The numbers kept getting worse for Jeremy McPeek. It started with paying $2,600 down and getting saddled with a high-interest loan on a car worth $5,200. Then came the repairs. Just two weeks in, the engine started knocking and the dealer told him it was shot — so McPeek told the dealer to just collect the car.
The twist: the finance company reported it as a repossession, plunging McPeek’s credit score from 620 to 500.
“It was depressing, it made me angry,” said McPeek, 41, a former Clearwater resident. “I cried. They took advantage and they weren’t offering a fair solution.”
Ubiquitous ads give the impression there’s never been an easier time for someone with tarnished credit to buy a used car. But as McPeek’s painful lesson shows, the world of subprime auto lending can be perilous, riddled with questionable practices and limited oversight. A four-months-long investigation by the Tampa Bay Times found:
Just as unsupervised practices in peddling subprime mortgage loans helped trigger the housing bust, some experts are concerned that abuses within the subprime auto lending industry could be dangerous. And like the home-lending industry, a lack of oversight could be contributing to the spread of questionable auto loan deals.
“It won’t crater the economy, but it will cause some significant pain to a lot of consumers who will end up losing their cars, maybe losing their jobs (and) certainly taking them out of the marketplace,” said Chris Kukla, executive vice president for the Center for Responsible Lending.
Delinquencies on subprime auto loans are at their highest rates since 2010. Nearly six million subprime borrowers — people with credit scores below 620 — were a minimum of 90 days or more behind on payments as of late 2016, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data. That means more repossessions, which could tank the credit scores of more borrowers, making it difficult to buy another car or home or even secure a job.
And it’s likely to ramp up.
Consumers are expected to turn toward what’s known as “buy here, pay here” dealers — auto dealer who both sell used cars and finance them — because large lenders are tightening their lending standards. In a May filing with the Securities and Exchange Commission, St. Petersburg-based Nicholas Financial, a longtime player in the subprime auto lending space, said it is looking closer at loan applications before approval. They, like other lenders, are trying to protect themselves from defaults.
Like Nicholas Financial, Pinellas Motors manager Jason Jagdeo said he, too, is frustrated with both defaults and dealing with some subprime customers.
Jagdeo, whose dealership sold the car with a bad engine to McPeek, said he offered a used, replacement engine to no avail. “I know that we do everything that we can do to please our customers, and there’s just some you cannot please no matter what you do, no matter what you offer them,” Jagdeo said.
Up and down Florida and Nebraska avenues and U.S. 19, the banners and signs are hard to miss: “No credit, bad credit, everybody approved” and “No credit? No problem.” They belong to used car lots, which are often buy here, pay here dealers. These “lenders of last resort” serve a need, said Ken Shilson, president and founder of the National Alliance of Buy Here, Pay Here Dealers. They cater to those who can’t get a loan elsewhere because of their poor financial standing.
“We have millions and millions of Americans who can’t get a bank loan,” Shilson said. “They need transportation because we’re car dependent, and that’s what the buy here, pay here business does.”
One such shop is ABC Autos Inc., where Nataliya Garcia bought her Toyota. Garcia initially went to ABC Autos in 2015 because she needed a good car quickly. She had recently given birth to her son, Noah, and was holding down a part-time job while putting herself through school to get a health and sciences degree. Finding reliable transportation was essential.
“I was desperate,” she said. “They were quick and easy and didn’t give me a hard time with my credit.”
At the time, her credit score was about 560 because her identity was stolen when she was 19, Garcia said. She figured that even with a 23 percent interest rate, the biweekly payments would help her build credit.
It’s the same desperation and hope that many have when they walk through the doors of a buy here, pay here dealer. Ideally, this is the way a sale should go: A consumer chooses a car, which has been inspected by the dealership and repaired if necessary. A credit check would determine that a borrower could afford monthly payments at an acceptable rate and the borrowers would continue to make payments until the car is paid for in full. Assuming those payments were made on time and the dealer reported to major credit agencies, the consumer’s credit score would go up and they would be able to get a better rate on their next car or large purchase.
But some Tampa Bay-area buyers report a far different experience. Interviews with a dozen consumers and reviews of more than 100 online complaints detail case after case of unaffordable rates and costly mechanical issues.
Garcia said she was never asked her income. She, and others, describe a rushed and confusing process once a car was picked out. Under her sales contract, she would have paid about $18,000 over four years on a car valued by Kelley Blue Book for roughly $5,000. But numerous mechanical issues, including a dead battery that resulted in her physically pushing her car back to the dealer, eventually forced her to trade in the car at another lot. She had already paid about $10,000 to get a trade-in credit of about $7,500.
“It sets up a fairly toxic mix for consumers,” Kukla said.
Steve Milligan, a Zephyrhills resident, was also an ABC customer. He bought a van from the dealer that was suitable for his construction work, financing it at a 22 percent interest rate, only to find that it had serious mechanical issues.
“My dash looks like a Christmas tree with all the lights up on there,” he said.
ABC Autos declined to comment for this article.
Measuring how many subprime loans are being written locally is difficult. There is little public data on the matter, and the only entities tracking loan origination are credit bureaus whose data sets are proprietary.
One way to get a sense of the number of subprime loans, however, is by looking at repossessions. When someone falls behind on their car payments, the car can be repossessed, and the people most likely to get behind on payments are those with subprime loans. State law requires repossession agents to alert the police when they take a car, so law enforcement knows it is not stolen if the owner calls about it.
According to data from Pinellas and Pasco counties, as well as Tampa, St. Petersburg and Clearwater, repossession rates have steadily increased since 2012 and as of March are on track to rise again this year. The largest jump was posted by Tampa: a 61 percent increase from 3,337 in 2012 to 5,386 in 2016. The Hillsborough County Sheriff’s Office does not distinguish between repossessions and all impounds made by private companies, thus could not be included.
Repossessions can shatter credit. Like a bankruptcy, repossessions stay on a consumer’s credit report for seven years.
But repossessions are also a cornerstone of the buy here, pay here business model. According to Shilson of the National Alliance of Buy Here, Pay Here Dealers, one-third of buy here, pay here contracts nationally end up in default, which most often results in repossession.
Many times, buy here, pay here shops partner with one or more towing companies to retrieve cars.
But the Times examination found that while most local buy here, pay here outfits partner with local towing companies, at least 10 shops in Tampa Bay have an in-house employee who tows cars as well.
In-house repossession agents, Shilson said, are unusual.
“We don’t advocate that at all,” he said. “We don’t think that’s the right way to go, and any good dealer is going to realize that that person is an agent and what he does he’s liable for.”
The amount of time between a missed loan payment and when the car can be seized is generally set by state law. Many car dealers also offer an additional 60- or 90-day grace period before repossessing a car.
Still, the Times’ examination found that some buy here, pay here dealers have repossessed a car in as little as two days, as one consumer told the Times in complaining about Car Credit in Tampa. Car Credit did not return requests for comment.
Shilson said such a quick repossession is not standard and advised against it.
Many consumers are also confused by what’s called a “voluntary repossession,” where a consumer willingly gives back a car. Despite the softer name, it still affects your credit report.
Oversight in subprime auto lending is scant.
A patchwork of federal and state agencies oversee disparate bits, but none specifically tracks the subprime loans themselves. The Florida Office of Financial Regulation oversees licensing for finance companies and motor vehicle sales companies, which governs the maximum interest rate a company can charge on a loan. But up to 30 percent interest can legally be charged under current state laws.
The Consumer Financial Protection Bureau has fined some buy here, pay here companies for predatory collection practices or giving inaccurate information to credit bureaus (including at least one operating in Florida). But the agency’s role is limited.
Beyond filing a complaint with either the Attorney General or the Florida Department of Agriculture and Consumer Services, irate consumers have little recourse with the state.
Florida Attorney General Pam Bondi, whose office is charged with protecting consumers, has not made the issue a priority. The only recent action was a judgment in June on a Jacksonville buy here, pay here dealer, which was ordered to pay $5 million in debt forgiveness for not honoring warranties, conducting “unconscionable” repossessions and collecting debts that didn’t exist.
Another option is to hire a lawyer. Florida law, however, gives the auto dealers a legal advantage: customers have to give their dealer a 30-day window before they can sue, giving them time to make things right.
Craig Rothburd, a Tampa-based attorney who has represented consumers in similar cases, said few customers make it that far. Many are struggling to afford their car payments, let alone pay a lawyer.
“Most people aren’t going to be represented at all,” Rothburd said, “and they’re going to be railroaded.”