A U.S. regulator is looking at whether auto finance companies that use sophisticated technology like ignition kill switches are illegally harassing subprime borrowers that have fallen behind on their payments.
The Federal Trade Commission, a consumer protection agency, has asked for information from at least two lenders, according to securities offering documents from both companies this month obtained by Bloomberg. The probe is part of a larger investigation into subprime auto lenders’ collection practices, said a person with knowledge of the matter. A spokesman for the FTC declined to comment.
The investigation adds to the pressure that auto finance companies are already facing after a massive wave of lending to borrowers with blemished credit. They are under investigation by the Department of Justice and state attorneys general. And more borrowers are falling behind on their bills.
To make it easier to repossess cars when loans go bad, finance companies have been using technology like ignition kill switches, which allow debt collectors to remotely disable a vehicle’s starter, and GPS devices, which can allow them to track down an automobile or truck. The devices
vices can also make noises to remind borrowers to pay. Somewhere between 35 and 70 percent of cars financed with subprime loans may have one of these gadgets installed, according to Corinne Kirkendall, vice president of compliance and public relations at PassTime, which sells the devices.
The Federal Trade Commission has asked for information about the devices from Credit Acceptance Corp. and DriveTime Automotive Group Inc., according to separate securities offering documents from both companies. DriveTime doesn’t install kill switches of any kind, but the cars it finances usually have pre-installed GPS systems, spokesman Chris Piper told Bloomberg in an e-mail. The company’s general counsel, Jon Ehlinger, characterized the request for information as “routine.” A representative for Credit Acceptance didn’t return calls seeking comment.
The FTC’s probe is generally looking at whether lenders using the devices are violating laws about fair collections practices, said the person with knowledge of the matter. For example, the regulator is concerned that debt collectors could be threatening to trigger kill switches even if it’s legally premature to take back the car, the person said, without identifying any specific lender.
Auto finance companies have been censured in the past for lower-tech forms of violating collections laws. In 2014, the FTC settled with Consumer Portfolio Services for $5.5 million over allegations that it was harassing and threatening delinquent customers, illegally telling struggling borrowers that, “the tow truck is around the corner,” or, “we’re coming to get your car,” even when repossessions weren’t imminent or likely, the FTC’s complaint said. CPS neither admitted nor denied the allegations in the complaint.
U.S. authorities have broadly been paying close attention to subprime auto lending, in part because the area has grown so much. Total car loans outstanding in December were $1.16 trillion, up more than 45 percent since the fourth quarter of 2008, when the financial crisis was at its peak. About 20 percent of car loans made in recent years have gone to subprime borrowers, according to data compiled by the Federal Reserve Bank of New York.
The Department of Justice subpoenaed lenders including General Motors Co.’s finance unit and Santander Consumer USA Holdings in 2014. A spokeswoman for GM Financial Co. said the company continues to cooperate with the investigation. A spokeswoman for Santander Consumer declined to comment.
Credit Acceptance has received at least five subpoenas or regulatory demands for information since December 2014, including one from Maryland’s attorney general requesting information about its repossession policies, the documents obtained by Bloomberg show.
As loans have grown, so have delinquencies. Borrowers were at least 60 days behind on about 5 percent of subprime auto loans in December, a figure that has steadily risen since at least 2010, when 2.95 percent were delinquent, according to S&P Global Ratings. Auto lenders lowered their lending standards between 2012 and the middle of last year, said Mark Zandi, chief economist at Moody’s Analytics.
Collections activities used to be a lot more aggressive, but that has changed due to new consumer protection laws, said Consumer Portfolio Services’ Chief Executive Officer Charles Bradley on a call with investors this week. “There are lots of rules to follow,” and a lot of work is required to make sure rules aren’t broken, he said when discussing the same topic on a call last year.
Devices like kill switches and GPS trackers help lenders cut losses when loans go bad by allowing them to repossess faster, said Michael Benoit, partner at Hudson Cook, a law firm that focuses on consumer financial services.
“The point is, you find the car faster, and these are depreciating assets, so it is a valuable tool,” Benoit said.
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