Auto dealers remain free to engage in practices outlawed in the mortgage lending industry by financial reform. Image: Flickr/Shane's Stuff CC-BY-SA

A predatory lending practice in the mortgage industry outlawed by the financial reform bill escaped regulation in the auto lending industry. “Dealer reserve” is a legal practice similar to yield spread premiums; the practice of steering borrowers toward more expensive loans in exchange for a kickback. Although yield spread premiums are now illegal, dealer reserve isn’t. But informed car buyers can protect themselves from getting fleeced.

Dealer reserve, default and repossession

If you’re ready to shop around for an auto loan, thank the Center for Responsible Lending for bringing the practice of dealer reserve into the light of day. The CRL report, “Under the Hood: Auto Loan Interest Rate Hikes Inflate Consumer Costs and Loan Losses,” examines how auto dealers receive kickbacks from financing companies for selling customers loans with higher interest rates, even when they qualify for a lower rate. “Under the Hood” also describes a correlation between the dealer reserve and higher rates of default and repossession, particularly among subprime borrowers. Dealer reserve auto loans can cost borrowers an extra $1,200 to $1,700 over the life of the loan–possibly more if the borrower has bad credit. According to the CRL, the practice will cost car buyers $25.8 billion they didn’t have to pay.

Auto lenders pursue outlawed mortgage schemes

Dealer reserve is remarkably similar to yield spread premiums, commissions paid to mortgage brokers who would trick borrowers into higher interest rates. The Dodd-Frank financial reform bill put a end to yield spread premiums, but thanks to auto lending industry lobbyists, the new Consumer Financial Protection Agency is currently powerless to do anything about dealer reserve. Free from regulation, the auto lending industry is also adopting a practice similar to bundling bad mortgages into securities that were sold on Wall Street. Another report from the Center for Public Integrity describes the trend of bundling subprime auto loans into securities. By absolving auto lenders of the risks involved with making bad loans, subprime auto loan-backed securities are encouraging predatory lending by auto dealers.

Don’t be a yo-yo

The CPI report also mentions tricks auto dealers use to dupe borrowers into higher interest loans, such as the “yo-yo.” To pull the yo-yo con, a dealer will offer a bargain interest rate and let the borrower drive the car home. Later, the dealer will call to say financing fell through in hope that the buyer has become attached to the vehicle enough to accept a higher interest rate when they return it to the lot. To guard against the yo-yo and other auto dealer deceptions, check out the list below, courtesy of Forbes:

Stay focused. Fast-talking finance managers will try to confuse you, a mental state they call “in the ether.”

Negotiate hard, but concentrate on the bigger issues, not nickles and dimes

Avoid extras such as rust-proofing dealers use to pad the finance amount, especially “credit life” insurance, which may already be part of your homeowners insurance.

Read the fine print on a price advertised by the factory. Sometimes a dealer will try and keep the savings as a bonus, instead of passing it on to you.

Sources

Examiner.com

Center for Responsible Lending

Forbes

When love becomes a burden . . .

The mom-mobile, the beloved suburban conveyor, the best-selling passenger vehicle in America for years on end: In its very success, the Ford Explorer unleashed a pestilence of vehicular obesity.  How did it get so fat?  Love had a hand in it.  People fell in love with the outdoorsy, go-anywhere image that riding up high on a 4000-pound steel behemoth imparts.

Even though more fuel-efficient minivans are perfectly adequate for hauling kids and cargo, Americans love the panoramic view from an SUV.  Over the years, the overachieving Ford Explorer catapulted the SUV from a special-interest vehicle to one of the most popular vehicle types on the road. With invoice prices ranging from $26,950 to $35,432, the 2010 Ford Explorer ranks high on the list of affordable midsize SUVs and continues to be a favorite among auto lenders.

Love is a risky business

The risk of rollover is higher in truck-based vehicles, including SUVs.  A short wheelbase combined with the greater vehicle height required to provide adequate ground clearance for bulky four-wheel-drive hardware is a recipe for in instability.   But never mind the spate of fatal accidents involving under-inflated Firestone tires and Explorer rollovers: Love is a lasting thing.  Accidents, including SUV rollovers, so the argument goes, happen only when people drive carelessly.

As vehicles grew more corpulent, buyers became competitive about size and advertisers jumped into the fray.  Bigger became synonymous with safer, although traffic-fatality statistics did not bear that out.  A widely cited New York Times article from July, 1999, stated: “Because it is taller, heavier and more rigid, an SUV or a pickup is more than twice as likely as a car to kill the driver of the other vehicle in a collision. Yet partly because these so-called light trucks roll over so often, their occupants have roughly the same chance as car occupants of dying in a crash.”

Hummer H2: the lovechild

Arrogantly huge, overtly militaristic, startlingly impractical, and openly scornful of the common good: The natural offspring of America’s love affair with fat cars, and General Motors’ crowning achievement, was the Hummer H2.  The H2 seemed to mock every practical justification ever posed for owning a large vehicle that consumes a lot of gasoline.    Never did a large family enjoy a long and leisurely summer-vacation road trip in an H2; never did a legitimate business require a fleet of H2s; never did wallboard for a bathroom remodel or manure for a garden ravage the roomy interior of an H2; and never was an H2 safe and reliable on ice or snow.  As for the off-road prowess of American SUVs, an unnamed senior marketing executive at Ford is roundly quoted as having once said: “The only time those S.U.V.s are going to be off-road is when they miss the driveway at 3 a.m.”  Whether or not this statement is the stuff of legend, the sentiment is pertinent here.

Won’t someone please think of the poor H2?

The H2 could not have made its entrance at a less auspicious time.  With an estimated fuel economy of nine miles per gallon, this ungainly lovechild was introduced shortly after 9/11, an event inextricably linked to America’s unquenchable thirst for the oil of other nations.   Rebellion of a sort ensued.  A Southern California Hummer dealership was torched; GM (who happened to be repossessing and crushing the few EV1 electric cars in existence at the time) suffered a PR catastrophe; and “Hummer” became synonymous with conspicuous American greed and over-consumption.  Not ironically, the number-one complaint of disenchanted H2 buyers turns out to be poor fuel economy — a mere six miles per gallon, if we heed the outcry of these unfortunates.

The rest of the story: nothing much changes

American automobile makers started churning out gas guzzlers in the 1960s and 1970s when fuel prices and consumer awareness of fuel economy were both low. Domestic automobiles became larger as consumers demanded comfort, roominess, and power.  Proportionally speaking, large sedans from this era rival today’s largest pick-up trucks.  In 1977, with an average of seven miles to the gallon, the Lincoln Continental Mark V was named by auto motor und sport as having the worst fuel economy of any vehicle ever tested by the magazine.  According to  a 2007 Wikipedia article, Passenger Vehicles in the United States, the Mark V has retained that ranking despite tough competitors like the H2.

Things started to change after the oil crisis of 1973, as smaller vehicles, including Japanese imports, became more popular. In the late 1970s, the federal government promulgated minimum fuel-economy standards and by the 1980s, American manufacturers were downsizing cars in earnest.  In the 1990s, however, improved technology — and commercial disregard for the spirit if not the letter of the law — led to the manufacture of larger vehicles capable of satisfying fuel-economy regulations.  The average fuel economy of passenger vehicles in the United States remained largely unchanged in the 1990s and 2000s, peaking slightly in 2001 and 2004.  The Wikipedia article states:

Overall, the past decade has seen the slowest increase in fuel economy since 1960, with fuel economy increasing from 16.4 miles a gallon in 1990 to 17.1 miles a gallon today. This is in contrast to the 1980s when the average fuel economy improved somewhat more significantly from 13.3 miles a gallon in 1980 to 16.4 miles a gallon in 1990. The lackluster increase in fuel economy during the 1990s is largely due to the rising popularity of [sport utility vehicles], whose status as light trucks gains them exception from the fuel economy restrictions placed on sedans and other cars.

Vehicular obesity is an insidious disorder

Like that other, all-too-familiar kind of obesity, the fatness of our cars inched up on us.  By the time it  became readily apparent, the disorder was shockingly well established. Just take a look at any store parking lot. Judging by the vehicles each patiently waiting to cart home one driver and two bags of groceries, you’d think that getting to the store involved fording rivers and traversing invious territory.  In any given parking lot, half the vehicles have four-wheel drive, 18 inches of clearance, and step-up bumpers.  Always the standout in an urban parking lot,  the H2 offers a convenient roof rack (and a true 4 x 4 look!) for shoppers hauling home extra groceries — if only a person of ordinary stature could reach it  without the inconvenience of hauling around an extension ladder.
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