Monday, April 09, 2007

Did Subprime Mortgage Lenders Learn Their Tricks From Used Car Salesmen?

That's the theory behind Road To Ruin: Subprime Lending In The Auto Industry

Overholt is a shady car dealer's worst nightmare. In the business for 25 years, Overholt stood up and blew the whistle in 1997. At the time, by his calculation, he had swindled consumers out of $33 million. Today, he says, abuses at auto dealerships are even worse.

"In 1997, the average rip-off that I could identify, because I did it, was about $1,200 a car. Today it's over $4,000 per automobile."

The rip-offs don't just come on the price of the car, but on the financing. And Overholt says the subprime customer has provided an easy mark for the unscrupulous dealer.

The customer who has little money and poor credit gets saddled with a very high interest rate. In addition, the consumer is charged for things that aren't really there, inflating the price of the car and -- more critically -- the amount the consumer must finance.

They're doing it, he says, by falsifying documents. On the credit application, income is inflated and length of employment is increased to make the subprime borrower look more credit worthy, so they can afford a more expensive car, with those higher than necessary monthly payments.

"They're taking other documents the bank requires, such as a book-out sheet, showing the equipment on the car, and falsifying that," Overholt charged. "Now, that's a very key document because it establishes the value of the car. These two documents they falsify consistently."

For example, a consumer may want to purchase a used SUV that is actually worth $12,000. But as chrome wheels, alarm systems and premium sound systems are added on paper -- but not installed -- the price of the car rises to $15,000. As a result, the bank lends more money on the car than it's actually worth.

"The customer is not only upside down because of the interest rate, there's equipment on the car that doesn't really exist, and they've been put into an automobile they know they really can't afford," Overholt said. "The consumer always believes that the bank is the good guy, that it's not going to lend them money they can't afford to repay. But that's not the case."

How many car dealerships engage in these fraudulent practices?

Overholt admits that it's hard to know for sure, but he believes it could be as many as 60 percent, with more succumbing to the pressure all the time. One rule of thumb, he says, is the bigger the car dealer, the more likely it is to be ripping off its subprime customers. Recently, automotive site hired an undercover reporter to expose fraud in the showroom.

[William] Cunningham, whose expertise is mortgage lending, has closely followed the implosion of the subprime mortgage market. He traces the problems to the very concerns Overholt has expressed.

"A lot of these predatory lending practices that are now showing up in the housing industry started out in the auto industry. When they weren't caught adding thousands of dollars to the cost of a car loan, those practices bled over to the housing sector," Cunningham said.

"A lot of these predatory practices were first put onto people in communities of color; in Hispanic communities, where there are language issues, and in African-American communities, where there is a problem just from a net-wealth standpoint. We've seen these practices that started out in communities of color now move into the broader community."

Hat Tip to Elaine Dowling for finding this article.

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