Not even a decade after Wall Street gamblers took us to the brink of global economic ruin, the same players are back abusing the financial product that caused so much trouble – the subprime loan.
This time the loans are for used cars sold to lower-income Americans who can’t afford them. It’s such a lucrative market that, reports the New York Times, subprime car loans have increased by 130 percent in five years. Equifax reports that subprime auto lending was the highest it has been since 2006.
The deals sound the same: Millions of people with bad credit and no way of repaying big debts are handed auto loans. Sometimes their financial information is exaggerated or falsified to qualify them. People with decent credit and moderate salaries can get auto loan rates at 4.14 percent to 4.71 percent, depending on the loan terms. People with exceptional credit can find 0 percent financing. But subprime borrowers are paying up to 23 percent. If they manage to pay off their car loan, they’ve paid for the equivalent of two cars.
The sellers of these loans are financial institutions you know, such as Wells Fargo, and private equity firms that have lots of money and not enough get-rich-quick ways to invest. It’s always good business to steal from the poor.
Worse yet, the bankers then take these loans to the casino called Wall Street by bundling them and converting them into bonds, which they sell to other banks, investors and mutual funds. Maybe even one of yours. Apparently, we learned nothing in 2008.
The good news is that, repugnant as this practice is, it’s unlikely to bring down the U.S. economy as the implosion of the housing market did in 2008. Cars are much easier to repossess than homes and not nearly as expensive.
But that’s also the bad news. It took the near-collapse of the world economy to crack down on the risky behavior of Wall Street’s financial titans – if you can call it a crackdown. All the perps escaped jail time or real penalty; many got big bonuses after the taxpayer-funded bailouts. Meanwhile, Americans collectively lost trillions in real wealth. Those on the bottom rung suffered the most, as they usually do, from job losses and wage stagnation that persists today.
In fact, jobs are in such demand that workers will do anything to keep them, including signing a deal for a car they know they can’t afford so they can get to work.
The 2008 subprime housing meltdown led to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the Consumer Financial Protection Bureau. An amendment to Dodd-Frank exempts auto loans from the CFPB’s authority. Wonder how that got there.
Subprime auto loans are bad news for consumers and our country’s fiscal health. Lawmakers should rein them in before they lead to another meltdown. But don’t hold your breath.