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.
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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 25, 2010

Department of Insurance Slams Consumer Direct Warranty Services for Unlicensed Sale of Insurance

Dilbert taps into consumer frustration with the comic strip posted below. Call it wry humor. But the California Department of Insurance doesn't think consumer fraud is funny. Whether they are referred to as "service contracts," "extended warranties" or "mechanical breakdown insurance," vehicle repair agreements are a big profit center for new and used car dealers. Telemarketers or internet schemes may tout them as well. Often such contracts are unnecessary. Even illusory. Some of these products are legal, but many are not. In the midst of a slick sales pitch, almost no one reads the prolix printed warranty form. That is a mistake Dilbert's "confusopoly consultant" wants you to make. Now the Department of Insurance is clamping down.

For many years, car dealers have claimed that these after-market products do not qualify as insurance and they do not have to be licensed to sell them. That may change. On June 17, 2010, the California Department of Insurance issued a Cease and Desist order against Consumer Direct Warranty Services and related entities. You can read the Department's full press release here.

Some dealer service contracts fall within an exception to the insurance rules. However, in order to exploit that loophole, car dealers must follow certain procedures, have back-up insurance, provide cancellation rights and comply with other regulations.

"If you want to sell insurance in California, you must obtain a license, have adequate financial reserves and you must not deceive consumers," said Commissioner Poizner. "In order to protect California consumers, there are specific requirements for insurance companies seeking to do business in California. If companies do not abide by these requirements, they will not be permitted to sell insurance in our state."

The Insurance commissioner's website goes a step further to promote consumer protection. Check out its "Guide to Auto Service Contracts and Agreements" here. If you have purchased a service contract or extended warranty that does not comply with these rules, contact us even before your car breaks down.

June 24, 2010

NCLC Consumer Resources

nclc_logo.jpg The National Consumer Law Center just launched a new website. Check it out here. The nonprofit center, headquartered in Boston, has been a premier source of assistance for consumers, legal services and consumer lawyers for decades.

Its new website provides information on NCLC's recent reports, numerous publications and current initiatives. Among other things, NCLC publishes reports on scams and predatory trends in consumer transactions, manuals and treatises on a wide variety of legal topics affecting consumers, as well as other books for lawyers and the public alike.Return%20to%20Sender.JPG NCLC is the publisher of "Return to Sender - Getting a Replacement for Your Lemon Car" by Nancy Barron.

In addition to its publications, NCLC funds research, legal conferences and consumer education programs on a wide range of important consumer topics -- from automotive fraud and warranty law, to financial abuse of the elderly, energy policy, student loans, and predatory lending.

Kemnitzer, Barron & Krieg is actively involved in the work of NCLC. Bryan Kemnitzer is a member of the partner's council and Nancy Barron currently serves on its board of directors.

June 11, 2010

Car Dealers Fear Financial Reform

Finance reform has been bumped from front page news by international incidents and the catastrophic BP oil spill. But even as public attention has shifted elsewhere, the National Automobile Dealers Association (NADA) has not lost its focus on Washington. They are lobbying hard against legislation aimed at improving consumer protection. Why?

sleazy-salesman-thumb.jpgThe landmark financial reform package that is working its way through Congress would greatly improve financial oversight of lenders. This means a wide variety of entities who share in the business of lending money, not just banks. After the House and Senate passed different versions of the bills, lawmakers from both bodies are in the process of reconciling the two versions. The battle is drawn, because the House passed a bill that exempted car dealers from financial reform, but a similar amendment failed in the Senate.

The outcome of this process will greatly affect the way cars are sold in coming years. NADA is lobbying for its car dealers to be exempt from financial regulation, and is trying hard to persuade committee members that dealers don't get involved in car loans. Nothing could be further from the truth. As Paul Wiseman of USA Today reports, "auto dealerships originate 79% of auto loans and leases." He goes on to quote the non-partisan Cambridge Winter Center for Financial Institutions Policy as concluding "that auto finance is demonstrably susceptible to unfair and deceptive practices." You can read USA Today's article here.

The argument made by car dealers that they are all small mom & pop shops is also far-fetched. While many are indeed locally owned, thousands of dealerships are controlled by mega-dealers like AutoNation whose 100+ stores have reportedly sold more than 7,000,000 cars. These multi-state conglomerates keep a short leash on customer finance through their tightly controlled on site dealer finance departments and preferred lender programs which direct dealer-arranged financing to a handful of financial institutions.

Just this week, the trade publication, Automotive News reported NADA to be particularly concerned that the proposed consumer financial protection agency would have scrutiny over sale of service contracts and aftermarket items. As we have often discussed on this blog (click on "Shopping for Car Loans") regulation of dealer finance departments is long overdue.

April 10, 2010

Consumer Literacy - A Case for Doing the Numbers

We are bombarded daily with advertisements for new cars, used cars, leased cars, rental cars, sales, auctions and swaps. When you can’t tell the “no-down” from the “low-down,” I say it’s time to slow down. Do the math. Don’t cringe! The fact is things cost money. And money is all about numbers.

Any time you are not paying cash, you need a calculator or a clear head for something called “credit math.” You are buying two separate things: (1) the wheels and steel you will drive off the lot and (2) the money you need to pay for it. Each of these two things makes a profit for someone, and their profit comes out of your pocket. Subtraction and addition, in other words. Throw in some multiplication and division, fractions and percents. Those are the basic functions of credit math.910922_calculator.jpg

The mathematical relationship between buyer, seller, lender and borrower is the very crux of our economy. And, at its most basic, a fundamental failure of that relationship is what set off the global economic crisis. Bankers and brokers took advantage of the fact that, in layer after layer of transactions, the person signing the documents had no clue what they meant but assumed that someone, somewhere did. Financial illiteracy got us into this mess.

Consumer literacy should be a matter of national security. All Americans should know how to ask - and get answers to - questions that affect financial health: Can I really afford this loan? What is the difference between credit and debit, or debit and debt? What is my interest rate? What’s an APR? When should I pay cash? Why do I owe this late fee? What factors go into a credit score? How do I protect against identity theft?

Finally, consumer literacy is getting some attention. An article in today's New York Times laments the dearth of financial skills training in standard curriculum. It will be a long time before budget-strapped high schools offer such courses, but there is some evidence that money matters are creeping into the classroom. The National Endowment for Financial Education has produced a number of programs for use in schools. One useful tool mentioned in the NYT piece can be accessed online here While it is billed as “40 Money Management Tips Every College Student Should Know,” there is plenty of good advice for all of us.

March 16, 2010

Kemnitzer, Barron & Krieg Launches New Website

Kemnitzer, Barron & Krieg LLP, the host of this California Lemon Law Blog, has just launched a new website with a Q&A section on a variety of consumer protection areas, ongoing consumer alerts, attorney biographies, internet resources, a bibliography and contact links. Check it out here

The firm represents consumers throughout California and has, to date, filed cases in 34 separate California counties. Bryan Kemnitzer, Nancy Barron and Bill Krieg have a combined 99 years experience as trial attorneys fighting to protect consumer rights.

Supported by a dedicated staff, attorneys in the firm have taken individual and class action cases to trial, obtaining verdicts and judgments that include punitive damages and civil penalties. On the other hand, the vast majority of cases settle prior to trial. In settlement, Kemnitzer, Barron & Krieg have obtained debt relief exceeding $300 million, as well as thousands of new car replacements and refunds.

As California consumer lawyers, the members of the firm believe that every consumer is entitled to safe and reliable transportation, fair credit, truth in lending, access to the courts and freedom from fraud. All clients have the opportunity to learn more about consumer protection in ways that increase consumer literacy and save money, as well as resolve the particular case at hand.

March 16, 2010

Tire Recalls Remind Us All to Check the Tread

prospector%20tires.JPGSeveral tire recalls went unnoticed last month, with media attention focused on Toyota recalls regarding sudden acceleration. National Highway Traffic Safety Administration notices, regularly delivered to my "lemon law" inbox, included manufacturer's voluntary recalls of SUV tires having a tendency to shred or exhibit “chunking,” with potential crash consequences. If you get a tire recall notice, be sure to arrange for your replacement tires without delay. Faulty tires can result in a serious loss of driver control, cause a crash, or leave you stranded. Recalls are expensive for manufacturers, which generally do not offer free parts – including free tires – without good reason.

Tires are like the fingers and toes of the vehicle. You take them for granted until they get injured or broken, and then you realize you can’t do without them. Tire checks are just not high on my personal "to do" list. But last weekend, my 17-year-old son noticed a loss of air in the left rear tire of the family station wagon. In a hurry, I thought of simply filling it with air at the gas station, but closer inspection found a nail embedded in the tread. We all need an occasional reminder to check the tires regularly, not just for nails and shredding, but overall condition and especially the traction surface.

Tire labeling regulations require that a lot of important information appear on the tire itself. tire-drawing-all-labels.jpg This and more information on tire safety is found on the NHTSA website.

In addition to having the tires rotated according to the schedule set out in the owner’s manual, you should periodically check for routine wear and tear. The “life” of a tire varies greatly with the kind of car or truck you drive. While a lightweight compact might enjoy 60,000 miles before needing new tires, a luxury sports car may need new rubber at 30,000 mile intervals.

Whether exercising routine maintenance or shopping for a used car, it is not enough to check for overall tire condition – pay particular attention to uneven wear. The technician will lapse into jargon like “camber” and “toe-in,” but if a simple visual inspection shows any kind of irregular wear pattern, it could be a symptom of more serious issues: alignment problems, steering defects or even frame damage from a prior accident. When buying a used car, the tires can thus be a potent indicator of whether the vehicle has seen previous abuse.

From a lemon law perspective, we look at tire issues as an important part of the vehicle history. Experts find that tire wear can reveal whether other defects have actually been fixed, as the service manager may insist, or are likely to recur over the life of the car.

March 9, 2010

Used Car History At Your Fingertips

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Car buyers in the market for a used car now have a powerful tool to protect against dealer fraud, title washing, sale of rebuilt wrecks and other deceptive practices. The National Motor Vehicle Titling Information System (NMVTIS), a nation-wide database of used vehicle history is up and running. Consumer advocates have fought for many years to establish such a national public database for used cars and trucks. The car industry fought back and successfully stalled the implementation of this important mandate for a long time. But the waiting is over.

Rosemary Shahan, the executive director of Consumers for Auto Reliability and Safety and a tireless advocate for California drivers, emphasizes, "For used car buyers, this is the most valuable information, at the lowest price. Consumers should check this database first, then if they want more info, check Carfax and Experian. And of course ALWAYS get a vehicle thoroughly inspected by a trusted auto tech / body shop BEFORE agreeing to buy it."

Beginning in January 2010, every state now contributes to this valuable internet resource. Shahan is optimistic when she says, "Keep in mind that the national database has been receiving reports from over 8,000 insurers and junkyards, from all 50 states, and the data has to be updated every 30 days." The NMVTIS website itself cautions that it is only as good as its various sources, warning that there may be some variation in state reporting requirements. Although not foolproof, NMVTIS is an important step toward highway safety.

April 26, 2007

Prior Daily Rental Cars: Rip-Off on Resale

Hertz, Avis, Budget, Thrifty, Dollar and Enterprise are all household names for daily rental cars. The ease and convenience of pay-per-day driving is a blessing to the traveler, whether on business or for pleasure. On the other hand, we've all returned from a trip saying, "Nice place to visit, but I wouldn't want to live there." The same can be said of rental cars.

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Despite what the car companies say, daily rental drivers just don’t treat those cars and trucks like their own. All too many otherwise responsible people don’t bother about running up over a curb, leaving gum in the cupholder, slamming on the brakes or stripping the gears. Day after day, someone unfamiliar with the vehicle is at the controls. Innumerable poor driving incidents will go unnoticed at the end of the day. We even heard about one fellow who drove off with the gas pump nozzle still connected to the fuel tank, ripping the fuel cap hinge off in the process. Although possibly invisible on return to Hertz or Avis, these small defects add up over the short eventful life of a Prior Daily Rental. And that’s not all. A predictably large percentage of PDRs (as Prior Daily Rentals are known in the trade) come out of service in two states: Florida and Hawaii. These two locales are great for a holiday, but the environment is tough on any car or truck. Rust and corrosion are common problems with Prior Daily Rentals. Most troublesome is the fact that many rental cars and trucks are in serious accidents involving body and frame damage that diminish the safety and overall life of the vehicle.

Did you ever stop to think what happens to all of those prior daily rental cars? After somewhere between 15,000 and 30,000 miles on the odometer, they are taken out of fleet service and shipped throughout the 50 states. They then re-enter the marketplace in a wide variety of used car markets. Some are resold at dealer-only auctions.

Consumer protection laws in California require that Prior Daily Rentals must be disclosed as such. It is a clear violation of law to knowingly fail to disclose a vehicle’s history as a PDR. Why? The public policy behind the law is clear: the fact is important to the decision to buy or not to buy a particular car or truck, and certainly material to the price someone would pay. Some experts say the difference in value is 20-25% -- but many consumers say they would not buy a PDR at any price. The risk of frame damage, invisible rust or corrosion, and just plain poor driving habits day-in and day-out over the vehicle history are deterrents about which most used car buyers really want to know. The failure to make the disclosure required by law at the time of sale is deceptive; and when a single dealer makes a pattern of this concealment, that can be a deceptive business practice.

Unfortunately, cars often change hands only to have the title sent later in the mail, or even worse, sent only to the bank as lienholder. Used car buyers should protect themselves against these deceptive practices by ordering a CarFax report when they buy a used car.Whether we handle a PDR non-disclosure case as an individual matter or a class action, a CarFax report is one step in our investigation.

If you bought a low-mileage used car that seems to suffer from a high level of driveability or suspension problems, rust or corrosion, small dents and dings – not to mention that dangling fuel cap hinge – give us a call.