Consumer Legislation Would Make Auto Finance Less Friendly
May 21 2009 - 3:12PM
Dow Jones News
A bill pending in the U.S. Senate Judiciary Committee is
striking fear in the heart of Steven Pittler, who lends to auto
buyers with spotty credit.
The legislation, called the Consumer Credit Fairness Act,
carries serious consequences for auto-finance lenders such as
Pittler. If passed into law, the bill would also hit the market for
used cars, whose values took a battering last year from high gas
prices.
The bill would allow borrowers to avoid payments on expensive
consumer debt, including auto loans, when they file for bankruptcy
protection. It would also eliminate lenders' ability to reclaim
vehicles as collateral to cut losses.
The bill faces a steep climb in the Senate, which recently
rejected a measure to allow strapped homeowners to reduce their
mortgages in bankruptcy.
Legislators supporting the bill argue it is a necessary check on
unfair lending practices and would ease the debt burden on strapped
Americans. The bill "is intended to help consumers struggling under
the burden of high-interest debt by encouraging lenders, including
auto sellers, to keep interest rates low," said Alex Swartsel, a
spokeswoman for Sen. Sheldon Whitehouse, D-R.I., who with Sen. Dick
Durbin, D-Ill., are the bill's co-authors. "Laws on retaining
property in bankruptcy estates vary from state to state, but in
general, the bill will make it easier for people entering
bankruptcy with high-interest debt to keep their cars."
The bill would deal a blow to lenders such as GMAC LLC and Ford
Motor Credit, whcih provide crucial financing to car buyers of the
domestic struggling auto makers. For General Motors Corp. (GM),
Ford Motor Co. (F) and Chrysler LLC and their financiers, this
would come on top of steep declines in sales and higher
delinquencies on auto loans.
"The pendulum is swinging too far on the other side," says
Pittler, president at Friendly Finance Corp., a private
auto-finance company that lends to subprime, or less credit-worthy,
consumers in 10 states.
The bill is aimed at voiding contracts for costly debt in
bankruptcy filings. It defines this high interest rate at 15% plus
the yield on a 30-year Treasury bond (currently this adds up to a
little over 19%).
Interest rates can be around these levels on auto loans to
subprime borrowers, including such loans for used cars. The bill
essentially means that an auto loan carrying these rates will be
voided if the borrower files for bankruptcy protection.
The critics of the bill warn that the legislation would restrict
credit at a time when Americans need it most. The lenders defend
the business practices as necessary to protect themselves when
providing money to consumers with patchy credit.
If the bill is passed, "it's hugely significant," says Michael
Benoit, a partner at Hudson Cook LLP. It would leave the
auto-finance lender "holding the bag. In the short term at the
least, there will be contraction of credit at a time when we really
can't afford that."
A reluctance to lend to subprime borrowers will shut out a large
swath of potential car buyers. In November, GM said nearly
three-fourths of customers had a credit score below 700. The median
credit score for U.S. consumers is about 723. Different lenders
define subprime borrowers differently; typically, these consumers
have credit scores of 620 and lower.
If the bill is passed, lenders would no longer be able to cut
their losses by reclaiming the vehicles of borrowers who have
defaulted on their payments and filed for bankruptcy.
"As a lender, not only do I lose my claim against the borrower,
I can't repossess the vehicle," says Bill Himpler, executive vice
president of federal affairs for American Financial Services
Association, an industry lobby group.
A spokeswoman at Ford Credit declined to comment. A GMAC
spokeswoman wasn't available for comment.
Friendly Finance's Pittler estimates a loss of about $7,000 for
every repossessed vehicle that is then sold off in an auction.
"You can imagine the losses the lender would incur if he can't
reduce the borrower's balance by selling the repossessed car," says
Pittler. "This bill encourages people to file for bankruptcy;
essentially they get rewarded with a free car."
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com
(Jessica Holzer contributed to this report.)