A recent New York Times article describes the crushing impact of predatory auto loans on borrowers who fall behind on their payments. When they default on their subprime loans—which are notorious for high interest rates and skyrocketing fees—their cars are repossessed. But that’s just the beginning of their nightmare.
According to Shanna Tallarico, a Supervising Attorney with the Consumer Protection Unit, who has represented a number of clients with subprime auto loan debt, the people attracted to subprime loans often have little choice in the matter if they need a car to drive to work, take their children to school or get to the medical facilities on which they depend. People are pushed into subprime loans for many reasons. Some individuals make very little money or have poor credit, and would not qualify for a traditional loan. Others are not aware that they could qualify for a loan from a traditional bank or credit union, which are often more affordable.
Overall, auto loans have become the fastest-growing household debt in the U.S., while there has been a pronounced increase in the delinquency rate for subprime loans. Studies show that the percentage of subprime auto loans being made to people with increasingly poor credit scores is on the rise. And the courts are swelling with collection lawsuits brought by aggressive subprime lenders. Often the defendants in these cases are not even aware that they have been sued, and a judgement against them has been entered, until their paycheck is garnished.
“Most of these used cars are old, high-mileage, and in disrepair – and overpriced to begin with, so the usurious loans are not meant to, and often do not, outlast the life of the car. If a borrower defaults, the lenders not only have the ability to seize the collateral to recoup alleged losses, but they use the courts to aggressively sue borrowers to recover the unpaid loan balances,” said Tallarico. “If the creditor wins a judgment against a borrower in court, they are allowed to seize people’s wages and freeze bank accounts until the debt is repaid. It’s a regular cottage industry.”
Staten Island resident Theresa Robinson’s story – which was featured in the New York Times piece, is all too typical. She is disabled and needs a car to get to her medical appointments. The one she purchased, from a dealership in Queens, broke down almost immediately. The replacement model didn’t last much longer. After the lender refused to re-negotiate the loan terms, Robinson defaulted on her loan. She was unable to pay for both the repair bills and the loan payments. Her subprime lender got an $8,000 judgement against her and began garnishing her wages. Ultimately, Tallarico was able to negotiate a settlement.
Most borrowers are not as lucky as Robinson, since the need for free legal assistance to defend them in these cases far outstrips available resources. Fortunately New York City is taking steps to protect low-income New Yorkers and those who are not fluent in English, the primary targets of auto loan fraud.
Earlier this year the Department of Consumer Affairs (DCA) filed charges against a number of used car dealerships in Brooklyn and Queens for allegedly engaging in unlawful practices, including deceptive advertising, falsifying credit applications, and pressuring Spanish-speaking consumers into signing contracts written only in English. The DCA has also introduced legislation that provides an additional layer of protection. The new law requires dealerships to post consumer rights information, ensure that all notices required by the DCA are written in whatever language is used to negotiate the deal, and include a provision that allows a contract to be cancelled within two days of a sale.
In June the City launched an awareness campaign, offering tips on how to avoid being defrauded and how to safely finance the purchase of a used car. A series of multilingual ads, prominent on bus shelters and telephone kiosks as well as in ethnic media and DCA’s website, highlight the over-the-top tactics used to entrap consumers—reminding them that if a deal sounds too good to be true, it probably is.
“Together we hope that the City’s collective efforts—litigation, tougher laws, and consumer education – will put unscrupulous used car dealers on notice, and help to protect vulnerable borrowers like Theresa from falling victim to these unlawful practices,” said Tallarico. “In the meantime, we will continue to defend the rights of New Yorkers who fall prey to predatory auto loans and so desperately need legal assistance to ensure they do not fall further into financial hardship or even ruin.”