|JESSICA SILVER-GREENBERG and MICHAEL CORKERY|
Lenders in the housing boom created so-called liar loans, which enabled borrowers, even those with no income or assets, to inflate their income. Government authorities are now taking aim at a new generation of liar loans. Only this time it is subprime auto loans.
Federal and state authorities, a group that includes prosecutors in New
At their center, the people said, the investigations are examining whether dealerships are inflating borrowers' income or falsifying employment information on loan applications to ensure that anyone, no matter what their credit quality, can buy a car.
Some of the same dynamics — the seemingly insatiable demand for loans as the market heats up and the dwindling pool of qualified borrowers — that helped precipitate the 2008 mortgage crisis are now playing out, albeit on a smaller scale, in the auto loan market. Under pressure to generate more and more loans, salesman at some used-car dealers are suspected of getting inventive.
It is not known how many subprime auto loans have been made on the basis of falsified applications. Still, such loans can corrode confidence in the booming market for securities that are created from bundled subprime auto loans. If loan applications are falsified, leading borrowers to ultimately fall behind on their bills, that could spell trouble for investors, which include insurance companies and public pension funds.
More immediately, such inflated applications can mean that some of the most vulnerable borrowers are saddled with auto loans they can never afford to repay. The loans, which often come with interest rates that soar to 29 percent, can haunt borrowers long after their cars are repossessed, further tarnishing their credit scores and plunging them into bankruptcy.
While the car was ultimately repossessed, the nightmare for
They are people like
''I see more fraud now than I have seen in my entire career,'' said
Car dealers say their industry, like any large group of businesses, has the occasional rogue employee. But they say dealerships go to great lengths to ensure the accuracy of credit applications.
''There is no place for fraud,'' said
The handful of federal and state criminal cases against dealerships are scattered across the country. In January, two employees of a dealership in
And this summer,
In that case, which is still pending, one of the former sales managers described a pervasive scheme at the dealership in which employees were under pressure to qualify customers for loans at virtually any cost. In a process the employee described as ''fluffing,'' they inflated borrowers' incomes. Through that process, the court records show, a borrower who had
''These cases should send a strong signal to dealerships that we are aware of this conduct and we aren't going to tolerate it,''
In a statement, Serra Nissan said, ''Once the dealership learned of the allegations, we launched our own investigation, cooperated fully with authorities, reviewed our procedures and implemented additional safeguards.''
One of the former employees pleaded guilty in June. The other former employee is cooperating with the government, court records show. Those cases are harbingers of others that may materialize against dealerships, the people briefed on the investigations said.
Prosecutors are going up against an industry that has tremendous sway in
The investigations are playing out as the market for loans to borrowers with poor credit is booming — a growth that has been the subject of a series of articles in The Times. In the second quarter, total auto loan originations were at the highest level since before the financial crisis, according to the Federal Reserve Bank of
Signs of strain are emerging. In the second quarter, according to
While still in their early stages, the investigations are also examining whether lenders, including some of the nation's largest banks and credit unions, are turning blind eyes to signs that the loans, which they scoop up from thousands of used-car dealers across the country, are fraudulent, the people with knowledge of the matter said.
The lenders note that they have rigorous controls in place to prevent fraud, routinely vetting their dealer partners and investigating complaints that arise.
If those safeguards fail and lenders unwittingly buy fraudulent loans from dealers, they are typically insulated from losses. One protection: The lenders make a partial payment to the dealers for the loans, holding on to a chunk of money until a few months have passed since the loan was originated, a period of time when most fraud becomes apparent as borrowers, doomed from the outset, quickly default.
As more and more lenders clamor for loans, they are increasingly paying dealers the full amount for the loans upfront, industry analysts say, fostering an environment where fraud can more easily flourish.
Miss a Payment? Good Luck Moving That Car
In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates
This is a more complete version of the story than the one that appeared in print.
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