'Buy Here Pay Here' Auto Companies Assault Working Poor; Setting Up Another Economic Crisis

A C&L reader sent in the following horror story:

I have continued to follow C&L through the years and enjoy the attention you give to the issues. I have seen a lot recently about home foreclosures and the ugly means banks are employing to get their hands on people’s property. I would like to ask that you also give some attention to another illegal activity going on—illegal car repossessions.

I have leased cars from Chrysler Financial and Beurge Chrysler Jeep since 2002. When my second lease came to an end in June of this year I had three options offered me by Chrysler: 1-buy the car, 2-turn the car in and begin a new lease or purchase another vehicle, or 3-extend the lease for up to 12 additional months. Since my wife and I are experiencing some rough financial times we decided to go with Option 3-extend our lease. We continued to do so each month until we could buy the car sometime in the next year. However, on September 20 a man showed up at our door claiming Chrysler had ordered a repossession. He refused to give any identification or proof of the order. He also refused to look at the documentation we had that proves our account is on good standing. In fact we had just received confirmation earlier that day that payment had been received for the next month. He took the car anyway.

We have tried, without success, to reach Chrysler Financial and resolve this issue. At first we thought it must be a simple mistake that Chrysler would correct. It does not appear that way anymore. Based on what we have been told by Chrysler reps, Chrysler wanted the car back because it had very low mileage and they could make a bigger profit than by allowing us to continue leasing and purchase at a later date. We have looked at the law and the only way a car can be repossessed is if the account is in default. I want to reiterate that our account has never been in default.

So, we are left without a car—that was our only vehicle. My wife is disabled and needs weekly treatment that she has not been getting because we can’t get her to appointments.

I am telling you this story because we have learned that we are not the only ones to have this happen. A Google search will bring up many pages of illegal repossessions being reported. I understand it may not be the eye-catching news item of 100k home foreclosures but it is happening to thousands of people who have done nothing wrong and yet are being bullied and deprived of their transportation by a company that received taxpayer money and wants to make more money. And BTW, Chrysler refuses to return the payment we made for 9/20—10/20, a period for which we do not have use of our car.

Thank you for any attention you can bring to this issue.

The details are even more disturbing. The wife's illness included a brain tumor and the purpose of the extension was to deal with the illness, not out of any irresponsibility. On top of that, the account was not in default and the repo man was belligerent and entered locked and gated property without permission. Luckily -- and no thanks to Chrysler -- the reader's wife is still alive and still fighting her illness

Others report similar experiences with cars financed through Chrysler Financial. Chrysler Financial was a recipient of a $1.5 billion bailout via the Troubled Asset Relief Program in 2009. In 2010, Chrysler Financial was bought out and their name was changed to TD Auto Finance. It isn't clear if Chrysler Financial/TD Auto Finance is what is known as a "Buy Here Pay Here" company, but their repossession practices are in line with that emerging industry.

The Los Angeles Times is running a series of articles on the practices of the Buy Here Pay Here industry:

In this little-known but fast-growing corner of the auto market, dealers command premium prices for road-worn vehicles and finance the sales at interest rates that can top 30%.

In a kind of financial alchemy, they have found a way to turn clunkers into cash cows and make money off the least creditworthy customers: the millions of Americans who are stuck in low-paying jobs, saddled with debt and unable to qualify for conventional auto loans.

For most of those people, having a car is the only way to stay employed, and they'll accept almost any terms to get one.

Buy Here Pay Here lots sold nearly 2.4 million cars nationwide last year, up from 1.3 million a decade ago, according to CNW Marketing Research.

CNW estimates that there are more than 33,000 such lots nationwide, compared with about 20,000 dealerships selling new cars. Buy Here Pay Here dealers make $80 billion in loans every year, according to the Federal Deposit Insurance Corp.

Although dealers are loath to open their books, profit margins average nearly 40%, according to a trade group, the National Alliance of Buy Here Pay Here Dealers. That's twice what new-car dealers make.

Many of the lots require customers to return once or twice a month to make loan payments in cash -- hence the term Buy Here Pay Here.

A key reason for the industry's growth in tough times is that dealers can come out ahead whether or not customers keep up with their loan payments.

About 1 in 4 buyers default. In the real estate and credit card industries, that would be bad news. In the world of Buy Here Pay Here, it's just another avenue for profit: The car can be repossessed and put back on the lot for sale in short order. A new buyer makes a down payment, takes on a high-interest loan and the cycle starts anew.

Provided they don't get wrecked, these recycled vehicles just keep paying dividends. At some dealerships, cars have been sold and resold over and over -- three, four, even eight times apiece, motor vehicle records show.

...

Bob Okeley, who owns a chain of Buy Here Pay Here lots in Indiana, sells about 300 cars a month, nearly twice the business he did five years ago. But he said the increased demand isn't entirely the result of hard economic times.

Some of his customers earn as much as $90,000 a year and have college degrees, he said. They're shut out of the conventional loan market not because they're poor but because they can't stay out of debt, he said.

Okeley maintains that by reminding customers to make their payments and badgering those who fall behind, his dealership teaches financial discipline.

“We're helping people manage money that aren't good at doing it on their own,” he said.

Squeezing hefty payments from credit-challenged people is possible because Buy Here Pay Here dealers don't use outside lenders to finance their sales.

In a conventional auto loan, the dealer is a middleman. The purchase money is provided by a bank or finance company.

In a Buy Here Pay Here loan, there is no outside money. The cars are sold on installment plans, an approach once common for big-ticket purchases like refrigerators and still widely used by rent-to-own furniture stores catering to people who don't have credit cards.

The arrangement allows Buy Here Pay Here dealers to make their own rules and set their own interest rates, with far less regulatory scrutiny than mainstream lenders receive.

Wall Street is investing heavily in the profitable industry:

Investor money is pouring into the industry from several sources, helping Buy Here Pay Here dealers expand their reach and raise their profile.

In addition to private equity firms such as Altamont, several payday lending chains are moving into Buy Here Pay Here and have acquired dealerships.

Stock investors are snatching up shares in Buy Here Pay Here chains and other publicly traded companies in the business. Two of the biggest, America's Car-Mart Inc. and Credit Acceptance Corp., have seen big gains in their share prices this year, outpacing the market.

Buy Here Pay Here is also being boosted by one of the sophisticated financial strategies that drove the nation's recent housing boom and bust: securitization.

Loans on decade-old clunkers are being bundled into securities, just as subprime mortgages were a few years ago. In the last two years, investors have bought more than $15 billion in subprime auto securities.

Although they're backed mainly by installment contracts signed by people who can't even qualify for a credit card, most of these bonds have been rated investment grade. Many have received the highest rating: AAA.

That's because rating firms believe that with tens of thousands of loans lumped together, the securities are safe even if some of the loans prove worthless.

Some analysts worry that the rush to securitization could lead to careless lending by dealers eager to sell more loans, as happened with many mortgage-backed bonds.

"We think that investing in such companies is a ticking time bomb," said Joe Keefe, chief executive of Pax World Management, which steers its investments into businesses it deems socially and environmentally responsible. "It has ethical as well as systemic risk implications."

The Federal Trade Commission regulates repossessions, but there are no specific laws dealing with the Buy Here Pay Here industry. In addition to the fact that these companies are preying on the most vulnerable of the country's working citizens, the business practices in the industry seem to be offering up significant possible negative impacts on an already fragile economy.

It is difficult to gage how often illegal repossessions are taking place. Repossessions, in general, are on the rise. In 2008, the Boston Globe reported that repossessions had reached a 10-year high the year before and were moving even higher. More than 1.6 million cars a year have been repossesed in recent years. Data wasn't available as to what percentage of these repossessions was illegal.

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