The Big Business of Subprime Auto Loans: NPR

The practice of subprime auto loans is booming in the United States, targeting customers with bad credit with loans that often fail. The companies behind it are making huge profits.


About 10 years ago, the reliance on subprime mortgages led this country into a financial crisis. Subprime loans are most often given to low-income borrowers with lower credit scores. They have high interest rates and people default more often than traditional loans. Today, subprime used car loans have become big business and not just for car dealerships. Anjali Kamat of member station WNYC examines lending practices.

ANJALI KAMAT, BYLINE: It’s a beautiful morning at the edge of Central Park in New York. Anouyen Meda Celeste, whose name is Celeste, has just worked the night shift.

Did you have a long night?

ANOUYEN MEDA CELESTE: Yes. But everything is fine.

KAMAT: Did you just go out?

CELESTE: Yes, I did.

KAMAT: How long was your shift?

CELESTE: It was from 8 p.m. to 9 a.m. now.

KAMAT: Today, Celeste is a registered nurse. He came to New York about five years ago when he was 19. He grew up in West Africa. And from the start, he knew he wanted to take care of people.

CELESTE: I wanted to go to med school, and then, you know, once you get here, you come across med school, that – that scares you, because if you’re all alone here, you must take the safest and fastest route.

KAMAT: So he went to nursing school instead. To pay for it, he needed a job with flexible hours.

CELESTE: I was like, I need the Uber. And people were saying that, you know, they can make 15, some people say $2,000, a week.

KAMAT: All he needed was a car. He went online and found what looked like a bargain at a used car dealership, a 2015 Chrysler with low mileage for $10,000. He says he deposited 4,000 and took out a loan for the rest.

CELESTE: They told me it’s just a bank. And then I didn’t really know their exact name. It was the acceptance of credit. I didn’t even know the name.

KAMAT: Accepting Credit – Celeste had never heard of it before, but the company financing her loan is a household name for used car dealerships across the country.


UNIDENTIFIED PERSON #1: So, need a new car? Are you tired of being refused funding? Well, accepting credit can help.

KAMAT: Celeste signed the papers and left in her new car. He says his contract arrived in the mail a week later with a few items he says he didn’t realize were part of the deal, a sale price of $17,000 plus tax and a subprime interest rate of 22.99%. He had pledged to pay $32,000 for a car he said would cost $10,000.


UNIDENTIFIED PERSON #1: We are a finance company that works with car dealerships across the country who specialize in helping consumers with no or bad credit.

KAMAT: Celeste had entered the murky world of subprime auto financing. It’s eerily similar to the subprime mortgages that sparked the last financial crisis. And the bulk of those loans come from independent auto finance companies like Credit Acceptance. They give loans to consumers that no one else will finance. But unlike other major subprime lenders, Credit Acceptance also operates as a collection agency, pursuing consumers after they default. That’s when he repossesses the car, sells it, and sometimes takes legal action to recover the balance of the loan.

UNIDENTIFIED PERSON #2: So I was at Credit Acceptance for almost nine years.

KAMAT: This is a former employee of Credit Acceptance. He agreed to talk to us on the condition that we did not share his name. He says funding and then collecting the loans is by design. Accepting Credit, he says, uses a proprietary software system that incentivizes dealers to increase the market value of used vehicles. The larger the loan the buyer signs, the greater the commission the dealer receives.

UNIDENTIFIED PERSON #2: CAC is lender and collector rolled into one. So, of course, you want to have as much money as possible, which is why you pay the dealers to inflate the price, which inflates the contract amount due to accepting credit.

KAMAT: So the higher the interest rate, the higher the mark-up…

UNIDENTIFIED PERSON #2: The more money there is to collect, seize, pursue.

KAMAT: WNYC obtained data on all loans made by the company in a single month in 2016. It showed that the majority of cars were sold at a price significantly above their market value, around 35% moreover. Credit Acceptance has not responded to our findings or their former employee’s claims, except to say that the legal process generated less than 2% of their total collections last year.

UNIDENTIFIED PERSON #2: Accepting credit sees this as, how can I put this customer in a position where, in the event of default, I have the largest amount of money to collect through others collection channels such as the judicial system?

KAMAT: And that money doesn’t just add to the profits of Credit Acceptance; it also goes to their backers on Wall Street. This includes their investors, their bondholders and their banks, like Wells Fargo. Credit Acceptance has issued more than $6 billion in subprime auto asset-backed securities — essentially bonds backed by subprime auto loan pools. Their bonds are highly rated by rating agencies and offer yields of up to 4%.

AARON GREENSPAN: It’s a very strange set of circumstances where, like, high finance has been married off to this kind of seedy underbelly of the auto industry.

KAMAT: This is Aaron Greenspan, a transparency expert who wrote a detailed report on the company and also shorted the company’s stock. But the stock of Credit Acceptance has grown more than 2,000% over the past decade. Meanwhile, in the Bronx, Celeste, the 24-year-old who bought the Chrysler, couldn’t afford his nearly $500-a-month payment and eventually quit.

CELESTE: I was like, OK, that’s enough. I have to, like, return the car.

KAMAT: Credit Acceptance repossessed the car, auctioned it off, then sued Celeste for what he still owed on the loan – just over $7,000.


UNIDENTIFIED JUDGE: Plaintiff, Credit Acceptance Corporation, v Defendant…

KAMAT: But just before her second hearing at the Bronx County Civil Courthouse, Celeste met Shanna Tallarico.

SHANNA TALLARICO: Most of the customers we help, it’s usually at the stage where credit acceptance has sued the consumer and is looking to recover the missing amount.

KAMAT: Tallarico is an attorney with the New York Legal Assistance Group, which provides support for consumer debtors. She challenged their lawsuit against Celeste for false advertising, deception, fraud and violation of the federal Truth in Lending Act. After seven months of delay, Credit Acceptance dropped the lawsuit. Thousands of others like Celeste are not so lucky. Tallarico said the overwhelming majority of consumer debtors in New York do not have access to an attorney.

TALLARICO: The fact that people aren’t represented is very much built into the business model.

KAMAT: Over the past 10 years, Credit Acceptance has filed nearly 25,000 cases in New York State alone. For NPR News, I’m Anjali Kamat.


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