Dealb%k, the financial news blog published by The New York Times, reported last week that poor people get ripped off trying to buy used cars, and apparently reached this epiphany without having to visit a reservation border town. In fairness, there is something new here about the practice of fleecing the poor that creates news for people who are not poor and do not live in Indian country.
“Subprime” loans are defined as those made to persons with credit scores at or below 640, and that inferior credit score is thought to justify credit terms that would be outrageous to most of Dealb%k’s readers. It was subprime mortgages that blew up the real estate bubble and, indirectly, devastated the world economy in 2008. To many poor people, “subprime” translated as “predatory,” which is why it’s time to reflect on why subprime mortgages were allowed to nearly bring down the entire economy.
In 1999, the legal walls cordoning off commercial banks, investment banks and insurance were torn down with the passage of the Financial Services Modernization Act.
Since the Great Depression, the high-stakes gambling that is investment banking had been separated from the commercial banking that produces mortgages and car loans for ordinary people, and bank accounts in commercial banks had been insured by the Federal Deposit Insurance Corporation (FDIC), funded by fees assessed on commercial banks. Insurance was regulated closely to require adequate money to be set aside to settle claims.
The result of the legal walls coming down was a flood of “collateralized debt obligations” (CDOs) that represented bundles of mortgages, good ones mixed with bad ones, and the unregulated sale of “credit default swaps” (CDSs) in amounts that investment banks, not part of the FDIC scheme, could not possibly repay.
When the real estate bubble burst in 2008, the result was the Troubled Asset Relief Program (TARP), in which we the people were forced to pay off the bad bets that had made so many rich people richer. Those who bought and sold the subprime paper got paid with taxpayer money and directed that money to so far successful efforts to keep the walls among investment banks, commercial banks and insurance from being rebuilt through the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010).
With Dodd-Frank cracking down on subprime mortgages (defined as loans 6.5 percent over prime), the playing field has moved to used cars, with subprime loans up 130 percent in the last five years. Dealb%k reported:
—Interest rates on used cars can exceed 23 percent;
—The loans are “typically” twice the fair value of the car purchased;
—”Liar’s loans,” to people with no income or grossly inadequate income, have migrated from mortgages to used cars. As was the case during the home mortgage bubble, there is dispute over who is the liar here, the car buyer or the car salesman;
—Lenders are managing risk by adding fees and by using the ability to repossess a car much more quickly than a home.
Why lend money to people who cannot repay it? CDOs secured by auto loans are up 150 percent since 2009, amounting to $17.6 billion last year. The bond rating agencies that blessed the mortgage CDOs have done the same for the used car versions. The bad loans are as necessary as the good loans to what Dealb%k calls “Wall Street’s securitization machine.”
The Indians who have been skinned by car dealers in reservation border towns for generations can now take cold comfort in this new trend, which means that when they are bankrupted by predatory lending, an important segment of the entire country’s economy will go down with them.