Testimony of Sarah Rosenthal, Staff Attorney with Consumer Protection Project, before the Senate Standing Committee on Banks regarding: An Examination of Predatory Lending Practices within the Sub-prime Auto Loan and Auto Title Loan Industry 

April 23, 2015

Chair Savino and members of the Banking Committee, thank you for the opportunity to offer testimony and submit recommendations concerning the regulation of sub-prime auto lending. My name is Sarah Rosenthal and I am a Staff Attorney with the Consumer Protection Project of the New York Legal Assistance Group (NYLAG).  NYLAG is a nonprofit law office dedicated to providing free legal services in civil law matters to low-income New Yorkers.  NYLAG serves immigrants, seniors, the homebound, families facing foreclosure, renters facing eviction, low-income consumers, those in need of government assistance, children in need of special education, domestic violence victims, persons with disabilities, patients with chronic illness or disease, low-wage workers, low-income members of the LGBT community, Holocaust survivors, and veterans, as well as others in need of free legal services.

In addition, NYLAG is a member of New Yorkers for Responsible Lending (NYRL), a statewide coalition with more than 160 organizational members across the state that have long been concerned with access to fair and affordable financial services and the preservation of assets for all New Yorkers and their communities. NYRL members include community development financial institutions, community-based organizations, affordable housing groups, advocates for seniors, legal services organizations, housing counselors, and community reinvestment, fair lending, labor, and consumer advocacy groups.

Thank you for considering this testimony and for the opportunity to comment on this vital issue that affects thousands of New Yorkers. In this testimony I will address the impact of sub-prime auto lending and share stories of clients who have suffered because of these loans. Additionally, I will share some recommendations to help protect New Yorkers from predatory lending. NYLAG commends Senator Savino and this committee for recognizing the devastating impact that sub-prime auto lending can have on New Yorkers, particularly vulnerable populations.

Predatory loans, including sub-prime auto loans as well as payday loans, have a devastating impact on New Yorkers who are forced to rely on these unregulated and deceptive sources of credit to meet basic needs, such as transportation or essential bills. Our consumer protection attorneys often encounter clients directly impacted by sub-prime auto lending practices due to overzealous and under-regulated lending. We assist clients who are being pursued for the collection of debt that threatens to impair their ability to meet basic expenses like rent and utilities because they are being held responsible for loans which they are unable to pay.  We have detailed several recommendations to alleviate the issue of sub-prime auto loans below.

  1. The impact of sub-prime auto lending

Automobile loans are often one of the largest purchases households will make, after the purchase of a home.[1] Due to the size of the purchase, the sale must often be financed. For prospective buyers with poor credit, the options for financing are often limited, and prospective buyers are often left to rely on the auto dealer to provide financing for the purchase of a vehicle.[2]  The lack of availability of credit is particularly problematic in light of the fact that cars are often essential to ensuring that someone can get to a job they need to support themselves.  When the only credit available to secure this necessary purchase is through the dealer, consumers are forced into deceptive and predatory loans with extraordinarily high interest rates, hidden fees, and unnecessary “add-ons.”

Though some regulations for auto-lending are already in place, such as the federal Truth in Lending Act, these regulations are insufficient to adequately protect consumers.  The lack of New York State laws designed to regulate auto lending is particularly problematic, given the other regulatory schemes in place for different types of lending, such as home loan financing.  In particular, people of color and minority communities are particularly targeted for predatory lending, and are more likely to have a dealer misrepresent terms of a loan or have optional add-ons portrayed as mandatory purchases.[3] Ultimately, these loans become unsustainable for purchasers. For instance, 18.3% of individuals told that add-on purchases were mandatory became delinquent on their car loan, double the rate of individuals who were not told the add-ons were mandatory.[4] Such delinquency can negatively impact an individual’s credit, leading to difficulties obtaining jobs or housing, or making other necessary purchases.

The impact of these predatory loans can be devastating on purchasers. One of NYLAG’s clients, Andrew purchased a car from a dealer who promised “no credit, no problem.” Andrew purchased a 7 year old car for $23,000, with a down payment of $6,000. Though Andrew was initially able to make payments on the car loan, when he lost one of his two jobs, he could no longer keep up and the car was repossessed, along with tools Andrew needed for his job. The car, which Andrew had purchased for $23,000, was then re-sold for $1,500, and Andrew was sued for the balance remaining due on the loan. This lawsuit impacted Andrew’s credit and his ability to meet his necessary expenses because his wages were garnished after he failed to make payments pursuant to an unfair settlement of the lawsuit that NYLAG was later able to vacate.

Another NYLAG client, Rhonda, purchased a vehicle with her husband, James, who is disabled and uses a wheelchair. Without disclosing the additions or discussing James and Rhonda’s needs the dealer added on warranties and service packages, raising the total cost of the vehicle over $15,000. Even though the additional cost was something James and Rhonda could not afford, they struggled to make the payments out of James’ disability benefits because having a car was vital to allowing James to travel outside his home, visit family and friends, and attend doctor’s appointments.

  1. Recommendations

NYLAG urges this committee to consider the following recommendations:

  • Require disclosure of fees, add-ons, and other mark-ups so that consumers have a clear understanding about what is being included in the financing of the vehicle they are about to purchase. Mandate the disclosure of which add-ons are optional, and the additional cost of these add-ons. These disclosures should be in a minimum of 12 point font and clearly labeled as mandatory disclosures in the loan documents.
  • Mandate a “cooling off period” for add-ons to allow the purchasers to consider the contract and its terms outside of a high pressure sales environment.
  • Require that add-ons be negotiated only after a purchase price for the car has been negotiated and agreed upon.
  • Institute underwriting requirements and a loan-to-value ratio cap to ensure that loans are only issued when there is a reasonable likelihood of repayment.
  • Enforce the New York State usury cap of 16% on auto loans and require a disclosure statement of the 16% maximum interest rate.

We would be happy to discuss our proposals further and look forward to working together to ensure that New Yorkers are protected from predatory loans. Again, we commend all those who are working to address these important issues. Thank you for the opportunity to testify today and provide feedback on this important issue.

Respectfully submitted,

Sarah Rosenthal, Staff Attorney
New York Legal Assistance Group


 

[1] Auto Loans: The State of Lending in America & its Impact on U.S. Households, Center for Responsible Lending, December 2012, available at http://www.responsiblelending.org/state-of-lending/reports/4-Auto-Loans.pdf

[2] Id.

[3]Non-Negotiable: Negotiation Doesn’t Help African Americans and Latinos on Dealer-Financed Car Loans, Center for Responsible Lending, January 2014, available at http://www.responsiblelending.org/other-consumer-loans/auto-financing/research-analysis/CRL-Auto-Non-Neg-Report.pdf.

[4] Id. at 12.