An exploration of the most commonplace predatory lending scams destroying the futures of poor and minority Americans with impunity.
Part 3: The “Buy Here Pay Here” Auto Trap – Burn ‘Em and Churn ‘Em
America’s mythology is steeped in the idea of people “pulling themselves up by the bootstraps.” We love a rags-to-riches story. We love a self-made person. This is a profoundly central element of our cultural narrative.
Unfortunately, one of the most important aspects of this particularly American storyline is the reality that to succeed you must have reliable transportation. And for the vast majority of us, that means a working car.
Our nation has a particularly intimate relationship with cars. Not only are we the country that first mass produced them, but our land is also designed to be navigated by automobiles. For most people, having a working and dependable vehicle is essential not only to success, but to a bare minimum survival. For growing numbers of people, their car might be the only thing between them and living on literal streets in homelessness.
Research shows the dramatic impact that owning or not owning a car has on a person’s financial wellbeing. Perhaps not surprisingly, those without cars are often locked into a nearly inescapable existence of being unable to find decent work because of the lack of reliable transportation, which then means they can’t afford to purchase a vehicle, which then means they can’t look for work that isn’t nearby. Without the flexibility to travel, a person must take the jobs nearest to their homes. And often, neighborhoods and communities where the most impoverished—and car-less—Americans live tend to be neighborhoods with few jobs, most of which are very low-wage occupations. It all-too-quickly can become a never-ending cycle of poverty perpetuating poverty.
Yes, some places do have public transportation, of course. But how good it is and who has access to it varies dramatically by neighborhood, based on demographics of race and income. For example, here in Chicago, we have a widely popular Chicago Transit Authority (CTA) “L” train system. But one look at the map of the train routes, and it becomes very apparent that the train system favors wealthier, whiter neighborhoods over the poorer, minority ones.
The CTA Red Line, for example, goes as far north as Howard, the northernmost border of the city. And then, it even extends beyond that—with the Yellow and Purple lines—into the neighboring suburbs of Skokie and Evanston, home to some of the wealthiest regions in the Chicagoland area. However, the CTA Red Line, going south, ends at 95th Street, which is over 30 blocks away from the southernmost tip of the city where the Riverdale/Calumet City suburbs begin.
So anyone living south and west of this final stop must rely on multiple buses and have hours to spare for travel time if they need to get downtown (or any other part of town, for that matter) to work. Bus service is sporadic and less frequent than other areas of town. Cabs and Ubers refuse to pick up or drop off riders in these “less desirable” neighborhoods.
Did you notice the discrepancy? Allow me to restate it. On the (wealthy) north side, the city’s public trains go past the city’s border into the near suburbs. On the (poor) south side, the city’s public trains stop over 30 blocks short of the city’s border.
In 2019, the City of Chicago did finally propose to extend the Red Line south to 130th Street, but, of course, first they have to repair existing tracks and build a “flyover” where the Red and Brown lines intersect on the city’s north side, to improve speed of the trains, since they have to frequently stop for a few seconds to allow for track switching. The Red Line extension south, then, will have to wait. Furthermore, the south extension is “pending funding,” which, in the devastating Chicago budget aftermath of Covid-19, seems highly unlikely to come anytime soon. If ever.
So difficult is it to get around Chicago without a car—and sometimes dangerous, depending on the neighborhood—that when I was a professor at Richard J. Daley College on Chicago’s southwest side, I had many students who had never been downtown or even to the beaches of Lake Michigan. People often find this hard to believe, but it is far more common for Chicagoans who do not own cars to be unable to venture too far from their neighborhoods safely or cheaply. Car-owning city dwellers have the ability to move about town much more quickly and efficiently than the people who have to rely on public transportation. Because of this, car owners have many more opportunities, both for work and for leisure.
It cannot be overstated how important an affordable, reliable car can be for opening doors of opportunity for gainful employment. And because of this, it is particularly disheartening that subprime auto loan scams are preying on the very people who can least afford to be preyed upon. Of course, this is why the predators are preying. Because the prey are desperate and defenseless. They are the perfect prey.
Meet the Godfather
But this all-too-common world of subprime auto lending was not always the norm. There was a time—not so very long ago—when most work paid well enough that people could afford a decent vehicle without drowning in unsustainable debt. But, as the U.S. economy began to shift away from factory work and stable union jobs in the late ‘60s and throughout the ‘70s, and as more and more U.S. companies moved their factories to other countries with cheaper labor, working-class incomes began to drop, pensions disappeared, savings evaporated, and auto prices began to rise. This, then, created a perfect situation for predatory lenders to swoop in and do what they do best.
And so began the birth of the subprime auto lending industry as we now know it.
Strangely enough, the modern-day predatory auto loan schemes being deployed all over our country largely stem from one man: Don Foss. If ever there were a Godfather in the used car sales industry, it would be this man. He holds the world’s record for selling the most used cars, and he has managed to identify, master, and exploit every possible aspect of the car-buying and selling process.
That car lot you see with the “Buy Here Pay Here” sign? The tacky inflatable neon man flapping wildly in the breeze and the American flag so massive and so high in the sky that it can be seen for miles? The red, white, and blue balloons and the “No Money Down!!!” shoe polish graffiti on the windshields of rows and rows of used cars? If it’s gaudy, exploitative, and generally makes you roll your eyes but draws your gaze to it regardless, Foss probably had a hand in introducing some variation of that to the used auto industry.
Foss, whose father was also a car dealer, conjured up many of the marketing and lending tricks of the trade being used to this very day. What began with a young Foss’s unassuming used car lot in Michigan in 1965 evolved over the next seven years into the seeds of most schemes that low- and very-low credit buyers encounter even today in various clever and sinister forms.
Foss’s status in the world of used car dealers, not to mention subprime auto lending, is legendary. There is a reason for that. And it is not just because he holds the world’s record for most used cars sold. It is because of how he made a realization in the first place that led to his used-car empire.
Foss was the first person to realize that enormous numbers of garbage cars that were often doomed for the junkyard were actually piles of cash being thrown in the trash. Instead, he figured, why not buy a virtually worthless car for a couple hundred bucks (and often, even less than that), fix the junker up enough to make it run well enough to get it off the lot, charge some poor sucker a few hundred bucks down—recouping the original investment—and refinance the rest, which is pure profit.
So that’s exactly what he did. Bought lemons, polished them up, flipped them, and made money hand over fist. Often the cars were sold at a cost of 35% or more over market value.
But then, in true Foss fashion, after a few years of this find-‘em-and-flip-’em method, he realized there were other people making money off the process that could be his: the lenders. They were the real winners. They didn’t have to move product or pay rent on lots and advertise. They simply sat there and let people come beg them for money and then made loans with terms based on what they deemed to be your level of risk.
The higher the risk, the higher the interest. The higher the risk, the worse the loan terms overall. Low-risk borrowers? These are high-prime customers. They get the best terms. High-risk borrowers? We are the subprime. We are down here just waiting to be kicked around because the regulations and laws designed to protect us don’t protect us.
It was then, in 1972, Foss formed his own lending agency, Credit Acceptance, which is directly responsible for turning a corner lot mom-and-pop business model of used car sales in to a sprawling behemoth subprime auto loan industry (another predatory Goliath) whose business far exceeds $100 billion a year. Subprime car loans, in 2019, made up nearly 10 percent of the nation’s $1.26 trillion of auto debt in circulation.
Foss’s best trick with Credit Acceptance? Not only did he finance junk cars being sold way over their market value at unconscionably high interest rates, but if you couldn’t afford the down payment, he would “lend” that to you too, in a form of smaller loan that mirrors many of the tactics used in payday lending schemes. He and his company, quite literally, found ways to bilk consumers in every single possible manner relating to each particular aspect of the car-buying process.
Shortly after forming his own lending agency, Foss came up with even more ideas in addition to selling junk cars and financing high-interest loans. According to a former Credit Acceptance employee, Foss realized that if Credit Acceptance was both the bill collector and the repo agent, they could take the cars back from delinquent borrowers, resell the cars, and still charge the original borrower the remainder of the balance due, a process that later became known as “churning.”
This was both a purposeful business decision and one that would eventually be the reason for a number of lawsuits against Foss and other used auto dealers who practiced the art of loaning, collecting, repossessing, and reselling vehicles to the most desperate and financially “unfit” customers.
The practice of churning became so widely used, that in 2015, The Los Angeles Times conducted an investigation that tracked a used car that was resold a mind-boggling eight times in less than two years.
Churning is a particularly deceitful and horrific practice that goes against many of the laws and regulations that are in place to protect consumers from abuses such as this. Legally, if a dealer repossesses your car and resells it, the amount he received for the resale is to be applied to the amount outstanding on the original buyer’s loan. But this is rarely the case. As the LA Times story shows, the regular practice is to repo the car, place the original buyer into collections and demand—even sue for—the original amount, resell the car at the original (or even higher price), and then start the process over with a whole new buyer.
Though there have been several lawsuits brought against Foss for his lending, collecting, harassing, and reselling techniques, ultimately he had the power of Wall Street money behind him, because ever since he first went public with Credit Acceptance in the early ‘90s, the company’s stock value has risen well over 200%.
Never mind that lawsuits alleging violations of the Truth In Lending Act (TILA)—ranging from false advertising to fraud to deception—were coming at Foss from all sides. Now that he had Wall Street’s backing, the suits largely fizzled out, and his empire continued to grow unchecked, which it does to this very day. Because, as so often happens each time a law or regulation is passed, these smaller loans on cars, paychecks, and so on, are rarely covered by the regulations. And when the laws come close to actually reining in the smaller lenders and their most predatory tricks, industry lobbyists swarm politicians and shower them with threats and money, and then their problems largely disappear. Big banks are forced to comply, while the predatory lending bottom feeders simply skate past the protections and leech off the desperation of the needy and unprotected.
As happened with payday lending, once Wall Street investors realized the money to be made milking the poorest and most vulnerable among us for the few pennies we have with these clever predatory lending techniques, they threw money at the industry, causing an explosion of subprime auto lending that grew even larger during the Great Recession. So, too, did Wall Street lobbyists manage to defang TILA, rendering it virtually useless and unenforceable. Another well-meaning law, another government agency we thought was finally seeing us, only to realize big money has a way of making them look the other way.
So bad has the legal wrangling gotten—especially with the mandatory arbitration clauses that buyers unwittingly sign, making it impossible to bring class-action lawsuits against predatory auto lenders—that consumer protection lawyers are leaving the National Association of Consumer Advocates in droves, unable to get cases to stick. Unable to even build cases in the first place.
And, yet again, under the Trump Administration, the Office of the Comptroller of Currency, tasked to oversee implementation of TILA, decided on 9/30/2020 to rescind the only rule that might hold smaller, predatory lenders accountable for their destructive actions. Lenders of small loans were no longer required to prove their customers could afford the loans they were giving them, and they were no longer subject to the same sorts of financial “examinations” that much larger banks had to undergo. So the predatory lenders slipped away again. Unscathed.
Sharks in the water just waiting to take another chunk of your flesh.
The “Buy Here Pay Here” Trap
Then there is the “Buy Here Pay Here” scheme. While not all of these car lots are looking to scam their customers the way Foss did to build his empire, they often use a similar lending tactic where they take a down payment that, in reality, usually covers the actual cost of the car paid by the dealer, then finance the remainder of the balance and collect on it themselves. In theory, this looks good for the buyer, as they do not need to get credit approval from a bank or other lender, so it seems like a godsend.
The downside to the “Buy Here Pay Here” model for the consumer, however, is that they aren’t regulated the same way a legitimate lender is, and so they can easily do things like place a “kill switch” on your car to disable it for late payment and then come retrieve it at their leisure. They can also resell the car and not disclose the sale or the amount of the sale, and then come after you for the difference, even though they are supposed to notify the borrower of both these things. This is illegal, but only if you are aware of it.
Sadly, most low-income and minority borrowers are not aware of their rights when it comes to this particular aspect of the delinquency process, and so they carry on paying for a car they no longer own. And so does the next buyer. And the next. The dealers “churn and burn” cars. Flipping them from buyer to buyer as frequently as they can, while they continue to make money from the high-interest loans of each buyer along the way.
And while payday loans are, by far, the most potentially damaging type of predatory lending a consumer can encounter, at least there is the fact that the borrower actually received the money they are stuck paying exorbitant rates on. With the “churn and burn” model, the buyers are left with nothing, as the car they continue to pay on has been churned to god-knows-how-many-people since the original buyer was unable to make a payment.
Of course, after conjuring up all these creatively deceptive and unethical schemes to suck the meager earnings of America’s poor, Foss attempted to scrub his image and paint himself as a living, breathing American Dream icon. Precisely one of the rags-to-riches stories to which I referred earlier. In what can best be described as a propaganda video commissioned by Foss and posted to YouTube, Foss uses paid actors (and a few actual employees) to tell the heartwarming tale of a man who has made it his life’s mission to help out the neediest among us.
The most offensive thing about this attempted whitewashing of his actual business history isn’t that he’s trying to clear his name. It’s that he’s spinning it as though he’s just trying to help poor people. To give us the opportunity to buy a car when we would otherwise not be able to. But you will come to see, if you haven’t already by now, that this is precisely what all predatory lenders say. They’re all here to help the poorest and most destitute among us. To give us a leg up. To put us in a car. To throw us a couple bucks between checks. But they do just the opposite. If it weren’t true, there wouldn’t need to be a TILA, a CFPB, a Dodd-Frank bill, and so on.
This is one of the reasons why I write for AHP 75. Because I am in the unique position of having been down among the poor and being kicked around by predators. Because I have also risen out of poverty. Only to have fallen back into it again. Because I know what it feels like to have lenders and businesses profess to want to help, while the harm they cause is exponentially worse. Because I am able to write about it. And because our initiative here is the real deal. AHP 75 and our allies actually want and are actually capable of helping people navigate their way out of the world of crushing debt and find themselves in a place they might never have bothered to imagine they could be: the truly remarkable and life-changing world of homeownership.
But even there, in the world of homeownership, predators lurk. Waiting for us to reach out for help. Be careful where you reach.
Guard your flesh carefully.
Protect Yourself. Know the Tricks of the Trade. Recommended further reading:
Under the Hood: Auto Loan Interest Rate Hikes Inflate Consumer Costs and Loan Losses
Auto Financing: Practices to Avoid In Your Next Auto Loan
“Reckless Driving”: Implications of Recent Subprime Auto Finance Growth
Consumer Financial Protection Bureau: Auto Loans
The New York Times Editorial: “Putting an End to Abusive Car Loans”
“They Had Created This Remarkable System of Taking Every Last Dime From Their Customers”: Welcome to the Lucrative, Predatory World of Subprime Car Loans
3 Ways to Get Milked On A Used-Car Lot
“If The Economy Is So Great, Why Are Car Loan Defaults at a Record High?”
“As the Planet Warms, Who Should Get to Drive?”
“Just Released: Auto Loans in High Gear”
Investigation Finds Car Dealers Basically Setting Customers Up to Fail So They Can Repossess & Resell Vehicles
“Driving Into Debt”: The Hidden Costs of Risky Auto Loans to Consumers and Our Communities
Santander Settles Predatory Auto Lending Claims for $500 Million
Caught in a downward spiral of debt? Visit AHP75.com to learn about our Debt Remediation Services.
Aaron Morales is the Social Justice Writer for AHP 75, based out of Chicago, IL.