The U.S. Justice Department is investigating General Motors’ subprime lending practices. It is “seeking documents on underwriting criteria, origination, warranties and securitization of subprime loans since 2007, GM Financial said in a filing yesterday,” Bloomberg News’ Tim Higgins and Sarah Mulholland reported in breaking the news yesterday.
“Our understanding is that the request is focused on the subprime auto finance space in general,” responded GM spokeswoman Chrissy Heinke in an emailed statement to the reporters. “There are no allegations set forth in the subpoena and GMF is cooperating with the request.”
The company said the subpoena “was in connection with an investigation into possible violations of the civil fraud law FIRREA [Financial Institutions Reform, Recovery, and Enforcement Act of 1989]," Reuters’ Aruna Viswanatha in Washington and Peter Rudegeair reported. The feds “also asked for information on the representations GM made about the criteria when the loans were pooled into securities.”
The subpoena, which was issued on July 28, “adds another challenge” for CEO Mary Barra, “who is already grappling with a separate Justice Dept. investigation over the automaker’s slow handling of potentially fatal defects in millions of its small cars,” write Higgins and Mulholland. “While that crisis has roiled for six months, U.S. sales have kept increasing with new products such as the Chevrolet Tahoe and Buick Encore.”
“The inquiry is being undertaken amid worries among some regulators that checks and standards are being neglected as the subprime auto loan market surges, in a small, yet disturbing, echo of the subprime mortgage crisis,” write Michael Corkery and Jessica Silver-Greenberg in the New York Times. That concern was the major issue in their front-page story in the paper that was published online on July 19.
The piece led with the tale of a 60-year-old man in upstate N.Y. on Social Security whose loan application, apparently without his knowledge, listed him working at a job he’d left three decades before. He told the reporters “I am not sure how I got the loan” for $15,197 to buy a used Mitsubishi sedan, which was repossessed after he missed payments.
Automotive News’ Jim Henry reported in November that GM Financial itself had “dialed back on its traditional specialty of subprime auto loans this year as it added leasing, wholesale financing and the former international operations of Ally Financial Inc.”
GM purchased Ally Financial for $3.5 billion in 2010. Last December, Ally paid “a record $98 million to settle Justice Dept. and regulatory claims” that it “helped car dealers inflate the cost of auto loans to black and Hispanic borrowers,” Bloomberg News reported.
Beyond fudged financial applications lie some in-your-face enticements that take advantage of consumers’ conditioned capacity to deny reality. The Times expose also pointed to a used-car dealership in Queens, N.Y., that has a banner proclaiming: “No Credit. Bad Credit. All Credit. 100 percent approval.”
“Inside …, Julio Estrada perfected his sales pitches for the borrowers, including some immigrants who spoke little English,” Silver-Greenberg and Corkery wrote. “Sure, the double-digit interest rates might seem steep, Mr. Estrada told potential customers, but with regular payments, they would quickly fall. Mr. Estrada, who sometimes went by John, and sometimes by Jay, promised others cash rebates.”
Meanwhile, “DriveTime Automotive Group Inc., which operates a chain of ‘buy-here, pay-here’ auto dealerships, disclosed in a March regulatory filing that the Consumer Financial Protection Bureau had notified the company in January that the agency was considering a possible enforcement action related to its collection practices,” Joseph B. White reports in the Wall Street Journal.
Now how could a company that creates such feel-good advertising get in trouble with regulators? And, to be fair, it has a very good rating on one website that publishes consumers’ reviews in partnership with brands.
Anyway, let’s not just pick on the Willie Lomans and small-fry dealers out there.
“The purveyors of these loans are financial institutions with familiar names, such as Wells Fargo, and private equity firms that have lots of money to spend and not enough get-rich-quick ways to invest,” the Sacramento Bee wrote in an editorial Saturday, reflecting on the original Times story. “It’s apparently good business to steal from the poor, so much so that firms are bundling up the loans and selling them as securities to banks and mutual funds. Maybe even one of yours.”