arbitration IS harmful, then it is required by the act to ban the use of forced arbitration by lenders."

This week that important CFPB survey has now been cleared to go forward, after having been stalled for months. The Consumer Financial Protection Bureau can get on with its study of consumer awareness or ignorance of the obscure world of forced arbitration. Hopefully, it will then have the data it needs to act. You can read more about this crucial consumer issue here.

September 9, 2014

It's A Dirty Business

There is nothing clean about "title washing." The phrase as used in this context is more like laundering, as in money laundering, than cleaning up anything that has to do with your car.

The core purpose of car title is to disclose and confirm the ownership of the vehicle, but it also gives notice of other information the legislature has deemed it essential for the owner to know. This might mean whether the car or truck was formerly a lemon law buyback, whether the vehicle had been used as a prior daily rental, or whether it had been wrecked and salvaged. Thus, title is said to "branded" with disclosures of these kinds. "Title washing" refers to scrubbing out the truth about vehicle history. It can result from actually erasing evidence of prior accidents, or delaying the report of a salvage history, or even counterfeiting registration documents to hide the negative history of a car. title.jpg

The result of title washing is that the next used car buyer thinks he or she is getting a bargain on a safe car, when in fact it might have been in a serious accident and only superficially repaired. If the price seems too good to be true, it probably is too good to be true.

The sale of rebuilt wrecks not only damages the buyer financially, but returns unsafe vehicles to the stream of traffic, making the roads and highways less safe for everyone. Some of theses salvaged vehicles should never be resold at any price. For example, a car that has serious frame damage puts the driver and passengers at greater risk of severe injury in the event of a second accident, even a simple rear end collision. A truck's steering system that was rusted out in undisclosed flood damage could endanger future oncoming traffic as well. A driver who does not know that a previous rental company failed to have brakes repaired pursuant to a recall could face great bodily harm to himself and others in the event of a crash.

Consumer advocates have argued for a national database of salvaged vehicles for a long time, meeting the resistance of industry and regulatory agencies at every turn. As far back as 2009, the federal Department of Justice created a National Motor Vehicle Title Information System, to protect consumers from title washing. But the data in the federal system is incomplete. Private companies like AutoCheck, CarFax and Experian have their own reporting systems, but these reports are notoriously incomplete as well. The problem is compounded when cars are shipped across state lines for resale, because different states exercise different levels of efficiency in compliance.

The concern is not a small one. You can read the full report, entitled "One Million Used Cars Are Hiding a Terrible Secret," right here.

September 7, 2014

What Does it Take to Become A Car Salesman?

Last year he was a celebrity, this year a salesman? After the NFL upheld star receiver Josh Gordon’s yearlong suspension last week for repeated positive drug tests, he found himself out of a job with the Cleveland Browns. At least for the time being. There is talk of the NFL revising its drug policy this season and some pundits wonder if that may lead to Gordon's reinstatement. But it looks like he won't be leaving Ohio in the interim. ESPN’s Josina Anderson reported Thursday that Gordon will be working for the Sarchione Auto Group, an Akron area multi-make car dealership. images-1.jpg His title is some sort of goodwill "ambassador," but his activities will reportedly include time on the sales floor.

We always wondered what qualifications are needed to get a job as a car salesman.

The editors at the highly informational automotive website,, apparently wondered the same thing. And they really went for it. To present an up-to-date expose, they hired invetigative journalist, Chandler Phillips, to work undercover at two new car dealerships in the Los Angeles area. The result is "Confessions of a Car Salesman," an absolute must-read narrative for anyone about to buy a car from a dealer of any kind. You can check out the full article right here

It's a little scary. Add the speed, size, strategy and driving ambition of pro football to the local car dealer sales force and the ordinary consumer hardly stands a chance.

July 22, 2014

Borrowers Beware

The subprime mortgage bubble that exploded in 2008, causing bailouts of banks and automakers alike, should have taught us something about irresponsible lending and unaffordable loans. But, another bubble of similar substance is about to burst next. Consumer advocates like the lawyers at Kemnitzer, Barron & Krieg, have cautioned for years that the subprime auto lending bubble is just as fragile in the aggregate as home loans were a decade ago.

In an excellent article this week, New York Times writers Jessica Silver-Greenberg and Michael Corkery report, "Auto loans to people with tarnished credit have risen more than 130 percent in the five years since the immediate aftermath of the financial crisis, with roughly one in four new auto loans last year going to borrowers considered subprime — people with credit scores at or below 640." That overall lending pattern is just not sustainable.

High interest rates and excessive loan periods mean that people who are most desperate for inexpensive transportation are least able to obtain it. They end up having to make loan payments long after the life of the car. They get saddled with repair costs, even while they are still trying to pay off the purchase price. They lose the equity they have in the vehicle when they fall behind and the car or truck is repossessed. And then their credit sinks lower in a downward spiral.

Used car dealers employ a wide variety of deceptive practices including the hard sell, bait and switch advertising, and sometimes outright forgery. Sad to say, many used car dealers, who know they can't get a loan funded by a responsible bank, falsify the credit application. Unscrupulous car dealers convince prospective purchasers to sign a credit app in blank, and they fill it in after the fact. Sometimes buyers allow themselves to be duped into exaggerating their income. Fudging on income is always a bad idea. An accurate credit application should be a reflection of the borrower's ability to repay the loan.

Generally, a lender does not offer the dealer a single interest rate, but rather a range called the "spread." If the dealer can get the buyer to agree to the higher end of the spread, the dealer keeps all or some of the yield spread premium. The buyer is never told that the dealer pocketed the markup.

Another common practice is called a yo-yo, where the dealer allows the buyer to take delivery, conditioned on the loan documents being approved; and when the bank balks, the buyer is called back to "re-sign" a contract with less favorable terms. This may include a higher downpayment, or a longer period of repayment, or other deceptive practices imbedded in the fine print. In the worst cases, a car dealer has already sold the trade-in vehicle and the buyer feels he or she has no choice but to sign off on the new deal. This is illegal in California, and yet many consumers report significant bullying at this stage of the process.

What is driving this new interest in subprime lending? The same thing that drove the mortgage crisis before. Wall Street financing has replaced the local bank, whose loan officers had a personal relationship with the borrowers they served. That sounds almost quaint in this economic climate, like something out of "the olden days." Now, automotive debt is bundled, securitized, and sold to Wall Street investors and private equity companies, who neither know or care whether the borrower has the ability to repay the loan.

The investigative journalists for the New York Times poured over masses of documents and court filings, and in a sober comment, found "echos of the mortgage boom." On the grand scale we should hope that financial institutions come to their senses, or the subprime auto finance industry will reverberate with echos from the bursting bubble of the mortgage bust. The hedge funds are already taking notice, but taxpayers are in no mood to help banks this time, and any echo of a bailout may fall on deaf ears.

Meanwhile, consumers with subprime credit are getting taken for a ride, with higher payments for lower quality cars. It's time for a new twist on the old phrase to urge the car buying public: Borrower Beware.

June 19, 2014

Credit Discrimination Is a Civil Rights Matter

As the country celebrates the 50th anniversary of the Civil Rights Act of 1964, the legacy of the Civil Rights Movement surfaces again for debate. Most Americans agree that the progress of the 1960s is far from complete. UCLA Professor Emeritus, Jack Rothman, stated this week in an excellent HuffPost piece entitled Civil Rights Need Economic Rights, "The clash between American's declared values of fairness and justice and the functioning of its contentious and uncaring economic system is a potent deterrent to racial progress. We are simply out of alignment as a nation. For the fight for racial equality is hopeless without an all-out fight for economic equality. The country stands in need of a new civil rights transformation -- this time taking aim to upend the broader system of unfairness."

toni%20morrison.jpgPoliticians, academics and advocates alike, including that icon of the Civil Rights Movement, Representative John Lewis (D., Georgia), have long argued that economic justice is the new battleground of the civil rights movement. It is a human rights issue for the 21st century.

"Racism" and "discrimination" are highly charged words. But what is racism, exactly, and why does it harm all races, not just the minority? Nobel Laureate, Toni Morrison, answered that question brilliantly in a classic 1993 interview which you can listen to here.

The National Consumer Law Center (NCLC) is a non-profit organization that advances fairness in the marketplace - including the financial marketplace - for all Americans. After documenting that access to financial products remains unequal, NCLC advocates argue that, "In addition to perpetuating historical discrimination against minority groups, credit discrimination destroys the financial well-being of its victims. Without access to reasonably priced credit, it becomes measurably more difficult to achieve homeownership and build assets, pay for college education or vocational training, or even buy a reliable car for transportation to work." You can read more about NCLC's work for economic justice on its website here.

Californians have the protection of several state laws, in addition to Federal laws, that grant rights and enhanced remedies to people of color and other vulnerable segments of the population. The California state civil rights act is commonly called the "Unruh Act." This and other consumer protection statutes are powerful tools in the effort to obtain economic justice for all.

June 8, 2014

Students Deserve a Fair Shot

Few people in America know more about student debt than Elizabeth Warren does. Before being elected to the Senate from Massachusetts, she was a professor teaching bankruptcy law at Harvard Law School, and has written books on financial literacy, such as "The Two Income Trap." Now Senator Warren is writing legislation to improve the situation.

Commencement speakers may spout cliches and optimism, with their gushing words of advice. But the reality is not abstract or philosophical. Debt is real.

Americans collectively owe about a trillion dollars in student loan debt. It is hard even to grasp what that figure means, but it is useful to note that about 40 million current and former students carry some part of that crushing debt load. Student loan debt follows the borrowers for much of their lives, affecting their credit for years after graduation, affecting where they live, and even affecting what jobs they can take. obamawarren.jpg It is not just a personal hardship, but a national tragedy when students cannot afford to take an entry level job, apprenticeship, or intern opportunity in the very field they incurred debt in order to train for.

Democrats, lead by Senator Elizabeth Warren and supported by the Obama administration, have come up with the best practical solution offered in many years. The Warren proposal would allow students and alums the opportunity to refinance that debt at lower interest rates those commonly available for other types of loans. "When interest rates are low, homeowners, businesses and even municipalities refinance their debt. But right now the government doesn't offer a refinancing option to students," Senator Warren explained. "Allowing students to refinance their loans would help give them a fair shot at an affordable education." This kind of relief is long overdue, and could go far to help students and former students get their credit life back on track.

In a familiar refrain Warren said, "Student loan debt is a real and growing crisis that is crushing young people and dragging down our economy." That sounds familiar. What is new is that the government is stepping in. The student loan refinance proposal is part of a coordinated congressional agenda that Democrats label "A Fair Shot." Meanwhile, President Obama is not waiting for Congress to act. He is issuing a partial fix by executive order today, directing the secretary of education to ensure that certain federal student loans be capped at 10 percent of the borrower's monthly incomes. Hopefully, election year politics will encourage bipartisan support rather than partisan debate. You can read more about the Warren proposal here and more about Obama's executive action here.

June 6, 2014

California Lemon Law and the "Serious Bodily Injury" Standard

There is no doubt that General Motors' botched handling of defective ignition switches was callous and incompetent. Engineers knew of the problem as early as 2004. The recall debacle has rippled through the company. To her credit, this week the new CEO of General Motors, Mary Barra, announced that 15 employees, many of them executives, have been fired over their poor handling of the situation. mary%20barra.jpg Consumer advocates are watching closely to see whether this action is an effective means of changing the corporate culture at GM, or just another desperate effort at damage control.

Termination is a severe reprimand. But is even this remedial action enough to comfort those scores of suffering families whose loved ones were killed or injured in accidents caused by defects that could have been prevented? What may be a ripple for a corporation is a tsunami of pain for human beings. It is hard to imagine the devastating feeling of a driver whose loved one is killed in the passenger seat. Then add arrest to that agony. Consider the case of a Texas woman, Candice Anderson, who pleaded guilty to negligent homicide of her fiance under these circumstances. She has now learned that the faulty ignition components in the Saturn Ion she was driving caused the fatal crash for which she took the blame. Meanwhile she lives with a felony on her record and a hole in her heart. You can read the story of this tragedy here.

The California lemon law, commonly known as the Song-Beverly Act, is one of the strongest in the country. In addition to the remedies it provides to consumers themselves, the Song-Beverly Act is a legislative attempt to use the law of warranty to improve the safety of vehicles on California highways. Even though it provides actual damages in the event of an accident resulting in personal injury, the idea behind the law is to prevent that fatal outcome by forcing manufacturers to act responsibly before tragedy strikes.

To that end, the California lemon law sets an easier standard for consumers to meet when the defect could result in serious injury. The California version of the lemon law was amended to add that liability is triggered when: "The same nonconformity results in a condition that is likely to cause death or serious bodily injury if the vehicle is driven and the nonconformity has been subject to repair two or more times by the manufacturer or its agents, and the buyer or lessee has at least once directly notified the manufacturer of the need for the repair of the nonconformity." For example, in proving the manufacturer has not repaired a vehicle within a reasonable time under warranty, the consumer need only show he or she had taken it in for repairs twice for certain components like brakes or steering.

One of the problems with the GM ignition switch was that it was not just about a simple switch, which sounds trivial on its face. The ignition switch on the steering column of the Chevrolet Cobalt, Ion and other compacts was so poorly designed that it easily slipped out of the run position, causing engines to stall. A faulty ignition switch could cause overall loss of power to the vehicle that rendered aspects of the brakes and steering system inoperative as well.

For other answers to common questions about the California Lemon law click here

June 3, 2014

Fake Debt Collectors

Borrowing and lending used to be so straightforward. A consumer borrowed money from a bank and paid that bank back on agreed-upon terms. If the consumer did not pay it back on time, the bank might hire a debt collector to assure payment of the amount owed to the bank.

Times have changed. In today's financial marketplace, banks often sell bundles of consumer debt to other financial institutions, for a portion of the amount owed, and the collectors get to keep what they are able to collect for themselves. These "downstream" debt collectors call and cajole consumers, or send endless streams of mail threatening damage to credit and other negative consequences.

check.jpgThe source of the debt may be as simple as a credit card account with a single bank, or as complicated as a jigsaw of hospitals and medical service providers. Unscrupulous entities may sell the same debt twice. Or criminals may get hold of a contact list of account holders and try to collect debt that they don't even own.

Suddenly, the bills and phone calls can come from multiple strangers. It is easy for borrowers to get confused as to whom they should pay. That is when fake debt collectors see an opportunity to profit and steal.

In the economic recession of the last decade, these deceptive practices have skyrocketed. The Federal Trade Commission received many complaints about debt collection abuse. The Consumer Financial Protection Bureau heard about the problem as well. Both agencies are studying debt collection abuse within their regulatory authority.

The FTC advises that consumer take a number of steps if you are being dunned by a company you don't recognize or have never done business with.

1. Ask the caller for his name, company, street address, and telephone number.
2. Tell the caller that you refuse to discuss any debt until you get a written "validation notice." The notice must include the amount of the debt, the name of the creditor you owe, and your rights under the federal Fair Debt Collection Practices Act.
3. If a caller refuses to give you all of this information, do not pay! Paying a fake debt collector will not always make them go away. They may make up another debt to try to get more money from you.
4. Stop speaking with the caller.
5. If you have the caller's address, send a letter demanding that the caller stop contacting you, and keep a copy for your files. By law, real debt collectors must stop calling you if you ask them to in writing.
6. Do not give the caller personal financial or other sensitive information.
7. Never give out or confirm personal financial or other sensitive information like your bank account or credit card to a stranger over the phone
8. Never give out your Social Security number unless you know whom you're dealing with.
9. Contact your creditor. If the debt is legitimate – but you think the collector may not be – contact your creditor about the calls. Share the information you have about the suspicious calls and find out who, if anyone, the creditor has authorized to collect the debt.

We would add two things to the FTC's good comments. First, pull your own personal credit report. You are entitled to get one per year for free, by going to the official website for one of the Big Three agencies - Experian, Transunion, or Equifax. Secondly, if you still don't know why this entity continues to contact you about a debt you don't think you owe, or if you are sued by a company you have never heard of, you may need to seek legal advice.