A few days before President Trump’s inauguration in January 2017, a 22-year-old nursing student in the Bronx was looking online for a car so he could work as an Uber driver.
Anouyen J. Celeste Meda is a recent immigrant from Burkina Faso who just goes by the name Celeste. He found an advertisement for a used 2015 Chrysler 200 for $10,480 at a Queens-based used car dealer called Auto Solution.
About twenty-four hours later, Celeste had signed a contract for a loan and was driving home in his own car, feeling on top of the world.
Celeste would spend the next two-and-a-half years going over the details of what happened in those intervening hours at the auto dealer. In court papers filed in January 2019, he and his lawyer would allege that he was defrauded.
According to those papers, after he made a down payment of $4,000 at Auto Solution, he was asked to wait while the dealer found him a loan. Then, he was taken to a second dealership called J.F. Motors, about 20 blocks west, on a busy stretch of Northern Boulevard lined with car dealers.
There, he alleges, he was led to believe that the total cost of the car, including interest payments on the loan, was just over $14,000. It seemed reasonable to him. He signed on an electronic pad and drove off the lot.
But a week later, a copy of the contract arrived in the mail from his lender, a Michigan-based finance company called Credit Acceptance. As it turned out, the sales price of the car was $17,090, plus $1,652 in taxes. Add on an interest rate of 22.99 percent, and he had actually signed up to pay $32,000 for his car over the next five years.
Six months later, he fell behind on his monthly payments of $467 and Credit Acceptance repossessed his car. Then they sued him for the remainder of the loan, and went to court to garnish his wages.
“I felt really sad to be honest, and upset too and naïve. I felt like, really stupid,” he said.
But Celeste is hardly unique in signing up for a loan he couldn’t afford. At the end of last year, despite stable employment numbers, a record 7 million Americans had fallen more than three months behind on their car loan payments, according to the Federal Reserve Bank of New York.
At nearly $1.3 trillion, auto debt is the third largest form of household debt, after mortgages ($9.4 trillion) and student debt ($1.5 trillion). The amount of auto debt has increased by nearly 75 percent since the financial crisis, and a growing proportion it comes from lending to borrowers the industry calls subprime, because of their low credit scores. Many are low-income workers who don’t have access to other sources of financing.
By signing that contract to pay $32,000 for a 2015 Chrysler 200, Celeste had stepped into a murky world leading from that used car lot on Northern Boulevard all the way to Wall Street, where investors are profiting off the debt problems of millions of borrowers.
Just like banks would pool together subprime mortgages into profit-spinning securities that were favorites on Wall Street before the crisis, lenders are bundling auto loans together and marketing them to investors as high-yield bonds. They’re called automobile asset-backed securities, or simply, auto ABS, and some offer investors returns as high as 7 percent.
“It’s all about risk and return and you know, when interest rates are so low, it’s a desperate search for yield,” Joseph Cioffi, a corporate attorney involved in large-scale litigation stemming from the subprime mortgage crash. He’s now closely watching Wall Street’s interest in subprime car loans and runs a blog called Credit Chronometer. Investors’ search for higher returns, he said, is driving lenders to make riskier and riskier loans and then securitize them.
For consumer advocates, subprime auto lending raises many of the same concerns that subprime mortgage lending did over a decade ago.
“Auto lending in the last decade has been a Groundhog Day repeat of the exact same practices that brought us to the 2008 market crash,” Rachel Cross, a policy analyst from the Public Interest Research Group, told the House Committee on Financial Services in testimony in May.
Echoing concerns outlined in recent reports by the Public Interest Research Group and the National Consumer Law Center, Cross discussed the loosening of borrowing standards, high interest rates, extended loan terms, racial discrimination and the rise of “outright abusive and predatory tactics” in one particular sector of automobile financing — when the dealer finds financing for a customer through an indirect lender.
In other words, the same way Celeste got his loan.
Independent finance companies like Credit Acceptance make the largest share of subprime car loans. Founded in 1972 by a used-car salesman named Don Foss, Credit Acceptance is a publicly traded company and one of the top five lenders for used cars in the U.S. They’re known for lending money to customers whose credit scores leave them with few other financing options.
In an email to WNYC, Credit Acceptance said they’ve provided a “second chance” to “millions” of consumers “who need a vehicle and cannot obtain one because of lower credit scores or past credit problems.”
The company does that by partnering with some 12,000 used car dealers across the country. They pay out advances to all their dealers for every loan they write and then bundle these advances into securities to be sold on the bond market. However, unlike other large lenders, Credit Acceptance also shares the risk—and potential profit—of lending to subprime borrowers with many of their dealers.
According to the company’s annual report, about 70 percent of their loans are from dealers who are signed up for their “Portfolio Program,” which allows dealers to receive a portion of whatever Credit Acceptance collects, for every hundred loans they write.
The company does not disclose its default rates, but on a call with investors in 2015, the company’s CEO Brett Roberts said they repossess more than a third of the vehicles they write loans for. They also publish an annual estimate of the collection rate they expect for the loans they have issued. That number has been in steady decline since the crash and is currently at 65 percent.
A detailed 3-part report on Credit Acceptance by the legal transparency group Plain Site questioned the health of the company and the quality of the loans backing their securities. Aaron Greenspan, Plain Site founder and co-author of the report, is also an investor who shorted Credit Acceptance stock.
“It’s a very strange set of circumstances where high finance has been married with this kind of underbelly of the auto industry,” he said.
Despite lending to the riskiest borrowers -- and to the chagrin of short-sellers like Greenspan -- Credit Acceptance seems to have done remarkably well. Its share price has increased by over 2000 percent since the crash and it’s been able to borrow billions of dollars from banks like Wells Fargo and Comerica Bank, as well as bondholders like BlackRock and Boeing. Their securities have A, AA, or AAA ratings and offer returns of up to four percent.
To find out more about how the company’s business model works, WNYC tracked down a former employee who agreed to speak on the condition of anonymity. He worked at the company for almost nine years.
Credit Acceptance, he explained, incentivizes dealers to markup the price of cars above market value by tying dealer profits to the size of the loan.
“They’re trying to build the largest collectible contract . . . the biggest amount of money owed legally,” he said. Dealers, he said, “have to adapt to the CAC [Credit Acceptance Corporation] system so they can make money, and that means raising the price of the vehicle.”
Using proprietary software called CAPS, Credit Acceptance can “dictate to the dealer how to structure these loans and how to make the most money,” he said. The patent for CAPS filed with the U.S. Patents and Trademarks office notes that “the financial packages are displayed in a manner such that . . . the dealer may then steer the customer toward purchasing a vehicle which may be financed on terms that will be most profitable to the dealer.”
WNYC also obtained training manuals used as recently as 2016 that encourage dealers to sell customers with the lowest credit scores the cheapest and oldest cars in their inventory at the highest markups.
“You’re putting people that have the worst credit and make the least amount of money, you’re putting them in unreliable cars and you’re still marking up the loan,” the former employee said.
This markup is in addition to the interest rate Credit Acceptance charges on these loans, which like with all subprime loans, tends to be high.
Credit Acceptance did not respond to the former employee’s claim about encouraging dealers to increase prices.
WNYC ran the former employee’s allegations by Josh Wortman, who runs General Forensics, a San Diego-based company that monitors the risk of fraud by dealers, a growing concern in the auto lending industry.
He said he was “startled” by the allegation of a lender suggesting markups to dealers based on people’s credit. He added that it was ultimately the “consumer’s responsibility to shop and compare prices at different dealerships and find a good deal.”
WNYC also separately obtained internal company data on 25,000 loans made by Credit Acceptance in May of 2016. Most of the cars were sold at a markup of about 35 percent over their retail value to borrowers who made less than $30,000 a year. At interest rates of 22.99 to 24.99 percent, borrowers owed Credit Acceptance more than two and a half times the advance that Credit Acceptance paid dealers.
Another reason why having a larger loan might be useful, the former employee suggested, is that Credit Acceptance is not just originating the loans, they also function as a debt collection company. It’s in the company’s interest, he said, to have the largest possible loan to sue for after a borrower defaults.
“If you were to walk into any local courthouse throughout the country, you’re most likely going to find Credit Acceptance hired attorneys taking people to that courthouse to obtain a judgement,” he said.
In all but four states -- North Carolina, Pennsylvania, South Carolina, and Texas -- judgements allow debt collectors to garnish a debtor’s wages.
Plain Site found that in 2017 the company was involved in over 150,000 lawsuits across the country. In Detroit, their lawsuits against debtors made up nearly 12 percent of the civil court’s cases that year. Greenspan described their business as having created a “state court litigation factory.”
In an emailed response to questions from NPR and WNYC, Credit Acceptance said the legal process generated less that 2 percent of the company’s total collections last year.
WNYC’s analysis found that Credit Acceptance has filed nearly 25,000 cases against debtors across New York state in the last decade.
One of them was against Celeste, in the Bronx County Civil Court, in July 2018, almost a year after the company repossessed Celeste’s car. They sued him for a balance of just over $7,200.
But then Celeste got lucky: in the courthouse, he ran into Shanna Tallarico, a lawyer with the New York Legal Assistance Group, who decided to take his case.
“He’s just a very kind, genuine person -- I could see it right away. I thought this is not right,” she said.
Tallarico challenged CAC’s lawsuit on the grounds of false advertising, fraud, deception and violations of the Truth in Lending Act. Eight months later, Credit Acceptance dropped the case.
As for the dealers, they have the same owner, who did not respond to WNYC’s questions about Celeste’s allegations.
New York City’s Department of Consumer Affairs (DCA) has received 61 complaints about them since 2015, primarily for misrepresentation, breach of contract, and false advertising. They have repeatedly settled with the department since then, paying fines of nearly $10,000 for numerous violations including failing to display prices and not maintaining or providing records for inspections.
DCA Commissioner Lorelei Salas told WNYC that Celeste’s experience is reflective of a larger problem. The department licenses and inspects nearly 700 used car dealers across the city and has received over 6,500 complaints about them since 2015. Most of them relate to false advertising, lack of disclosure, and being overcharged, she said. The complaints are primarily from low-income communities of color in Brooklyn and Queens.
The DCA does not oversee auto lenders but Salas said they can be part of the problem.
“There’s no question that during some of our investigations, we’ve seen the lender or finance company actually being perfectly aware that some of the transactions were fraudulent,” she said. ”And they continue to do business with them, and whether they were intentionally part of the fraud or not, at least they were aware of it.”
In 2017, during an investigation into the predatory sales practices of four Brooklyn-based dealerships, the DCA settled with Credit Acceptance and two other subprime auto lenders after they agreed to issue more than $300,000 in restitution to affected consumers.
Credit Acceptance is currently under investigation by the Attorneys General of Maryland, Massachusetts, Mississippi and New York for potential violations of fair lending and consumer protection laws, according to its filings with the Securities and Exchange Commission.
In a complaint filed in April, the Mississippi state Attorney General said the company’s business model has “set subprime consumers up to fail” and is “pushing consumers into financial ruin.” In its latest quarterly report, Credit Acceptance said it will “vigorously defend itself” in court.
The company has also disclosed that it’s been under federal investigation by the Consumer Financial Protection Bureau (CFPB) since 2017. But under the Trump Administration, the agency has scaled back its enforcement of fair-lending laws. The CFPB would not comment on the status of its investigation.
“I worry that a kind of collective amnesia has descended on Washington and that regulators are forgetting the causes and consequences of the last financial crisis,” said Michael Barr, who was assistant secretary for financial institutions at the Treasury Department in the first Obama administration.
Barr, who oversaw the creation of the CFPB, said he’s concerned that rising defaults in auto loans could pose a broader risk to the economy, particularly in the event of another downturn.
“We’re now ten years into an expansion period and so people kind of forget that the economy at one point will turn and when it does you'll see higher than expected losses,” he said.
It is unlikely to cause a system-wide crash because auto loans are a much smaller part of the economy than mortgages were. But higher defaults will, he said, have a ripple effect.
“The risk can extend throughout the financial system if there are widespread failures in auto lending,” he said. “And those can cause harm not only to their consumers and investors but also to the creditors of those auto lenders.”
In recent years, the largest of those creditors have included Bank of America, Barclays, Blackstone, Citigroup, Deutsche Bank, JP Morgan, and Wells Fargo.
Barr said weakened bank regulations and scaled back consumer protections make it hard to gauge the potential threat.
“The Trump administration and Trump appointees are taking their eye off the ball and weakening the kind of safety systems we set up in the in the wake of the last financial crisis,” he said.
Data reporter Dave Sheingold contributed to this story.
This story was produced with support from the Corporation for Public Broadcasting as part of a collaboration between APM Reports, KCUR in Kansas City, KPCC in Southern California, WABE in Atlanta, and WNYC in New York.
Music used in the story is "Erase" by Nosaj Thing.