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About 10 years ago, the use of subprime housing loans led this country into a financial crisis. Subprime loans are most often issued to low-income borrowers with lower credit scores. They have high interest rates and people default on them more than traditional loans. Today, subprime used car loans have become a huge business and not just for car dealers. Anjali Kamat from member station WNYC looks at lending practices.
ANJALI KAMAT, BYLINE: It's a beautiful morning at the edge of Central Park in New York City. Anouyen Meda Celeste, who goes by Celeste, has just worked the overnight shift.
You had a long night?
ANOUYEN MEDA CELESTE: I did. But it's all right.
KAMAT: You just got out?
CELESTE: Yeah, I did.
KAMAT: How long was your shift?
CELESTE: It was from 8 p.m. to 9 a.m. now.
KAMAT: Today, Celeste is a registered nurse. He came to New York about five years ago when he was 19. He grew up in West Africa. And right from the start, he knew he wanted to take care of people.
CELESTE: I wanted to go to med school, and then, you know, once you get here, you run into medical school, that - that scares you, 'cause if you're on your own here, you need to take the safest route and the quickest one.
KAMAT: So he went to nursing school instead. To pay for it, he needed a job with flexible hours.
CELESTE: I was like, I need the Uber. And people were saying that, you know, they can make 15, some people say $2,000, a week.
KAMAT: All he needed was a car. He went online and found what looked like a good deal at a used-car dealer, a 2015 Chrysler with low mileage for $10,000. He says he put 4,000 down and took out a loan for the remainder.
CELESTE: I was told that it's just a bank. And then I didn't really know exactly their name. It was Credit Acceptance. I didn't even know the name.
KAMAT: Credit Acceptance - Celeste hadn't heard of them before, but the company financing his loan is a familiar name to used-car dealers across the country.
(SOUNDBITE OF AD, "WHAT IS CREDIT ACCEPTANCE?")
UNIDENTIFIED PERSON #1: So need a new car? Tired of being turned down for financing? Well, Credit Acceptance can help.
KAMAT: Celeste signed the papers and drove off the lot in his new car. He says his contract arrived in the mail a week later with a few things he says he hadn't realized were part of the deal, a sales price of $17,000 plus taxes and a subprime interest rate of 22.99%. He had signed up to pay $32,000 for a car he thought would cost 10,000.
(SOUNDBITE OF AD, "WHAT IS CREDIT ACCEPTANCE?")
UNIDENTIFIED PERSON #1: We're a finance company that works with car dealers across the country who specialize in helping consumers with no credit or bad credit.
KAMAT: Celeste had stepped into the murky world of subprime auto finance. It's eerily similar to the subprime mortgage lending that touched off the last financial crisis. And the largest share of these loans comes from independent auto finance companies like Credit Acceptance. They give loans to consumers nobody else will finance. But unlike other large subprime lenders, Credit Acceptance also functions as a collection agency, pursuing consumers after they default. That's when it repossesses the car, sells it and sometimes sues to collect the balance of the loan.
UNIDENTIFIED PERSON #2: So I was at Credit Acceptance for almost nine years.
KAMAT: This is a Credit Acceptance former employee. He agreed to talk to us on the condition we not share his name. He says financing and then collecting loans is by design. Credit Acceptance, he says, uses a proprietary software system that incentivizes dealers to raise the market value of the used vehicles. The bigger the loan the buyer signs, the bigger the commission the dealer gets.
UNIDENTIFIED PERSON #2: CAC is the lender and the collector wrapped into one. So, of course, you want to have the most money to go after, which is why you pay the dealers to inflate the price, which inflates the contract amount that's owed to Credit Acceptance.
KAMAT: So the higher the interest rate and the higher the markup...
UNIDENTIFIED PERSON #2: The more money there is to collect, to garnish, to sue for.
KAMAT: WNYC obtained data on all the loans the company made during a single month in 2016. It showed that a majority of the cars were sold for significantly more than their market value, about 35% more. Credit Acceptance did not respond to our findings or their former employee's claims, except to say that the legal process generated less than 2% of their total collections last year.
UNIDENTIFIED PERSON #2: Credit Acceptance is looking at it as, how can I put this customer in a position where, should they default, I have the largest amount of money to collect via alternate collection routes like the court system?
KAMAT: And this money doesn't just add to Credit Acceptance's profits; it's also going to their backers on Wall Street. That includes their investors, their bondholders and banks, like Wells Fargo. Credit Acceptance has issued over $6 billion in subprime, automobile asset-backed securities - basically bonds backed by pools of subprime auto loans. Their bonds are highly rated by the ratings agencies and offer returns of as much as 4%.
AARON GREENSPAN: It's a very strange set of circumstances where, like, high finance has been married with this kind of seedy underbelly of the auto industry.
KAMAT: That's Aaron Greenspan, a transparency expert who wrote a detailed report about the company and also shorted the company's stock. But Credit Acceptance's stock has increased by over 2,000% over the past decade. Meanwhile, back in the Bronx, Celeste, the 24-year-old who bought the Chrysler, couldn't afford his payment of almost $500 a month and eventually stopped making it.
CELESTE: I was, like, OK, it's enough. I have to, like, give back the car.
KAMAT: Credit Acceptance repossessed the car, sold it at auction and then took Celeste to court for what he still owed on the loan - just over $7,000.
(SOUNDBITE OF ARCHIVED RECORDING)
UNIDENTIFIED JUDGE: Plaintiff, Credit Acceptance Corporation, versus Defendant...
KAMAT: But just before his second hearing at the Bronx County Civil Courthouse, Celeste ran into Shanna Tallarico.
SHANNA TALLARICO: Most of the clients we help, it's usually at the stage where Credit Acceptance has sued the consumer and is seeking to recover the deficiency amount.
KAMAT: Tallarico is a lawyer with the New York Legal Assistance Group, which provides support to consumer debtors. She challenged their lawsuit against Celeste on grounds of false advertising, deception, fraud and violations of the federal Truth in Lending Act. After seven months of delays, Credit Acceptance dropped the suit. Thousands of others like Celeste aren't so lucky. Tallarico said the overwhelming majority of consumer debtors in New York City have no access to a lawyer.
TALLARICO: The fact that people aren't represented is very much integrated into the business model.
KAMAT: In the last 10 years, Credit Acceptance has filed nearly 25,000 cases across New York state alone. For NPR News, I'm Anjali Kamat.
(SOUNDBITE OF NOSAJ THING'S "ERASE") Transcript provided by NPR, Copyright NPR.